Half-yearly Report
Invesco Perpetual UK Smaller Companies Investment Trust plc
Half-Yearly Financial Report for the Six Months to 31 July 2011
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 2011.
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 %
2011 2011 CHANGE
Total return
(all income
reinvested)
for the six
months ended
31 July 2011:
Net asset +4.1
value*
Benchmark +3.5
index*
FTSE +1.2
All-Share
Index*
Net asset
value and
share price:
Net asset
value per
ordinary
share:
- balance 250.2p 242.9p +3.0
sheet
- after 248.6p 240.2p +3.5
charging
proposed
dividend
Mid-market 210.8p 195.0p +8.1
price per
ordinary
share
Discount per 15.8% 19.7%
ordinary
share
Shareholders' 136,738 133,999 +2.0
funds (£'000)
Capital
return -
Indices:
Benchmark* +2.0
FTSE -0.6
All-Share
Index*
*Source:
Thomson
Reuters and
Morningstar
SIX MONTHS SIX MONTHS
ENDED ENDED
31 JULY 31 JULY
2011 2010
Return and
dividend per
ordinary
share:
Revenue 2.8p 2.5p
return
Capital 6.8p 7.5p
return
Total return 9.6p 10.0p
Interim 1.6p 1.6p
dividend
AT AT AT
31 JULY 31 JANUARY 31 JULY
2011 2011 2010
Gearing
- gross nil nil nil
gearing(1)
- net gearing -0.1% -0.6% -6.3%
(2)
- potential 14.6% 14.9% 17.4%
gearing(3)
(1) Gross Gearing
This reflects the amount of gross borrowings in use by a company and takes no
account of any cash balances. It is based on gross borrowings as a percentage
of shareholders' funds.
(2) Net Gearing
This reflects the amount of net borrowings invested, ie borrowings less cash
and bond holdings. It is based on net borrowings as a percentage of
shareholders' funds.
(3) Potential Gearing
This reflects the maximum potential borrowings of a company taking into account
both any gearing limits laid down in a company's investment policy and the
maximum borrowings laid down in covenants under a company's borrowing facility.
It is calculated from maximum potential borrowings as a percentage of
shareholders' funds.
A positive percentage indicates the extent to which shareholders' funds are
geared; a nil gearing percentage, or `nil', shows a company is ungeared. A
negative percentage indicates that a company is not fully invested.
Chairman's Statement incorporating the interim management report
Chairman's Statement
During the six months under review, the Company achieved an increase in net
asset value of 4.1% on a total return basis, out-performing the benchmark
Extended Hoare Govett Smaller Companies Index (excluding Investment Trusts),
which rose by 3.5%. It also out-performed the FTSE All-Share Index, which rose
by 1.2% over the same period.
This out-performance is due to the continuing cautious stance adopted by the
Company's managers and their persistence in investing only in quality companies
with solid balance sheets and proven business models. This approach will not
work all the time, as stock markets sometimes reward companies that, prima
facie, do not deserve it. However, your Board continues to support the
managers' preference for higher quality stocks and their belief that, over
time, they will deliver better and more consistent returns for shareholders.
I am pleased to note that the mid-market price of the Company's shares rose
during the period from 195.0p to 210.8p per share and the discount narrowed
from 19.7% at the beginning of the period to 15.8% as at 31 July 2011. Since
the period end, subsequent events have proved less positive.
Share Buy Backs
During this six month period, the Company bought back and cancelled 508,945
ordinary shares at a weighted average price of 206p per share and at an average
discount to NAV of 18.1%, enhancing the NAV per share by nearly 0.2%.
Interim Dividend
The Board is pleased to declare an interim dividend of 1.6p per share to be
paid on 21 October 2011 to shareholders on the register on 30 September 2011.
This is the same level as the interim dividends paid in respect of the years
ended 31 January 2009, 2010 and 2011.
Outlook
The outlook for the UK and world economies is probably less clear now than it
was a few months ago. A degree of confidence had returned at the beginning of
2011 that, whilst the road was long and difficult to navigate, the right tools
had been employed to ensure that recovery would be forthcoming. Since then, the
world has experienced a number of shocks including the natural disaster in
Japan, continuing unrest in the Middle East, the Arab Spring spreading amongst
dictator-led nations. Most importantly, economic turmoil within the Euro
countries, from a financial and economic viewpoint, and poor leadership
demonstrated by the US when negotiating its debt ceiling restructuring have
worsened the outlook. Such problems and lack of leadership have led investors
to flee to safe-haven investments, such as gold and the Swiss franc. Equities
have suffered as a result.
