Annual Financial Report

RNS Number : 9547Y
Herald Investment Trust PLC
08 March 2012
 



Regulatory Announcement

 

HERALD INVESTMENT TRUST plc

 

ANNUAL REPORT AND FINANCIAL STATEMENTS

 

A copy of the Annual Report and Financial Statements for the year ended 31 December 2011 of Herald Investment Trust plc has been submitted electronically to the National Storage Mechanism and will shortly be available for inspection at http://www.hemscott.com/nsm.do.

 

The Annual Report and Financial Statements for the year ended 31 December 2011 including the Notice of Annual General Meeting is also available on Herald Investment Management Limited's website at:

 

www.heralduk.com 

 

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 December 2011 which require to be published by DTR 4.1 is set out on the following pages.

 

Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of this announcement.

 

 

 

 

Baillie Gifford & Co

Company Secretaries

8 March 2012

 


CHAIRMAN'S STATEMENT

 

2011 was a year of macroeconomic uncertainty and volatile stock markets that saw widespread declines. Against this background I am pleased to report that the majority of portfolio companies made sound progress, albeit the net assets per share showed a negative return of 5.1%. The UK portion of our portfolio returned +1.5%, which is significantly ahead of the main UK and overseas indices, as well as the overseas returns in the portfolio, justifying the overweight position in this region. The FTSE Small Cap Index returned -12.3%, the HGSC Index plus AIM (ex. investment companies) returned -13.1% and the FTSE AIM Index returned -25.0%. The Company's second heaviest weighting was in the US, where small technology companies had a poor year relative to large ones, and the Russell 2000 Technology Index returned -8.4% in $ (-7.9% in £). The Company's US portfolio returned -1.8%. Unfortunately the overall return was dragged down by the smaller Asian and European portfolios and a widening loss on the mark to market valuation of the interest rate swap, which was taken out to hedge interest rate volatility on the loan.

 

The dull returns reflect the difficult stock market environment, which has led to a virtually closed market for primary capital for the third year running in the UK, Europe and to a lesser extent in the US. In contrast there has continued to be a steady pace of takeovers. A total of fourteen investee companies were taken over during the year, where our stakes had an aggregate value of almost £42m. This takes the cumulative total value of takeovers within the portfolio over the last five years to £171m, and compares to a net value of just over £66m of external capital raised in the history of the Trust. Valuations and takeovers in the UK seem to be driven by a continued withdrawal of capital from equities by pension funds and insurance companies. From the micro perspective of Herald, it seems bizarre that actuaries appear to have such an influence on asset allocation decisions, with views that are so divergent from any reasoned investment judgment over the medium and long term.

 

The TMT sector, in which the Company's investments are focused, is never homogeneous, and as ever there have been parts of the universe structurally and cyclically challenged, while other parts have shown sparkling growth. New technologies open up new markets, which can grow significantly whatever the economic backdrop. The internet continues to have the most profound effect, both positively and negatively, and the mobile internet has again been a strong driver in 2011.

 

The best way of illustrating what a good year 2011 has been for the Company, in spite of the decline in the net asset value, is to quantify a few metrics in the portfolio. The share of revenues in portfolio companies exceeds £400m for the first time, the share of net income of profitable companies exceeds £30m for the first time, and the share of net cash continues to exceed £20m, against an equity value of £462m. Furthermore, although the prime motive for the fund is capital growth, dividend income growth has been particularly robust in the UK (+44%), which is masked by flat overseas dividend income and a decline in bond income. Some companies paying a dividend for the first time flatter the dividend growth rate. These valuation metrics provide considerable confidence for the year ahead, and appears to offer value versus cash and bonds.

 

Dividends have never been significant for the Company, reflecting the growth orientation of the portfolio, but 2010 was the first year in respect of which no dividend was paid by the Company. In light of the robust dividend growth during the year the Directors have decided to recommend a dividend of 1.00p in respect of 2011.



It is rational to be apprehensive about the coming year reflecting the excessive Government leverage in the world and European instability in particular. Nevertheless, cash and bonds seem particularly unattractive, while there remains scope for growth in the technology sector, on very reasonable valuations, which appears attractive relative to appealing alternative investment opportunities.

 

The Board

I am delighted to welcome Stewart Newton, who joined the Board in January. Stewart has very broad experience in the investment world. He is currently chairman and founder partner of an investment group focussed on real and absolute returns. He is also closely involved in technology in both the academic world, as a Council Member of Imperial College, and in the charitable sector as a member of the Investment Committee of The Wellcome Trust. We very much look forward to working with him.

 

Clay Brendish will leave the Board at the conclusion of the AGM. Clay's clear advice and wisdom over the past eleven years have been very much appreciated by both the Board and the Manager. We thank him most sincerely for his contribution to Herald during his time as a Director and wish him well for the future.

 

Julian Cazalet

Chairman

21 February 2012

 

 


INVESTMENT MANAGER'S REPORT

 

The 5.1% decline in NAV is disappointing, and at odds with what has seemed a very good year. Throughout the year many days have started miserably with the deluge of grim political and economic news. Earthquakes and floods have added to the woes. Yet every day we have been cheered by meetings and results from companies with news flow that has been altogether more satisfactory. It seems that the TMT (technology, media and telecommunications) sector in which we invest has operated on a different cycle, not economically, but temperamentally. The sector's period of madness was in 2000, when excessive confidence led to insane valuations; over-exuberant growth plans; excessive investment; and unsound jargon became the order of the day: land grab, multiples of sales, salary inflation, excessive IPOs, acquisitions using overrated paper etc. The sector came down to earth with a bump in 2002. Since then, technology company managements are wiser, and sound business fundamentals have resumed with cash-generative, controlled growth the objective. The madness of the financial and property sector bubbles followed that of the TMT bubble, eventually extending to the consumer. I fear excessive leverage will take longer to repair than the TMT follies, but let us hope that there is a similarly effective grounding in other parts of the economy. Meanwhile we can enjoy the progress in the sector in which we invest.

 

UK

The UK declined marginally in capital terms, but yield raised the total return to 1.5%. This is some 15% ahead of the HGSC Index plus AIM (capital gains ex investment companies), but this is a general index, so a flattering comparator on this occasion. Nevertheless, since inception the internal rate of return of HIT's UK portfolio is nearly 15% in capital terms versus the HGSC Index rising just over 3% per annum, so 2011's outperformance is not so far ahead of the long-term average.

 

Eleven holdings appreciated by more than £1m over the year, and 19 fell by more than £1m, so performance was mixed. Phoenix IT and IQE proved the most expensive, each declining more than £5m, but neither are troubled businesses, and I remain confident about their potential. In contrast, both Alterian and Patsystems genuinely disappointed expectations and in consequence were both defenceless when approached for a takeover. Imagination, Telecom Plus and NCC were large holdings that performed well, offsetting the losers. There were five other UK takeovers which, including Alterian and Patsystems, yielded £29m cash. Collectively over time the stocks taken over increased the assets of the Company by £15.6m, of which Group NBT was the most significant. In recent years I have been disappointed by some takeovers occurring at too low a price. It has been frustrating to have invested pre-profits at a high risk stage to find the company is taken over at a much lower-risk stage, with profits potential remaining. I have been less anguished by this year's takeovers, because a number had management issues. As ever, the cash is helpful, and in particularly short supply when there are excellent opportunities arising from low, and sometimes anomalously low valuations associated with the perennial cash outflow from shrinking the UK equity market. The Bank of England helpfully quantified this in a recent report. Between 2003 and 2008, the average monthly net withdrawal (primary capital issues less take-over and buybacks) was £0.7bn. There was a brief respite in 2009-10 reflecting rescue rights issues, but outflows have resumed at a similar rate in 2011. The TMT space should be an area prolific for IPOs, but when fund managers have negative cash flows the resources are not available, which I find disturbing as a UK taxpayer. It is advantageous to be able to buy stocks inexpensively, but it is disappointing to have missed out on investable propositions, because there were insufficient other funds prepared to invest.

