Half-yearly Report
1nvesco Perpetual UK Smaller Companies Investment Trust plc
Half-Yearly Financial Report for the Six Months to 31 July 2009
KEY FACTS
Invesco Perpetual UK Smaller Companies Investment Trust plc (`the Company') is
an investment trust, quoted on the London Stock Exchange, which invests
predominantly in the shares of small to medium sized UK quoted companies.
Investment objectives of the Company
The Company aims to achieve long-term total return for its shareholders via an
investment vehicle which gives access to a broad cross section of small to
medium sized UK quoted companies.
Full details of the Company's investment policy and risk and investment limits
can be found in the annual financial report for the year ended 31 January 2009.
Performance Statistics
The Benchmark Index of the Company is the Extended Hoare Govett Smaller
Companies Index (excluding Investment Trusts).
At At
31 July 31 January %
2009 2009 Change
Total return (all income
reinvested) for the six
months ended 31 July 2009:
Net asset value* +16.0
Benchmark index* +38.8
FTSE All-Share index* +16.1
Net asset value and share price:
Net asset value per ordinary
share:
- balance sheet 162.2p 144.7p +12.1
- after deducting proposed 160.6p 141.0p +13.9
dividend
- excluding current period 159.6p 141.0p +13.2
revenue
Mid-market price per ordinary 131.5p 107.0p +22.9
share
Discount per ordinary share 18.9% 26.1%
Shareholders' funds (£'000)(1) 93,568 84,348 +10.9
Capital return - Indices:
Benchmark* +36.4
FTSE All-Share Index* +13.2
*Source: Datastream and Fundamental Data
Six Months Six Months
Ended Ended
31 July 31 July
2009 2008
Return and dividend per ordinary
share:
Revenue return 2.6p 2.9p
Capital return 18.1p (9.6)p
Total return 20.7p (6.7)p
Interim dividend 1.6p 1.6p
At At At
31 July 31 January 31 July
2009 2009 2008
Gearing
Actual gearing(2) 100 100 100
Potential gearing(3) 127 130 122
Asset gearing(4) 99 93 97
(1) Includes enhancements from share repurchases.
(2) Actual gearing reflects the amount of loans already arranged and in use by
the Company. It is calculated by dividing the aggregate of shareholders' funds
and all drawndown loans by shareholders' funds. A gearing level of 100
indicates there is no gearing
(3) Potential gearing is the amount currently available for the Company to use
by way of loans already arranged. It is based on the lower of 30% of net asset
value and £25 million.
(4) Asset gearing reflects the amount of loans actively invested in assets and
not held in cash. It is calculated by dividing fixed asset investments by
shareholders' funds. A gearing level of 100 indicates there is no gearing.
Chairman's Statement INCORPORATING THE interim management report
Chairman's Statement
The six months under review has been a remarkable period for UK smaller
companies. Initially, sentiment was very subdued, reflecting the
exceptional nature of the financial crisis and resulting in equities
being heavily over sold. A period of low interest rates and quantitative
easing, accompanied by extensive equity fund raising, then contributed to a
sharp rally in smaller companies, reflected in a rise in the benchmark index of
no less than 38.8%, on a total return basis. This recovery was additionally
impacted by technical factors such as index rebalancing, which resulted in many
previously heavily sold shares entering the Company's benchmark index at the
beginning of the year, causing it to become dominated by companies which have
subsequently recovered some of their value, notwithstanding their often weak
fundamentals and stretched balance sheets.
The fact that your Company's portfolio has been positioned relatively
defensively, ignoring the superficial attraction of many of these shares, has
contributed to the fact that the net asset value per share increased over the
period by a lesser 16%. However, your Manager remains firmly of the view that
his stance will be vindicated by events, given that the government has used
monetary policy to treat the symptoms, but not necessarily the causes, of the
current problems and that life will become more difficult for the UK economy
going forward, as the need to tackle the issues of an over extended consumer
and of large trade and budget deficits becomes more pressing.
I am pleased to note that, over the six month period, the mid-market share
price rose by 22.9% and its discount to NAV narrowed from 26.1% as at 31
January 2009, to 18.9% as at 31 July 2009.
