Aberforth
Smaller Companies Trust plc
Audited
Annual Results for the year to 31 December
2023
The
following is an extract from the Company's Annual Report and
Financial Statements for the year to 31
December 2023. The Annual Report is expected to be posted to
shareholders by 8 February
2024.
Members of
the public may obtain copies from Aberforth Partners LLP, 14
Melville Street, Edinburgh EH3 7NS
or from its website:
www.aberforth.co.uk. A copy
will also shortly be available for inspection at the National
Storage Mechanism at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
FINANCIAL HIGHLIGHTS
|
Year
to
31
December 2023
|
|
Net Asset
Value per Ordinary Share Total Return
|
8.2%
|
|
Numis
Smaller Companies Index (excluding Investment Companies) Total
Return
|
10.1%
|
|
Ordinary
Share Price Total Return
|
8.0%
|
|
Total
ordinary dividends (excluding special dividend) for the year of
41.50p per share represents growth of 6.4% compared to last year’s
39.00p per share. In addition, a special dividend of 9.00p (last
year: 8.30p) results in total dividends of 50.50p per share for the
year.
INVESTMENT OBJECTIVE
The
investment objective of Aberforth Smaller Companies Trust plc ("the
Company" or "ASCoT") is to achieve a net asset value total return
(with dividends reinvested) greater than that of the Numis Smaller
Companies Index (excluding Investment Companies) (“NSCI (XIC)” or
“benchmark”) over the long term.
From
1 January 2024, the benchmark was
renamed the Deutsche Numis Smaller Companies Index (excluding
Investment Companies).
CHAIRMAN’S STATEMENT TO SHAREHOLDERS
Review
of performance
ASCoT’s
net asset value total return in the twelve months to 31 December 2023 was +8.2%. The discount of
ASCoT’s share price to its net asset value widened very slightly
over the year. Therefore, ASCoT’s share price total return was
+8.0%. The total return from the Numis Smaller Companies Index
(excluding investment companies) (NSCI (XIC)) was +10.1%. Larger UK
companies, represented by the FTSE All-Share, were up by 7.9% in
total return terms.
It was a
volatile year for financial markets as they wrestled with inflation
and its implications for monetary policy. A positive outturn for
2023 seemed unlikely as late as November. But then favourable
inflation data in both the UK and the US encouraged the view that
the next move in interest rates would be downwards. This triggered
a powerful and welcome rally into the year end. In the UK, this has
so far been led by the mid cap stocks, to which ASCoT has a
relatively low exposure.
The
financial markets maintained an obsessive focus on the interest
rate cycle, largely overlooking other developments in 2023. With
the war in Ukraine continuing,
Hamas’s October attacks intensified geopolitical risk. Meanwhile,
the economic backdrop also deteriorated as the impetus of the
pandemic recovery faded and the impact of earlier monetary
tightening affected activity. Through the second half of the year,
evidence built of more challenging trading conditions both in the
UK’s domestic economy and in many overseas markets. The frequency
of weaker trading updates rose and many companies, not just in the
UK, experienced a year of lower profits in 2023.
Another
notable feature of 2023 was the persistent despondency about the UK
equity market and its constituent companies. Institutional and
retail investors continue to move money out of the UK and
valuations for most UK companies are very low, particularly among
smaller companies. Low need not mean attractive, but the Managers’
report makes a strong case for why the prevailing doom and gloom
have been overdone.
Dividends
My
statement twelve months ago described the very strong recovery in
dividends paid by investee companies following the pandemic. This
recovery took ASCoT’s Revenue Return per Ordinary Share to its
highest ever level of 55.64p. Remarkably, this number was exceeded
in 2023, with Revenue per Ordinary Share reaching 59.79p. Seven
special dividends were helpful, but even with these excluded from
both years, the underlying rate of growth was 9%.
The
strength of this income performance means that the Board can meet
its ambition to grow ASCoT’s full year ordinary dividend above the
rate of inflation, which was 4.0% in December. In dividing Revenue
per Ordinary Share between the ordinary dividend, the special
dividend and the addition to revenue reserves, we have taken into
account the economic outlook for 2024 and the Managers’ dividend
estimates for the investee companies. These estimates point to a
year of lower dividend receipts, which would be consistent with
what does appear to be a more difficult trading environment for
companies. However, it seems likely that Revenue per Ordinary Share
will still be well above its pre-pandemic levels.
