Final Results - Year Ended 30 April 2000
Schroder UK Growth Fund PLC
21 June 2000
Schroder UK Growth Fund plc
Preliminary Results For The Year Ended 30 April 2000
Preliminary Results
The Directors of Schroder UK Growth Fund plc announce the unaudited preliminary
results for the year ended 30 April 2000:
Year Ended Year Ended
30 April 2000 30 April 1999
Revenue Capital Total Revenue Capital Total
(restated*) (restated*)
£'000 £'000 £'000 £'000 £'000 £'000
Realised gains on - 28,285 28,285 - 35,101 35,101
sales of investments
Unrealised losses on - (36,204) (36,204) - (47,197) (47,197)
investments
Losses on - (7,919) (7,919) - (12,096) (12,096)
investments
Premia paid on - (392) (392) - (981) (981)
purchase of warrants
for cancellation
Income 9,031 - 9,031 12,541 - 12,541
Investment (1,238) (1,238) (2,476) (1,357) (1,357) (2,714)
management fee
Administrative (269) - (269) (272) - (272)
expenses
Net return before 7,524 (9,549) (2,025) 10,912 (14,434) (3,522)
finance costs and
taxation
Interest payable (18) (18) (36) (446) (446) (892)
Net return on 7,506 (9,567) (2,061) 10,466 (14,880) (4,414)
ordinary activities
before taxation
Taxation on ordinary - - - (30) - (30)
activities
Return on ordinary 7,506 (9,567) (2,061) 10,436 (14,880) (4,444)
activities after
taxation
attributable to
equity shareholders
Dividends (8,521) - (8,521) (8,837) - (8,837)
Transfer (from)/to (1,015) (9,567) (10,582) 1,599 (14,880) (13,281)
reserves
Return per ordinary 3.41p (4.35)p (0.94)p 4.59p (6.54)p (1.95)p
share
Return per ordinary 3.28p (4.18)p (0.90)p 4.39p (6.26)p (1.87)p
share - fully
diluted
Dividends for the 4.00p - 4.00p 3.90p - 3.90p
year per ordinary
share
* Restated in accordance with FRS16.
Summary Balance Sheet At 30 April At 30 April
2000 1999
Assets £'000 £'000
Listed investments 362,245 395,564
Net current assets 2,739 7,161
Net Assets 364,984 402,725
Net asset value per share 175.633p 178.58p
Net asset value per share - 166.66p 169.14p
diluted
Year Ended Year Ended
30 April 2000 30 April 1999
Abridged Cash Flow Statement £'000 £'000
Net cash inflow from operating 6,963 11,056
activities
Total interest paid - (1,763)
Total tax paid (24) (220)
Net cash inflow from financial 32,927 30,575
investment
Equity dividends paid (8,949) (8,524)
Net cash outflow from financing (27,578) (47,473)
Net cash inflow/(outflow) 3,339 (16,349)
Reconciliation of net cash flow to movement in net funds
Year Ended Year Ended
30 April 2000 30 April 1999
£'000 £'000
Increase/(decrease) in cash in 3,339 (16,349)
the year
Movement in overdraft facility/ (3,000) 45,000
revolving credit facility
Change in net debt 339 28,651
Net funds/(debt) at the 5,784 (22,867)
beginning of the year
Net funds at 30 April 6,123 5,784
The above financial information is unaudited and does not amount to statutory
accounts under Section 240 of the Companies Act 1985 (as amended). The
information given as comparative figures for the financial year ended 30 April
1999 does not constitute the Company's statutory accounts for that financial
year. Statutory accounts for the financial year ended 30 April 1999 have been
reported on by the Company's auditors and delivered to the Registrar of
Companies. The report of the auditors was unqualified and did not contain a
statement under Section 237(2) or (3) of the Companies Act 1985.
The statutory accounts for the year ended 30 April 2000 will be finalised on the
basis of the financial information presented by the Directors in this
preliminary announcement and will be delivered to the Registrar of Companies
following the Company's Annual General Meeting.
This announcement is prepared on the basis of the accounting policies as set out
in the most recent published set of annual financial statements.
This statement was approved by the Board of Directors on 20 June 2000.