Share Buy Backs
During the period under review, the Company bought back and cancelled 585,000
shares at an average price of 103p and an average discount to NAV of 23.4%,
enhancing the NAV per share by approximately 0.2%.
Interim Dividend
For the six months ended 31 July 2009, an interim dividend of 1.6p per share
will be paid on 23 October 2009 to shareholders on the register on 25 September
2009. This dividend is the same as that paid for the six months ended 31 July
2008.
VAT on Management Fees
Following discussions by the Company's Manager with HMRC, I am pleased to
report that the Company received a further £159,000 of VAT previously suffered,
together with interest of £92,000, for the period prior to 2001. This has been
recognised in the revenue account of the income statement and adds 0.44p to the
net asset value. This is in addition to the VAT refund and interest of £
1,327,000 previously received.
Outlook
The economic conditions in the UK remain challenging. The portfolio bias
towards stable companies and an underweight in cyclical and recovery situations
has led to under performance in the Company's NAV versus the benchmark during
this extraordinary six month period. The Board remains supportive of the
Manager's strategy of investing in a diversified portfolio of profitable, well
established, fundamentally sound companies with an emphasis on strong balance
sheets, recurring revenue and the ability to grow earnings. The Board continues
to believe that this strategy will benefit shareholders over the medium to long
term.
Ian Barby
Chairman
17 September 2009
Investment Manager's Report
Investment Review
The six months under review was an extraordinary period for UK smaller
companies, which finished the period 38.8% higher on a total return basis as
measured by the Extended Hoare Govett Smaller Companies Index (ex Investment
Trusts). From its low in March, the index rose 48.2%, driven by a moderation in
the rate of deterioration of the UK and Global economies and an unprecedented
combination of 0.5% base rates and £150 billion of quantitative easing. The
wider stock market, as measured by the FTSE All-Share Index, ended the period
16.1% higher.
Your Company did not keep pace with the market over the period, with net assets
increasing by 16% on a total return basis. We are convinced that the continuing
financial crisis will lead to an extended difficult period in the UK economy
but, in the short term, it seems that we have underestimated the impact of the
actions of the Bank of England in reducing interest rates and stimulating
monetary growth. As a result, we were more heavily invested in defensive,
stable companies, which hindered our performance relative to the market, and
were underweight in the cyclical and recovery situations which have done so
well. In particular, the portfolio was underweight in the Mining, Retail and
Leisure sectors, all of which increased significantly over the period.
Overweight positions in Aerospace and Defence, Healthcare and Support Services
yielded poor relative performance. At a company level, there were strong
contributions from Premier Oil, an oil exploration and production business, and
Intec Telecom systems which provides billing software to the telecom sector.
However, some of our larger holdings, such as VT and Mouchel Parkman
disappointed.
Investment and Portfolio Strategy
The UK economy is in the midst of the worst recession since World War II. GDP
contracted by 2.5% in the first quarter of 2009, following a fall of 2.5% in
the second half of 2008. Unemployment has surged at the fastest rate in a
generation, touching 7.6%, and may rise above 10%, if previous recessions are
indicative.
There are, nevertheless, some signs of 'green shoots' of economic recovery
emerging in reaction, presumably, to the unprecedented monetary loosening
adopted by the Bank of England. House prices have stabilised over the last few
months and mortgage lending has increased from a very low base. Some of the
lead indicators, such as the PMI Services Index, have showed an improvement,
and the rate of decline in industrial production has moderated.
However, we believe these green shoots may be taking root in infertile soil.
The main drivers of economic growth over the last decade have been consumer
spending, led by an explosion in personal debt, and government spending. The
outlook for both is likely to be more difficult for some time to come.
Consumers in the UK are indebted to a level never seen before, and if the
savings ratio returned to the level of the early 90's recession, economists
believe it could have a significant impact on consumer spending. This, coupled
with a rapid increase in unemployment, declining asset prices and significantly
tighter credit conditions is likely to exert substantial downward pressure on
consumer spending, which accounts for about 70% of UK GDP.