The Board
therefore proposes a final dividend of 28.55p per Ordinary Share,
which would represent growth of 5.9% on the previous year’s 26.95p.
Together with the interim dividend of 12.95p, the full year
dividend would be 41.50p. The year-on-year increase of 6.4% would
be well above the rate of inflation. We also propose a special
dividend of 9.00p, which underlines how robust a year it was and
ensures that ASCoT passes the HMRC’s minimum retention test for
investment trusts. The total dividend in respect of 2023 of 50.50p
would allow 9.29p to be added to revenue reserves to take them to
80.1p per Ordinary Share, which would cover the ordinary full year
dividend just under two times.
In what
has been the best year for income in ASCoT’s 33 years, the Board
considered it appropriate to add to revenue reserves. Prudent
management of revenue reserves since 1990 has made an important
contribution to ASCoT’s dividend record, allowing it to be
sustained even in the more challenging years. Thus, amid the
pandemic in 2020, ASCoT was able to grow its dividend by 4% when
the UK equity market saw dividends decline by 33%. Revenue reserves
also allow the Managers to appraise investments in the context of
total returns – they are not limited to finding value among higher
yielding companies. This flexibility has been important as ASCoT
has navigated its way through previous economic cycles.
Gearing
In
May 2023, ASCoT announced the
refinancing of its credit facility with The Royal Bank of Scotland
International Limited. The term of this £130m facility runs to
June 2026 and is designed to align
with the three yearly continuation vote.
The
Board’s gearing policy has been consistent throughout ASCoT’s life:
gearing is deployed tactically with the aim of taking advantage of
periods of stress in equity markets. ASCoT has been geared on four
occasions in its 33 years. The most recent of these came in 2020
amid the pandemic. Gearing has remained in place since then and has
added to ASCoT’s net asset value performance. At the year end, £72m
of the facility was deployed and the gearing ratio, which is net
debt to Shareholders’ Funds, was 5.1%.
Beyond the
potential to enhance returns, the credit facility provides
flexibility to conduct buy-backs and allows the Managers to react
nimbly to new opportunities without disturbing existing
investments. In what can often be a volatile and relatively
illiquid asset class, these are important benefits and the Managers
took advantage of them over the past twelve months.
Share
buy-back
The Board
believes that buy-backs provide an increase in liquidity at the
margin for those Shareholders looking to crystallise their
investment and, at the same time, deliver an economic uplift for
those Shareholders wishing to remain invested in the
Company.
In the
year to 31 December 2023, 930,000
shares were bought back and cancelled. The total value of these
repurchases was £11.6m, on an average discount of 13.3%. Since
2008, ASCoT’s share buy-backs have totalled £158m and added £24m of
value to shareholders.
The
Company seeks authority to buy back up to 14.99% of its Ordinary
Shares at the Annual General Meeting. The authority was renewed in
March 2023 and the Board will seek to
renew the authority at the Annual General Meeting on 5 March 2024.
Stewardship
The Board
is responsible for the effective stewardship of the Company’s
affairs and oversees the activities of the Managers in relation to
Environmental, Social and Governance (ESG) matters. Pages 14 to 16
of the Annual Report cover the Board’s oversight and activities in
2023. They also address the Managers’ ESG policies and practices,
along with their voting approach and activity during the year. The
Board endorses the Managers’ stewardship policy, which is set out
in their submission as a signatory to the UK Stewardship Code.
This, together with examples relating to voting and engagement with
investee companies, can be found in the “About Aberforth” section
of the Managers’ website at
www.aberforth.co.uk.
Board
Composition
The Board
regularly reviews its composition and structure in line with
corporate governance requirements. As I previewed last year, as
part of the Board’s succession planning Julia Le Blan retired from the Board during the
year and Patricia Dimond took over
as chair of the Audit Committee. Furthermore, Jaz Bains became a member of the Audit
Committee.