 

 

 

 

 

US

The Trust's US return was marginally negative at -2.5%, which was 6.2% ahead of the most relevant index, the Russell 2000 Technology Index. In contrast the large capitalisation index was virtually flat. As in the UK, performance was mixed. MIPS, Support.com and Anadigics all fell by $4m, but were offset by the star performer for the year, Silicon Motion. It increased by 341% ($14.3m). At the start of the year HIT was its largest institutional shareholder, but some quality names have built stakes this year. It provides controllers for flash memory, which is being widely used in Android mobile phones. Ceva and OCZ also contributed usefully, the first providing IP for the baseband in phones, and the second also in the flash memory market. The long term returns for HIT in the US have been materially inferior to the UK and European returns, albeit better than the relevant US indices. This may appear anomalous given the number of strong US companies, but reflects valuations that have often discounted too much growth at IPO. However, these have come down, and technology stocks no longer have a premium valuation to the S&P in p/e terms in spite of the S&P p/e also being low by historic standards. I am more tempted than at any stage to increase the US weighting because of improved relative valuations.

 

Europe

Europe has had a dire year. This was reflected in very limited exposure to Europe, and the decline of 21.8% would have been worse but for the takeovers of Norkom (Ireland) and Infovista (France). The European exposure of £9.3m at the year-end, and only £12.3m at the start of the year is minimal. The trouble is that so much of Europe is so horribly uncommercial, with shareholders ranking low in the pecking order. It seems things can only get worse in the short term. We are privileged at Herald to have the chance to meet management around the globe. More than ever the UK and the US appear safer homes than raw economic data might suggest.

 

Far East

It has been a challenging year in Asia. We have previously commented that the manufacturing nature of the Far East, often with little pricing power, makes companies vulnerable to reduced demand. This has occurred this year, particularly in the second half. The biggest exposure is to South Korea, which seems to be moving up the value chain, and performance positively returned 1.5%, but Taiwan was poor. Overall the Far East declined 16.6%.

 

Swap

The fund continues to have a facility of £50m. Nearly four years ago interest rates seemed attractively low, and worth locking in at the available level. Neither the Board nor I anticipated the degree to which yields have continued to fall. The mark to market loss is now £20.4m, but need never be realised if we carry forward the position, as we currently plan to do.

Sector Background

The TMT space has the luxury and challenge of supplying multiple market sectors. It is wise to assume that consumer, Government and enterprise spending will be constrained in the coming year, so how will it affect the TMT sectors? By segment:

 

1.  Consumer

There are now over 2 billion connected consumers globally. This century has seen universal consumer adoption of the internet: Initially "narrow" band for e-mails, and search (Google), and progressively broadband, and the mobile internet. This has led to the emergence of social media (Facebook, Twitter et al), internet TV (Netflix now accounts for >40% of internet traffic in the US), e-Readers, online shopping and more. Can the indebted consumer in the Anglo-Saxon world, or the poor consumers in the emerging world afford to maintain, and even increase their expenditure? Increasingly the consumer cannot afford not to be "connected". Indeed for many users the cost of internet connection is actually negative, reflecting the sums saved on flights, holidays, insurance, on-line shopping etc. The savings are being created by disintermediation of middlemen (insurance brokers, travel agents, book shops, specialist retailers etc), by reduced administration costs and by the enablement of pricing comparisons and therefore suppliers margin pressure. In addition for many products there is a profound disruption in the retail channel. There is evidently a diversion of consumer expenditure to fund internet access, the devices that enable it and the products and services available over it. As networks are upgraded, and users learn the enhanced capabilities usage will grow, and the thirst for upgraded devices will continue. Usage will have to become metred, and the days of unlimited access are numbered. In the emerging world, while expenditure and therefore savings are less, the communications leap is greater, and more basic markets such as banking are being opened up. There remains a strong following wind!

 

2.  Government

With fiscal deficits everywhere there will be pressures. However, large parts of Government are bureaucratic, and have been slow and inefficient about adopting cost-saving technology solutions. Furthermore, Governments have huge installed bases of legacy systems with viciously high maintenance costs. Some of the large legacy technology companies could well be challenged by an erosion of these lucrative maintenance charges when applications and databases are migrated to more efficient cloud architectures. Essentially 'the cloud' is not an application, but it enables existing applications to be delivered more cheaply, and enables new applications such as social media to exist. There has been a fashion for outsourcing services. While this has further to run, in the UK and US many long term contracts are firmly in renewal territory. These suppliers should be vulnerable to difficult headwinds.

 

Traditional defence expenditure looks particularly vulnerable, but as military headcount and weapons expenditure reduce, there simply must be a corresponding diversion of resources to cyber security. This has multiple facets. (i) protecting data against criminals (internally as well as externally). (ii) protecting data and infrastructure against terrorists or hostile states. (iii) it has become evident this year with the Arab Spring and riots in the UK, that social media poses new challenges that Governments will have to address.

 

IT spending looks set to rise overall, but almost certainly there will be incumbent losers, and newcomers addressing the new issues.

 

 

 

 

3.  Enterprise

Gartner is a leading IT research house which analyses the large enterprises' IT budgets. They have published interesting statistics stating that the average IT spend per employee for their customer base was $12,700 in 2011. Of this, 41% was spent on IT staff and a further 21% outsourced. 75% of total spend was operational expenditure versus 25% capital investment. Internal IT departments are facing huge challenges. Legacy systems are hugely expensive to maintain, and employees from 21 year old starters to the Chairman are increasingly IT literate, and expect consumer quality, which comes at a small fraction of the cost of business systems, whose development costs cannot be amortised over millions of units.

 

Enterprises have to address the requirement for mobile internet, and they are having to respond to the social media phenomena in marketing, advertising and more sophisticated business intelligence applications. The majority of IT spend relates to legacy applications, and expenditure will be made to save costs. It seems probable that internal operational expenditure will fall as legacy applications are gradually replaced by cloud architecture, which may well be outsourced. This is akin to the food retailing chains' development of their buying power, which squeezed the food manufacturers. As companies migrate IT resources to third party data centres, with large buying power, it seems probable that there will be a similar squeeze on suppliers.

 

Again winners and losers are inevitable, but note that 75% of spend is virtually non-discretionary operational cost, which can only be reduced with investment.

 

The big trend to come has been described as "the internet of everything". The internet began as a network of computers, then phones, and next devices. A hyperconnected world is emerging where everything (physical and virtual) has its own URL (IP address) and can communicate information. Machine-to-machine communication, RFID chips, QR codes, GPS, NFC, IP video are innovations that have already begun to emerge, but there will be more.

 

Summary

The prospective p/e of the portfolio is c.12x on analysts' forecasts. It seems that forecasts may in aggregate fall to a lower rate of growth, but a couple of warnings on US holdings left the share prices relatively unscathed. I expect a more difficult year for profits growth, but a better year for share prices, because there is fundamental value. A resolution of the structural issues in Europe could see a dramatic upside, and a lower chance of a worsening. Currently the fund is fully invested reflecting confidence in the value in the portfolio, but it is reassuring to have the proceeds of the borrowing facility available if there is a material wobble, which could provide some outstanding opportunities.

 

 

Performance Attribution (in sterling terms)

 

 

 

 

 

 

 

 

Comparative index allocation

Herald

asset allocation

 

Performance*

 

Contribution attributable to:

Contribution to relative return

Equity Markets

01.01.11

31.12.11

01.01.11

31.12.11

Herald

Comparative index

Stock selection

Asset allocation†

 

 

%

%

%

%

%

%

%

%

%

 

UK

66.7

66.7

65.4

68.6

1.5

(13.1)

11.2

11.4

(0.2)

 

Europe ex. UK

-

-

2.6

2.1

(21.8)

-

(0.3)

-

(0.3)

 

USA

33.3

33.3

25.5

25.0

(1.8)

(8.0)

1.0

1.6

(0.6)

 

Asia Pacific ex. Japan

-

-

6.3

6.9

(16.6)

-

(0.4)

-

(0.4)

 

Emerging Markets

-

-

0.4

0.4

5.1

-

0.1

-

0.1

 

Bonds

-

-

4.2

5.8

9.2

-

0.9

-

0.9

 

Cash

-

-

8.0

6.8

0.1

-

0.5

-

0.5

 

Swap

-

-

(1.9)

(4.5)

n/a

-

(3.3)

-

(3.3)

 

Loans

-

-

(10.5)

(11.1)

1.7

-

(1.5)

-

(1.5)

 

Total

100.0

100.0

100.0

100.0

(4.1)

(11.2)

8.0

13.2

(4.6)

 

Past performance is not a guide to future performance.