The prognosis for government expenditure is equally bleak, with a dramatic
deterioration in public finances occurring over the last year. Public sector
net debt is likely to be around £1 trillion by 2010 and annual net borrowing
will be in excess of £175 billion for the next 2 or 3 years, greater than 10%
of GDP. This level of gilt issuance has already led to credit rating agencies
placing the national debt rating on negative watch and may lead to the crowding
out of corporate sector borrowing. It seems inevitable that a combination of
deep spending cuts and increased taxes will be implemented after the next
general election. Another major constraint on economic growth is the
availability of bank finance. The capacity of banks to lend is restricted by
the continued requirement to provide against doubtful debts, a closed
securitisation market and an unwillingness to be seen to repeat the mistakes of
recent history. Businesses with existing bank finance have generally been able
to refinance. However, this has come at a significant cost both in term of fees
and interest rates.
The Company continues to hold a diversified portfolio of profitable, well
established, quality companies with an emphasis on strong balance sheets and
recurring revenue. The portfolio has a bias towards non-cyclical businesses
with a low exposure to the UK consumer. This has proven to be a poor short-term
strategy, with the market beginning to price in a strong economic recovery.
However, we continue to believe that investing in fundamentally strong
businesses, with the ability to grow earnings in spite of a difficult economic
environment, will ultimately be the correct strategy.
With this in mind, we continue to be overweight in Healthcare which will
benefit from demographic trends and an increase in non-clinical NHS
outsourcing. Support Services companies should continue to benefit from both
the private sector and the government outsourcing of non-core activities. The
scale of savings required cannot be achieved without substantial involvement of
the private sector in the provision of public services. The portfolio is also
overweight Aerospace and Defence, with its emphasis on services and consumables
which are likely to prove more resilient than large capital projects which may
be under threat from reduced government expenditure. Sectors underweight
include consumer related sectors such as Travel and Leisure, and Retail.
Although, we have increased our exposure to the consumer slightly, it is
through strong companies with resilient earnings, or companies benefiting from
refinancing.
Outlook
The economic outlook continues to pose significant problems for many UK
companies. Unprecedented government financial intervention (now raised to £175
billon of quantitative easing) has stemmed the rate of decline, but this is
potentially pushing the fundamental problems into the future. A sustained
period of sub-par economic growth is in prospect, despite some recent
improvement in economic signals, with bond spreads narrowing and confidence
surveys improving. Many of the companies we favour in this environment have
been ignored in the rush to increase cyclical exposure. This has given us the
opportunity to build positions in high quality businesses, which offer good
growth prospect at attractive prices. We continue to believe that, with careful
stock selection, a positive return can be achieved, even in these difficult
times.
Richard Smith
Investment Manager - Smaller Companies Team
Related Party
Invesco Asset Management Limited (`IAML'), a wholly owned subsidiary of Invesco
Limited, acts as Manager, Company Secretary and Administrator to the Company.
Details of IAML's services and fees arrangements are given in the annual
financial report which is available on the Company's website.
Principal Risks and Uncertainties
The principal risks and uncertainties that could affect the Company's business
can be divided into the following areas:
- Market Movements and Portfolio Performance; and
- Regulatory and Tax Related.
A detailed explanation of these principal risks and uncertainties can be found
on pages 21 and 22 of the latest published annual financial report which is
available on the Company's website.
In the view of the Board, these principal risks and uncertainties are equally
applicable to the remaining six months of the financial year as they were to
the six months under review.
DIRECTORS' RESPONSIBILITY STATEMENT
In respect of the preparation of the half-yearly financial report.
The Directors are responsible for preparing the half-yearly financial report
using accounting policies consistent with applicable law and International
Financial Reporting Standards.
The Directors confirm that to the best of their knowledge:
- the condensed set of financial statements contained within the half-yearly
financial report have been prepared in accordance with the International
Accounting Standards 34 `Interim Financial Reporting';
- the interim management report includes a fair review of the information
required by 4.2.7 and 4.2.8 of the FSA's Disclosure and Transparency Rules; and
- the interim management report includes a fair review of the information
required on related party transactions.
