Annual Financial Report

RNS Number : 5362Q

Herald Investment Trust PLC

20 February 2019

ANNUAL FINANCIAL REPORT for the year ended

31 December 2018 (audited)

This is the Annual Financial Report of Herald Investment Trust plc as required to be published under DTR 4 of the UKLA Listing Rules.

Results and dividend

The net asset value (NAV) of the Company at 31 December 2018 was 1,307.9p per ordinary share (2017 - 1,374.9p). This represented a decrease of 4.9% during the year. The discount was 17.8% (2017: 14.8%) and the share price decreased by 8.2% to 1,075.0p.

The Company made a revenue profit of £58,000 (2017: £486,000) giving net earnings of 0.08p per share (2017: 0.68p) per share. The directors do not recommend a dividend (2017 - nil) for the year ended 31 December 2018.

The financial information set out in this Annual Financial Report does not constitute the Company's statutory accounts for 2017 or 2018. Statutory accounts for the years ended 31 December 2017 and 31 December 2018 have been reported on by the Independent Auditor. The Independent Auditor's Reports on the Annual Report and Financial Statements for 2017 and 2018 were unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006. The Company's statutory accounts for the year ended 31 December 2017 have been filed with the Registrar of Companies. The Company's statutory accounts for the year ended 31 December 2018 will be delivered to the Registrar in due course.

The financial information in this Annual Financial Report has been prepared using 'FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland' (FRS102), which forms part of Generally Accepted Accounting Practice ('UK GAAP') issued by the Financial Reporting Council. The financial statements have also been prepared in accordance with The Companies Act 2006 and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued by the Association of Investment Companies (AIC) in November 2014 as amended in January 2017 and updated in February 2018.

STATISTICS AND PERFORMANCE - YEAR'S SUMMARY

	31 December 2018	31 December 2017	% change
Total net assets	£901.2m	£966.7m
Shareholders' funds	£901.2m	£966.7m

Net asset value per ordinary share	1,307.9p	1,374.9p	- 4.9
Share price	1,075.0p	1,171.0p	-8.2
Numis Smaller Companies Index plus AIM (ex. investment companies)	4,917.9	6,001.8	-18.1
Russell 2000 (small cap) Technology Index (in sterling terms)	2,597.2	2,480.2	4.7
Dividend per ordinary share	-	-
Profit per ordinary share (revenue)	0.08p	0.68p
Ongoing charges*	1.07%	1.08%
Discount to NAV**	17.8%	14.8%

* Ongoing charges calculated in accordance with AIC guidelines: annualised charges, excluding interest, incurred by the Company, expressed as a percentage of the average net asset value.

** The discount is the difference between the share price and the NAV, divided by the NAV.

Long Term Performance Summary

The following table indicates how an investment in Herald has performed relative to its comparative index (applied retrospectively) and its underlying fully diluted net asset value over the period since inception of the Company.

	31 December 2018	Inception 16 February 1994	% change
Net asset value per ordinary share (including current year income)	1,307.89p	98.72p	1,224.85
Net asset value per ordinary share (excluding current year income)	1,307.81p	98.72p	1,224.77
Share price	1,075.00p	90.90p	1,082.62
Numis Smaller Companies Index plus AIM (ex. investment companies)	4,917.91	1,750.00	181.02
Russell 2000 (small cap) Technology Index (in sterling terms)	2,597.21	688.70	277.12

Chairman's Statement AND REVIEW OF 2018

At the half-year stage, the net asset value per share ('NAV') had risen by 9.6%. However, the final quarter of 2018 saw a sharp correction in markets, which more than eliminated earlier gains and the NAV had fallen by 4.9% by the year end. Likewise, the share price total return fell 8.2% for the year. It is always disappointing to report negative returns, but the portfolio had been positioned defensively, reflecting the manager's belief that some valuations had become somewhat too ambitious. The performance relative to the wider market is quite pleasing, since the wider market (captured by the FTSE All Share Index) depreciated by 9.5%. We enter 2019 more comfortable that valuations now offer scope for good absolute performance once again.

At the year end, UK listed companies accounted for 52% of the net assets, which is down from 60% a year ago. This was influenced by a deliberate reduction of £54.6 million in the exposure to AIM stocks because valuations had become stretched and we were concerned about the sustainability of inheritance tax relief on AIM stocks. Having represented 47% of the portfolio at the end of 2017, AIM stocks were just 35% by the end of 2018. This reduction proved timely. The UK portfolio returned minus 8.7%. In comparison, the Numis Smaller Companies Index plus AIM (ex. Investment Companies) declined by 18.1%.

The North American portfolio accounts for 24% of net assets, unchanged from the prior year. The positive return of 11.7% in sterling terms is satisfactory in both an absolute and relative sense. Although US technology has offered better returns than most equity indices in 2018, by the year end the Russell 2000 (small cap) Technology Index (in sterling terms) returned only 4.7% in sterling, and declined marginally in dollars.

The technology correction in the US had been much anticipated. However, the markets in Asia and Europe (5.9% and 5.0% of the portfolio respectively) were more challenging. The environment for profits in our sector has generally been benign in the UK and US. This has not been the case in technology manufacturing in Asia. The maturity of the smartphone and PC market was predictable, but the Trump trade battles with China on top created a difficult environment.

The KOSDAQ Korean IT Index declined 22.8% in 2018, the Taiwan Electronics Index declined 6.8% and the Chinese indices have been worse. The decline in Herald's Asian portfolio of 10.9% was therefore relatively good. The return on the small European portfolio was the most disappointing, with a decline of 23.8% in sterling terms. In the long run the returns on the European portion of the portfolio have been the best, but valuations had become extended.

2018 has been the sixth year in succession in which sales of investments in the portfolio have exceeded purchases. Net sales were £40m in the first half and a further £18m in the second half. Over the last six years, sales have exceeded purchases by £222m. Over that time there have been 80 takeovers of portfolio companies with an aggregate value of £347m, of which 16 occurred in 2018 with an aggregate value of £74m from completed deals and a further £5m which has yet to complete.

Over this six year period, £89m has been used to repurchase over 10.4m of the Company's shares. In 2018 alone, we repurchased 1.4m shares, at a cost of £17m. At the end of 2012 there was modest net debt of £18m; by the end of 2018 there were net liquid assets (cash and Government bonds) of £116m. The return in sterling during 2018 on short-dated US Government bonds, held as a proxy for cash, was 8.8%, which was better than the return on equities.

Last year was an extraordinarily busy one for primary offerings. Our manager endeavoured to resist these, except to support existing investments or where there was exceptional value. A number of the larger IPOs were exits for private equity and venture capital where there was limited value. These were mainly in the US. In the UK there was better value, but some potential IPOs did not make it to market because there was insufficient demand, which was disappointing.

There have been dire predictions in the media about the risks in the technology sector and the high valuations. From our perspective the valuations seem high in the private markets, but we are encouraged that valuations seem more sensible in public markets, particularly following the recent correction. There are no parallels to the TMT sector in 2000, when valuations were universally too high.

The most pressing issue today is the trade and tariff war between the US and China. It appears that President Trump's aggressive stance is supported by the US electorate, and even more by the US security departments, so tensions are unlikely to abate. We may be seeing the start of major structural changes with a Western US centric sector diverging from China, and China developing an indigenous self-contained sector. This has already become apparent in the telecoms sector where it appears that Ericsson and Nokia will dominate supply of 5G in the West, versus Huawei and ZTE in China.

The challenge will be for hardware companies dependent on a China supply chain, such as Apple. China is currently a big importer of semiconductors from Taiwan, Korea and the US and is clearly intent on developing indigenous capacity, which will present other challenges.

It is already evident that sub-contract manufacturing is moving out of China at the commodity end for cost reasons, and further up the value chain for tariff and political reasons. Herald focuses on investing in small companies, so we are only marginally exposed to this dynamic: we have a modest weighting in Asian manufacturing and no exposure to the large semiconductor companies.