 

Source: HSBC

 

*  The above returns are calculated on a total return basis with net income reinvested.  Dividends and interest are reinvested on a cash basis, unlike the NAV calculation where income is recognised on an accruals basis.  Relative performance may differ as a result.

 

Contributions cannot be added together, as they are geometric; for example, to calculate how a return of (4.1%) against a comparative index return of (11.2%) translates into a relative return of 8.0 %, divide the portfolio return of 95.9 by the comparative index return of 88.8 and subtract one.

 

†   Asset allocation includes the contribution attributable to currency movements.

 

 


Katie Potts

21 February 2012


DISTRIBUTION OF ASSETS

 


 At 31 December 2011

%


At 31 December 2010

%

 

 

Equities:

 

United Kingdom


59.2


58.2

 

                      

Continental Europe


1.8


2.3

 

                      

USA

 

21.6


22.7

 

                      

Asia Pacific

 

6.0


5.5

 

                      

Emerging Markets

 

0.4


0.4

 

Total equities


89.0


89.1

Sterling denominated bonds


3.1


3.8

 

Euro denominated bonds


1.9


-

Net current assets


6.0


7.1

Total assets

(before deduction of bank loans and derivative financial instruments)


 

100.0


 

100.0

 

 

 

TOP TWENTY HOLDINGS

at 31 December 2011

 

A brief description of the twenty largest equity holdings in companies is as follows:

 

Imagination Technologies


Imagination Technologies is an international leader in the creation and licensing of semiconductor System-on-Chip Intellectual Property (SoC IP). Imagination creates market-leading embedded graphics, video and display acceleration, multi-threaded processing and multi-standard receiver technologies and licenses this IP (Intellectual Property) to global semiconductor and system companies. These technologies are used in the following markets: digital radio and audio, mobile phone multimedia, personal media player, car navigation and driver information, personal navigation, mobile computing, digital TV and set-top box, and mobile TV. Imagination has been particularly successful in selling graphics technology to the mobile phone and LCD TV sectors and is a pioneer in developing Digital Audio Broadcasting Technology (DAB). Imagination Technology incorporates this technology in its "Pure Digital" radio brand, which is the number one supplier of radios in the UK. The adoption of digital radio in other countries, France and Germany in particular, is opening up a bigger international market and they have launched an internet radio range for the US market. The group has a highly skilled workforce of around 900 people, of which over 80% are R&D engineers. Apple and Intel are both investors in Imagination Technologies.

 

Country                  United Kingdom

% of total assets                            5.3

                           31/12/11      31/12/10

Valuation (£m)       27.73            21.00

Shares (m)                5.05              5.86


 

SDL


SDL is the leader in Global Information Management (GIM) solutions that help organisations to accelerate the delivery of high-quality multilingual content to global markets alongside their products and services. SDL's best-of-breed Web Content Management, eCommerce, Structured Content and Language Technologies, combined with its Language Services drive down the cost of content creation, management, translation and publishing. SDL solutions increase conversion ratios and customer satisfaction through targeted information across all customer touch points. Global industry leaders who rely on SDL include ABN-Amro, Bosch, Canon, CNH, FICO, GlaxoSmithKline, Hewlett-Packard, KLM, Microsoft, NetApp, Philips, SAP and Sony. SDL has over 1,500 enterprise customers, has deployed over 170,000 software licenses and provides access to on-demand portals for 10 million customers per month. It has a global infrastructure of more than 60 offices in 35 countries. SDL is in Gartner's leader quadrant for web content management.

 

Country                  United Kingdom

% of total assets                            3.8

% of issue share capital held       3.8

                           31/12/11      31/12/10

Valuation (£m)       19.70            21.55

Shares (m)                2.98              3.36

Telecom Plus


Telecom Plus, which owns and operates the Utility Warehouse brand, is the UK's only fully integrated provider of a wide range of competitively priced utility services, spanning both the communications and energy markets. Telecom Plus supplies fixed wire and mobile telecommunications services, gas and electricity to over 370,000 residential and small business customers in the United Kingdom with a unified bill and good value utilities. Telecom Plus was incorporated in 1996 and began operations in 1997 providing a unique range of low-cost telephony services to the residential and SOHO markets. They use the collective buying power of individual users to negotiate bulk buying deals with major suppliers, passing the benefit back to their customers. Telecom Plus does not advertise and has no shops. Instead, they rely on word of mouth recommendations from satisfied customers and from a network of Independent Distributors.

 

Country                  United Kingdom

% of total assets                            2.8

                           31/12/11      31/12/10

Valuation (£m)       14.52            12.07

Shares (m)                1.89              2.69

NCC Group


As a trusted adviser, NCC Group provides business critical IT assurance and protection to over 15,000 organisations worldwide, including 94 out of the FTSE 100. The Group operates two main complementary divisions, Escrow and Assurance: Escrow, includes ensuring source code, data or other business critical material is protected and accessible should anything happen to a key supplier. Furthermore NCC confirm the material held is properly protected by verifying that it can be rebuilt from its source code components. Assurance, incorporates expert led security testing, covering forensics, vulnerability research and the development of expert software to aid organisations in their on-going battle with information security breaches.

 

Country                  United Kingdom

% of total assets                            1.9

% of issued share capital held    3.5

                           31/12/11      31/12/10

Valuation (£m)       10.05              6.66

Shares (m)                1.21              1.21


 

Silicon Motion Technology


Established in 1995, Silicon Motion Technology designs, is a fabless semiconductor company which develops and markets high performance, low-power semiconductor solutions for multimedia consumer electronics applications, such as smartphones, digital cameras, notebook and tablet PCs, and personal navigation devices. It has three product lines: mobile storage, multimedia systems-on-a-chip (SoCs) for embedded graphics applications, and mobile communications. Silicon Motion Technology is often at the forefront of microcontroller and NAND flash storage devices, with their products being used in many of the leading smartphone and mobile devices. The Company's mobile communications product line consists of mobile television integrated circuit solutions and handset transceiver circuits. Its embedded graphics processors are generally used to render text, or two-dimensional graphics and user interfaces.

 

Country                                       USA

% of total assets                            1.9

                           31/12/11      31/12/10

Valuation (£m)         9.86              2.68

Shares (m)                0.75              1.00

OpSec Security


OpSec provides solutions to combat counterfeiting and the related problems of diversion, grey marketing, online brand abuse and fraud. It provides anti-counterfeiting technologies, services and software to over 300 global brands across industry sectors and over 50 governments worldwide. The Group operates manufacturing facilities and laboratories in the USA and the UK, and has sales operations in the Americas, Europe and Asia. OpSec supplies technologies and solutions into three core markets: Banknote and High Security Documents; Brand Protection; and ID Solutions. In addition, OpSec owns 50% of 3dcd LLC, a joint venture which licenses technologies for the protection of optical discs (CDs and DVDs).

 

Country                  United Kingdom

% of total assets                            1.9

% of issued share capital held            23.3

                           31/12/11      31/12/10

Valuation (£m)         9.71              1.53

Shares (m)              18.68               6.98

 

Phoenix IT Group


Phoenix IT was established in 1980, the Group provides a growing range of complementary IT infrastructure support services including systems management, communications, remote telephone support, high-touch field services, project and consultancy services as well as business continuity and disaster recovery services. Often these services are sold and delivered as a managed service where Phoenix manages complex IT infrastructures to agreed levels of service under long term contracts. In May 2007 Phoenix acquired ICM for £130m in cash and shares, ICM had been a portfolio holding since 2002.