The half-yearly financial report has not been audited or reviewed by the
Company's auditors.
Signed on behalf of the Board of Directors.
Ian Barby
Chairman
17 September 2009
THIRTY LARGEST HOLDINGS AT 31 JULY 2009
Ordinary shares unless stated otherwise
Value % of
Company Activity by Sector £'000 Portfolio
Synergy Healthcare Health Care Equipment & 3,413 3.7
Services
Chemring Aerospace & Defence 2,794 3.0
VT Aerospace & Defence 2,655 2.9
Premier Oil Oil & Gas Producers 2,268 2.5
Croda Chemicals 2,077 2.3
Dignity General Retailers 1,973 2.1
Dechra Pharmaceutical Pharmaceuticals & 1,827 2.0
Biotechnology
Fenner Industrial Engineering 1,656 1.8
Mears Support Services 1,621 1.8
Intec Telecom Systems Software & Computer Services 1,588 1.7
Omega Insurance Non-life Insurance 1,472 1.6
Mouchel Parkman Support Services 1,387 1.5
Homeserve Support Services 1,375 1.5
Xchanging Support Services 1,364 1.5
Domino Printing Electronic & Electrical 1,290 1.4
Equipment
Carillion Construction & Materials 1,236 1.4
Care UK Health Care Equipment & 1,214 1.3
Services
Fidessa Software & Computer Services 1,202 1.3
Just Retirement Life Insurance 1,150 1.2
Beazley Non-life Insurance 1,147 1.2
Babcock Support Services 1,129 1.2
PZ Cussons Household Goods 1,098 1.2
RWS Support Services 1,039 1.1
Rensburg Sheppards General Financial 1,034 1.1
Devro Food Producers 1,032 1.1
Hiscox Non-life Insurance 993 1.1
Brown (N.) General Retailers 963 1.1
Charles Taylor General Financial 956 1.0
Consulting
William Hill Travel & Leisure 949 1.0
Ultra Electronic Aerospace & Defence 946 1.0
44,848 48.6
Other Investments (97) 47,439 51.4
Total Investments (127) 92,287 100.0
CONDENSED STATEMENT OF COMPREHENSIVE INCOME
Year
Ended
31
January
Six Months to 31 July Six Months to 31 July 2009
2009 2008
Revenue Capital Total Revenue Capital Total Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on - 10,604 10,604 - (4,113) (4,113) (36,782)
investments held at fair
value through profit or
loss
Income
UK dividends 1,488 - 1,488 1,961 - 1,961 3,256
Overseas dividends 30 - 30 67 - 67 221
Deposit interest 22 - 22 12 - 12 15
Underwriting commission 7 - 7 12 - 12 15
Interest on VAT 92 - 92 - - - 159
recoverable
Gross return 1,639 10,604 12,243 2,052 (4,113) (2,061) (33,116)
Investment management fee (133) (133) (266) (204) (204) (408) (694)
- note 2
Performance related fee - - - - - (1,374) (1,374) (1,242)
note 2
VAT recoverable on 159 - 159 - - - 1,168
management fees
Other expenses (171) (1) (172) (130) (1) (131) (272)
Net return before finance 1,494 10,470 11,964 1,718 (5,692) (3,974) (34,156)
costs and
taxation
Finance costs - note 2 - - - (4) (18) (22) (22)
Return on ordinary 1,494 10,470 11,964 1,714 (5,710) (3,996) (34,178)
activities before tax
Taxation (2) - (2) - - - (4)
Return after tax 1,492 10,470 11,962 1,714 (5,710) (3,996) (34,182)
Return per ordinary share
Basic - note 3 2.6p 18.1p 20.7p 2.9p (9.6)p (6.7)p (57.9)p
The total column of this statement represents the Company's Income Statement,
prepared in accordance with International Financial Reporting Standards. The
supplementary revenue and capital columns are presented in accordance with the
Statement of Recommended Practice issued by the Association of Investment
Companies. All items in the above statement derive from continuing operations
and the Company has no other gains or losses. No operations were acquired or
discontinued in the period.