The only effect will be secondary, if the US/China tensions inhibit global growth. Trump might be an unpredictable mouthpiece to trade negotiations, but it is certain that there is a wider 'US establishment' alarm at the growing strength of the Chinese technology industry, and the US dependency on it as a supplier, for security reasons more than the balance of trade. It seems wise to assume that this will be an evolving issue for months and years to come. If China still has to develop leading edge semiconductor technology, it is already leading edge in many internet technologies.

Although some valuations are discounting considerable growth, and are stretched when adjusted for share-based payments, the sector is still dynamic, and small companies continue to emerge at sensible valuations. The UK has entrepreneurial creativity and continues to be an interesting market. It is constrained by a shortage of institutional co-investors, but that helps Herald in terms of value at the point of entry. Valuations remain more challenging in North America, but the economy and sector remains world-leading.

The implementation of MiFID II has clearly not helped. Successful institutional small company investment managers tend to move up the size scale ignoring microcaps, and illiquidity is increasing due to market breakdown. This is a greater concern for open-ended funds with unpredictable cash flows.

The focus of the fund is capital appreciation, but the Company has again delivered a small profit in income terms, although insufficient to pay a dividend.

Board composition and governance

I will retire as your chairman at the conclusion of the AGM on 16 April 2019. It has been a great privilege to have been a director of Herald since 2008 and its chairman since 2009. The Company has delivered outstanding returns to shareholders since it was formed in 1994. Herald is unique among investment trusts in playing a vital role in the funding and development of start-ups and small businesses in the TMT sector and there have been many examples where this has delivered value for our shareholders, and for the sector. In addition it has made an invaluable contribution to the UK.

I would like to pay tribute to the contribution of Katie Potts and her team, who have delivered a near four-fold increase in NAV per share since I became chairman. I would also like to thank all of my fellow directors, past and present, for their wise counsel and unswerving support while I have been chairman.

Your board has carefully considered board composition for the period ahead. We were very pleased to recruit Ian Russell as a director from August 2018 and, subject to his election by shareholders at the AGM, he will succeed me as chairman. Ian has extensive and varied NED experience, including on the boards of other investment trusts. He is well placed to lead the Company into the future.

We also recognised that it would be appropriate to increase the size of the board to five directors in order to recruit an independent director with specific experience in accounting. We are delighted that Stephanie Eastment, who is a qualified chartered accountant with great experience in fund management, joined the board in December 2018 and she has succeeded James Will as chair of the audit committee.

Regulation

My tenure as chairman has coincided with a huge increase in regulation in the fund management sector. Every new piece of legislation has added cost and complexity to the industry and ultimately to shareholders. The effects are exemplified by the increase in the length of the annual report and accounts. This has grown by 25% since 2008. The additional 14 pages comprise regulatory disclosures which were not deemed necessary in 2008 but are now required to satisfy all the regulatory bodies.

The industry has had to contend with, among others, MiFID, AIFMD, UCITS V, CRD, SRD, Benchmark regulations, PRIIPs, GDPR and most recently MiFID II. Most of these have emanated from the European Union and have been required to be incorporated in UK law. Every one of these directives has required management time and the great majority have added directly to the costs borne by shareholders and investment managers.

The most recent legislation, MiFID II has fundamentally altered the balance in the broking and investment banking industry in a very worrying way.

The smaller broking houses, which are essential to the health of the smaller companies sector, have been put under great pressure by the new environment which has been forced on them by the changed requirements in relation to the payment of commissions and for research.

AGM and continuation vote

The forthcoming AGM, to which all shareholders are invited, provides shareholders with an opportunity to vote on the continuation of the Company, as the articles of association require every third year. Herald is one of the largest investment trusts specialising in TMT and has performed very well since its launch in February 1994. It is the only specialist technology orientated investment trust with a material exposure to the United Kingdom.

The Herald board believes that the investment manager's focus on smaller capitalisation companies provides exposure to some of the most rapidly growing companies within the Company's targeted sectors and that this should continue to provide attractive long term investment opportunities.

The directors believe that the prospects for investment in the TMT sectors remain positive and that we are fortunate to be managed by Katie Potts. She is one of the most experienced and successful managers in the sector. Your board strongly recommends that shareholders vote in favour of the resolution to continue as an investment trust - as the directors intend to do in relation to their own shareholdings.

We remain enthusiastic about the TMT sector in which we operate.

Julian Cazalet
Chairman

Investment Manager's Report

In 2018 we were intent on maintaining cash and even accumulating higher cash levels. This was helpful in the fourth quarter when there was a correction, which led to a decline in net assets per share of 4.9%. We are beginning to believe that cash may be a drag moving forwards, albeit there remain some macro imponderables. The intention is to slowly reinvest as opportunities arise, and to maintain the borrowing facility in case a good buying opportunity emerges.

There has been a wide divergence in performance between stocks. A few have disappointed at the trading level, while others have just been de-rated. The subset of the technology sector that has experienced downgrades has mainly been exposed to volume markets, such as mobile phones and automotive. This has hit the semiconductor sector in particular where increases in capacity combined with lower growth in demand have led to price cuts and margin pressure. This has affected holdings such as IQE and BE Semiconductor Industries, both of which performed outstandingly in previous years. We had reduced our positions, but not enough. However, the appeal of the sector is that it is not homogeneous, and in all markets, there are some that grow. For most of our holdings there has been no discernible weakness versus expectations.

The US economy, and consequently the global economy, has benefited from tax cuts which have provided a tailwind to corporate profits. However, this has been offset by the Federal Reserve moving towards normalising interest rates, which the market worried about in the fourth quarter. This, as much as the tariff war, has spooked the markets. Of concern is that the UK has hardly started to normalise interest rates with the Bank of England fearful over slowing the economy around Brexit uncertainty. The housing market already recognises that easy money will not endure forever. However, the macroeconomic environment is less relevant to the technology sector than almost all others. We continue to be in an exciting phase where companies have to adapt or be disrupted. In addition, cybersecurity, data protection (GDPR) and regulation all require compulsory expenditure for Governments and businesses alike.

Technology disruption is also seeing winners and losers within the sector. The legacy companies are evident - IBM, HP, Oracle, Blackberry to name a few. In particular, processing power and storage is migrating to the big datacentre companies dominated by Amazon Web Services and Microsoft Azure, followed by Google and Alibaba. These companies are disintermediating the branded companies such as HP and IBM.

There was a twenty-year period when food retailers outperformed food manufacturers as powerful buying chains squeezed manufacturers margins compared to the weaker buying power of the corner shop. This is happening in computer infrastructure. For Waitrose see Microsoft, for Tesco see Amazon Web Services and for Aldi see Alibaba?

Interestingly IBM was the legacy mainframe computer company that survived the move to client server PC based computing, but is now floundering. Microsoft and Intel were the winners in the PC world. Microsoft has conspicuously succeeded in being the legacy PC company to survive the transition to the datacentre world. The jury is out on Intel, only because its near monopoly position in microprocessors for PCs and servers is now being challenged by AMD and GPUs, and it is being squeezed by the 'supermarket' buying power of the big four datacentre companies.

Furthermore, with the growth in server applications powerful computing can be accessed on battery powered phones and tablets, which do not use X86 architecture, but are ARM based. The companies mentioned here are all larger than this Company's small capitalisation remit, but they are hugely relevant to the small company world. The ability to rent scalable processing power, storage and software is collapsing the cost, and more importantly the capital requirements for small companies. We see this as a driver to global economic growth akin to collapsing oil prices.

It is only in the last few years that the consumer, the enterprise and Government have all been networked, and soon vehicles will be too. The network roll-out for higher speeds continues but is ex-growth. The applications used on the network are far from mature. Faster, cheaper processing power is enabling artificial intelligence to be used commercially, which will have further profound disruptive effects.

The UK portfolio declined 8.7% on a total return basis. The two worst performing stocks were IQE and Bango, which last year were the best. In 2017 IQE appreciated £29.8m and in 2018 it declined £11.5m. Fortunately, we had been aggressively taking profits on rising prices so that during 2017 we had realised cash of £19.2m and profits of £15.3m, and a further £5.1m of cash and £3.8m of profit in the first quarter of 2018 in 27 separate trades, albeit offset by an investment of £2.9m to support the fundraising to ensure they could invest in additional capital equipment for demand expected from Apple.

