Final Results
MONTANARO UK SMALLER COMPANIES INVESTMENT TRUST PLC
PRELIMINARY ANNOUNCEMENT OF AUDITED ANNUAL RESULTS
The Directors announce the audited statement of results for the year ended 31
March 2003 as follows:-
SUMMARISED STATEMENT OF TOTAL RETURN
(incorporating the revenue account*) of the Company
1 April 2002 to 31 March 1 April 2001 to 31 March
2003 2002
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Capital losses on
investments - (29,413) (29,413) - (10,702) (10,702)
Dividends and interest 2,179 - 2,179 2,256 - 2,256
receivable
Other income - - - 13 - 13
Investment management (386) (387) (773) (510) (510) (1,020)
fee
Other expenses (238) - (238) (422) - (422)
Net return before
financing costs
and taxation 1,555 (29,800) (28,245) 1,337 (11,212) (9,875)
Interest payable and
similar
charges (299) (299) (598) (311) (311) (622)
Return on ordinary
activities
before taxation 1,256 (30,099) (28,843) 1,026 (11,523) (10,497)
Taxation on ordinary - - - - - -
activities
Return on ordinary 1,256 (30,099) (28,843) 1,026 (11,523) (10,497)
activities after
taxation
Dividend proposed (928) - (928) (690) - (690)
Transfer to/(from)
reserves
after dividends proposed 328 (30,099) (29,771) 336 (11,523) (11,187)
Pence Pence Pence Pence Pence Pence
Return per ordinary 3.37 (80.72p) (77.35p) 2.66 (29.84) (27.18)
share
* The revenue column of this statement is the revenue account of the Company.
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the year.
SUMMARISED BALANCE SHEET
As at As at
31 March 31 March
2003 2002
£'000 £'000
Investments 44,728 78,543
Net current assets/(liabilities) 9,270 (4,774)
Total assets less current liabilities 53,998 73,769
Creditors - amounts falling due after
more than one year (10,000) -
Net assets 43,998 73,769
Net asset value per ordinary share 118.00p 197.84p
STATEMENT OF CASHFLOWS
Year to 31 Year to 31
March March
2003 2002
£'000 £'000
Operating activities
- Investment income received 2,101 2,044
- Deposit interest received 155 262
- Underwriting commission received - 13
- Investment Management fee (681) (1,327)
- Company Secretarial fees paid (51) (50)
- Other cash expenses (345) (606)
Net cash inflow from operating activities 1,179 336
Servicing of finance
- Interest and similar charges paid (615) (614)
Net cash outflow from servicing of finance (615) (614)
Taxation
- Taxation recovered 2 105
Net inflow from taxation 2 105
Capital expenditure and financial investment
- Purchases of investments (16,560) (21,365)
- Sales of investments 20,589 22,740
Net cash inflow from capital expenditure
and financial investment 4,029 1,375
Equity dividends paid (690) (120)
Financing
- Proceeds of credit facility 2,500 -
- Ordinary shares purchased for cancellation - (4,037)
Net cash inflow/(outflow) from financing 2,500 (4,037)
Increase/(decrease) in cash 6,405 (2,955)
The financial information set out above does not constitute the Company's
statutory accounts for the years ended 31 March 2002 or 2003. Statutory
accounts for 2002 have been delivered to the Registrar of Companies, whereas
those for 2003 will be delivered following the Company's Annual General
Meeting. The auditors have reported on those accounts; their reports were
unqualified and did not contain a statement under section 237 (2) or (3) of the
Companies Act 1985.
CHAIRMAN'S STATEMENT
Background
The Company was launched on 16 March 1995 as an asset allocation vehicle for
institutional shareholders to invest in quoted UK 'smaller' companies. In 1996,
the initial £25 million Company was increased in size through a £30 million 'C'
share issue. Net assets now stand at £44 million.
At the time of the launch, 'smaller' companies were defined as those with a
market capitalisation of £100 million or less. Currently, the Company invests
in companies falling within the smallest ten per cent of the UK stock market
('the HGSC'). The HGSC includes companies up to £600 million in size. The
investment policy remains to research and invest in the 'smaller' end of the
quoted UK small companies market.