CONDENSED BALANCE SHEET
At At At
31 July 31 January 31 July
2009 2009 2008
£'000 £'000 £'000
Non-current assets
Investments held at fair value through 92,287 78,317 112,725
profit or loss
Current assets
Amounts due from brokers 237 613 -
Prepayments and accrued income 329 1,463 481
Cash and cash equivalents 1,374 5,592 4,538
1,940 7,668 5,019
Total assets 94,227 85,985 117,744
Current liabilities
Amounts due to brokers (556) (242) (201)
Accruals (103) (1,395) (105)
(659) (1,637) (306)
Total assets less current liabilities 93,568 84,348 117,438
Provision for performance fee - note 2 - - (1,374)
Net assets 93,568 84,348 116,064
Issued capital and reserves attributable to
equity holders
Share capital 11,539 11,656 11,749
Share premium 21,244 21,244 21,244
Other reserves:
Capital redemption reserve 2,489 2,372 2,279
Capital reserves 54,513 44,651 77,273
Revenue reserve 3,783 4,425 3,519
Total Shareholders' funds 93,568 84,348 116,064
Net asset value per ordinary share
Basic - see note 5 162.2p 144.7p 197.6p
CONDENSED STATEMENT OF CASH FLOW
Six Months Year Six Months
To To To
31 July 31 January 31 July
2009 2009 2008
£'000 £'000 £'000
Cash flow from operating activities
Profit/(loss) before tax 11,964 (34,178) (3,996)
Taxation (2) (4) -
Adjustments for:
Purchases of investments (15,091) (19,933) (9,123)
Sales of investments 12,415 32,270 20,293
(2,676) 12,337 11,170
(Losses)/Gains on investments (10,604) 36,782 4,113
Finance costs - 22 22
Operating cash flows before movements in (1,318) 14,959 11,309
working capital
Decrease/(increase) in receivables 1,134 (1,343) (361)
(Decrease)/increase in payables (1,292) 1,226 1,307
Net cash flows from operating activities (1,476) 14,842 12,255
after tax
Cash flow from financing activities
Interest paid - (45) (45)
Decrease in bank overdraft - (2,764) -
Buy back of shares (608) (4,159) (3,566)
Equity dividends (2,134) (2,282) (1,342)
Net cash used in financing activities (2,742) (9,250) (4,953)
Net (decrease)/increase in cash and cash (4,218) 5,592 7,302
equivalents
Cash inflow from movement in bank - 2,764 -
overdrafts
Cash and cash equivalents at the beginning 5,592 (2,764) (2,764)
of period
Cash and cash equivalents at the period end 1,374 5,592 4,538
CONDENSED STATEMENT OF CHANGES IN EQUITY
Capital
Share Share Redemption Capital Revenue
Capital Premium Reserve Reserve Reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
For the year ended 31
January 2009
At 31 January 2008 12,178 21,244 1,850 86,552 3,147 124,971
Shares bought back and (522) - 522 (4,159) - (4,159)
cancelled
Profit/(loss) for the - - - (37,742) 3,560 (34,182)
year
Dividends paid - - - - (2,282) (2,282)
At 31 January 2009 11,656 21,244 2,372 44,651 4,425 84,348
For the six months ended
31 July 2009
Shares bought back and (117) - 117 (608) - (608)
cancelled
Profit for the period - - - 10,470 1,492 11,962
Dividends paid - - - - (2,134) (2,134)
At 31 July 2009 11,539 21,244 2,489 54,513 3,783 93,568
For the six months ended
31 July 2008
At 31 January 2008 12,178 21,244 1,850 86,552 3,147 124,971
Shares bought back and (429) - 429 (3,569) - (3,569)
cancelled
Profit/(loss) for the - - - (5,710) 1,714 (3,996)
period
Dividends paid - - - - (1,342) (1,342)
At 31 July 2008 11,749 21,244 2,279 77,273 3,519 116,064
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. Basis of Preparation
(a) Accounting Standards and Policies
These condensed financial statements have been prepared using the same
accounting policies as those adopted in the 2009 annual financial report, which
are consistent with International Financial Reporting Standards (`IFRS'), and
Standing Interpretation Committee and International Financial Reporting
Interpretation Committee interpretations issued by the International Accounting
Standards Board to the extent adopted by the EU.