The level of expected demand from Apple has reduced, however, and so has IQE's share price. The business remains the world leader in manufacturing compound semiconductor wafers, and now has a strong balance sheet. These wafers will be used in the forthcoming 5G phones and infrastructure, and we expect the demand for VCSELs, which are used in the iPhone's facial recognition product, to grow albeit at a slower rate now that Apple has demonstrated that the market for £1,000 smartphones is more limited than hoped.

As a user I am a convert to the belief that facial recognition will be more widely adopted, but the overall phone price must lower, and it will do so as component prices such as DRAM fall. As an investor focussed on smaller companies in the supply chain of large companies such as Apple, it is evident that it is brutally tough in requiring the supply chain to build capacity in excess of any potential demand, and then subsequently has the whip hand on pricing.

Bango appreciated £15.4m in 2017, and fell £13.7m in 2018. Unfortunately, we were not as successful at taking profits realising only £0.5m. The shares were too high, but there were not willing buyers. It is a microcap company with only two customers of significance - Google and Amazon, but very valuable ones they are.

The potential scale of those players makes it difficult to value. We were surprised by how strong both shares were, but in IQE's case there was massive private client buying. Not only did that enable us to sell shares too expensively, but it concerned us that a new phenomenon became more evident - that of private client buying influenced by internet chat boards. This buying was not across the board but very stock specific. But private investor demand of this nature, combined with the disappearance of the institutional investor, had made us cautious for the market overall.

There were also some positive returns. There were five stocks that appreciated in excess of 100% collectively returning £10m. Two of these were struggling companies where the return came from the takeover premium. In both cases, Lombard Risk and Earthport, we were losing faith in management's ability to deliver, and were happy to see them go.

In addition, Elektron, Brave Bison and Versarien rose 145%, 144% and 121% respectively. In terms of materiality Versarien is the most relevant. It appreciated £4.5m during the year. We have significantly reduced the position having started to sell in 2017, and have now realised £9.5m in cash and £8.2m in gains. The company has a graphene product, and an energetic entrepreneurial management team, but again private clients have elevated the price to a level that we could not resist selling.

Craneware appreciated £6.4m with an encouraging rise in revenue and profit expectations. This has been a good long term performer but after upgrades at over £30 per share we were torn between wanting to own the shares long term, and worrying about the valuation being ahead of itself. We sold a little, but the market has resolved the issue with the share price markedly correcting in the fourth quarter.

ZOO was a star performer in 2017 and appreciated a further £6.8m in 2018. When the company was in financial difficulties, we increased Herald's stake to 20% and provided funds through a convertible loan to provide survival funding. It is therefore rewarding to have been able to reduce our holding materially towards a more normal percentage ownership withdrawing £4.6m, and still having a material unrealised gain. BATM has been a sleeper for a while, but has an exciting ARM based networking solution so appreciated 80% and £4.9m.

There were several IPOs that we were prepared to participate in towards the end of the year, but there were insufficient co-investors. On the other hand, we did not participate in the Avast IPO because it exceeded our size threshold of $3bn market capitalisation, but it subsequently fell sufficiently, and we were pleased to take the opportunity to acquire a stake.

We remain committed to AIM but have purposefully reduced the weighting in the portfolio from a high of 44% of the Company's net assets at the end of 2017 to 35% at the end of 2018. The attraction is that there are some dynamic companies, and new ones continue to appear, but our caution emanates from the withdrawal of so many institutional investors. Index tracking funds are growing but do not invest in small companies and, in particular, they do not make the capital allocation decisions in order to provide primary funding of companies requiring capital, which is an important raison d'etre for public markets, and requires judgment and not machines.

We are proud of the fact that we have invested £417m since the Company's inception in primary capital in the UK, and an additional sum of £52m overseas, to provide development capital which is about 5x the outside capital ever raised by the Company, so capital has been productively recycled. The market has become too dependent on marginal buying from private clients, some of which is speculative and some IHT exemption driven. Liquidity is an issue; fund managers of scale cannot get adequately sized positions, particularly when coping with cash inflows and outflows. This has led to takeovers exceeding new issues, and shrinking the addressable market.

The other cloud that has made us so cautious and led to us withdrawing money from the UK is the unknown effects of the numerous regulatory changes. In 2018 sales from the UK exceeded purchases by £60m. The exercise stimulated me to consider the long term cash flows, and overall sales in the UK portfolio exceed purchases by £167m from inception in 1994, with a market value of £468m at the year end.

North America

The North American total return in sterling terms was 11.7% versus the Russell 2000 (small cap) Technology Index (in sterling terms) return of 4.7%, and the NASDAQ return of 3.1% in sterling terms. At one point in the year the return exceeded 30%, so the fourth quarter correction was as vicious as any region but North America had performed better previously. The US is a particularly momentum driven market with gyrations more extreme than elsewhere. Nevertheless, the outcome is satisfactory.

We were net sellers in the UK, and we were also net sellers in North America by £13m in 2018 and by £44m over the last three years. This reflects in part takeovers of £27m in North America in 2018, £61m over the last three years and £131m over the last six years, which is material in relation to a portfolio valued at £218m at the year-end.

This year there have been six takeovers in the North American portfolio, of which the significant ones have been Barracuda, Callidus and Web.com. There have been a healthy number of IPOs in the US. We have tracked thirty one. We do not normally participate in NASDAQ IPOs led by the global players, because we are irrelevantly small clients, and get poor allocations in hot IPOs and filled in the difficult ones, and prefer to look in the aftermarket. We do however want a vibrant public market, and remain frustrated that institutional cash flows continue to move in the direction of private equity, and their valuations seem higher than public ones. We prefer to be in the cheaper market, but do not want the move to private equity and tracking funds to strangle markets to death.

The star performer of the year was Attunity, which appreciated 199% during the year, from a good-sized position, so the appreciation was £10.2m. We acquired a small position in 2014, and bought some more in 2015, but the shares languished although regular meetings with the company reassured that underlying progress was better than the share price. When they had a secondary offering in December 2017 we were the cornerstone of a $23m fund raising, investing $4.75m in a share issue that was a struggle.

Value is more evident in the smaller companies with offerings made by smaller brokers. We are better networked into these brokers following the opening of our New York office three years ago. Alteryx and ACM Research appreciated 149% and 120% respectively. Alteryx's IPO was in 2017, but we invested six months after the IPO following a meeting with management at which we were impressed. We did participate in the IPO of ACM Research from a smaller broker. In both cases the position was small because we are always resistant to committing large amounts of capital until we have got to know the company and its management over a period of time.

By value Five9, Mellanox, Fabrinet and LivePerson were all strong contributors.

The smaller brokers in the US were hit by Sarbanes Oxley, which raised the cost for a small company to be public, and the fact that venture capital is providing follow on rounds to a much later stage.

The latest twist is MiFID, which has hit them hard. Although MiFID has not been implemented globally, some of the large multinational players are applying the same rules. It is evident that some of the technology boutiques important to us have been hit hard. As in the UK it is difficult to know quite how great the pain is, because nobody wants to say they are losing for obvious reasons, but the number of quality individuals choosing to leave the industry, and the continuing drift of lay-offs, tells its own story.

Tracker funds are even more significant in the US market but do not make the investment judgement required for investing in IPOs. It was interesting to see Spotify come to the market by way of an introduction without the expense of fund raising fees to investment bankers, because venture capital had provided sufficient capital, and index trackers can provide an exit. The price has subsequently performed poorly.

Asia

The Asian portfolio declined 11.2% (IRR, total return in sterling terms). In comparison, the Kosdaq IT Index in Korea declined 22.8% and the larger company TWSE Electronics Index in Taiwan declined 6.8%. Generally, the Asian indices across the region had a difficult year, with some of the smaller companies indices particularly impacted, for instance the Tokyo Stock Exchange Mothers Index being amongst the weakest falling 28%.

In the first half the momentum in Asian stock markets remained very strong, continuing the trend from the prior year. Globally, monetary policy remains loose with interest rates very low. In this environment any areas where there was good newsflow proved irresistible and there was a great deal of excitement amongst retail technology investors. This was most clearly illustrated by the euphoria (particularly widespread in Asia) that surrounded Bitcoin which peaked close to £18,000 in December 2017, but then collapsed to lows near to £3,000.