In this environment, your Company's managers have performed well especially as
smaller companies listed in the UK tend to have a greater focus on the UK
economy.
It is now widely believed that growth will be slower and recovery will take
even longer than originally envisaged. During this period, interest rates are
likely to stay low for an extended period and there is a chance of more support
for markets and economies through a third round of Quantative Easing, both in
the UK and the US. With or without such support, your managers' preference for
a balanced and diversified portfolio of high quality companies is likely to be
the right one and your Board believes that this is the surest way to ride out
the current period of market uncertainty and volatility until economic recovery
is a reality.
Ian Barby
Chairman
16 September 2011
Investment Manager's Report
Investment Review
The FTSE All-Share Index appeared to take political tensions in the Middle
East, European sovereign debt crises, the threat of a Greek default and the
Japanese earthquake in its stride to end the period up 1.2%, on a total return
basis. Smaller companies as measured by the Extended Hoare Govett Smaller
Companies Index (ex investment trusts) fared slightly better, ending up 3.5%,
in part due to their greater exposure to industrial stocks but lower exposure
to financial and mining sectors than their larger counterparts.
Against this background, your Company produced an increase in net asset value
on a total return basis of 4.1% for the half-year. The portfolio benefited from
overweight positions in the Industrial Engineering, Electronic & Electrical
Equipment and Software sectors but was hurt by its exposure to the Aerospace &
Defence and Oil & Gas sectors. At the individual stock level the best
performers were Fenner, whose share price increased by 16% as a result of a
number of earnings upgrades due to the continued recovery in its industrial
polymers division and a strong performance from its heavy duty conveyor belting
division. Babcock, a defence services business which maintains nuclear
submarines and runs army bases, also added to performance (+16%), as did
Diploma (+32%) which distributes seals, medical products and controls in North
America and Europe. Detractors from the portfolio included defence business
Chemring, which, despite profit upgrades, suffered from negative sentiment
towards the sector, as well as oil & gas exploration company Gulfsands
Petroleum, whose principal assets are in Syria.
Investment and Portfolio Strategy
Although we are four years on from the onset of the credit crunch, many
governments have only just started taking affirmative action to address the
underlying causes of the on-going economic problems, namely excessive leverage
caused by trade and budget deficits. Most politicians hoped that a period of
quantitative easing and record low interest rates, helped by strong economic
growth in emerging countries, would boost growth in the developed economies and
provide a stronger platform upon which to institute spending cuts. This appears
not to have been the case. Growth has been anaemic and government debt is still
growing rapidly. Moreover, the unfortunate side effect of this extremely loose
monetary policy has been higher inflation, driven by a combination of weakening
currencies in the west and higher commodity prices, caused by emerging market
infrastructure spend and financial speculation. Politicians in Europe continue
to be reluctant to force through austerity measures, a situation mirrored in
the US ahead of the 2012 presidential elections.
While we believe inflation in the UK will be lower next year than this, due to
lower commodity prices and the effects of the VAT increase annualising out,
economic growth is likely to remain lacklustre. Consumers are stretched by slow
wage growth, higher taxes and the increased cost of living. The fear of job
cuts continues to weigh on consumer sentiment, as does a weak housing market.
The picture in the public sector is equally difficult, with government spending
forecast to contract in real terms for a sustained period of time. These two
sectors combined account for almost 90% of UK GDP, suggesting to us that a
healthy level of growth will be hard to achieve for some time to come.
In our view, the situation in the Eurozone requires either full fiscal
integration, which would be hard to achieve and politically difficult to sell
to the electorates of Europe, or ultimately a break up of the euro, which would
inevitably be followed by debt defaults and another banking crisis.