In
addition, the Board has decided, given its relatively small size,
that Martin Warner will be appointed
to the Audit Committee from 1 February
2024 having previously attended by invitation. In the past,
the Audit Committee chair has performed the role of Senior
Independent Director (SID) as and when needed. The Board has
decided to formalise this with the appointment of Patricia Dimond as SID from 1 February 2024.
Annual
General Meeting (“AGM”)
The AGM
will be held at 14 Melville Street, Edinburgh EH3 7NS at 10.30 am on 5 March
2024. Details of the resolutions to be considered by
Shareholders are set out in the Notice of the Meeting on page 62 of
the Annual Report. Shareholders are encouraged to submit their vote
by proxy in advance of the meeting. In accordance with normal
practice, the results of the AGM will be issued in a regulatory
news announcement and posted on Aberforth’s website. An update on
performance and the portfolio will also be available on the website
following the meeting.
Conclusion
It
promises to be a fascinating year on both the economic and
political fronts. The outcome of the Presidential Election in the
US will set the tone for global financial markets over the medium
term, while the UK’s General Election will affect the trading
environment for many smaller companies. At this stage, the UK
election would appear to carry less risk. A smooth change of
government could help restore confidence in UK politics and erode
the political discount that has afflicted UK stockmarket valuations
since the EU referendum.
At the
same time, there is good reason to reappraise the UK’s economic
performance. It is now clear that the economy fared less badly
during the pandemic than initially feared. Furthermore, recent
inflation data indicate that the UK is not an outlier and that the
Bank of England will have scope to
reduce interest rates in coming quarters. Whether these cuts will
be enough to mitigate the impact of previous monetary tightening
remains to be seen. The risk of a recession lingers, though it may
be mitigated as growth in wages and benefits moves above the rate
of inflation.
A downturn
would be unfortunate for the country – recessions bring financial
stress and hardship to households and companies alike. However,
from ASCoT’s perspective, the question of whether we experience
recession now feels academic. As the Managers’ Report makes clear,
a downturn is baked into the valuations of ASCoT’s investee
companies. So, in practical terms, the more interesting question is
what will allow the stockmarket to move on and to anticipate
recovery. Though there will be a myriad of complicating factors,
the straightforward response is the reality of interest rate
cuts.
In the
meantime, my fellow directors and I are excited by ASCoT’s
prospects. In a constantly changing industry, the Managers’ value
investment philosophy and their consistent investment process are
important differentiators. They have underpinned the Company’s 33
year record and their relevance today is undiminished. We have also
been encouraged by the additional insights shared in the Managers’
Report into their engagement approach. Through our discussions with
them over the years, it is clear that engagement has made an
important contribution to ASCoT’s investment returns. Insights of
this sort are a further support of the Board’s ambition to keep
ASCoT’s dividend growing in real terms. This can reward
Shareholders for our patience as we await a broader appreciation of
small UK quoted companies and UK equities in general. When that
reappraisal happens, the very attractive valuations of ASCoT’s
portfolio bode well for a period of strong investment
returns.
Finally,
my fellow Directors and I are always keen to receive the views of
Shareholders – please contact me at my e-mail
address,
which is noted below.
Richard Davidson
Chairman
31 January 2024
richard.davidson@aberforth.co.uk
MANAGERS’ REPORT
Introduction
ASCoT’s
net asset value total return in the twelve months to 31 December 2023 was +8.2%. Over the same period,
the NSCI (XIC) – ASCoT’s benchmark – rose by 10.1%. The FTSE
All-Share, which is representative of larger UK companies, was up
by 7.9%.
Investment
Background
Geopolitical
risk was already elevated at the start of 2023 as the war in
Ukraine continued. It rose further
towards the end of the year with Hamas’s attack on Israel. However, financial markets were
dominated by one issue – inflation and its implications for
monetary policy, especially US monetary policy. Persistent
inflation had driven the Federal Reserve to raise interest rates by
a cumulative 525 basis points in the sixteen months to July 2023. This brought to an end the era of very
low borrowing costs that followed the global financial crisis of
2007 and 2008. Understandably, markets have struggled with this new
reality and have been eager for indications that inflationary
pressure might be relenting.
The ebb
and flow of sentiment through the year can be gauged from the US
ten year government bond yield. This started 2023 at 3.8% and
surged to 5.0% in August, which was its highest level since 2007.