Asian technology companies in general were highly sought after with great excitement in the press regarding concepts such as cloud computing, artificial intelligence, machine learning, robotics, autonomous vehicles and 3D machine vision. We believe that the continuing advances in computing power, sensing and networking are increasing the opportunity for technology to become ubiquitous and alter the working and leisure environment for a growing proportion of the world's population.

However, at the end of the first half the excitement had clearly run ahead of the reality and markets were vulnerable to bad news - this was duly delivered in the form of the accelerating US-China trade war, fears of monetary policy tightening, softer demand for smartphones, pc's and servers and weakness in semiconductor prices - particularly memory. Given the hardware skew and cyclical nature of the Asia technology sector, the business models of Asian technology companies were particularly vulnerable.

The worst performing stocks within the Asian portfolio were generally semiconductor companies or capital equipment suppliers to semiconductor companies, for example Wonik IPS, RichWave Technology, Eugene Technology, PSK and Innox saw declines of between 38-54%. The better performing names came from a broader range of business models including software, hosting, payment and internet platforms with four holdings rising over 50%, the best being Bravura - an Australian financial software company - up over 110%. There has been a deliberate effort to diversify the portfolio from an over reliance on the volatile hardware business models prevalent in Korea and Taiwan with an increased emphasis on unearthing new opportunities in other markets such as Australia and Japan.

EMEA

The European element of the portfolio has always been small, but over the long term has performed well. Unfortunately, this year has been challenging. BE Semiconductor has provided a total return of £17.4m and remained the biggest holding in the portfolio at the start of 2018, but in 2018 the return was a £5.7m loss. However, the position had been significantly reduced with £17.4m cash and £7.8m profit already realised on share sales by the beginning of April 2018, which significantly reduced the damage. BE Semiconductor is an extremely well-managed company, but is a capital equipment supplier to a cyclical semiconductor industry. There was a major cancellation of an order believed to be in excess of $20m from Apple, but that is the nature of the sector. The stock accounted for a third of the European portfolio at the start of the year, and declined 42%.

The best performing stock in the year was Link Mobility, which benefited from a takeover by private equity. Management are staying with the business, but believe funding for acquisitions will be easier to find through private equity owners. The private equity power has even extended to this Norwegian company.

Outlook

Several references have been made to regulatory changes. Metaphorically this is what keeps me awake at night, not the quality of the portfolio, not the US/China trade war, not Brexit, not politics, but the trends in public markets.

If recent trends persist then quoted markets, for small companies anyway, will cease to exist. The private investor will be marginalised, and private equity will own everything. We discuss this challenge ad nauseum. Wise elder counsel tells me the darkest hour is always just before dawn.

"Asset allocators will realise that P-E valuations have become too high and their returns will deteriorate, and that there might be volatility in public markets but at least there is liquidity and regulated public scrutiny. They will become forced sellers, and public market investors will get bargains. Remember hedge funds were flavour of the month at one time. The market will adapt to regulatory changes and realise commissions or spreads have to be higher, so that the market can function again and provide liquidity and provide capital for companies. The regulator will realise that it has heaped too much cost throughout the chain of financial advisors, fund managers and brokers at the expense of the poor old private investor that they are trying to protect and become more practical."

We can but hope.

Nevertheless, we are considering allocating a small portion of the portfolio to private companies because we are aware the market is changing and want to ensure access to the best opportunities.

The good news is that you can make money out of shrinking markets, as has been demonstrated in this fund over the last decade if not the last year. Most importantly of all, the sector continues to offer exciting emerging companies. It is evident to all how pervasive technology change is for the consumer, corporates and Governments alike.

Regional allocation changes (£'000)

	Valuation at 31 December 2017	Net acquisitions/ (disposals)	Appreciation/ (depreciation)	Valuation at 31 December 2018
Equities*
UK	582,632	(59,549)	(54,695)	468,388
EMEA	55,616	4,640	(14,892)	45,364
North America	207,475	(13,116)	23,379	217,738
Asia Pacific	50,373	9,695	(6,663)	53,405
Total equities	896,096	(58,330)	(52,871)	784,895
Government bonds	29,445	14,905	2,435	46,785
Total investments	925,541	(43,425)	(50,436)	831,680
Net liquid assets	41,109	26,317	2,048	69,474
Total assets+	966,650	(17,108)	(48,388)	901,154

* Equities includes convertibles and warrants.

+The total assets figure comprises assets less current liabilities before deduction of bank loan.

Sector Performance (Sterling Millions)

	Market value equity portfolio 31 Dec 2018	% of equity portfolio 31 Dec 2018	Total return equity portfolio 31 Dec 2018	Total return equity portfolio 31 Dec 2017
Software	227.7	29.0	29.8	45.2
Computer Services	88.1	11.2	-8.8	38.8
Semiconductors	86.0	11.0	-39.4	56.9
Media Agencies	65.9	8.4	-16.1	20.3
Telecommunications Equipment	47.3	6.0	4.9	-0.4
Internet	41.8	5.3	-13.9	24.2
Publishing	39.6	5.0	-0.4	3.7
Electrical Components & Equipment	30.9	3.9	3.3	4.5
Fixed Line Telecommunications	17.1	2.2	5.2	0.7
Business Support Services	14.7	1.9	0.1	-4.1
Computer Hardware	13.0	1.7	-3.0	0.3
Other	112.8	14.4	-4.7	27.1
Total	784.9	100.0	-43.0	217.2

Katie Potts

Fund Manager

Top 20 Equity Holdings

AS AT 31 DECEMBER 2018

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

GB Group

GB Group (GBG) offers a series of solutions that help organisations quickly validate and verify the identity and location of their customers. GBG's products are built on an unparalleled breadth of data obtained from over 200 global partners which in conjunction with GBG's innovative technology leads the world in location intelligence, detects fraud and enables GBG to verify the identity of 4.4 billion people globally. GBG is headquartered in the UK, with over 900 team members across 18 countries. They work with clients in 79 countries, including some of the best-known businesses around the world, ranging from US e-commerce giants to Asia's biggest banks and European household brands.

£23.1m Valuation

2.6% Of total assets

3.6% Of issued share capital held

£1.5m Book cost

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.

£20.6m Valuation

2.3% Of total assets

1.5% Of issued share capital held

£1.2m Book cost

Next Fifteen Communications

Next Fifteen Communications is a family of 18 marketing businesses spanning digital content, PR, consumer, technology, marketing software, market research, public affairs and policy communications. Founded in 1981, Next 15 are centred on the technology of marketing: data, insight, analytics, apps, content platforms and content itself.

£18.4m Valuation

2.0% Of total assets

4.6% Of issued share capital held

£2.4m Book cost

Attunity

Attunity is a leading provider of data integration and big data management software solutions that enable availability, delivery and management of data across heterogeneous enterprise platforms, organisations and the cloud. Attunity's software solutions include data replication and distribution, test data management, change data capture (CDC), data connectivity, enterprise file replication (EFR), managed file transfer (MFT), data warehouse automation, data usage analytics and cloud data delivery. Attunity has supplied innovative software solutions to its enterprise-class customers for over 20 years and has successful deployments at thousands of organisations worldwide. Attunity provides software directly and indirectly through a number of partners such as Microsoft, Oracle, IBM and Hewlett Packard Enterprise.

£15.4m Valuation

1.7% Of total assets

4.6% Of issued share capital held

£5.1m Book cost

Craneware

Craneware is the leader in automated Value Cycle solutions that help US Healthcare provider organisations discover, convert and optimise assets to achieve best clinical outcomes and financial performance. Founded in 1999, Craneware is headquartered in Edinburgh, Scotland with offices in Atlanta and Pittsburgh employing over 320 staff. Craneware's market-driven, SaaS solutions normalise disparate data sets, bringing in up-to-date regulatory and financial compliance data to deliver value at the points where clinical and operational data transform into financial transactions, creating actionable insights that enable informed tactical and strategic decisions.

