Half-yearly Report
Montanaro UK Smaller Companies Investment Trust PLC ("MUSCIT" or the "Company")
Half-yearly Report for the six months ended 30 September 2014
MUSCIT was launched in March 1995 and is listed with the UKLA and its shares
are traded on the London Stock Exchange.
Investment Objective
The investment objective is capital appreciation through investing in small
quoted companies listed on the London Stock Exchange or traded on the
Alternative Investment Market ("AIM") and to achieve relative outperformance of
its benchmark, the Numis Smaller Companies Index (excluding Investment
Companies) ("NSCI").
No unquoted investments are permitted.
Investment Policy
The Company seeks to achieve its objective and to diversify risk by investing
in a portfolio of quoted UK smaller companies. At the time of initial
investment, a potential investee company must be profitable and no bigger than
the largest constituent of the NSCI, which represents the smallest 10% of the
UK Stock Market by value. At the start of 2014, this was any company below £1.7
billion in size. The Manager focuses on the smaller end of this index.
In order to manage risk, the Manager will normally limit any one holding to a
maximum of 4% of the Company's investments. The portfolio weighting of each
investment is closely monitored to reflect the underlying liquidity of the
particular company. The Company's AIM exposure is also closely monitored by the
Board and is limited to 30% of total investments, with Board approval required
for exposure above 25%.
The Manager is focused on identifying high quality niche companies operating in
growth markets. This typically leads the Manager to invest in companies that
enjoy high barriers to entry, pricing power, a sustainable competitive
advantage and strong management teams. The portfolio is therefore constructed
on a "bottom up" basis.
The AIFM, in consultation with the Board, is responsible for determining the
gearing levels of the Company and has determined that the Company's borrowings
should be limited to 25% of shareholders' funds. Gearing is used to enhance
returns when the timing is considered appropriate. The Company currently has
credit facilities of £25 million with ING Bank of which £18 million was drawn
down as at 30 September 2014, at which date, net gearing amounted to 10.2% of
shareholders' funds.
Alternative Investment Fund Managers' Directive
The Alternative Investment Fund Managers' Directive ("AIFMD") is a European
Directive that creates a European-wide framework for regulating managers of
alternative investment funds. Closed-ended investment companies fall within the
remit of these regulations, which came fully into force on 22 July 2014.
The Board has reviewed the impact of the AIFMD on the Company's operations and,
with effect from 22 July 2014, appointed Montanaro Asset Management Limited
("Montanaro") as the Company's Alternative Investment Fund Manager and Bank of
New York Mellon as Depositary and Custodian.
Change in Investment Manager's fee
As reported in the Annual Report, with effect from 1 April 2014, the investment
management fee decreased from 1% p.a. to 0.85% p.a. of gross assets. In
addition, the performance fee was removed.
Highlights
for the six months to 30 September 2014
Total Return
Net Asset Value ("NAV") -10.0% (£175m)
Gross assets -9.1% (£193m)
Share price -10.5% (£149m*)
Numis Smaller Companies Index** -6.7%
* Market capitalisation
** Excluding Investment Companies
Capital Return
As at As at % Change
30 September 31 March
2014 2014
NAV per Ordinary share (excluding 515.22p 580.38p (11.2)
current period revenue)
Ordinary share price 445.00p 505.50p (12.0)
Benchmark (NSCI Capital Return) 6,241.47 6,799.82 (8.2)
NAV Performance vs Benchmark***
(to 30 September 2014)
6 months 3 years 5 years Since
inception
March 1995
% % % %
NAV (excluding current period (11.2) 33.4 87.8 422.6
revenue)
Benchmark*** (8.2) 35.7 30.4 99.4
(Underperformance)/ (3.0) (2.3) 57.4 323.2
outperformance
*** Previous benchmark of FTSE SmallCap (excluding Investment Companies) to 31
March 2013 and Numis Smaller Companies Index (excluding Investment Companies)
from 1 April 2013.
Capital Structure
As at 30 September 2014, the Company had 33,475,958 Ordinary shares of 10p each
in issue (none of which were held in Treasury). Holders of Ordinary shares have
unrestricted voting rights of one vote per share at all general meetings of the
Company.