 

Country                  United Kingdom

% of total assets                            1.7

% of issued share capital held     7.3

                           31/12/11      31/12/10

Valuation (£m)         8.80            14.09

Shares (m)                5.58              5.35

Diploma


Diploma is a group of specialised distribution businesses serving industries with long term growth potential and with the opportunity for sustainable superior margins through the quality of customer service, depth of technical support and value-adding activities. The three sectors the company focuses on are life sciences, seals and controls.

 

Country                  United Kingdom

% of total assets                            1.5

                           31/12/11      31/12/10

Valuation (£m)         8.00              6.46

Shares (m)                2.35              2.35


 

ATMI


ATMI Inc. is a supplier of materials, materials packaging and materials delivery systems used globally in the manufacture of microelectronics devices. The company's products consist of front-end semiconductor performance materials, sub-atmospheric pressure gas delivery systems for safe handling and delivery of toxic and hazardous gases, and materials packaging and dispensing systems. ATMI serves and provides applications and analytical support services to three markets: integrated circuit IC fabrication, flat-panel displays and life sciences. ATMI is devoted to constantly revolutionising microelectronic manufacturing technologies, helping them drive these industries forward. They are headquartered in Danbury, Connecticut, and employ over 800 people.

 

Country                                       USA

% of total assets                            1.5

                           31/12/11      31/12/10

Valuation (£m)         7.73              5.09

Shares (m)                0.60              0.40

Advent Software


Advent supplies investment management companies with integrated software products and services in portfolio administration, including workflows within the managers and external portfolio reporting. Each solution focuses on specific mission-critical functions of the front, middle and back offices and is designed to meet the needs of the particular client, as determined by size, assets under management and complexity of the investment environment. With more than 4,600 client firms, Advent has established itself as a leading provider of mission-critical applications to meet the demands of investment management operations around the world. It has adopted a rental model.

 

Country                                       USA

% of total assets                            1.4

                           31/12/11      31/12/10

Valuation (£m)         7.52              8.88

Shares (m)                0.48              0.24

IDOX


IDOX plc develops and markets information management products and services. It services more than 90% of UK local authorities and has a high proportion of recurring revenue. It provides document management, case management, workflow systems, content and related Web-based portals. IDOX has three main service lines: data management software, mainly sold to the public sector; consultancy services; and recruitment systems for the management and distribution of personnel files and information. It is actively moving its market focus to increasingly target the private sector.

 

Country                  United Kingdom

% of total assets                            1.4

% of issued share capital held     8.8

                           31/12/11      31/12/10

Valuation (£m)         7.28              4.17

Shares (m)              30.32            30.32

Allocate Software


Allocate Software plc is a global workforce and corporate governance software solutions provider for organisations with large, multi-skilled workforces. With a blue chip client base spanning the public and private sector, its key vertical markets include healthcare and defence. At the core of the business is Allocate's workforce optimisation software, which streamlines the whole workforce management of multi disciplinary groups, across diverse locations. Allocate provides services and support to over 700 customers throughout the world, with the majority of revenue coming from the healthcare industry.  It is headquartered in London.

 

Country                  United Kingdom

% of total assets                            1.3

% of issued share capital held   13.6

                           31/12/11      31/12/10

Valuation (£m)         6.58              4.56

Shares (m)                 8.55              6.00

 


 

Euromoney Institutional Investor


Euromoney is a leading international business-to-business media group focused primarily on the international finance, metals and commodities sectors. It publishes more than 70 magazines, newsletters and journals, including Euromoney Institutional Investor and Metal Bulletin. It also runs an extensive portfolio of conferences, seminars and training courses and is a leading provider of electronic information and data covering international finance, metals and emerging markets. Its main offices are in London, New York and Hong Kong and nearly half its revenues are derived from the United States.

 

Country                  United Kingdom

% of total assets                            1.3

                           31/12/11      31/12/10

Valuation (£m)         6.56              8.65

Shares (m)                1.05              1.25

Alternative Networks


Alternative Networks is a UK based independent telecommunications service provider, targeted primarily at the corporate market. It supplies a wide range of services, including managed network services, non-geographic number services, mobile phone and data services, and internet and broadband provision. It also supplies, installs and maintains business telephone systems, and associated integrated communications applications and manages working group tariffs via partnerships with O2, Vodafone, RIM, Nokia and HTC. Founded in 1994, it employs over 500 members of staff, servicing over 5,000 customers.

 

Country                  United Kingdom

% of total assets                            1.2

% of issued share capital held     4.4

                           31/12/11      31/12/10

Valuation (£m)         6.33              4.07

Shares (m)                2.13              2.13

Ceva


CEVA is the world's leading licensor of DSP cores and platform solutions for the mobile, digital home and networking markets. CEVA's IP portfolio includes comprehensive technologies for cellular baseband (2G / 3G / 4G), multimedia, HD video, HD audio, voice over packet (VoP), Bluetooth, Serial Attached SCSI (SAS) and Serial ATA (SATA). Headquartered in Mountain View, California, CEVA has 190 employees worldwide, with design centers in Israel and Ireland, and sales and support offices located in Europe, the U.S. and throughout Asia. More than 2.5 billion CEVA-powered chips have been shipped worldwide. The CEVA business model consists of three components; upfront license fees; royalty revenue chips incorporating CEVA IP, and; revenues from related customer support, development tools and maintenance.

 

Country                                       USA

% of total assets                            1.2

                           31/12/11      31/12/10

Valuation (£m)         6.19              4.96

Shares (m)                0.32              0.38

M&C Saatchi


M&C Saatchi is a global marketing services business working for clients across a wide variety of industry sectors. The Company was founded in 1995. Starting with a strong base in the UK and Australia, M&C Saatchi have added new agencies and disciplines in Asia, USA and Europe, employing over 1,250 staff in 19 countries.

Country                  United Kingdom

% of total assets                            1.1

% of issued share capital held    8.2

                           31/12/11      31/12/10

Valuation (£m)         5.92              6.86

Shares (m)                5.15              5.40

 

StatPro Group


StatPro is a leading provider of portfolio analysis and asset valuation software and services for the global asset management industry. The company's focus is on delivering a SaaS-based analytics and data platform on a rental basis to investment management companies, allowing them to analyse portfolio performance, attribution, risk and GIPS® compliance. StatPro also provides market data and valuation feeds including a Complex Asset Pricing service. StatPro has over 250 clients and generally experiences in excess of a 90% annual renewal rate.

 

Country                  United Kingdom

% of total assets                            1.1

% of issued share capital held   11.3

 

                       31/12/11      31/12/10

Valuation (£m)         5.92              7.71

Shares (m)                6.88              6.88

Fidessa Group


Fidessa supplies trading systems to the world's financial markets. It is the leading supplier of multi-asset trading, portfolio analysis, decision support, compliance, market data and connectivity solutions. Fidessa's products and services make it easier to buy, sell and own financial assets of all types on a global basis and uniquely, serves both the buy-side and sell-side communities globally. Fidessa has developed its products over 28 years, investing heavily in their continual evolution. Fidessa's products are used by over 85% of tier-one, global financial institutions. Headquartered in London and with regional operations across Europe, North America, Asia and the Middle East, Fidessa supports over 26,000 users across 900 clients, serving a broad spectrum of customers from major investment banks and asset managers through to specialist niche brokers and hedge funds. The product is supplied on a rental basis.

 

Country                  United Kingdom

% of total assets                            1.1

                       31/12/11     31/12/10

Valuation (£m)         5.88              6.00

Shares (m)                0.39              0.39

Mellanox Technologies


Mellanox Technologies is a leading supplier of end-to-end InfiniBand and Ethernet connectivity solutions and services for servers and storage. Mellanox products optimise data center performance and deliver industry-leading bandwidth, scalability, power conservation and cost-effectiveness, whilst converging multiple legacy network technologies into one future-proof architecture. The company offers innovative solutions that address a wide range of markets including High Performance Computing, enterprise, mega warehouse data centers, cloud computing, Internet and Web 2.0. Founded in 1999, Mellanox Technologies is headquartered in Sunnyvale, California and Yokneam, Israel.