£14.6m Valuation

1.6% Of total assets

2.3% Of issued share capital held

£1.8m Book cost

Mellanox Technologies

Mellanox Technologies is a leading supplier of end-to-end Ethernet and InfiniBand smart interconnect solutions and services for servers and storage. Mellanox interconnect solutions increase datacentre efficiency by providing the highest throughput and lowest latency, delivering data faster to applications and unlocking system performance capability. Mellanox offers a choice of fast interconnect products: adapters, switches, software and silicon that accelerate application runtime and maximise business results for a wide range of markets including high performance computing, enterprise data centres, Web 2.0, cloud, storage and financial services.

£12.9m Valuation

1.4% Of total assets

0.3% Of issued share capital held

£2.0m Book cost

Radware

Radware is a global leader of cyber security and application delivery solutions for physical, cloud, and software defined data centres. Its award-winning solutions portfolio secures the digital experience by providing infrastructure, application, and corporate IT protection and availability services to enterprises globally. Radware's solutions empower more than 12,500 enterprise and carrier customers worldwide to adapt to market challenges quickly, maintain business continuity and achieve maximum productivity while keeping costs down.

£12.8m Valuation

1.4% Of total assets

1.6% Of issued share capital held

£4.5m Book cost

Pegasystems

Pegasystems is the leader in software for customer engagement and operational excellence. Pega's adaptive, cloud-architected software - built on its unified Pega Platform - empowers people to rapidly deploy and easily extend and change applications to meet strategic business needs. Over its 35-year history, Pega has delivered award-winning capabilities in CRM and digital process automation (DPA) powered by advanced artificial intelligence and robotic automation, to help the world's leading brands achieve breakthrough business results.

£11.9m Valuation

1.3% Of total assets

0.4% Of issued share capital held

£1.6m Book cost

Future

Future is an international media group, organised into two divisions, Media and Magazines. The Media division focuses on being at the forefront of digital innovation with three complementary revenue streams: eCommerce, events and digital advertising. It operates in a number of sectors, including the growing technology and games markets, and has a number of leading brands, including TechRadar, PC Gamer, GamesRadar+, The Photography Show, Generate and Golden Joysticks. The Magazine division creates specialist magazines and bookazines, with 60 magazines and over 430 bookazines published a year, with a total global circulation of over one million. The Magazine portfolio spans technology, games and entertainment, music, creative and photography, field sports, knowledge and home interest verticals. Its titles include T3, Total Film, How It Works, Edge and All About History.

£11.9m Valuation

1.3% Of total assets

3.0% Of issued share capital held

£6.1m Book cost

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.

£11.8m Valuation

1.3% Of total assets

4.8% Of issued share capital held

£4.6m Book cost

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 the communications, energy and insurance markets. Customers ('Members') benefit from the convenience of a single monthly bill, consistently good value across all their utilities and superior levels of customer service. The company does not advertise, relying instead on 'word of mouth' recommendation by existing satisfied Members and a network of part-time distributors ('Partners') in order to grow its market share.

£11.7m Valuation

1.3% Of total assets

1.0% Of issued share capital held

£2.3m Book cost

YouGov

YouGov is an international data and analytics group. The core offering of opinion data is derived from a participative panel of 5 million people worldwide. This continuous stream of data is combined with deep research expertise and broad industry experience into a systematic research and marketing platform. The suite of syndicated, proprietary data products includes YouGov BrandIndex, the daily brand perception tracker, and YouGov Profiles, a planning and segmentation tool. YouGov Omnibus provides a fast and cost-effective service for obtaining answers to research questions from both national and selected samples. With 30 offices in 20 countries and panel members in 38 countries, YouGov has one of the world's top ten international market research networks.

£11.4m Valuation

1.3% Of total assets

2.8% Of issued share capital held

£3.0m Book cost

BATM Advanced Communications

BATM Advanced Communications is a leading provider of real-time technologies with two divisions providing networking and cyber solutions and biomedical systems. These two divisions have been built on the creation of strong intellectual property backed by strong patents. This is the foundation for the development of BATM's market-leading innovative and cost-effective solutions in the divisions' respective fields. The Bio-Medical Division is focused on becoming a leading provider of diagnostic laboratory equipment as well as innovative products to treat biological pathogenic waste in the medical, agricultural and pharmaceutical industries. BATM is growing its Networking and Cyber Division to be the worldwide leader of Carrier Ethernet and MPLS access solutions, mainly targeting Tier 1 telecom operators in developed markets. This industry is undergoing a transition to more cloud-based solutions and software defined products, and BATM's Networking and Cyber Division has shifted its product focus to address these trends.

£11.1m Valuation

1.2% Of total assets

5.9% Of issued share capital held

£5.9m Book cost

IQE

IQE is the leading global supplier of advanced compound semiconductor wafers. These wafers are atomically engineered to provide IQE's customers with the materials from which they produce high performance wireless, photonic and electronic devices or 'chips'. It is IQE's epitaxial layer processes that enable chips to operate at the high frequencies (radio frequencies or RF) that are used for all forms of wireless communications. IQE's 'epi' processes also manufacture materials that enable the conversion of energy to light or light to energy for sensing, lighting and power generation technologies. IQE produces materials which can emit or detect/receive light from the infrared, through the visible and into the ultraviolet range of wavelengths. IQE's products cover a diverse range of applications, supported by an innovative outsourced foundry services portfolio that allows the Group to provide a 'one stop shop' for the contract wafer manufacturing needs of the world's leading semiconductor manufacturers.

£10.5m Valuation

1.2% Of total assets

2.1% Of issued share capital held

£5.8m Book cost

Boingo Wireless

Boingo Wireless' footprint of distributed antenna systems (DAS), Wi-Fi and small cells reaches more than a billion people annually, making Boingo one of the largest providers of indoor wireless networks. Boingo connects people at airports, stadiums, military bases, convention centres and commercial properties.

£10.0m Valuation

1.1% Of total assets

1.5% Of issued share capital held

£3.0m Book cost

Descartes Systems
Descartes Systems is a leader in providing on-demand, software-as-a-service solutions focused on improving the productivity, performance and security of logistics-intensive businesses. Customers use Descartes' modular, software-as-a-service solutions to route, schedule, track and measure delivery resources; plan, allocate and execute shipments; rate, audit and pay transportation invoices; access global trade data; file customs and security documents for imports and exports; and complete numerous other logistics processes by participating in the world's largest, collaborative multimodal logistics community. Descartes' headquarters are in Waterloo, Ontario, Canada and they have offices and partners around the world.		£9.9m Valuation 1.1% Of total assets 0.6% Of issued share capital held £0.9m Book cost
Silicon Motion Technology
Silicon Motion Technology is a global leader and pioneer in developing NAND flash controller ICs for solid-state storage devices. Key products are controllers used in embedded storage products such as SSDs and eMMC+UFS, as well as in expandable storage products such as memory cards and USB flash drives. Products are widely used in consumer devices such as smartphones, tablets and PCs and for industrial, enterprise, commercial and other applications. Silicon Motion ship over 750 million NAND controllers annually and have shipped over five billion NAND controllers in the last ten years. They also supply specialised high-performance hyperscale data centre and industrial SSD solutions. Customers include most of the NAND flash vendors, storage device module makers, and leading OEMs. Silicon Motion was founded in 1995 in San Jose, California and now operates from corporate offices in Hong Kong, Taiwan and the US, with design centres and sales offices in Taiwan, Korea, China, Hong Kong, Japan and the US.		£9.9m Valuation 1.1% Of total assets 1.0% Of issued share capital held £1.7m Book cost
Euromoney Institutional Investor
Euromoney Institutional Investor was founded in 1969 by Sir Patrick Sergeant, then City editor of the Daily Mail. Since that time, the business, which was launched to reflect the growth in global capital flows, has flourished alongside the development of financial markets. Euromoney Institutional Investor PLC ('Euromoney') is a global, multi-brand information business which provides critical data, price reporting, insight, analysis and must-attend events to financial services, commodities, telecoms and legal markets. The portfolio includes brands such as Euromoney, Institutional Investor, BCA Research, Ned Davis Research, Metal Bulletin, American Metal Market, Insurance Insider, Mining INDABA and IJ Global among others. Euromoney's strategy is to recycle capital towards ever-higher-quality businesses. Euromoney is now mostly what they describe as a 2.0 information business, focused on customer-centric, digital, subscription businesses and networking events. These types of business will continue to be important but Euromoney are also looking to invest in B2B 3.0 businesses which are defined as operating at the centre of a customer's industry, offering products deeply embedded in its customers' workflow and helping customers to become more efficient and to find solutions to opportunities and threats they face.		£9.8m Valuation 1.1% Of total assets 0.8% Of issued share capital held £1.6m Book cost