Manager's Review
We have witnessed a marked change in investor sentiment since 31 March 2014,
with appetite for SmallCap waning as investors sought refuge in LargeCap. A
period that began with investor enthusiasm for equities and extremely low
volatility closed with increasing geopolitical risks and slowing global
economic growth. Having broken through 2007 peaks earlier in the year, the NSCI
fell by over 7% during the last six months, underperforming LargeCap (as
represented by the FTSE 100 Index) by a total of 7.5% over two consecutive
quarters. Meanwhile, the Company's NAV declined by 11.2% compared with the fall
in the benchmark of 8.2%.
In the UK, concern over the march of "Islamic State" was temporarily replaced
by a more pressing local issue, namely the Scottish Referendum. The push for
independence by the Scottish National Party, an attempt to end the 300-year old
union between Scotland and England, ultimately ended in failure to the dismay
of other European regions with similar separatist aspirations.
The health of the UK economy was repeatedly expressed (according to politicians
at least) as "robust". Rating agency Standard & Poor's upgraded its outlook for
the UK's credit rating in June and the manufacturing PMI index rose to its
second highest level in 3 years, while unemployment fell to 6%, the lowest
level since 2008. However, this rosy picture was contrasted by poor labour
productivity data and stagnant wage growth.
Throughout this period, financial market participants obsessively focused on
the words and deeds of Central Bankers. Rhetoric in the UK and US introduced
the prospect of imminent interest rate rises, while in the Eurozone pressure
grew on policy makers to loosen the monetary belt further. The European Central
Bank, however, seemed satisfied with pro-devaluation policies, which was less
positive for British exporters into Europe. Indeed, Sterling gained 6% against
the single currency during the period under review, offset somewhat by
Sterling's 3% decline against the US dollar.
Outlook
Investors have become decidedly more cautious over the last six months. Fund
flow data published by the Investment Management Association shows that
investors began rotating out of SmallCap and into LargeCap during the summer.
At just under 14x 12-month forward earnings, SmallCap valuations are neither
cheap nor expensive, but may need to offer more compelling valuations before
investors are tempted back.
We expect investors to be offered an attractive entry point into SmallCap in
early 2015 if the prevailing correction continues. In the meantime, we believe
that investors have come to realise that this is not the time to take on high
risk: in our view, a low beta and quality focused strategy makes sense. There
have been several periods of uncertainty since the Company's inception in 1995.
MUSCIT's focus on the highest quality companies has generally meant that it
performs relatively well during such times.
Montanaro Asset Management Limited
26 November 2014
Investment Portfolio
as at 30 September 2014
Holding Sector % of
portfolio % of
Market 30 portfolio
Value cap September 31 March
£'000 £m 2014 2014
Consort Medical Health Care, Equipment and 6,305 284 3.3 2.7
Services
NCC Group Software and Computer 6,100 409 3.2 2.5
Services
Cineworld Group Travel and Leisure 5,868 860 3.0 2.1
Dignity General Retailers 5,477 786 2.8 1.0
Clarkson Industrial Transportation 5,428 446 2.8 2.1
Big Yellow Group Real Estate/Real Estate 5,200 739 2.7 2.6
Investment Trusts
Restaurant Group Travel and Leisure 5,024 1,309 2.6 1.7
Marshalls Construction and Materials 5,019 400 2.6 2.1
Hilton Food Group Food Producers 4,736 301 2.5 2.7
Shaftesbury Real Estate/Real Estate 4,734 1,894 2.5 1.2
Investment Trusts
Mears Group Support Services 4,723 440 2.5 2.8
James Fisher Industrial Transportation 4,641 664 2.4 2.4
Rathbone Brothers Financial Services 4,591 911 2.4 1.3