As inflation data improved and markets started to anticipate lower
interest rates, the yield dropped to 3.9% by the year end, a move
that was echoed by the strong performance of equity indices over
the last two months of the year.
The UK and
much of Europe are also facing
higher borrowing costs. These contributed to lacklustre economic
growth in 2023, compounding the effects of high energy costs and
waning momentum from the pandemic recovery. Recession threatens
several European economies, including the UK’s, while China’s
reopening has so far proved rather tepid. The brighter spots in
terms of economic activity are the US, which is benefiting from
government spending through the Inflation Reduction Act and other
programmes, and some emerging economies, which are proving more
resilient than in past phases of US monetary tightening.
An overall
weaker economic backdrop has complicated trading for companies.
Results for 2023 will be reported in the first half of 2024 and are
likely to show that profits declined in the UK and in Europe. Even the US stockmarket is expected to
experience next to no profit growth, notwithstanding its
“magnificent seven” technology leviathans. There are several
reasons for this. First, higher interest rates and the other
macro-economic uncertainties have put pressure on revenues. Second,
it is proving more difficult to raise selling prices as the rate of
inflation reduces, but labour costs are continuing to rise. These
are harder to pass through to customers, which squeezes profit
margins. Third, the cost of borrowing is rising as debt terms are
renegotiated in today’s environment of higher interest
rates.
Turning
specifically to small UK quoted companies, the Managers expect a
double digit percentage decline in profits for 2023, with falls for
nearly half of the profitable companies that they track closely.
Unsurprisingly, those companies operating close to the housing
market have been most affected, but it has been notable that
overseas facing companies also experienced more challenging trading
conditions in the second half of 2023. The effect of this slowdown
on profits might be close to half of the impact typically
experienced in a full economic recession. Strong balance sheets and
battle-hardened boards of directors offer mitigation, but what is
important for ASCoT is how much of this is already embedded in the
stockmarket’s valuations of the companies. This is considered in
detail in the Valuations section of this report.
Analysis of performance and portfolio
characteristics
Over the
twelve months to 31 December 2023,
ASCoT’s net asset value total return was +8.2% and the NSCI (XIC)’s
was +10.1%. An analysis of the difference between the two numbers
is shown in the table below. The most important influence on
ASCoT’s return was the performance of the companies that make up
its portfolio of investments.
For the twelve months ended 31 December
2023
|
|
Basis points
|
Attributable
to the portfolio of investments, based on mid
prices
(after
transaction costs of 14 basis points)
|
|
(271)
|
Movement
in mid to bid price spread
|
|
40
|
Cash/gearing
|
|
102
|
Purchase
of ordinary shares
|
|
14
|
Management
fee
|
|
(71)
|
Other
expenses
|
|
(7)
|
Total
attribution based on bid prices
|
|
(193)
|
|
|
|
Note: 100
basis points = 1%.
Total
Attribution is the difference between the total return of the NAV
and the Benchmark Index (i.e. NAV = 8.21%; Benchmark Index =
10.14%; difference is -1.93% being -193 basis points).
|
The next
table sets out a series of characteristics of both the portfolio
and the NSCI (XIC). The paragraphs that follow provide context and
explanation for these characteristics and for ASCoT’s performance
in 2023.