 

Country                                       USA

% of total assets                            1.1

% of issued share capital held     6.8

                           31/12/11        31/12/10

Valuation (£m)         5.77              4.62

Shares (m)                0.28              0.28

Andor Technology


Andor develops and manufactures high performance digital cameras for the scientific research & industrial communities. The company has grown organically and is today the fastest growing company manufacturing high performance digital cameras. Established in 1989 out of Queen's University in Belfast, Andor now employs more than 300 people in 16 offices worldwide, and distributes its products to 10,000 customers in 55 countries. Andor acquired Bitplane AG in 2009. Bitplane is the world's leading interactive microscopy image analysis software company specialising in Medical and Life Sciences. In 2010 Andor acquired Photonic Instruments, USA., which developed the revolutionary Mosaic and Micropoint products and are the market leaders in fluorescence imaging and laser ablation for confocal and widefield microscopy.

 

Country                  United Kingdom

% of total assets                            1.1

% of issue share capital held       3.1

                       31/12/11          31/12/10

Valuation (£m)         5.61              3.88

Shares (m)                0.95              0.95

 

Note: A figure is presented for % issued share capital held only if greater than 3%.

 


RELATED PARTY TRANSACTIONS

 

The Directors' fees for the year are detailed in the Directors' Remuneration Report contained within the Annual Report. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under the Companies Act 2006.

 

Herald Investment Management Limited is appointed as investment manager under a management agreement which is terminable on twelve months' notice. Their fee is calculated on a monthly rate of 0.08333% of the Company's net asset value based on middle market prices. The management fee is levied on all assets except the holding in Herald Ventures II Limited Partnership managed by Herald Investment Management Limited.

 

The details of the management fee are as follows:

 

2011

£'000


2010

£'000





Investment management fee

4,752


3,966

 

 

PRINCIPAL RISKS AND UNCERTAINTIES

 

In accordance with the corporate objective of maximising capital appreciation, the Company invests in securities on a worldwide basis. The Company makes use of gearing to achieve improved performance in rising markets and has an interest rate swap, the purpose of which is to hedge the variability in cash flows arising from interest rate fluctuations on bank loans. The Company's other financial instruments consist of cash, short term debtors and creditors.

 

The main risks arising from the Company's financial instruments are:

 

A.   Market Risk

(i)    Other price risk, being the risk that the value of investment holdings will fluctuate as a result of changes in market prices caused by factors other than interest rate or currency rate movement.

(ii)   Interest rate risk, being the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates; and

(iii)   Foreign currency risk, being the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

 

B.   Credit Risk, being the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

 

C.   Liquidity Risk, being the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.

 

These risks and the policy for managing them have been applied throughout the year and are summarised below.

 

 

 

 

 

 

A.  Market Risk

 

(i)    Other Price Risk

The Company's investment portfolio is exposed to market price fluctuations which are monitored by the Manager in pursuance of the corporate objective. Securities held by the Company are valued at bid prices, whereas material unlisted investments are valued by the Directors on the basis of the latest information in line with the relevant principles of the International Private Equity and Venture Capital Valuation Guidelines. These valuations also represent the fair value of the investments.

 

An analysis of the investment portfolio by broad industrial or commercial sector and a review of the 20 largest equity investments by their aggregate market value, are shown above.

 

Other Price Risk Sensitivity

33.6% of the Company's equity investments at 31 December 2011 (2010 - 33.4%) were listed on the main list of the London Stock Exchange and a further 31.6% (2010 - 31.2%) on AIM. The NASDAQ Stock Exchange accounts for 24.2% (2010 - 25.3%) and other stock exchanges 9.2% (2010 - 9.4%). A 10% increase in stock prices at 31 December 2011 would have increased total net assets and net return on ordinary activities after taxation by £46,200,000 (2010 - £47,500,000). A decrease of 10% would have had an equal but opposite effect. The portfolio does not target any exchange as a comparative index, and the performance of the portfolio has a low correlation to generally used indices.

 

The shares of Herald Investment Trust plc have an underlying NAV per share. The NAV per share of Herald Investment Trust plc fluctuates on a daily basis. In addition, there is volatility in the discount/premium the share price has to NAV.

 

(ii)   Interest Rate Risk

The majority of the Company's assets are equity shares and other investments which neither pay interest nor have a maturity date. However, the Company does hold Convertible Bonds and Government Securities, the interest rate and maturity dates of which are detailed below. Interest is accrued on sterling cash balances at a rate linked to the UK base rate.

 

The Company has borrowings. The aim of the use of gearing is to enhance long term returns to shareholders by investing borrowed funds in equities and other assets. Gearing is actively managed. How and where borrowings are invested is reviewed by the Board in consultation with the Manager at every Board meeting. In light of the decisions made, appropriate adjustments to the gearing position are then made by the Manager.

 

At the year end the Company had borrowings of £50 million (2010 - £50 million). Under the terms of an interest rate swap, the interest payable on the bank loans has been fixed.

 

The interest rate risk profile of the financial assets and financial liabilities at 31 December was:

 

Financial Assets

 


2011



2010



 

 

Fair value

£'000

Weighted average interest rate/interest rate

Weighted average period until maturity/ maturity date

 

 

Fair value

£'000

Weighted average interest rate/interest rate

Weighted average period until maturity/ maturity date

Fixed rate:







UK bonds

16.445

4.9%

5 years

20,151

4.7%

4 years

EUR bonds

9,791

4.4%

6 years

-

-

-

UK convertible bonds

1,162

7.5%

3 years

843

6.9%

3 years








Cash:







Other overseas currencies

1,762



2,278



Sterling

28,259

0.3%


37,219

0.2%



30,021



39,497



 

The cash deposits generally comprise call or short term money market deposits with original maturities of less than 3 months which are repayable on demand. The benchmark rate which determines the interest payments received on cash balances is the bank base rate.

 

Financial Liabilities

 


2011



2010



£'000

Net Interest rate paid

Loan Facility expired/expires

£'000

Net Interest rate paid

Loan Facility expired/expires

Bank loan

25,000

1.3%

May 2011

25,000

1.3%

May 2011


25,000

1.6%

May 2013

25,000

1.4%

May 2013


25,000

2.4%

May 2013

-

-

-



1.9%



1.4%


Swap

50,000

4.1%


50,000

4.2%




6.0%



5.6%









 

 

The effective fixed rate of interest on the loans of 6.0% (2010 - 5.6%) reflects a weighted average variable interest rate paid of 1.9% (2010 - 1.4%), with a further weighted average of 4.1% paid on the swap (2010 - 4.2%). The Company's facilities are rolling on a quarterly basis with the facilities expiring in May 2013. While the 30 year swap remains in place, the net interest payable will effectively be fixed for the duration of the term of the loan facilities.

 

 

2011

2010


Notional contract amount

£'000

Fair value assets £'000

Fair value liabilities £'000

Fair value balance £'000

Notional contract amount

£'000

Fair value assets £'000

Fair value liabilities £'000

Fair value balance £'000

Total derivative assets/(liabilities) held for trading

50,000

27,551

(47,908)

(20,357)

50,000

49,370

(58,307)

(8,937)

 

 

 

Interest rate risk sensitivity

(a) Cash

An increase of 100 basis points in interest rates as at 31 December 2011 would have a direct effect on net assets. Based on the position at 31 December 2011, over a full year, an increase of 100 basis points would have increased the net return on ordinary activities after taxation by £300,000 (2010 - £395,000) and would have increased the net asset value per share by 0.38p (2010 - 0.49p). The calculations are based on the cash balances as at the respective balance sheet dates and are not representative of the year as a whole.

 

(b) Fixed rate bonds

An increase of 100 basis points in bond yields as at 31 December 2011 would have decreased total net assets and total return on ordinary activities by £817,000 (2010 - £678,000) and would have decreased the net asset value per share by 1.02p (2010 - 0.85p). A decrease in bond yields would have had an equal and opposite effect. The Convertible loan stocks having an element of equity are not included in this analysis as given the nature of the businesses and the risk profile of the balance sheets they are considered to have more equity like characteristics.