The growth prospects for emerging markets remain attractive, with favourable
demographics and a lower cost of production. However, inflation is becoming a
serious issue, particularly the rise in basic commodities such as foodstuffs,
translating into demands for higher wages. Interest rates have risen sharply in
many of these countries and, with the notable exception of the dollar pegged
Chinese renminbi, have resulted in stronger currencies, which, if sustained, we
believe will erode the competitive advantage that these countries enjoy.
While the global economic situation is likely to remain difficult, we continue
to see equities (and within this smaller companies) as an attractive asset
class. We believe they offer investors the prospect of real returns, mainly via
dividends, that are not currently available from fixed income securities or
bank deposits. Valuations, in terms of P/E ratios, are low compared to
historical levels and many publicly quoted companies have healthy balance
sheets. One of the attractions of the smaller companies sector is its depth of
businesses, with products and services addressing niche, growth areas of the
economy. Another positive factor is the upside potential offered by take-overs
of smaller companies by their larger counterparts to augment lacklustre organic
growth. Significant cash balances are available, earning virtually nothing. We
hope to see an increase in takeover activity over the coming months.
As ever, we seek to run a balanced portfolio of quality companies. The emphasis
within the portfolio continues to be on high quality, export-led businesses
with strong pricing power and domestic companies with exposure to higher growth
niches. With this in mind, we retain significant exposure to the industrial
sector, through companies such as Fenner, Babcock and Domino Printing, and
healthcare, through businesses such as Synergy Health. We remain cautious about
consumer focused stocks and financials, although we see selective opportunities
even here.
Outlook
Since the start of August, markets have suffered a significant set back,
falling over 17% from peak to trough, triggered by the downgrade of US debt by
Standard & Poor's and continuing debt fears within the Eurozone. Despite
reduced growth forecasts, we take a slightly more positive view of events. We
think the US economy will prove more resilient than expected and would point to
the recent pick-up in money supply growth. We also feel that the Federal
Reserve will be supportive of the US economy in the run-up to the elections in
2012. If we are correct, markets should stage a rally before the end of 2011,
which in turn will feed through to smaller companies.
Richard Smith Jonathan Brown
Invesco Asset Management Limited
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 Manager's website.
Principal Risks and Uncertainties
The principal risks and uncertainties that could affect the Company's business
are detailed on pages 22 and 23 of the latest published annual report which is
available on the Manager's website. These are disclosed under the following
headings:
- Investment Objective;
- Market Movements and Portfolio Performance;
- Regulatory and Tax Related; and
- Reliance on Third Party Providers.
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.
Going Concern
The financial statements have been prepared on a going concern basis. The
Directors consider this is the appropriate basis as the Company has adequate
resources to continue in operational existence for the foreseeable future. In
considering this, the Directors took into account the diversified portfolio of
readily realisable securities which can be used to meet funding commitments,
and the ability of the Company to meet all of its liabilities and ongoing
expenses from its assets.
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 4.2.7R and 4.2.8R of the UKLA'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
16 September 2011
THIRTY LARGEST HOLDINGS AT 31 JULY 2011
Ordinary shares unless stated otherwise