Performance
In the year to 31 March 2003, the NAV of the Company declined by 40 % to
118.00p (2002: 197.84p) in comparison with a 35 % fall by the SmallCap.
Since the launch of the Company , the NAV of the Company has increased by 20 %.
T he SmallCap has fallen over this eight-year period by 3 %.
Last year, the Company underperformed the SmallCap for the first time since
launch, having outperformed for seven consecutive years.
Dividend
T he Company's primary focus is on capital appreciation rather than income. T
he Board proposes a final dividend of 2.49p (2002: 1.85p) per ordinary share,
which is the minimum payable. The final dividend will be payable on 31 July
2003 to shareholders on the register at the close of business on 6 June 2003.
Discount
The Company focuses on quoted UK 'smaller' companies, which are less widely
researched. The illiquidity of the underlying investments tends to be reflected
in the level of discount of the Company.
The discount of the Company's share price to NAV on 31 March 2003 was 21%, in
line with the sector average of 21% (Source: Thomson Financial). The discount
of the Company over the past eight years has averaged 16% (Source: Bloomberg).
Share Buy Backs
The Board is responsible for the implementation of the share buy back
programme, which is undertaken at arm's length from the Manager.
The Board continues to consider share buy backs as and when appropriate. A
resolution to renew this authority will be put to shareholders at the
forthcoming Annual General Meeting.
Gearing
The Board reviews the level of gearing considered appropriate for the Company.
One of the benefits of investment trusts is the ability to hold prudent levels
of gearing, which can enhance investment returns.
On 1 August 2002, the Company's £15 million gearing facility expired and was
renewed. The new facility will mature on 1 August 2007 and has been reduced to
£10.0 million at a fixed rate of 5.73%.
The Board
Peter Griffiths will be retiring from the Board on reaching his 70th birthday
in September this year. I would like to record my thanks to him for his support
and valuable contribution during his time as a Director of the Company. Both I,
and my fellow Directors, wish him well for a long and happy retirement.
I am pleased to welcome Laurie Petar to the Board. He has spent many years in
the City specialising in investment trusts and has wide ranging expertise in
the sector. I very much look forward to working with him.
The Higgs Review
A review of the role and effectiveness of non-executive directors by Derek
Higgs was published in January 2003. It has created some controversy but,
without endorsing all the detailed recommendations, any review that seeks to
improve corporate governance must surely be welcomed. Much of the unease among
investors in recent times and the associated weakness of stock markets has been
caused by concerns over corporate conduct. High standards of corporate
governance will protect and enhance shareholder interests, which should help to
restore investor confidence.
Higgs endorsed the central theme of Paul Myners' review in April 2001, which
argued that institutional shareholders should be more actively involved with
the companies in which they invest. He believes that 'institutional
shareholders have a responsibility to make considered use of their votes.
[They] should enter into a dialogue with companies based on the mutual
understanding of objectives [and] when evaluating companies' governance
arrangements, particularly those relating to board structure and composition,
institutional investors should give due weight to all relevant factors drawn to
their attention. [They] should, on request, make available to their clients
information on the proportion of resolutions on which votes were cast [and]
should take steps to ensure their voting intentions are being translated into
practice [and] should be expected to attend AGMs where practicable'.
While at first sight such suggestions are commendable, they will place a
considerable burden on fund managers. They come at a time when many
institutional investors in UK small companies have reduced internal resources
to cut costs and are already stretched. This is less of a problem for
specialists. The Manager already complies with many of the review's suggestions
and considers good governance an essential part of the investment
decision-making process.
Corporate governance responsibilities are taken seriously by the Directors and
Manager: shares are voted at AGMs as a matter of policy; an active dialogue
with executive management is encouraged through one-on-one meetings; bonus
schemes (including options) are openly debated with management; the splitting
of the roles of Chairman and Chief Executive is encouraged; meetings with
non-executive directors of investee companies (without executive directors
present) are requested when necessary; candidates to become potential new
directors are put forward (on request) for consideration by nominations
committees.