 

(c) Bank loans

The effect of an increase or decrease of 100 basis points in 3 month LIBOR interest rates as at 31 December 2011 on the interest cost of the bank loans and the net income return has been eliminated through a 30 year floating interest rate to fixed interest rate swap. The swap generates payments or charges that offset changes in the 3 month LIBOR interest rate, so that the interest payable on the bank loans is effectively converted to a fixed rate loan at 4.8975% (2010 - 4.8975%) plus margin cost. The initial term of the swap on commencement at 30 years did not match the term of the loans, therefore, hedge accounting is not used and changes in the fair value of the swap are captured in the net return on ordinary activities as set out in (d) below.

 

(d) Floating interest rate to fixed interest rate swap

A decrease of 100 basis points on 30 year interest rates as at 31 December 2011 would have a direct effect on the fair value of the swap and net assets. Based on the position as at 31 December 2011, over a full year, a decrease of 100 basis points would have decreased the gains on investments and net return on ordinary activities after taxation by £12,020,000 (2010 - £9,617,000) and would have decreased the net asset value per share by 15.08p (2010 - 12.03p). An increase of 100 basis points would have had an equal but opposite effect.

 

(iii) Foreign Currency Risk

The Company's reporting currency is sterling, but investments are made in overseas markets as well as the United Kingdom and the asset value can be affected by movements in foreign currency exchange rates.

 

Furthermore many companies trade internationally both through foreign subsidiaries, and through exports. The greatest foreign currency risk occurs when companies have a divergence in currencies for costs and revenues. A much less risky exposure to currency is straight translation of sales and profits. The List of Investments on pages 16 to 20 of the Annual Report breaks down the portfolio by geographic listing. However the location of the stock market quote only has a limited correlation to the costs, revenues and even activities of those companies, and so this note should not be regarded as a reliable guide to the sensitivity of the portfolio to currency movements. For example, the holdings in the portfolio that have suffered most from US$ weakness are UK companies with dollar revenues and sterling costs.

 

The Company does not hedge the sterling value of investments that are priced in other currencies. Overseas income is subject to currency fluctuations. The Company does not hedge these currency fluctuations because it is impossible to quantify the effect for the reasons stated above. However, from time to time the Manager takes a view by holding financial assets or liabilities in overseas currencies.

 

Exposure to currency risk through asset allocation by currency of listing is indicated below:

 

At 31 December 2011

 

*Includes net non-monetary assets of £32,000.

 

At 31 December 2010

 

*Includes net non-monetary assets of £49,000.

 

 

Foreign currency risk sensitivity

At 31 December 2011, had sterling strengthened by 10% (2010 - 10%) in relation to all currencies, with all other variables held constant, total net assets and net return on ordinary activities after taxation would have decreased by the amounts shown below based solely on translation of securities quoted in currencies overseas. A 10% (2010 - 10%) weakening of sterling against all currencies, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts. However, companies whose cost base diverges in currency terms from its sales will in the longer term have a significantly greater effect on valuation than simple translation. In the short term investee companies generally cover their currency exposure to varying degrees. There is insufficient publicly disclosed information to quantify this, but in the long term this effect is expected to dwarf simple translation of foreign listings in terms of both risk and reward, because many investee companies trade globally. Furthermore, the country of listing is not necessarily an indication of the geography of some or even any operational activities for investee companies. The Manager does not use financial instruments to protect against currency movements. From time to time financial leverage has been made using debt in overseas currencies.

 

2011

2010


£'000

£'000

US dollar

11,321

12,097

Korean won

1,536

998

Norwegian krone

1,128

-

Taiwan dollar

1,210

1,668

Euro

803

898

Other overseas currencies

640

1,057


16,638

16,718

 

B.  Credit Risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment which it has entered into with the Company. The Manager monitors counterparty risk on an ongoing basis.

 

The Company has investments in convertible loan stocks that have an element of equity. These securities are viewed as having a risk profile similar to the equity holdings. This is because the convertibles held are in nascent technology companies that may be loss making and may have weak balance sheets. For this reason these stocks are categorised as equity holdings.

 

The fixed interest securities held are UK and Norwegian Government securities and UK corporate bonds.

 

Credit Risk Exposure

 

The exposure to credit risk at 31 December was:

 

2011

2010


£'000

£'000

Fixed interest investments

26,236

20,151

Cash and short term deposits

30,021

39,497

Debtors and prepayments

1,947

1,316


58,204

60,964

 

The maximum exposure in fixed interest investments was £30,587,000 (2010 - £27,331,000) and the minimum £20,059,000 (2010 - £20,041,000). The maximum exposure in cash was £42,208,000 (2010 - £45,239,000) and the minimum £12,009,000 (2010 - £13,213,000).

 

None of the Company's financial assets are past due or impaired.

 

C. Liquidity Risk

The Company's policy with regard to liquidity is to provide a degree of flexibility so that the portfolio can be repositioned when appropriate and that most of the assets can be realised without an excessive discount to the market price.

 

 

 

(a)   Equity Securities

 

The Company's unlisted investments are not readily realisable, but these only amount to 1.8% of the Company's total assets at 31 December 2011 (2010 - 0.7%).

In practice, liquidity in investee companies is imperfect, particularly those with a market value of less than £100 million. To reduce this liquidity risk it is the policy to diversify the holdings and generally to restrict the holding in any one company to less than 10% of the share capital of that company. Furthermore the guideline is for no single investment to account for more than 5% of the assets of the Company.

 

The market valuation of each underlying security gives an indication of value, but the price at which an investment can be made or realised can diverge materially from the bid or offer price depending on market conditions generally and particularly to each investment. 34% (£168 million) (2010 - 32% (£160 million)) of the portfolio is invested in listed stocks with a market capitalisation below £100 million, where liquidity is expected to be more limited. If these stocks had on average a realisable value 20% below the bid price the value of the total fund would be adversely affected by 6.9% (2010 - 6.4%).

 

(b)   Floating interest rate to fixed interest rate swap

 

The fair value of the swap is estimated by RBS the provider of the swap and is compared to an external model and external prices.

 

Previously, the primary valuation method has been to use an external model with external prices (source: Bloomberg), which is then compared to the swap provider's valuation. Historically the difference has been within an acceptable tolerance, however there was a divergence at 31 December 2011 between the RBS valuation and the external model. The RBS capital valuation was (£20,357,842) in comparison to the external model of (£19,850,744). As the RBS valuation was lower this figure has been used as the appropriate fair value.

 

However RBS have acknowledged that they have changed their valuation methodology and assumptions during the year, but have not disclosed the details, and furthermore may change these at any time as the following RBS disclaimer highlights.

 

"RBS has produced this valuation as of a particular time and date on the basis of, inter alia, its proprietary valuation models or those of third party providers, the assumptions made therein, relevant market data (including data from third party sources) and its assessment (in its sole discretion) of the factors relevant to the valuation and may be changed at any time at RBS' sole discretion without notice to you. Provision of this valuation does not constitute either a bid or an offer for securities, or a bid or an offer to unwind a transaction. If RBS agrees to quote a live price to unwind a transaction or to trade a security, such live price is likely to differ from the most recent valuation for such transaction or security, as the case may be, and may be more unfavourable to you. Valuations and quotations may differ materially between dealers."

 

The swap valuation gives an indication of fair value, but the price at which the swap can be unwound or realised may diverge materially from this valuation depending on market conditions and liquidity.

 

Liquidity Risk Exposure

 

Contractual maturities of the financial liabilities at the year end, based on the earliest date on which payment can be required are as follows:

 

2011

One year

or less

2010

One year

or less


£'000

£'000

Bank loans

51,727

51,591

Derivative financial instruments

25,725

12,935

Other creditors

444

2,201


77,896

66,727

 

 

Fair Value of Financial Instruments

 

Fair values are measured using the following fair value hierarchy:

 

Level  1: reflects financial instruments quoted in an active market.

Level 2: reflects financial instruments whose fair value is evidenced by comparison with other observable current market transactions in the same instrument or based on a valuation technique whose variables includes only data from observable markets.