VALUE % OF
COMPANY ACTIVITY BY £'000 PORTFOLIO
SECTOR
Synergy Health Health Care 5,542 4.1
Equipment &
Services
Fenner Industrial 5,064 3.7
Engineering
Babcock Support 4,738 3.5
Services
Croda Chemicals 3,671 2.7
International
Chemring Aerospace & 3,207 2.4
Defence
Homeserve Support 2,711 2.0
Services
Domino Printing Electronic & 2,629 1.9
Electrical
Equipment
Dechra Pharmaceuticals 2,605 1.9
Pharmaceuticals & Biotechnology
Diploma Support 2,415 1.8
Services
Melrose Industrial 2,315 1.7
Engineering
RPC General 2,134 1.6
Industrials
Filtrona Support 2,003 1.5
Services
Elementis Chemicals 1,976 1.4
Mears Support 1,888 1.4
Services
Fidessa Software & 1,765 1.3
Computer
Services
Avocet Mining Mining 1,763 1.3
Greene King Travel & 1,725 1.3
Leisure
Spectris Electronic & 1,709 1.3
Electrical
Equipment
Paypoint Support 1,696 1.2
Services
Dignity General 1,694 1.2
Retailers
Cape Oil Equipment, 1,650 1.2
Services &
Distribution
RWS Support 1,634 1.2
Services
Victrex Chemicals 1,631 1.2
Premier Oil Oil & Gas 1,629 1.2
Producers
Microgen Software & 1,626 1.2
Computer
Services
BTG Pharmaceuticals 1,578 1.2
& Biotechnology
JamesHalstead Construction & 1,544 1.1
Materials
Brown (N.) General 1,524 1.1
Retailers
Globeop Financial 1,521 1.1
Financial Services
Hargreaves Support 1,488 1.1
Service Services
69,075 50.8
Other 67,264 49.2
Investments
(80)
Total 136,339 100.0
Investments
(110)
CONDENSED STATEMENT OF COMPREHENSIVE INCOME
YEAR
ENDED
31
JANUARY
SIX MONTHS TO 31 JULY SIX MONTHS TO 31 JULY 2011
2011 2010
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Gains on - 4,138 4,138 - 4,485 4,485 27,225
investments
held at fair
value
through
profit or
loss
Income
UK dividends 1,849 - 1,849 1,614 - 1,614 2,749
UK unfranked 4 - 4 - - - 25
investment
income
Overseas 73 - 73 111 - 111 210
dividends
Underwriting - - - 1 - 1 1
commission
Gross return 1,926 4,138 6,064 1,726 4,485 6,211 30,210
Investment (219) (219) (438) (177) (177) (354) (754)
management
fee - note 2
Performance - (180) (180) - - - -
fee - note 2
Other (163) (1) (164) (132) - (132) (296)
expenses
Net return 1,544 3,738 5,282 1,417 4,308 5,725 29,160
before
finance
costs and
taxation
Finance - - - - - - -
costs - note
2
Net return 1,544 3,738 5,282 1,417 4,308 5,725 29,160
on ordinary
activities
before
taxation
Taxation (1) - (1) - - - (1)
Net return 1,543 3,738 5,281 1,417 4,308 5,725 29,159
after tax
Return per
ordinary
share
Basic - note 2.8p 6.8p 9.6p 2.5p 7.5p 10.0p 51.3p
3
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
Registered AT AT AT
number
2129187
31 JUL 31 JUL 31 JAN
2011 2010 2011
£'000 £'000 £'000
Non-current
assets
Investments 136,339 107,732 133,237
held at fair
value through
profit or
loss
Current
assets
Amounts due 457 111 448
from brokers
Prepayments 375 213 180
and accrued
income
Cash and cash 159 7,207 847
equivalents
991 7,531 1,475
Total assets 137,330 115,263 134,712
Current
liabilities
Amounts due (277) (74) (495)
to brokers
Accruals (135) (277) (218)
Provision for (180) - -
performance
fee
(592) (351) (713)
Net assets 136,738 114,912 133,999
Issued
capital and
reserves
Share capital 10,930 11,421 11,032
Share premium 21,244 21,244 21,244
Other
reserves:
Capital 3,098 2,607 2,996
redemption
reserve
Capital 97,715 75,928 95,030
reserve
Revenue 3,751 3,712 3,697
reserve
Total 136,738 114,912 133,999
Shareholders'
funds
Net asset
value per
ordinary
share
Basic - see 250.2p 201.2p 242.9p
note 5
CONDENSED STATEMENT OF CASH FLOW
SIX MONTHS SIX MONTHS YEAR
TO TO TO
31 JUL 31 JUL 31 JAN
2011 2010 2011
£'000 £'000 £'000
Cash flow
from
operating
activities
Profit 5,282 5,725 29,160
before tax
Taxation (1) - (1)
Adjustments
for:
Purchases of (16,321) (8,820) (29,819)
investments
Sales of 17,130 14,760 33,077
investments
809 5,940 3,258
Gains on (4,138) (4,485) (27,225)
investments
Operating 1,952 7,180 5,192
cash flows
before
movements in
working
capital
(Increase)/ (195) 25 58
decrease in
receivables
Increase/ 112 (20) 83
(decrease)
in payables
Net cash 1,869 7,185 5,333