Portfolio characteristics
|
31 December 2023
|
31 December 2022
|
ASCoT
|
NSCI (XIC)
|
ASCoT
|
NSCI (XIC)
|
Number of
companies
|
78
|
353
|
79
|
350
|
Weighted
average market capitalisation
|
£591m
|
£957m
|
£548m
|
£866m
|
Weighting
in “smaller small” companies*
|
61%
|
28%
|
62%
|
32%
|
Portfolio
turnover
|
20%
|
N/A
|
18%
|
N/A
|
Active
share
|
75%
|
N/A
|
77%
|
N/A
|
Price
earnings (PE) ratio (historical)
|
7.9x
|
12.8x
|
8.1x
|
8.1x
|
Dividend
yield (historical)
|
4.2%
|
3.3%
|
3.5%
|
3.4%
|
Dividend
cover (historical)
|
3.0x
|
2.3x
|
3.5x
|
3.7x
|
*”Smaller
small” companies are members of the NSCI (XIC) that are not also
members of the FTSE 250
Style & size
Since the
pandemic recovery started in late 2020, inflation has caused
interest rates and bond yields to rise. These conditions have
favoured the value investment style. The London Business School analyses style effects
within the NSCI (XIC) using price-to-book ratios to differentiate
between value and growth stocks. They calculate that the total
return of the index’s value cohort exceeded that of its growth
cohort in 2021, 2022 and 2023. A caveat to this positive style
backdrop for value is the very strong share price performance in
2023 of the large US technology companies collectively known as the
“magnificent seven”. This suggests a more favourable environment
for growth stocks, which would be consistent with the stockmarket’s
current optimism about an end to the cycle of higher interest
rates. Nevertheless, the positive backdrop for the value investment
style has benefited ASCoT’s returns over recent years.
Turning to
size, the NSCI (XIC) has a significant overlap with the FTSE 250
index: 72% of its value is represented by mid cap stocks. The
portfolio’s weighting in these is much lower at 39%, with the
majority made up of holdings in the more attractively valued
“smaller small” companies. The share price performances of the
“larger small” and “smaller small” companies were similar through
2023 as a whole. However, the stockmarket rally at the end of the
year was led by the mid caps, which out-performed their smaller
peers by 5% in just over two months. This hampered ASCoT’s
performance as the year drew to a close. In periods of rapid share
price moves, both upwards and downwards, it is common for the
“larger small” companies to lead the way and for the “smaller
smalls” to catch up in due course.
Balance sheets
The table
below shows the balance sheet profile of the portfolio and of the
Tracked Universe, which is a subset of the NSCI (XIC). It comprises
234 companies, which the Managers follow closely and which together
represent 98% by value of the total NSCI (XIC) index.
Weight in companies with:
|
Net cash
|
Net debt/EBITDA
<
2x
|
Net debt/EBITDA
> 2x
|
Other*
|
Portfolio:
2023
|
33%
|
42%
|
17%
|
7%
|
Tracked
universe: 2023
|
34%
|
41%
|
17%
|
8%
|
*Includes
loss-makers and lenders
|
Small
companies’ balance sheets have not been so strong since around
2014. Back then, a phase of balance sheet repair was a reaction to
2009’s recession. Today, balance sheets are already in a robust
state. This should limit the risk to dividends and the requirement
for equity issuance in the event of an economic downturn. Strong
balance sheets also help to mitigate refinancing risk, as
companies’ borrowing costs rise amid the current environment of
higher interest rates.
The
balance sheet profiles of the portfolio and the Tracked Universe
are similar, with high exposures to companies with net cash or
modest degrees of leverage. The opportunity for ASCoT to invest in
these companies comes from the stockmarket’s aversion to the UK and
to its smaller companies in particular. Their fundamental
attributes are being ignored and pricing inefficiencies
abound.
Another
fundamental change being widely overlooked is the improvement in
the funding position of defined benefit pension schemes. For two
decades, UK companies have deployed large amounts of their free
cash flow to reduce pension deficits. A silver lining to the cloud
of higher interest rates has been the narrowing of these deficits.
Many pension scheme trustees are now able to contemplate
de-risking, which relieves the sponsoring companies of the
requirement to make top-up payments. The boost to free cash flow is
often significant and several of ASCoT’s holdings benefited in this
way through 2023.
Income
The
portfolio’s income performance in 2023 was good, with income earned
by ASCoT reaching its highest ever level. Seven special dividends
chipped in, but the main influence was a further recovery in
profits from the pandemic. Inevitably, that momentum is starting to
fade as profits and pay-out ratios approach pre-pandemic
levels.
Nil Payer
|
Cutter
|
Unchanged Payer
|
Increased Payer
|
New/Returner
|
15
|
14
|
15
|
31
|
3
|
The table
above splits ASCoT’s 78 holdings into five categories, which are
determined by each company’s most recent dividend action. The most
populous category remains the Increased Payers, though there are
proportionately fewer than last year. Three companies returned to
paying a dividend, having previously been classified as Nil Payers.