Level 3: reflects financial instruments whose fair value is determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data.

 

The valuation techniques used by the Company are explained in the accounting policies on pages 40 and 41 of the Annual Report.

 

The tables below set out the fair value measurements using the fair value hierarchy.

 

At 31 December 2011

 

 

Level 1

 £'000

Level 2

£'000

Level 3

£'000

Total

£'000

Financial assets

 

 

 

 

Equity investments

454,597

-

7,856

462,453

Government debt securities

18,934

-

-

18,934

Other debt securities

5,602

-

1,700

7,302

Current assets

31,968

-

-

31,968

Total assets

511,101

-

9,556

520,657

 

 

 

 

 

Financial liabilities

 

 

 

 

Bank loans

50,000

-

-

50,000

Derivatives

-

20,357

-

20,357

Current liabilities (excluding bank loans)

1,001

-

-

1,001

Total liabilities

51,001

20,357

-

71,358

 

 

 

 

 

Total net assets

460,100

(20,357)

9,556

449,299

 

A reconciliation of fair value measurements in Level 3 is set out below:

 

At 31 December 2011

 

 

Equity Investments

£'000

Opening balance at 1 January 2011

3,900

Purchases

3,558

Sales

(703)

Transfers into Level 3

2,469

Total gains or losses:

 

-               on assets sold during the year

(1,088)

-               on assets held at 31 December 2011

1,420

Closing balance at 31 December 2011

9,556

 

Transfers into Level 3 relate to investments for which listing has been suspended during the year.

 

At 31 December 2010

 

 

Level 1

 £'000

Level 2

£'000

Level 3

£'000

Total

£'000

Financial assets

 

 

 

 

Equity investments

471,350

-

3,900

475,250

Government debt securities

14,669

-

-

14,669

Other debt securities

5,482

-

-

5,482

Current assets

40,813

-

-

40,813

Total assets

532,314

-

3,900

536,214

 

 

 

 

 

Financial liabilities

 

 

 

 

Bank loans

50,000

-

-

50,000

Derivatives

-

8,937

-

8,937

Current liabilities (excluding bank loans)

2,715

-

-

2,715

Total liabilities

52,715

8,937

-

61,652

 

 

 

 

 

Total net assets

479,599

(8,937)

3,900

474,562

 

A reconciliation of fair value measurements in Level 3 is set out below:

 

At 31 December 2010

 

 

Equity Investments

£'000

Opening balance at 1 January 2010

2,949

Purchases

1,639

Sales

-

Transfers into Level 3

1,578

Total gains or losses:

 

-               on assets sold during the year

-

-               on assets held at 31 December 2010

(2,266)

Closing balance at 31 December 2010

3,900

 

Transfers into Level 3 relate to investments for which listing has been suspended during the year.

 

Other Risks

Other risks faced by the Company include the following:

 

Regulatory Risk - failure to comply with applicable legal and regulatory requirements could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report. Breach of Sections 1158 and 1159 of the Corporation Tax Act 2010 could lead to the Company being subject to tax on capital gains. The Manager's Compliance Officer and Baillie Gifford's Heads of Business Risk & Internal Audit and Regulatory Risk provide regular reports to the Audit Committee on their monitoring programmes. The Manager monitors investment movements and the Secretary monitors the level of forecast income and expenditure to ensure the provisions of Sections 1158 and 1159 are not breached.

 

Major regulatory change could impose unnecessary compliance burdens on the Company or threaten the viability of the investment company structure.  In such circumstances representation is made to ensure that special circumstances of investments trusts are recognised.

 

Operational/Financial Risk - failure of the Secretary's accounting systems or those of other third party

service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. The Secretary has a comprehensive business continuity plan which facilitates continued operation of the business in the event of a service disruption or major disruption. The Audit Committee reviews the Secretary's Report on Internal Controls and the reports by other key third party providers are reviewed by the Secretary on behalf of the Audit Committee.

 

Discount Volatility - the discount at which the Company's shares trade can widen. The Board monitors the level of discount and the Company has authority to buy back its own shares.

 

Gearing Risk - the Company may borrow money for investment purposes. If the investments fall in value, any borrowings will magnify the extent of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings.

 

All borrowings require the prior approval of the Board and gearing levels are discussed by the Board and Managers at every meeting. The majority of the Company's investments are in quoted securities.

 

 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

The Directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

 

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

 

·           select suitable accounting policies and then apply them consistently;

·           make judgements and accounting estimates that are reasonable and prudent; and

·          state whether applicable UK Accounting Standards have been followed, subject to any material  departures disclosed and explained in the financial statements.

 

The Directors are responsible for the keeping of adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

The Directors have delegated responsibility to the Manager for the maintenance and integrity of the Company's page of the Manager's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

 

The work carried out by the Auditor does not involved any consideration of these matters and, accordingly, the Auditor accepts no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

 

Each of the Directors, whose names and functions are listed within the Directors, Manager and Advisers

section of the Annual Report confirm that, to the best of their knowledge:

·          the financial statements, which have been prepared in accordance with applicable law and  United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), give a true and fair view of the assets, liabilities, financial position and net return of the Company; and

·          the Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

 

By order of the Board

Julian Cazalet

21 February 2012

 

INCOME STATEMENT

 

 

For the year ended

31 December 2011


For the year ended

31 December 2010


Revenue

£'000

Capital

£'000

Total

£'000


Revenue

£'000

Capital

£'000

Total

£'000

(Losses)/gains on investments

-

(25,012)

(25,012)


-

137,953

137,953

Currency(losses)/gains

-

(66)

(66)


-

347

347

Income (note 2)

9,171

-

9,171


7,277

-

7,277

Investment management fee

(4,752)

-

(4,752)


(3,966)

-

(3,966)

Other administrative expenses

(350)

-

(350)


(299)

-

(299)

 

Net return before finance costs and taxation

4,069

 

 

(25,078)

(21,009)


 

 

3,012

 

 

138,300

 

 

141,312

Finance costs of borrowings

(2,978)

-

(2,978)


(2,816)

-

(2,816)

 

Net return on ordinary activities before taxation

1,091

 

 

(25,078)

(23,987)


 

 

196

 

 

138,300

 

 

138,496

Tax on ordinary activities

(144)

-

(144)


(154)

-

(154)









Net return on ordinary activities after taxation

947

 

(25,078)

(24,131)


 

42 

 

138,300

 

138,342

Net return per Ordinary share (note 3)

1.19p

(30.24p)


0.05p

 

171.87p

 

171.92p









Dividend per Ordinary share (note 4)

 

1.00p




 

-



   

 

   The total column of this statement is the profit and loss account of the Company.

All revenue and capital items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above statement.

 

 


BALANCE SHEET

 

 


 

At 31 December 2011


 

At 31 December 2010



£'000


£'000

FIXED ASSETS

Investments held at fair value through profit or loss


488,689


 

495,401 

 

CURRENT ASSETS





Debtors


1,947


1,316 

Cash and short term deposits


30,021


39,497 



31,968


40,813 

CREDITORS:

Amounts falling due within one year (note 5)


(51,001)


 

(52,715)

Derivative financial instruments (note 5)


(20,357)


(8,937)



(71,358)


(61,652)

Net current liabilities


(39,390)


(20,839)






TOTAL NET ASSETS


449,299


474,562 

 

CAPITAL AND RESERVES





Called up share capital


19,924


19,978 

Share premium


73,738


73,738 

Capital redemption reserve


2,028


1,974 

Capital reserve


350,721


376,931 

Revenue reserve


2,888


1,941 

SHAREHOLDERS' FUNDS


449,299


474,562 

 





Net asset value per Ordinary share

(including current year income)


563.75p


593.85p






Net asset value per Ordinary share

(excluding current year income)


562.56p


593.80p






Ordinary shares in issue (note 6)


79,698,283


79,913,283

 

 

 

 

 

 

 

 

 

 


RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

 

 

For the year ended 31 December 2011

 

Called up share capital

£'000

Share premium

£'000

Capital redemption reserve

£'000

 

Capital reserve*

   £'000

 

Revenue reserve

£'000

 Shareholders' funds

£'000








Shareholders' funds at
1 January 2011

 

19,978 

 

73,738

 

1,974

 

376,931

 

1,941

 

474,562

Net return on ordinary activities after taxation

 

- 

 

-

 

-

 

(25,078)

 

947

 

(24,131)

Shares bought back

(54)

-

54

(1,132)

- 

(1,132)

Shareholders' funds at
31 December 2011

 

19,924 

 

73,738

 

2,028

 

350,721

 

2,888

 

449,299

 

*Capital reserve as at 31 December 2011 included investment holding gains of £72,225,000.