(b) Changes to Presentation
IAS1 `Presentation of Financial Statements' affects the presentation of IFRS
financial statements and is effective for periods beginning on or after 1
January 2009. As a result, the income statement has been redesignated as the
statement of comprehensive income. There is no effect on either the net assets
or earnings of the Company.
2. Management and Performance Fees
The investment management fee is allocated 50% to revenue and 50% to capital;
finance costs are allocated 20% to revenue and 80% to capital.
No performance fee arose in the six months to 31 July 2009 (31 January 2009: £
1,242,000; 31 July 2008: £1,374,000). Performance fees are charged wholly to
capital.
3. Basis of Returns
Six Months Six Months Year
To To To
31 July 31 July 31 January
2009 2008 2009
£ £ £
Returns after tax:
Revenue 1,492,000 1,714,000 3,560,000
Capital 10,470,000 (5,710,000) (37,742,000)
Total 11,962,000 (3,996,000) (34,182,000)
Weighted average number of 57,761,038 59,598,844 59,034,482
ordinary shares in
issue during the period
4. Dividends on Ordinary Shares
For the Rate Six Months Six Months Year
year
Ended Ended Ended Ended
31 Jan 31 Jul 31 Jul 31 Jan
2009 2008 2009
£'000 £'000 £'000
Final 2008 2.25p - 1,342 1,342
Interim 2009 1.60p - - 940
Final 2009 2.50p 1,442 - -
Special 2009 1.20p 692 - -
Dividends 2,134 1,342 2,282
paid
An interim dividend of 1.6p per ordinary share (2008: 1.6p) will be paid on 23
October 2009 to shareholders on the register on 25 September 2009.
5. Basis of Net Asset Value per Ordinary Share
At 31 July At 31 July At 31 January
2009 2008 2009
Shareholders' funds £93,568,000 £116,064,000 £84,348,000
Ordinary shares in issue at 57,694,629 58,742,629 58,279,629
period end
6. Movements in Share Capital
Six Months Six Months Year
To 31 July To 31 July To 31 January
2009 2008 2009
Number of ordinary 20p shares:
Brought forward 58,279,629 60,889,229 60,889,229
Buy backs in period (585,000) (2,146,600) (2,609,600)
In issue at period end 57,694,629 58,742,629 58,279,629
The average share price of shares bought back in the six months to 31 July 2009
was 103p.
7. VAT
As reported in the 2009 annual financial report, the Company recognised £
1,168,000 of VAT recoverable from HM Revenue & Customs (`HMRC') for the period
2001 to 2007, together with £159,000 of interest. These amounts were
subsequently received in May 2009. Following further discussions by the
Company's Manager with HMRC, a further refund of £159,000 plus interest of £
92,000 thereon, were both recognised and received in the period under review.
These latter amounts added a further 0.44p per share to the net asset value
based on the period end number of shares in issue.
8. Investment Trust Status
It is the intention of the Directors to conduct the affairs of the Company so
that it satisfies the conditions for approval as an investment trust company
set out in section 842 of the Income and Corporation Taxes Act 1988.
9. Status of Half-Yearly Financial Report
The financial information contained in this half-yearly financial report, which
has not been reviewed or audited by the independent auditors, does not
constitute statutory accounts within the meaning of section 434 of the
Companies Act 2006. The financial information for the half years ended 31 July
2008 and 31 July 2009 has not been audited. The figures and financial
information for the year ended 31 January 2009 are extracted and abridged from
the latest published accounts and do not constitute the statutory accounts for
that year. Those accounts have been delivered to the Registrar of Companies and
include the Report of the Independent Auditors, which was unqualified.
By order of the Board
Invesco Asset Management Limited
Company Secretary
17 September 2009
www.invescoperpetual.co.uk/investmenttrusts
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