ZOO Digital
ZOO Digital is a leading provider of localisation and media production services for the entertainment industry. Using its own revolutionary technology, ZOO delivers cloud-based subtitling and dubbing solutions to simplify the management of global distribution operations for creative organisations.		£8.9m Valuation 1.0% Of total assets 11.5% Of issued share capital held £1.9m Book cost
Idox
Idox is the leading applications provider to UK local government for core functions relating to land, people and property, such as its market leading planning systems and election management software. Over 90% of UK local authorities are now customers. Idox provides public sector organisations with tools to manage information and knowledge, documents, content, business processes and workflow as well as connecting directly with the citizen via the web, and providing elections management solutions. Idox delivers engineering document control, project collaboration and facility management applications to many leading companies in industries such as oil & gas, architecture and construction, mining, utilities, pharmaceuticals and transportation in North America and around the world.		£8.3m Valuation 0.9% Of total assets 7.4% Of issued share capital held £4.9m Book cost

CLASSIFICAtion Of Investments

Classification *	UK %	EMEA %	North America %	Japan & Asia Pacific %	2018 Total %	2017 Total %

OIL & GAS	0.4	-	0.4	-	0.8	1.2
Alternative Energy	0.4	-	0.4	-	0.8	1.2
BASIC MATERIALS	0.3	-	-	0.2	0.5	1.1
Chemicals	0.3	-	-	0.2	0.5	1.1
INDUSTRIALS	7.4	-	1.7	1.1	10.2	10.1
Construction & Materials	0.2	-	0.1	-	0.3	0.1
Aerospace & Defence	0.6	-	-	-	0.6	0.6
Electronic & Electrical Equipment	2.9	-	1.1	0.3	4.3	4.1
Industrial Engineering	-	-	-	0.1	0.1	0.1
Support Services	3.7	-	0.5	0.7	4.9	5.2
CONSUMER GOODS	0.7	-	0.4	-	1.1	1.7
Household Goods & Home Construction	-	-	-	-	-	0.2
Leisure Goods	0.7	-	0.4	-	1.1	1.5
HEALTH CARE	0.9	0.1	-	-	1.0	1.0
Health Care Equipment & Services	0.8	0.1	-	-	0.9	0.8
Pharmaceuticals & Biotechnology	0.1	-	-	-	0.1	0.2
CONSUMER SERVICES	11.7	-	0.3	0.9	12.9	13.6
General Retailers	-	-	-	0.5	0.5	0.4
Media	11.6	-	0.3	0.2	12.1	12.8
Travel & Leisure	0.1	-	-	0.2	0.3	0.4
TELECOMMUNICATIONS	1.8	-	0.6	-	2.4	2.3
Fixed Line Telecommunications	1.6	-	0.3	-	1.9	1.9
Mobile Telecommunications	0.2	-	0.3	-	0.5	0.4
UTILITIES	0.3	-	-	-	0.3	-
Electricity	0.3	-	-	-	0.3	-
FINANCIALS	1.6	-	0.1	0.3	2.0	0.9
Financial Services	0.4	-	0.1	0.3	0.8	0.3
Equity Investment Instruments	1.2	-	-	-	1.2	0.5
Nonequity Investment Instruments	-	-	-	-	-	0.1
TECHNOLOGY	26.9	4.9	20.7	3.4	55.9	60.8
Software & Computer Services	21.8	3.1	13.0	1.8	39.7	41.7
Technology Hardware & Equipment	5.1	1.8	7.7	1.6	16.2	19.1

TOTAL EQUITIES (including convertibles and warrants)	52.0	5.0	24.2	5.9	87.1	-

Total equities - 2017 (including convertibles and warrants)	60.3	5.7	21.5	5.2	-	92.7
BONDS	-	-	5.2	-	5.2	3.0

NET LIQUID ASSETS**	3.7	1.1	2.7	0.2	7.7	4.3

TOTAL ASSETS	55.7	6.1	32.1	6.1	100.0	-

Total assets - 2017	61.8	6.2	26.7	5.3	-	100.0
SHAREHOLDERS' FUNDS	55.7	6.1	32.1	6.1	100.0	-
Shareholders' Funds - 2017	61.8	6.2	26.7	5.3	-	100.0
Number of equity investments (including convertibles and warrants)	149	21	69	46	285	271

*FTSE Russell Industry Classification Benchmark.

**Cash, current assets and liabilities.

Income Statement

FOR THE YEAR ENDED 31 DECEMBER

	2018 Revenue £'000	2018 Capital £'000	2018 Total £'000	2017 Revenue £'000	2017 Capital £'000	2017 Total £'000
(Losses)/gains on investments	-	(50,436)	(50,436)	-	205,508	205,508
Currency gains/(losses)	-	2,048	2,048	-	(3,172)	(3,172)
Income	11,250	-	11,250	10,799	-	10,799
Investment management fee	(10,050)	-	(10,050)	(8,962)	-	(8,962)
Other administrative expenses	(719)	(7)	(726)	(578)	(5)	(583)
Profit/(loss) before finance costs and taxation	481	(48,395)	(47,914)	1,259	202,331	203,590
Finance costs of borrowings	(156)	-	(156)	(514)	-	(514)
Profit/(loss) before taxation	325	(48,395)	(48,070)	745	202,331	203,076
Tax	(267)	-	(267)	(259)	-	(259)
Profit/(loss) after taxation	58	(48,395)	(48,337)	486	202,331	202,817
Profit/(loss) per ordinary share (basic and diluted)	0.08p	(69.67p)	(69.59p)	0.68p	283.44p	284.12p

There is no final dividend proposed (2017 - nil).

The total column of this statement is the profit and loss account of the Company, prepared in accordance with UK Accounting Standards.

The profit after taxation is the total comprehensive income and therefore no additional statement of comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the year.

Balance Sheet

AT 31 DECEMBER

	2018 £'000	2018 £'000	2017 £'000	2017 £'000
Fixed assets
Investments held at fair value through profit or loss		831,680		925,541
Current assets
Cash and cash equivalents	68,860		41,870
Other receivables	1,575		1,682
	70,435		43,552
Current liabilities
Other payables	(961)		(2,443)
	(961)		(2,443)
Net current assets		69,474		41,109
TOTAL NET ASSETS		901,154		966,650
Capital and reserves
Called up share capital		17,225		17,577
Share premium		73,738		73,738
Capital redemption reserve		4,727		4,375
Capital reserve		804,245		869,799
Revenue reserve		1,219		1,161
SHAREHOLDERS' FUNDS		901,154		966,650
NET ASSET VALUE PER ORDINARY SHARE (including current year revenue)		1,307.89p		1,374.88p
NET ASSET VALUE PER ORDINARY SHARE (excluding current year revenue)		1,307.81p		1,374.20p

STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2018

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Share- holders' funds £'000
Shareholders' funds at 1 January 2018	17,577	73,738	4,375	869,799	1,161	966,650
(Loss)/profit after taxation	-	-	-	(48,395)	58	(48,337)
Shares purchased for cancellation	(352)	-	352	(17,159)	-	(17,159)
Shareholders' funds at 31 December 2018	17,225	73,738	4,727	804,245	1,219	901,154

FOR THE YEAR ENDED 31 DECEMBER 2017

	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Share- holders' funds £'000
Shareholders' funds at 1 January 2017	18,266	73,738	3,686	695,049	675	791,414
Profit after taxation	-	-	-	202,331	486	202,817
Shares purchased for cancellation	(689)	-	689	(27,581)	-	(27,581)
Shareholders' funds at 31 December 2017	17,577	73,738	4,375	869,799	1,161	966,650