Statement by the Chairman, Mr. Peter Sedgwick:
Investment Performance
After a period of under-performance in recent years, the Company's net asset
value total return was much in line with the benchmark index, producing a total
return of 1.0% over the year to 30 April 2000, compared with the FTSE All-Share
Index which produced a total return of 1.4% over the same period. As the table
below indicates, performance since the Company's launch in March 1994 also
remains in line with the benchmark index.
Total Return to 30 April 2000
One Year Three years Five Years Six Years*
% % % %
FTSE All-Share Index 1.4 51.2 117.2 124.0
Diluted Net Asset Value 1.0 36.3 108.7 124.9
Source: Association of
Investment Trust Companies
Monthly Information Service.
*The Company was launched in March 1994.
Investment Strategy
In response to the growing importance of high growth stocks to the UK stock
market, particularly those in technology related areas, the Board again asked
the Investment Manager to review its investment strategy. The Investment Manager
concluded that, in view of the Company's principal investment objective to
achieve capital growth, the Company's portfolio was too heavily biased towards
stocks in out-of favour, lowly rated companies known as value stocks, which had
provided the focus of the portfolio in the past. Whilst these stocks have
generated good overall returns in the long run their recent performance has been
more erratic as a result of the changing economic and stock market environments.
It was therefore agreed with the Board that the Investment Manager would dispose
of any stocks that were not sufficiently orientated towards this investment
objective and achieve a satisfactory balance between good value cyclical growth
and secular long-term growth stocks. I would stress that the Company is neither
an aggressive growth fund nor a technology fund, and remains a UK Growth Fund
invested in UK equities for long-term capital growth.
The restructuring is laid out in more detail in the Investment Manager's review.
Dividend Policy
Earnings for the year ended 30 April 2000 were 3.41 pence per ordinary share.
Your Directors paid a first interim dividend of 1.90 pence per share and a
second interim dividend of 2.10 pence per share has been declared and will be
paid on 31 July 2000. The total dividend for the year ended 30 April 2000 of
4.0 pence per share represents a slight increase over the previous year.
Since launch, the Directors have adopted a progressive dividend policy whenever
possible. However, one effect of the change in investment policy outlined above
is that the yield provided by the portfolio will be less than that seen in the
past. As a result, the level of dividends seen since launch will not be
sustainable in the future.
Allocation of Management Fees and Finance Costs
Currently, the management fees and finance costs are allocated equally between
the capital account and the revenue account. In view of the changes to the
portfolio and the expected reduction in dividend yield, your Directors have
decided to allocate 70% to the capital account and 30% to the revenue account,
with effect from 1 May 2000.
Gearing
During the year the Company maintained a 364-day revolving facility of £50
million with J. Henry Schroder & Co., Limited, and this was replaced at the end
of April 2000 with a similar £25 million facility from The Royal Bank of
Scotland plc. During the year, the facility remained unutilised, but on 30 May
2000, the Company drew £15 million from the facility in addition to its £3
million overdraft which was utilised during the year, and this level of gearing
has been maintained since that time.
Share and Warrant Purchases
A total of 18,280,916 shares were purchased for cancellation during the
financial year, equal to 8.1% of the total shares in issue on 1 May 1999. The
net asset value of the Company has been enhanced as a result of these purchases,
and the Board believes that discount volatility has also been reduced.
A resolution to renew the authority is included in the Notice of the Annual
General Meeting.
The Directors also continued to purchase warrants for cancellation during the
year. Since 1 May 1999, the Company has purchased 2,245,000 warrants amounting
to 7.3% of the total warrants in issue at the beginning of the financial year.
The Directors will continue to purchase warrants whenever market conditions are
such that purchases may be made at a cost that will enhance the diluted net
asset value. Formal guidelines relating to the purchase of warrants have been
adopted by the Board.
Year 2000
In the Report & Accounts for the year ended 30 April 1999 the Directors reported
on arrangements which had been made in preparation for the resolution of
technology issues associated with the Year 2000. Subsequent to 31 December
1999, the Board has received further assurances from Schroder Investment
Management Limited that their in-house systems and third party applications have
passed the validation process stipulated by the Financial Services Authority and
that their business has experienced no disruption to normal operations to date.