Dechra Pharmaceuticals and 4,548 666 2.4 1.9
Pharmaceuticals Biotechnology
AG Barr Beverages 4,504 720 2.3 2.1
Helical Bar Real Estate/Real Estate 4,375 414 2.3 2.2
Investment Trusts
Jupiter Fund Financial Services 4,338 1,628 2.3 2.3
Management
RPS Group Support Services 4,176 577 2.2 2.4
Innovation Group Software and Computer 4,160 344 2.2 2.5
Services
Ted Baker Personal Goods 4,099 814 2.1 1.9
Twenty Largest Holdings 98,046 51.1
Dialight Electronic and Electrical 4,055 293 2.1 2.0
Equipment
Victrex Chemicals 4,015 1,368 2.1 2.4
Entertainment One Media 4,008 930 2.1 1.9
SuperGroup Personal Goods 3,966 917 2.1 2.5
Cranswick Food Producers 3,821 652 2.0 2.0
Bovis Homes Group Household Goods and Home 3,739 1,045 1.9 2.1
Construction
Senior Aerospace and Defence 3,634 1,121 1.9 2.0
Berendsen Support Services 3,626 1,691 1.9 2.9
KCOM Group Fixed Line 3,591 488 1.9 1.8
Telecommunication
AVEVA Group Software and Computer 3,564 984 1.9 1.8
Services
Hellermanntyton Electronic and Electrical 3,563 667 1.9 1.2
Group Equipment
Diploma Support Services 3,447 781 1.8 1.7
Brammer Support Services 3,403 487 1.8 2.2
Brewin Dolphin Financial Services 3,400 748 1.8 2.4
Holdings
Dairy Crest Group Food Producers 3,339 525 1.7 1.6
Hunting Oil Equipment, Services 3,146 1,325 1.6 1.5
and Distribution
Dunelm Group General Retailers 3,069 1,666 1.6 1.5
Telecom Plus Fixed Line 3,006 1,069 1.6 2.0
Telecommunication
EnQuest Oil and Gas Producers 2,904 880 1.5 1.6
Halma Electronic and Electrical 2,876 2,318 1.5 1.6
Equipment
Renishaw Electronic and Electrical 2,771 1,186 1.4 1.6
Equipment
Paypoint Support Services 2,705 669 1.4 1.5
Domino Printing Electronic and Electrical 2,402 688 1.2 2.2
Sciences Equipment
Wilmington Group Media 2,260 184 1.2 1.2
Euromoney Media 2,248 1,301 1.2 1.3
Institutional
Investor
Galliford Try Construction and Materials 2,215 1,042 1.1 1.1
Latchways Support Services 2,050 115 1.1 1.1
Ocean Wilson Industrial Transportation 2,025 391 1.1 1.0
Holdings
Elementis Chemicals 1,698 1,179 0.9 -
Xaar Electronic and Electrical 1,617 287 0.8 1.9
Equipment
ITE Group Media 1,610 423 0.8 0.9
Total Holdings 191,819 100.0
Analysis of Investment Portfolio by FTSE Classification
Classification % of portfolio % of portfolio
as at as at
30 September 2014 31 March 2014
FTSE 100 - -
FTSE 250* 13 13
Numis Smaller Companies 87 87
AIM - -
* represents those holdings that are in the FTSE 250 and are above the
threshold for Numis Smaller Companies holdings.
Interim Management Report and Responsibility Statement
Interim Management Report
The important events that have occurred during the period under review and the
key factors influencing the financial statements are set out in the Manager's
Review.
The principal risks and uncertainties for the remaining six months of the
financial year are reviewed in the Outlook section of the Manager's Review. The
Company actively monitors its counterparty exposures.
The principal risks facing the Company are substantially unchanged since the
date of the Annual Report for the year ended 31 March 2014 and continue to be
as set out in that report on pages 9 to 11 and pages 41 to 43.
Risks faced by the Company include, but are not limited to, Investment Manager,
investment and strategy, gearing, portfolio liquidity, liquidity of MUSCIT
shares, discount volatility, regulatory risk, operational risk, financial risk,
banking, reputational and Company viability, credit risk, market price risk and
interest rate risk.
Under the Listing Rules, the Manager is regarded as a related party of the
Company. The amounts paid to the Manager during the period were £890,000 (six
months to 30 September 2013: £956,000; year to 31 March 2014: £1,998,000). At
30 September 2014, the amount due to Montanaro, included in creditors, was
£172,000.
However, the existence of an independent Board of Directors demonstrates that
the Company is free to pursue its own financial and operating policies.