flows from
operating
activities
after tax
Cash flows
from
financing
activities
Buy back of (1,068) (368) (3,966)
shares
Equity (1,489) (1,549) (2,459)
dividends
Net cash (2,557) (1,917) (6,425)
used in
financing
activities
Net (688) 5,268 (1,092)
(decrease)/
increase in
cash and
cash
equivalents
Cash and 847 1,939 1,939
cash
equivalents
at the
beginning of
period
Cash and 159 7,207 847
cash
equivalents
at the end
of the
period
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
six
months
ended 31
July 2011
At 31 11,032 21,244 2,996 95,030 3,697 133,999
January
2011
Profit - - - 3,738 1,543 5,281
for the
year
Shares (102) - 102 (1,053) - (1,053)
bought
back and
cancelled
Dividends - - - - (1,489) (1,489)
paid -
note 4
At 31 10,930 21,244 3,098 97,715 3,751 136,738
July 2011
For the
six
months
ended 31
July 2010
At 31 11,492 21,244 2,536 72,165 3,844 111,281
January
2010
Profit - - - 4,308 1,417 5,725
for the
period
Shares (71) - 71 (545) - (545)
bought
back and
cancelled
Dividends - - - - (1,549) (1,549)
paid -
note 4
At 31 11,421 21,244 2,607 75,928 3,712 114,912
July 2010
For the
year
ended 31
January
2011
At 31 11,492 21,244 2,536 72,165 3,844 111,281
January
2010
Profit - - - 26,847 2,312 29,159
for the
year
Shares (460) - 460 (3,982) - (3,982)
bought
back and
cancelled
Dividends - - - - (2,459) (2,459)
paid
At 31 11,032 21,244 2,996 95,030 3,697 133,999
January
2011
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. Basis of Preparation
Accounting Standards and Policies
These condensed financial statements have been prepared using the same
accounting policies as those adopted in the 2011 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.
2. Management Performance Fees and Finance Costs
The investment management fee is allocated 50% to revenue and 50% to capital;
finance costs are allocated 20% to revenue and 80% to capital.
Performance-related fees are charged wholly to capital and at the period end, a
provision of £180,000 (31 July 2010 and 31 January 2011: nil) is included in
the financial statements.
3. Basis of Returns
SIX MONTHS SIX MONTHS YEAR
TO TO TO
31 JUL 31 JUL 31 JAN
2011 2010 2011
Returns
after tax:
Revenue £1,543,000 £1,417,000 £2,312,000
Capital £3,738,000 £4,308,000 £26,847,000
Total £5,281,000 £5,725,000 £29,159,000
Weighted 55,031,620 57,336,480 56,878,794
average
number of
ordinary
shares in
issue during
the period
4. Dividends on Ordinary Shares
RATE SIX SIX YEAR
MONTHS MONTHS
ENDED ENDED ENDED
31 JUL 31 JUL 31 JAN
2011 2010 2011
£'000 £'000 £'000
Second 2.7p - 1,549 1,549
interim
2010
First 1.6p - - 910
interim
2011
Final 2.7p 1,489 - -
2011
Dividends 1,489 1,549 2,459
paid
An interim dividend of 1.6p per ordinary share (2010: 1.6p) will be paid on 21
October 2011 to shareholders on the register on 30 September 2011.
5. Basis of Net Asset Value per Ordinary Share
AT 31 JUL AT 31 JUL AT 31 JAN
2011 2010 2011
Shareholders' £ £ £
funds 136,738,000 114,912,000 133,999,000
Ordinary 54,650,084 57,104,629 55,159,029
shares in
issue at
period end
6. Movements in Share Capital
SIX MONTHS SIX MONTHS YEAR
TO 31 JUL TO 31 JUL TO 31 JAN
2011 2010 2011
Number of
ordinary 20p
shares:
Brought 55,159,029 57,459,629 57,459,629
forward
Bought back (508,945) (355,000) (2,300,600)
and
cancelled in
period
In issue at 54,650,084 57,104,629 55,159,029
period end
The average share price of shares bought back in the six months to 31 July 2011
was 206.01p.
In the period under review, no shares have been held in treasury.
After the period end an additional 400,000 shares were repurchased and
cancelled at an average share price of 187.7p.
7. 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 1159 of the Corporation Tax Act 2010.
8. 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
2010 and 31 July 2011 has not been audited. The figures and financial
information for the year ended 31 January 2011 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
16 September 2011
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