Prospects
The recent correction in technology related stocks has returned valuations to
more sustainable levels. With interest rates likely to be at or close to a peak
and concerns regarding economic overheating receding, there now exists the basis
for a sustainable recovery in the UK stock market, in line with corporate
earnings growth. It is this improving background that has encouraged the Board
to introduce the element of gearing to the portfolio to which I referred
earlier. Taken together with the recent rebalancing of the portfolio this gives
your Board confidence that the Company should benefit from an improving stock
market outlook.
Peter Sedgwick
Chairman
Investment Manager's Review
Performance
Over the twelve months to 30 April 2000 the diluted net asset value of the
Company generated a total return of 1.0%, compared with the benchmark index
which produced a total return of 1.4% over the same period. However, all of the
relative underperformance can be attributed to the fourth quarter of calendar
1999 when the Company's NAV substantially lagged the sharp rise in the UK stock
market. This occurred as a result of the narrow market leadership driven by
stocks in the Technology, Media and Telecoms sectors ('TMT') and the Company's
under representation in these areas. Since the beginning of calendar 2000 the
portfolio has been rebalanced (discussed in more detail below) and has
substantially recovered in relative performance terms.
Market Background
The small positive total return achieved by UK equities in the twelve months
under review completely fails to reveal the extreme volatility and sectoral
divergence that has occurred over this period.
In the months up to early September 1999 the market overall was led by a
recovery in 'value' stocks, typically having a high degree of sensitivity to the
pick-up in economic growth. With the rise in short term interest rates in
September 1999, however, investors generally sought to take profits in cyclical
companies.
However, what might have been initially a normal sectoral rotation by portfolio
managers in response to a modest change in economic fundamentals became an
exaggerated and ultimately unsustainable move into so called 'New Economy'
growth stocks in the latter months of 1999 and early 2000. Stimulated by the
exceptional growth in internet usage, investors rushed to buy a rash of new
start-up dot.com companies and at the same time pushed valuations of most
established Technology and Telecommunications growth stocks to excessive levels.
For a short period of time the market in such stocks became wholly momentum
driven with share valuations appearing to be of little relevance.
Unsurprisingly the situation has proven to be unsustainable and the internet
stock 'bubble' burst in late February 2000 and with it the valuations of other
'TMT' stocks have returned to more rational and acceptable levels.
Throughout this period perhaps the most important single influence on UK
equities has been the movement of the US equity market, especially the extreme
volatility of the NASDAQ index with its heavy exposure to Technology stocks. In
recent months the continued strength of the US economy has prompted a more
aggressive tightening of monetary policy and encouraged investors to adopt a
more cautious approach, placing more emphasis in particular on near term
profitability of companies. This trend has been wholly mirrored in London, with
a return to favour of traditional 'Old Economy' stocks on modest valuations.
Market movements, both in the UK and overseas, have been remarkable in their
extremes.
Investment Activity and Portfolio Strategy
The portfolio has been significantly restructured since the start of calendar
2000 with a view to achieving both long term growth and a more consistent
relative performance against the UK stock market. To this end the portfolio is
reasonably balanced between the different sectors of the market yet with a bias
towards high quality longer term growth stocks.
Portfolio activity in recent months has been unusually high and should be
comparatively modest from hereon. Numerous new holdings have been introduced,
the most notable of which are ARM Holdings, Celltech, Cantab Pharmaceutical,
Pace Micro Technology and SmithKline Beecham. These are all clearly higher
growth stocks. However, many new holdings are of well managed companies in more
traditional areas of the economy such as Airtours (Packaged Holidays), Ashstead
(Plant Hire) and Dixons (Retailing). Several holdings also offer attractive
growth for the foreseeable future by virtue of their current exposure to the
economic cycle; in this regard the Company's exposure to Property shares is
noteworthy, with new holdings having been acquired in the last six months in
British Land, Great Portland Estates and Moorfield Group.
Finally, the portfolio is now overweight in smaller companies, many of which are
believed to offer attractive growth yet stand on modest share ratings in
comparison with equivalent large stocks; indeed, the portfolio is over 15
percentage points underweight FTSE 100 stocks (65.7% of the portfolio vs 82.6%
that FTSE 100 stocks represent of the FTSE All-Share Index).