It will be interesting to see the final shape of the Higgs Review following a
period of consultation. In the case of UK small listed companies, he has taken
a pragmatic approach: 'The Review recognises that it may take more time for
smaller listed companies to comply and that some of the Code's provisions may
be less relevant or manageable for smaller companies (paragraph 16.8)'.
Investing in Equities
From its peak on 4 September 2000, the SmallCap has more than halved. Last
year, the UK stock market saw the worst performance in both absolute and
relative terms since 1974. For more than three years, investors have suffered
one of the most extreme and longest Bear Markets in living memory. The most
recent Barclays Equity-Gilt Study shows that equities gave investors real
annual returns of just 3.9% over the past decade, less than half that of
corporate bonds and only marginally better than cash at 3.4%. It is small
wonder that investors are questioning whether the cult of the equity is finally
over.
Before throwing in the towel, equity investors can take some comfort from
looking at the longer-term picture. This same study also highlights that £100
in 1899 would be worth £15,000 today if held in cash; £17,000 if invested in
gilts; and £815,000 if invested in equities with dividends re-invested. The key
to the higher returns lies in the importance of dividends, compounding over
time, to overall investment returns.
For the first time since 1957, the dividend yield on the UK stock market in
2003 has been greater than the yield on gilts. Clearly the income on gilts is
fixed, whereas dividend income should grow over time in line with profits and
the economy. As HSBC argue: 'We can see no justification for an asset offering
a growing income stream [equities] to have the same upfront yield to one
offering no growth ever [bonds], unless the income stream on equities is
expected to actually fall. We have no such expectation for the UK and therefore
see the dividend yield-bond yield parity as an absolute floor for the market'.
As Alistair Ross Goobey states: 'Today, equities are better value against bonds
than they have been for a generation' (Source: FTfm - 10 March 2003). The
authors of the Barclays Equity-Gilt Study recommend that most investors should
avoid bonds and overweight equities.
For those investors swayed by such arguments and keen to gain diversified
exposure to UK equities, there remains the choice of investing in large or
small companies. One of the obvious benefits of investing in the FTSE-100 Index
is liquidity, the ability to buy and sell shares at short notice. However,
future returns are likely to be lower than in the heady days of the bull market
in the 1980s and 1990s, commentators suggest possibly in the range of 7% - 8%
per annum. In a low inflationary environment this still represents historically
attractive real returns.
On the other hand, UK small companies have outperformed large companies by more
than 3% per annum since 1955 (Source: ABN Amro). They tend to underperform
during periods of economic slowdown and uncertainty but outperform in times of
recovery, benefiting from a strong domestic economy. Almost 1,300 companies
fall within the HGSC, offering a wide choice of companies that are less well
researched. At the end of March 2003, small companies were also almost 30%
cheaper overall, based on price earnings ratio, than large companies (Source:
ABN Amro).
Fund Managers
One of the features of the present bear market has been the impact on the fund
management industry, which had come to expect the bull market since the early
1980s to continue forever. The excesses of what Warren Buffet terms the 'Great
Bubble' led to overhead structures that could not support the dramatic
subsequent fall in revenues. We are now witnessing long overdue cost cutting by
many financial institutions.
A number of brokers have withdrawn from the UK small companies market, leading
to less research and reduced market-making capacity. Financial institutions
facing the need to reduce costs have reduced internal resources devoted to
small companies just at the time when support from brokers is diminishing and,
if anything, more resource is needed. Many small company funds have fallen so
much in value that they are no longer viable to fund managers.
Fund Managers cannot simply abrogate their responsibility and leave portfolios
inadequately managed. One possible solution would be for them to outsource UK
small company mandates to specialist investors, as is commonly done in the case
of private equity and property. This could reduce cost, allow internal
resources to be deployed more efficiently elsewhere and bring the potential for
higher returns. It would also enable institutional investors to meet the
recommendations of the Higgs Review for more active management.
SIR BRANDON GOUGH
Chairman
23 May 2003
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