Therefore, in terms of FRS 8 "Related Party Transactions", the Manager is not
considered a related party.
Responsibility Statement
The Directors confirm that to the best of their knowledge:
â— The condensed set of financial statements has been prepared in accordance
with the Statement `Half-Yearly Financial Reports' issued by the UK Accounting
Standards Board and gives a true and fair view of the assets, liabilities,
financial position and profit of the Company;
â— The Manager's Review (constituting the interim management report) includes a
fair review of the information required by DTR 4.2.7R of the Disclosure and
Transparency Rules, being an indication of important events that have occurred
during the first six months of the financial year and their impact on the
condensed set of financial statements;
â— The statement of principal risks and uncertainties for the remaining six
months of the financial year set out above is a fair review of the information
required by DTR 4.2.7R; and
â— The financial statements include a fair review of the information required by
DTR 4.2.8R of the Disclosure and Transparency Rules, being related party
transactions that have taken place in the first six months of the current
financial year and that have materially affected the financial position or
performance of the Company during that period, and any changes in the related
party transactions described in the last Annual Report that could do so.
This Half-yearly Report was approved by the Board of Directors on 26 November
2014 and the above Responsibility Statement was signed on its behalf by Kathryn
Matthews, Chairman.
Income Statement (unaudited)
for the six months to 30 September 2014
6 months to 30 September 6 months to 30 September Year to 31 March
2014 2013 2014
Revenue Capital Total Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains on - (21,326) (21,326) - 5,604 5,604 - 20,352 20,352
investments
designated at fair
value through profit
or loss
Dividends and 3,087 - 3,087 2,760 - 2,760 4,371 - 4,371
interest
Management fee (445) (445) (890) (478) (478) (956) (999) (999) (1,998)
Other expenses (210) - (210) (208) - (208) (422) - (422)
Movement in fair - 26 26 - 276 276 - 371 371
value of derivative
financial
instruments
Net return before 2,432 (21,745) (19,313) 2,074 5,402 7,476 2,950 19,724 22,674
finance costs and
taxation
Interest payable and (181) (181) (362) (162) (162) (324) (325) (325) (650)
similar charges
Net return before 2,251 (21,926) (19,675) 1,912 5,240 7,152 2,625 19,399 22,024
taxation
Taxation (Note 2) (2) - (2) - - - - - -
Net return after 2,249 (21,926) (19,677) 1,912 5,240 7,152 2,625 19,399 22,024
taxation
Return per Ordinary 6.72p (65.50)p (58.78)p 5.71p 15.65p 21.36p 7.84p 57.95p 65.79p
share
The total column of this statement is the profit and loss account of the
Company. The supplementary revenue and capital columns are presented under
guidance issued by the Association of Investment Companies.
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the period.
No Statement of Total Recognised Gains and Losses has been prepared as all such
gains and losses are shown in the Income Statement.
Reconciliation of Movements in Shareholders' Funds (unaudited)
for the six months to 30 September 2014
Distributable Total
Called-up Share Capital revenue equity
share premium redemption Special Capital reserve shareholders'
capital account reserve reserve reserve funds
6 months to 30 £'000 £'000 £'000 £'000 £'000 £'000 £'000
September 2014
As at 1 April 2014 3,348 19,307 1,362 4,642 163,658 4,595 196,912
Fair value - - - - (21,326) - (21,326)
movement of
investments
Costs allocated to - - - - (626) - (626)
capital
Net revenue for - - - - - 2,249 2,249
the period
Movement in fair - - - - 26 - 26
value of
derivative
financial
instruments
Dividends paid in - - - - - (2,511) (2,511)
the period
As at 30 September 3,348 19,307 1,362 4,642 141,732 4,333 174,724
2014
6 months to 30
September 2013
As at 1 April 2013 3,348 19,307 1,362 4,642 144,259 4,233 177,151
Fair value - - - - 5,604 - 5,604
movement of
investments
Costs allocated to - - - - (640) - (640)
capital