 

 

 

For the year ended 31 December 2010

 

Called up share capital

£'000

Share premium

£'000

Capital redemption reserve

£'000

Capital reserve*

     £'000

 

Revenue reserve

£'000

 Shareholders' funds

£'000








Shareholders' funds at
1 January 2010

 

20,263 

 

73,738

 

1,689

 

243,064

 

2,142

 

340,896

Net return on ordinary activities after taxation

 

- 

 

-

 

-

 

138,300

 

42

 

138,342

Shares bought back

(285)

-

285

(4,433)

- 

(4,433)

Dividends paid during the year

- 

-

-

- 

(243)

(243)

Shareholders' funds at
31 December 2010

 

19,978 

 

73,738

 

1,974

 

376,931

 

1,941

 

474,562

 

* Capital reserve as at 31 December 2010 included investment holding gains of £119,429,000.

 

 

 


 

SUMMARISED CASH FLOW STATEMENT

 


For the year ended

31 December 2011

For the year

ended

31 December 2010


£'000

£'000


£'000

£'000

NET CASH INFLOW FROM OPERATING ACTIVITIES


3,547



3,580

NET CASH OUTFLOW FROM SERVICING OF FINANCE


(2,935)



(2,823)

FINANCIAL INVESTMENT






Purchase of investments

(89,449)



(77,590)


Sale of investments

80,493 



102,455 


NET CASH (OUTFLOW)/INFLOW FROM FINANCIAL INVESTMENT


(8,956)



24,865

EQUITY DIVIDEND PAID


-



(243)

NET CASH (OUTFLOW)/INFLOW BEFORE FINANCING


(8,344)



25,379

FINANCING






Bank loans drawn down

25,000



-


Bank loans repaid

(25,000)



-


Shares repurchased

(1,132)



(4,433)


 

NET CASH OUTFLOW FROM FINANCING


 

(1,132)



 

(4,433)

 

(DECREASE)/INCREASE IN CASH


 

(9,476)



 

20,946







RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT






(Decrease)/increase in cash for period


(9,476)



20,946

 

MOVEMENT IN NET (DEBT)/FUNDS IN PERIOD


 

(9,476)



 

20,946

 

NET DEBT AT 1 JANUARY


 

(10,503)



 

(31,449)

 

NET DEBT AT 31 DECEMBER


 

(19,979)



 

(10,503)







RECONCILIATION OF NET RETURN BEFORE FINANCE COSTS AND TAXATION TO NET CASH INFLOW FROM OPERATING ACTIVITIES






Net return on ordinary activities before finance costs and taxation


(21,009)



 

141,312 

Losses/(gains) on investments


25,012



(137,953)

Currency losses/(gains)


66



(347)

Amortisation of fixed income book cost


(25)



(19)

Changes in debtors and creditors


(291)



394

Income tax repaid


4



-

Overseas tax suffered 


(144)



(154)

Realised currency (loss)/profit


(66)



347 

 

NET CASH INFLOW FROM OPERATING ACTIVITIES


3,547



 

3,580 


 

NOTES

 

 

1.

 

The financial statements for the year to 31 December 2011 have been prepared on the basis of accounting policies which are consistent with those set out in the Company's Annual Report and Financial Statements at 31 December 2010.

 

The Directors consider the Company's functional currency to be sterling as the Company's shareholders are predominantly based in the UK and the Company is subject to the UK's regulatory environment.

 

 


31 December 2011

£'000


31 December 2010

£'000

 

2.

Income




 


Income from investments and interest receivable

9,171



7,243


 


Other income

-



34


 



9,171



7,277


 






 


31 December 2011

£'000


31 December 2010

£'000

 

3.

Net return per ordinary share

 


Revenue return

947



42


 


Capital return

(25,078)



138,300


 


Total return

(24,131)



138,342


 






 


Net return per Ordinary share is based on the above totals of revenue and capital and on 79,799,598 Ordinary shares (2010 - 80,465,858) being the weighted average number of Ordinary shares in issue during the year.

 

There are no dilutive or potentially dilutive shares in issue.

 

 


31 December


31 December

 



2011


2010

 


2011

£'000


2010

£'000

4.

Ordinary Dividends


















Amounts recognised as distributions in the period:









Previous year's final

-


0.30p 


-


243











Set out below are the total dividends payable in respect of the financial year, which is the basis on which the requirements of Section 1158 of the Corporation Tax Act 2010 are considered.  The revenue available for distribution by way of dividend for the year ended 31 December 2011 is £947,000 (2010 - £42,000). 

 


Amounts paid and proposed in respect of the period:








 


Proposed final dividend per Ordinary share

1.00p


-


797


-

 



 


The current year's proposed dividend will be paid on 3 May 2012 to all shareholders on the register at the close of business on 10 April 2012.  The ex-dividend date is 4 April 2012.

 

 

5.

The Company has a £50 million multi-currency variable rate loan facility with The Royal Bank of Scotland plc, which comprises two £25 million tranches expiring in May 2013.  On 31 May 2011, a £25 million tranche expired and was replaced with a two year £25 million multi-currency variable rate loan facility with The Royal Bank of Scotland plc expiring 30 May 2013.  The arrangement fee on this replacement facility was £62,500 which has been written off through finance costs of borrowings.

 

At 31 December 2011, there were outstanding drawings of £50 million (2010 - £50 million). Interest on the loans is payable in quarterly instalments in January, April, July and October. The estimated repayment value of the loan at 31 December 2011 was £50 million. The indicative costs of repaying the loan as at 31 December 2011 were not material in the context of the above figures.

 

The interest on £50 million of this facility has been fixed for the long term through a 30 year interest rate swap but may vary on periodic renewals of the debt facility to the extent that the mark up over LIBOR charged by a lending bank varies. The fair value of the interest rate swap contract at 31 December 2011 was an estimated liability of £20.4 million (2010 - £8.9 million) which was based on the swap provider's valuation.

 

The loan has been disclosed as due within one year as the Company has an unconditional and irrevocable right to prepay the advance under the terms and conditions of the loan agreement.  The duration of the advance is 1, 3 or 6 months and the decision to rollover the loan is made at quarterly board meetings based on circumstances prevailing at the time.  The decision to continue with the swap arrangement is reviewed at the same time as the loan agreement.

 

 

6.

At the Annual General Meeting in April 2011, Shareholders granted the Company authority to purchase shares in the market up to 11,979,001 Ordinary shares (equivalent to 14.99% of its issued share capital at that date). In the year to 31 December 2011, a total of 215,000 (2010 - 1,140,000) Ordinary shares with a nominal value of £53,750 (2010 - £285,000) were bought back at a total cost of £1,132,000 (2010 - £4,433,000). At 31 December 2011 the Company had authority to buy back a further 11,764,001 Ordinary shares. Under the provisions of the Company's Articles share buy-backs are funded from the capital reserve. The Company does not have any externally imposed capital requirements.

 

 

7.

During the period transaction costs on purchases amounted to £424,000 (2010 - £422,000) and transaction costs on sales amounted to £198,000 (2010 - £368,000).

 

 

8.

The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2011.  The financial information for 2010 is derived from the statutory accounts for 2010 which have been delivered to the Registrar of Companies.  The Auditors have reported on the 2010 and 2011 accounts; their reports for both years were unqualified and did not contain a statement under sections 495 to 497 of the Companies Act 2006.  The statutory accounts for 2011 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

 

 


None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

 

 

 

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of, this announcement.

 

- ends -

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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