Cash Flow Statement

FOR THE YEAR ENDED 31 DECEMBER

	2018 £'000	2018 £'000	2017 £'000	2017 £'000
(Loss)/profit before finance costs and taxation	(47,914)		203,590
Adjustments for losses/(gains) on investments	50,436		(205,508)
(Increase)/decrease in accrued income	(341)		8
Purchase of investments	(153,429)		(156,421)
Sale of investments	195,948		171,125
Decrease/(increase) in other receivables	4		(38)
(Decrease)/increase in other payables	(27)		119
Amortisation of fixed income book cost	(127)		(22)
Effect of foreign exchange rate changes	(2,048)		3,172
Overseas tax suffered	(267)		(259)
Net cash inflow from operating activities		42,235		15,766
Finance activities
Loan repayment	-		(25,000)
Interest paid on loan	(116)		(582)
Shares repurchased	(17,177)		(27,590)
Net cash outflow from financing activities		(17,293)		(53,172)
Increase/(decrease) in cash and cash equivalents		24,942		(37,406)
Cash and cash equivalents at the start of year		41,870		82,448
Effect of foreign exchange rate changes		2,048		(3,172)
Cash and cash equivalents at the end of year		68,860		41,870
Comprised of:
Cash and cash equivalents		68,860		41,870

Cashflow from operating activities includes interest received of £849,000 (2017 - £518,000) and dividends

received of £9,848,000 (2017 - £9,674,000).

Income

	2018 £'000	2017 £'000
Income from investments
Total income	11,250	10,799
Total income comprises:
Dividends from equity securities at fair value through profit or loss	10,113	9,988
Interest from financial assets at fair value through profit or loss	841	440
Other income	296	371
	11,250	10,799

Business model and status

The Company is an investment company within the meaning of Section 833 of the Companies Act 2006.

The Company carries on business as an investment trust. It was approved by HM Revenue & Customs as an investment trust under Section 1158 of the Corporation Tax Act 2010 for the year ended 31 December 2017, subject to matters that may arise from any subsequent enquiry by HM Revenue & Customs into the Company's tax return. In the opinion of the directors the Company has subsequently conducted its affairs so as to enable it to continue to seek such approval.

Objective

The Company's objective is to achieve capital appreciation through investments in smaller quoted companies, in the areas of telecommunications, multimedia and technology ('TMT'). Investments may be made across the world. The business activities of investee companies will include information technology, broadcasting, printing and publishing and the supply of equipment and services to these companies.

Investment policy - strategy

While the policy is global investment in the above target areas, the approach is to construct a diversified portfolio through the identification of individual companies which offer long term growth potential, typically over a five year horizon or more. The portfolio is actively managed and does not seek to track any comparative index. With a remit to invest in smaller companies with market capitalisation generally below $3bn, there tends to be a correlation with the performance of smaller companies, as well as those of the technology sector. A degree of volatility relative to the overall market should be expected.

The risk associated with the illiquidity of smaller companies is reduced by generally restricting the stake in any one company to less than 10% of the shares in issue. A number of investments are in early stage companies, which have a higher stock specific risk but the potential for above average growth. Stock specific risk is reduced by having a diversified portfolio of over 250 holdings. In addition, to contain the risk of any one holding, the manager generally takes profits when a holding reaches more than 5% of the portfolio. The manager actively manages the exposure within the constraint that illiquid positions cannot be traded for short term movements.

The Company has a policy not to invest more than 15% of gross assets in other UK listed investment companies.

From time to time, fixed interest holdings, non equity or unlisted investments may be held on an opportunistic basis.

The Company recognises the long term advantages of gearing and has a maximum gearing limit of 50% of net assets. Borrowings are invested primarily in equity markets but the Manager is entitled to invest in other securities in the companies in the target areas when it is considered that the investment grounds merit the Company taking a geared position. The board's intention is to gear the portfolio when appropriate. Gearing levels are monitored closely by the manager and reviewed by directors at each board meeting.

The Company may use derivatives which will be principally, but not exclusively, for the purpose of efficient portfolio management (i.e. for the purpose of reducing, transferring or eliminating investment risk in its investments, including protection against currency risk).

Share capital

At 31 December 2018 the Company's capital structure consisted of 68,901,568 ordinary shares of 25p each (2017 - 70,307,785 ordinary shares). During the year 1,406,217 (2017 - 2,754,016) shares were bought back and cancelled. There are no restrictions concerning the holding or transfer of the Company's ordinary shares and there are no special rights attached to any of the shares. On a winding up, after meeting the liabilities of the Company, the surplus assets would be paid to ordinary shareholders in proportion to their shareholdings.

Investment management agreement

The management of the Company and the implementation of its investment strategy is contracted to Herald Investment Management Limited ('HIML'). HIML is authorised and regulated by the Financial Conduct Authority both for investment management and as an Alternative Investment Fund Manager.

The management contract is subject to 12 months' notice by either party. The senior director of HIML with prime responsibility for the management of the Company's portfolio is Katie Potts, who is also a substantial shareholder of HIML Holdings Limited, the parent company of HIML. HIML is remunerated at an annual rate of 1.0% of the Company's net asset value (excluding current year income) calculated using middle market prices. Compensation fees would only be payable in respect of this 12 month period if termination were to occur sooner. Careful consideration has been given by the board as to the basis on which the management fee is charged. The board considers that maintaining an appropriate level of ongoing charges for a specialist trust is in the best interest of all shareholders. The board is also of the view that calculating the fee with reference to performance would be unlikely to exert a positive influence over the long term performance.

The board is of the opinion that the continued appointment of HIML as investment manager, on the terms agreed, is in the interests of shareholders due to the experience of the manager and the quality of information provided to the board.

Acquisition of own shares

At the Company's AGM held in April 2018 the Company was authorised to purchase up to 14.99% of the Company's ordinary shares. During the year to 31 December 2018 the Company bought back 1,406,217 ordinary shares on the London Stock Exchange for cancellation. The board continues to believe that the ability of the Company to purchase its own ordinary shares in the market will potentially benefit all shareholders of the Company. The repurchase of ordinary shares at a discount to the underlying net asset value ('NAV') should enhance the NAV per ordinary share of the remaining shares and may also enable the Company to address more effectively any imbalance between supply and demand for the Company's ordinary shares.

Significant financial issues relating to the 2018 financial statements

The UK Corporate Governance Code requires us to describe any significant issues considered in relation to the financial statements and how those issues were addressed. While there were no significant issues, two matters of risk of particular focus at the balance sheet date were the risks that investments might not have been correctly valued or beneficially owned. No issues were discovered.

Borrowings

The Company has a multi-currency revolving loan facility with RBS up to £25m, maturing in December 2019, under which no drawdowns have been made to date. The Company had a sterling term loan facility with RBS of £25m which was repaid at the expiry of its term on 29 December 2017.

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. The Company's other financial instruments consist of cash and cash equivalents, 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 fair value or 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.

The Company is exposed to counterparty credit risk from the parties with which it trades and will bear the risk of settlement default. Counterparty credit risk to the Company arises from transactions to purchase or sell investments held within the portfolio.

There were no past or impaired assets as of 31 December 2018 (31 December 2017: nil).

The counterparties engaged with the Company are regulated entities and of high credit quality.

C. Liquidity Risk

Being the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.

These risks and the policies 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. Listed 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.

Other Price Risk Sensitivity

17.6% of the Company's equity investments at 31 December 2018 (2017 - 16.7%) were listed on the main list of the London Stock Exchange and a further 41.3% (2017 - 47.8%) on AIM. The NASDAQ Stock Exchange accounts for 24.5% (2017 - 20.9%), New York Stock Exchange for 4.1% (2017 - 3.2%) and other stock exchanges or unlisted 12.5% (2017 - 11.4%). A 10% increase in equity investment prices at 31 December 2018 would have increased total net assets and profit & loss after taxation by £78,490,000 (2017 - £89,610,000). A decrease of 10% would have the exact 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.

(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 bonds, the interest rate and maturity dates of which are detailed below. Interest is accrued on cash balances at a rate linked to the UK base rate.