Outlook
At the time of writing the UK stock market has recovered partially from the lows
prevailing in early May as confidence has begun to grow that UK interest rates
may have peaked at the current level of 6%. This is supported by recent
economic data that points to a moderation in the rate of economic growth and
receding inflationary pressures. The market in Technology stocks has also
stabilised now that much of the previous valuation excess has been removed.
There remain significant concerns about the likely course of the US economy,
however, and the vulnerability of the US market to a further sell-off should
interest rates need to be raised significantly. On the other hand, current
market expectations for further rises would seem to already adequately discount
the likely extent of further tightening.
On balance, therefore, both domestic UK and international fundamental factors
look to be more supportive to equities than for some time. Following the
prolonged consolidation in the UK market so far this year it may well be that,
despite continued short term volatility, the market is likely to recover from
hereon. The medium term outlook for the UK economy of modest inflation and
reasonable economic growth suggests that economic fundamentals are positive.
Combined with more realistic share valuations, good earnings growth prospects
and the likelihood of further corporate takeover and merger activity there are
genuine grounds for increasing investor confidence and sustained market
appreciation.
Schroder Investment Management Limited
Twenty Largest Investments
At 30 April 2000
Value of Percentage of
Holdings Shareholders'
Company and Activity £'000 Funds
Vodafone Airtouch 42,602 11.66
Global mobile telephone service supplier.
Glaxo Wellcome 19,810 5.42
Research based pharmaceutical company.
AstraZeneca Group 14,655 4.01
Research based pharmaceutical company.
British Telecommunications 14,388 3.94
Telecommunications provider
BP Amoco 13,863 3.80
Integrated Oil Company
Arm Holdings 13,100 3.59
Designer of microprocessor intellectual property.
SmithKline Beecham 12,738 3.49
Research based pharmaceutical company.
Electrocomponents 12,255 3.36
UK's leading catalogue distributor of electronic,
electrical and mechanical products. Supplies and
services industrial, commercial and retail
customers, through its distribution channels
worldwide.
Legal & General Group 10,720 2.94
Insurance company.
Cable & Wireless 10,630 2.91
International telecommunications utility with an
emphasis on UK and Hong Kong.
Royal Bank of Scotland Group 10,073 2.76
Bank and financial services group.
Cantab Pharmaceuticals 10,014 2.74
Early stage bioscience company specialising in
therapeutic vaccines
Pace Micro Technology 8,588 2.35
Designer and manufacturer of digital TV set-top boxes.
British Lane 6% Subordinated Ordinary 8,522 2.33
Irredeemable Convertible
Bonds
Leading UK property investment company.
Celltech Group 8,416 2.30
Research based pharmaceutical company.
Johnson Matthey 8,354 2.29
World's leading refiner of platinum group metals
and manufacturer of autocatalysts.
Airtours 7,877 2.16
UK based packaged holiday company with
international business in Europe and North America.
Enterprise Oil 7,564 2.07
Oil exploration and production company.
United News & Media 7,353 2.01
Diversified publishing and broadcasting company.
Bank of Scotland 7,156 1.96
Bank and financial services group
Total 248,678 68.09
Second Interim Dividend
The Directors of the Company have declared the payment of a second interim
dividend, in lieu of a final dividend, of 2.10p net per share which will make a
total distribution of 4.00p, for the year ended 30 April 2000. The dividend
will be payable on 31 July 2000 to shareholders on the register on 7 July 2000.
Ex-Dividend Date : 3 July 2000
Transfers must be lodged by : 2.30 p.m. on 7 July 2000
Dividend Warrants : Despatched on 28 July 2000
Payment Date : 31 July 2000
Dividend per share : 2.10p net
The Annual Report and Accounts will be mailed to shareholders at their
registered addresses in July 2000 and copies of the Annual Report and Accounts
will be available to the public at the Company's registered office: 31 Gresham
Street, London, EC2V 7QA.
Enquiries: Schroder Investment Management Limited
John Spedding (020 7658 3206)
21 June 2000
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