Net revenue for - - - - - 1,912 1,912
the period
Movement in fair - - - - 276 - 276
value of
derivative
financial
instruments
Dividends paid in - - - - - (2,263) (2,263)
the period
As at 30 September 3,348 19,307 1,362 4,642 149,499 3,882 182,040
2013
Year to 31 March
2014
As at 1 April 2013 3,348 19,307 1,362 4,642 144,259 4,233 177,151
Fair value - - - - 20,352 - 20,352
movement of
investments
Costs allocated to - - - - (1,324) - (1,324)
capital
Net revenue for - - - - - 2,625 2,625
the year
Movement in fair - - - - 371 - 371
value of
derivative
financial
instruments
Dividends paid in - - - - - (2,263) (2,263)
the year
As at 31 March 2014 3,348 19,307 1,362 4,642 163,658 4,595 196,912
Balance Sheet (unaudited)
as at 30 September 2014
As at As at As at
30 September 30 September 31 March
2014 2013 2014
£'000 £'000 £'000
Fixed assets
Investments designated at fair value 191,819 184,137 209,411
through profit and loss
Current assets
Debtors 1,283 1,132 1,070
Cash at bank 244 12,523 2,137
1,527 13,655 3,207
Creditors: amounts falling due within
one year
Revolving credit facility (18,000) (15,000) (15,000)
Other creditors (465) (474) (523)
(18,465) (15,474) (15,523)
Net current liabilities (16,938) (1,819) (12,316)
Total assets less current liabilities 174,881 182,318 197,095
Creditors: amounts falling due after
more than one year
Interest rate swap (157) (278) (183)
Net assets 174,724 182,040 196,912
Share capital and reserves
Called-up share capital 3,348 3,348 3,348
Share premium account 19,307 19,307 19,307
Capital redemption reserve 1,362 1,362 1,362
Special reserve 4,642 4,642 4,642
Capital reserve 141,732 149,499 163,658
Distributable revenue reserve 4,333 3,882 4,595
Total equity shareholders' funds 174,724 182,040 196,912
Net asset value per Ordinary share 521.94p 543.79p 588.22p
Statement of Cash Flows (unaudited)
as at 30 September 2014
Note As at As at As at
30 September 30 September 31 March
2014 2013 2014
£'000 £'000 £'000
Net cash inflow from operating 3 1,769 1,813 2,284
activities
Servicing of finance
Interest and similar charges (338) (322) (645)
paid
Net cash outflow from servicing (338) (322) (645)
of finance
Taxation
Irrecoverable tax paid (2) - -
Recoverable tax paid (2) - -
Total taxation paid (4) - -
Capital expenditure and
financial investment
Purchases of investments (23,248) (66,135) (108,868)
Sales of investments 19,439 66,469 98,668
Net cash (outflow)/inflow from (3,809) 334 (10,200)
capital expenditure and
financial investment
Equity dividends paid (2,511) (2,263) (2,263)
Net cash outflow before (4,893) (438) (10,824)
financing
Financing
Proceeds of loan drawn down 3,000 - -
Net cash inflow from financing 3,000 - -
Decrease in cash 4 (1,893) (438) (10,824)
Notes to the Financial Statements
as at 30 September 2014
1 Financial information
The financial information contained in this report does not constitute full
statutory accounts as defined in section 434 of the Companies Act 2006. The
financial information for the six months to 30 September 2014 and 30 September
2013 has not been audited or reviewed by the Company's Auditor pursuant to the
Auditing Practices Board guidance on such reviews.
The information for the year ended 31 March 2014 has been extracted from the
latest published audited financial statements, which have been filed with the
Registrar of Companies. The Report of the Auditors on those financial
statements was unqualified and did not contain a statement under section 498(2)
or (3) of the Companies Act 2006.
The financial statements are prepared on the basis of the accounting policies
set out in the Annual Report and Accounts for the year ended 31 March 2014.
2 Tax credit/charge on ordinary activities
The tax charge for the six months to 30 September 2014 is £2,000 (six months to
30 September 2013: £nil; year to 31 March 2014: £nil). The tax charge comprises
a corporation tax charge for the six months to 30 September 2014 of £nil (six
months to 30 September 2013: £nil; year to 31 March 2014: £nil) and
irrecoverable withholding tax suffered of £2,000 (six months to 30 September
2013: £nil; year to 31 March 2014: £nil).