At 31 December 2018, the Company had an undrawn £25 million multi-currency credit facility (2017: multicurrency loan: £nil). 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.

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

Financial Assets

	2018 Fair value £'000	2018 Weighted average interest rate/ interest rate	2018 Weighted average period until maturity/ maturity date	2017 Fair value £'000	2017 Weighted average interest rate/ interest rate	2017 Weighted average period until maturity/ maturity date
Fixed rate:
US bonds	46,785	1.6%	0.7 Years	29,445	1.0%	0.8 Years
UK convertible bonds	4,341	6.1%	2.1 Years	3,238	9.8%	3.4 Years
Cash:
Other overseas currencies	35,218	0.7%		26,363	0.2%
Sterling	33,642	0.0%		15,507	0.0%
	68,860			41,870

The benchmark rate which determines the interest payments received on cash balances is the Bank of England base rate.

Interest rate risk sensitivity

a) Cash
An increase of 100 basis points in interest rates as at 31 December 2018 would have a direct effect on net assets. Based on the position at 31 December 2018, over a full year, an increase of 100 basis points would have increased the profit & loss after taxation by £689,000 (2017 - £419,000) and would have increased the net asset value per share by 1.00p (2017 - 0.60p). 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 2018 would have decreased total net assets and profit & loss after taxation by £308,000 (2017 - £294,000) and would have decreased the net asset value per share by 0.45p (2017 0.42p). 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.

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. 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 dollar weakness are UK companies with US 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 2018

	Investments £'000	Cash and deposits £'000	Other receivables and payables £'000	Net exposure £'000
US dollar	269,358	24,077	200	293,635
Norwegian krone	6,265	4,537	-	10,802
Korean won	8,623	-	114	8,737
Taiwan dollar	15,598	1,569	-	17,167
Euro	37,293	5,033	153	42,479
Australian dollar	13,515	-	-	13,515
Other overseas currencies	12,640	2	2	12,644
Exposure to currency risk on translation of valuations of securities listed in overseas currencies	363,292	35,218	469	398,979
Sterling	468,388	33,642	145	502,175
	831,680	68,860	614	901,154

At 31 December 2017

	Investments £'000	Cash and deposits £'000	Other receivables and payables £'000	Net exposure £'000
US dollar	243,248	20,655	103	264,006
Norwegian krone	9,264	4,510	-	13,774
Korean won	14,505	-	110	14,615
Taiwan dollar	17,175	1,143	-	18,318
Euro	44,852	52	611	45,515
Other overseas currencies	14,098	3	15	14,116
Exposure to currency risk on translation of valuations of securities listed in overseas currencies	343,142	26,363	839	370,344
Sterling	582,399	15,507	(1,600)	596,306
	925,541	41,870	(761)	966,650

Foreign currency risk sensitivity

At 31 December 2018, had sterling strengthened by 10% (2017 - 10%) in relation to all currencies, with all other variables held constant, total net assets and profit & loss after taxation would have decreased by the amounts shown below based solely on the balances denominated in foreign currency. A 10% (2017 - 10%) weakening of sterling against all currencies, with all other variables held constant, would have had the exact 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.

	2018 £'000	2017 £'000
US dollar	29,363	26,401
Norwegian krone	1,080	1,377
Korean won	874	1,461
Taiwan dollar	1,717	1,832
Australian dollar	1,352	-
Euro	4,248	4,551
Other overseas currencies	1,264	1,412
	39,898	37,034

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 and for risk management purposes excluded from the credit risk analysis.

Credit Risk Exposure

The maximum exposure to credit risk at 31 December was:

	2018 £'000	2017 £'000
Fixed interest investments	46,785	29,445
Cash and cash equivalents	68,860	41,870
Other receivables	1,575	1,682
	117,220	72,997

During the year the maximum exposure in fixed interest investments was £46,785,000 (2017 - £30,825,000) and the minimum £28,000,000 (2017 - £7,520,000). The maximum exposure in cash was £103,191,000 (2017 - £101,245,000) and the minimum £41,543,000 (2017 - £41,870,000).

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.

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 2018 (2017 - 1.3%).

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. 22.0% (£183 million) (2017 - 20.1% (£178 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 4.1% (2017 - 3.7%).

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:

2018

One year

or less

£'000

2017

One year

or less

£'000

Other payables

961

2,443

961

2,443

Fair Value of Financial Instruments

The Company's investments, as disclosed in the Company's balance sheet, are valued at fair value. Nearly all of the Company's portfolio of investments are disclosed in the Level 1 category as defined in FRS102. Categorisation is based on the lowest level input that is significant to the fair value measure in its entirety.

The three levels set out in FRS102 follow:

Level 1 The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.

Level 2 Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly.

Level 3 Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.

The investment manager considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

The analysis of the valuation basis for the financial instruments based on the hierarchy as at 31 December is as

follows:

At 31 December 2018

	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Financial assets
Equity investments	768,960	-	10,302	779,262
Government debt securities	46,785	-	-	46,785
Other debt securities	-	-	5,633	5,633
Total investments	815,745	-	15,935	831,680

At 31 December 2017

	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Financial assets
Equity investments	883,217	-	8,349	891,566
Government debt securities	29,445	-	-	29,445
Other debt securities	-	-	4,530	4,530
Total investments	912,662	-	12,879	925,541

Other risks

Other risks to the Company's model, future performance, solvency or liquidity 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, depositary and administrator provide regular reports to the audit committee on their monitoring programmes. The manager monitors investment positions and the manager and company secretary monitor the level of forecast income and expenditure.

Major regulatory change could impose disproportionate compliance burdens on the Company. In such circumstances representation would be made to seek to ensure that special circumstances of investment trusts are recognised.

Operational/financial/custody risk - failure of the administrator'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 manager, administrator and company secretary each have comprehensive business continuity plans which facilitate continued operation of the business in the event of a service disruption or major disruption. The audit committee receives the administrator's report on internal controls and the reports by other key third party providers are reviewed by the manager and company secretary on behalf of the audit committee. The depositary reports six monthly on custody matters, including the continued safe custody of the Company's assets by the custodian.

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 manager at every meeting. The majority of the Company's investments are in quoted securities.

Viability statement

The UK Corporate Governance Code and Listing Rules require that the Company should publish a longer-term statement on the viability of the Company. The directors consider that three years is an appropriate forward looking time period. This recognises the Company's current position, the investment strategy, which includes investment in smaller companies and start-ups where a three year horizon is a meaningful period over which to judge prospects, the board's assessment of the main risks that threaten the business model and the relatively fast moving nature of the sectors in which the Company invests.

The directors confirm that, based on reviews conducted as part of the detailed internal controls and risk management processes, they have a reasonable expectation that the Company will continue to maintain its status as an investment trust, to implement its investment strategy and to operate and be able to meet its liabilities as they fall due for at least the next three financial years. Their consideration also takes into account the Company's gearing and financing arrangements and its projected income and expenditure.

There are no current plans to amend the investment strategy, which has delivered good investment performance for shareholders over many years and, the directors believe, should continue to do so. The investment strategy and its associated risks are kept under constant review by the board.

By definition, investment in smaller and start-up companies carries higher risks, both in terms of stock liquidity and longer-term business viability and this risk is accepted by the board. In addition, it should be noted that under the Company's articles of association, shareholders are required to vote triennially on whether the Company should continue as an investment trust, so the longer-term viability statement is contingent upon shareholders voting to support any continuation vote falling within the relevant three year period. The next continuation vote will be at the AGM on 16 April 2019. The directors strongly support the Company's continuation. They recommend that shareholders should vote in favour of continuation and believe that they will do so.

Directors' responsibility statement pursuant to DTR4

The directors confirm that to the best of their knowledge:

· The financial statements have been prepared in accordance with United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including 'FRS 102 The Financial Reporting Standard applicable to the UK and Republic of Ireland' and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

· The management 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.

Copies of the Company's annual report and financial statements will be available from the Company's registered office or at www.heralduk.com once published on 13 March 2019.

By order of the board

Law Debenture Corporate Services Limited

Secretary

19 February 2019

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

FR LLFLAFSIALIA

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Thursday, 23rd May 2024

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