This transition can provide a significant boost to ASCoT’s income
and a further five holdings are presently expected to make the
shift from Nil Payer to New / Returner over the next eighteen
months.
The
historical dividend yield of ASCoT’s holdings at 31 December 2023 was 4.2%, which was 28% higher
than the average over ASCoT’s 33 year history. Dividend cover of
3.0x also compared well with the long term average of 2.8x. This
feature, along with the portfolio’s strong balance sheets, should
support ASCoT’s income experience as corporate profitability is
coming under pressure.
Corporate activity
Despite
the backdrop of higher interest rates and borrowing costs, M&A
continued apace in 2023. The takeovers of twelve NSCI (XIC)
constituents were completed in the year. ASCoT had holdings in six
of these. The average EV/EBITA multiple at which the deals were
executed was 12.4x, while the average premium to the
pre-announcement share prices was an unusually high 66%.
Somewhat
surprisingly, private equity houses were the bidders in seven of
the twelve deals. The Managers had expected the higher cost of
borrowing to limit this source of interest. However, the very low
valuations accorded to small UK quoted companies by the stockmarket
give private equity the opportunity. At these valuations, it would
appear that debt is not needed at the outset to make M&A models
work. This remarkable situation highlights a risk to ASCoT and
other investors in the asset class – in many cases, even a large
takeover premium may not bring the valuation to a level that
reflects the true worth of the target company.
In such
circumstances, the Managers are prepared to vote against
under-priced deals and did so in 2023. The best M&A experiences
are often those in which boards of directors consult shareholders
well in advance. Such consultation reduces the risk of
embarrassment, should shareholders find proposed terms
unacceptable, and can lead to better outcomes, which may be that
the company in question retains its independence. The Managers make
it clear to the boards of the investee companies that they should
be consulted in such situations and that they are willing to be
insiders for extended periods.
ASCoT’s gearing
ASCoT
employs gearing tactically to take advantage of periods of stress
in financial markets. It is currently geared for the fourth time in
its history, having drawn on its borrowing facility amid the
pandemic in 2020. Since then, gearing has enhanced ASCoT’s returns,
but valuations of smaller companies remain very attractive. As long
as the opportunity embedded in these valuations remains, it is
appropriate for ASCoT to retain some gearing. At 31 December 2023, the gearing ratio was 5.1%,
down from 5.7% at the start of the year. The reduction is
influenced by the rise in share prices over the period and by the
timing of purchases and sales.
Active share
Active
share is a measure of how different a portfolio is from an index.
The ratio is calculated as half of the sum of the absolute
differences between each stock’s weighting in the index and its
weighting in the portfolio. The higher a portfolio’s active share,
the higher its chance of performing differently from the index, for
better or worse. The Managers target an active share ratio of at
least 70% for ASCoT’s portfolio compared with the NSCI (XIC). At
31 December 2023, it stood at
75%.
Value roll and portfolio
turnover
The main
influence on ASCoT’s portfolio turnover in any period is usually
the stockmarket’s appetite for small UK quoted companies. If prices
and valuations are rising, the upsides to the Managers’ target
prices are likely to be narrowing. All else being equal, this would
encourage the rotation of ASCoT’s capital from companies with lower
upsides to those with higher upsides. The Managers term this
dynamic the “value roll” and it has played an important role in
ASCoT’s capital and income returns over the years. It follows that
periods of higher portfolio turnover are often associated with
strong returns for ASCoT.
In 2023,
portfolio turnover, defined as the lower of purchases and sales
divided by average portfolio value, was 20%. This is below the long
term average of 34%. Notwithstanding ASCoT’s positive return in the
year, this suggests that there was less opportunity for “value
roll” than usual. This is another symptom of the deep
under-valuation of small UK quoted companies – if the stockmarket
does not reflect their true value, there is every incentive to
maintain the position.
Environmental, social and governance
(ESG)
The issues
underlying this umbrella term bring both threats and opportunities
to individual companies. Additionally, it seems likely that the
valuation of the asset class as a whole is affected by the view
that small companies are ESG victims. The Managers disagree and
believe that the passage of time will show that small companies are
coping well with the challenges of ESG. A broader appreciation of
this ought to contribute to a re-rating of the asset class in due
course, which should benefit ASCoT’s returns.