The corporation tax charge is based on an estimated effective tax rate of 0% as
investment gains are exempt from tax owing to the Company's status as an
investment trust and there is expected to be an excess of management expenses
over taxable income.
3 Reconciliation of net return before finance costs and taxation to net cash
inflow from operating activities
6 months to 6 months to Year to
30 September 30 September 31 March
2014 2013 2014
£'000 £'000 £'000
Net return before finance costs 2,432 2,074 2,950
and taxation
Management fee charged to (445) (478) (999)
capital
(Decrease)/increase in (83) 59 105
creditors
(Increase)/decrease in (135) 158 228
prepayments and accrued income
Net cash inflow from operating 1,769 1,813 2,284
activities
4 Reconciliation of net cash flows to movements in net debt
6 months to 6 months to Year to
30 September 30 September 31 March
2014 2013 2014
£'000 £'000 £'000
Decrease in cash in the period (1,893) (438) (10,824)
Increase in debt/loan proceeds (3,000) - -
Movement in net debt (4,893) (438) (10,824)
Net debt at beginning of period (12,863) (2,039) (2,039)
Net debt at end of period (17,756) (2,477) (12,863)
5 Analysis of net debt
As at As at
1 April 30 September
2014 Cash flows 2014
£'000 £'000 £'000
Cash at bank 2,137 (1,893) 244
Debt due in less than one year (15,000) (3,000) (18,000)
(12,863) (4,893) (17,756)
6 Going concern
The Company has adequate financial resources to meet its investment commitments
and as a consequence, the Directors believe that the Company is well placed to
manage its business risks. After making appropriate enquiries and due
consideration of the Company's cash balances, the liquidity of the Company's
investment portfolio and the cost base of the Company, the Directors have a
reasonable expectation that the Company has adequate available financial
resources to continue in operational existence for the foreseeable future and
accordingly have concluded that it is appropriate to continue to adopt the
going concern basis in preparing the Half-yearly Report, consistent with
previous years.
Directors
Kathryn Matthews (Chairman)
Kate Bolsover (appointed 17 October 2014)
Roger Cuming
Michael Moule
James Robinson
Principal Advisers
Alternative Investment Fund Manager Depositary
Montanaro Asset Management BNY Mellon Trust & Depositary
Limited (UK) Limited
53 Threadneedle Street BNY Mellon Centre
London EC2R 8AR 160 Queen Victoria Street
Tel: 020 7448 8600 London EC4A
Fax: 020 7448 8601
info@montanaro.co.uk Custodian
www.montanaro.co.uk Bank of New York Mellon
(International) Limited
Company Secretary, Administrator and Registered One Canada Square London E14 5AL
Office
Capita Sinclair Henderson Limited
Beaufort House
51 New North Road Bankers
Exeter EX4 4EP ING Bank N.V.
Tel: 01392 412 122 London Branch
Fax: 01392 253 282 60 London Wall
London EC2M 5TQ
Registrar Financial Adviser
Capita Asset Services Cantor Fitzgerald Europe
Shareholder Services Department 17 Crosswall
The Registry London EC3N 2LB
34 Beckenham Road
Beckenham Auditor
Kent BR3 4TU KPMG LLP
Tel: 0871 664 0300 100 Temple Street
(calls cost 10p per minute plus network charges) Bristol BS1 6AG
Fax: 020 639 2342
ssd@capitaregistrars.com
www.capitaregistrars.com
Montanaro UK Smaller Companies Investment Trust PLC
Registered in England and Wales No. 3004101
An investment company as defined under
Section 833 of the Companies Act 2006
Sources of further information
Information on the Company, including this Half-yearly Report is available on
the Manager's website: www.montanaro.co.uk and the Company's website:
www.montanarouksmaller.co.uk
Key Dates
March Company Year End
June Annual Results
July Annual General Meeting
November Interim Results
Frequency of NAV Publication
The Company's NAV is released to the London Stock Exchange on a daily basis.
ISA Status
The Company is fully eligible for inclusion in ISAs.
Association of Investment Companies ("AIC")
The Company is a member of the AIC.
Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on this announcement (or any other website) is
incorporated into, or forms part of, this announcement.
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