In 2023,
the Managers continued to populate the ESG module within their
investment database. This module was launched in 2022 and is
intended to provide insights into the portfolio’s ESG profile as
the data set is enriched over time. It also allows the Managers to
track and prioritise engagement activities. Work in 2023 indicated
that smaller companies are coping well with the increasing
expectations and regulations associated with ESG. Disclosure
continues to improve and action is being taken to address
underlying issues. When that is not the case, the Managers engage
to understand the reason and seek change where appropriate. Beyond
this, they also encourage companies to think about and articulate
opportunities arising from environmental and social issues, such as
climate change. To this point, several industrial companies in
which ASCoT invests manufacture products that generate both
financial and emission savings for their customers. Examples are
provided in the Stewardship & ESG section of the Managers’
website at www.aberforth.co.uk. Further details of the Managers’
approach to ESG are set out on pages 14 to 16 of the annual
report.
Engagement
Since
ASCoT’s inception in 1990, an integral part of Aberforth’s
investment process has been engagement with the boards of the
investee companies. The Managers often take significant stakes in
investee companies – up to 25% of issued share capital across
Aberforth’s client base. Engagement is therefore a responsibility.
Importantly, it is also a means to improve investment outcomes.
Aberforth’s approach to engagement is intended to be purposeful,
discreet and constructive. It includes regular updates with
executive directors and also encompasses meetings with non
executives. There is a particular focus on the chair, which is the
most important role in the UK’s system of corporate governance. The
Managers engage on any topic that affects the value of an
investment or the rights of shareholders, with the most common
being capital allocation.
The
Managers are prepared to be taken inside for extended periods,
which indicates their commitment to responsible stewardship and
which can be helpful to investee companies. They also expect to be
consulted in a timely fashion – the presentation of a
fait
accompli by the
board to shareholders is a risky and unhelpful undertaking. Several
of the takeovers in recent years have been presented without due
consultation and have led to the Managers engaging to improve the
terms for shareholders and/or voting against the deals. The
Managers are confident that their purposeful, discreet and
constructive engagement has enhanced ASCoT’s returns over
time.
Valuations
The chart
depicts the historical price earnings ratio (PE) of ASCoT’s
portfolio. At 31 December 2023, the
PE was 7.9x, which was more than one standard deviation below the
33 year average of 12.1x. History suggests that this only happens
during recession – the early 1990s downturn towards the left of the
chart, the global financial crisis in the middle and more recently
the pandemic recession.
If share
prices are unchanged over the next twelve months, it is likely that
the historical PE will rise. This would reflect lower reported
profits, consistent with the description given in the introduction
to this report. Lower profits are clearly not to be welcomed, but
they are not inconsistent with good equity returns because the
stockmarket focuses on what will happen rather than what has
happened. In the early 1990s recession, small company profits
declined by 25-30% over three years, while the PE of ASCoT’s
portfolio rose from 7x at the end of 1990 to a high of almost 19x
at the end of 1993. Investors more than doubled their money in
total return terms over that period.
Aside from
concern about the near term outlook for corporate profits, three
other factors contribute to the particularly attractive levels of
valuation currently accorded to ASCoT’s portfolio. These are the
prevailing malaise with the UK and its stockmarket, the concern
about the liquidity of smaller companies, and the effect of the
Managers’ value investment style. The following paragraphs address
each of these factors.
-
At
31 December 2023, the FTSE
All-Share’s PE was 35% lower than Panmure Gordon’s calculation of
the PE for the Rest of the World. Since 1990, the average discount
of UK equities has been 16%. Several justifications for today’s
larger than usual discount are regularly offered.
First,
since the EU referendum in 2016 and with the subsequent succession
of Prime Ministers, the UK’s reputation for political stability has
been impaired. However, the UK does not have a monopoly in
political uncertainty. The UK’s flirtation with populism may prove
to be behind it, while elections over the coming years may cast
other countries in a relatively unfavourable light.
Second,
there is a widespread view that the UK’s economic performance in
recent years has been comparatively poor, from Brexit through a
proportionately tougher lockdown experience to a more intransigent
problem with inflation. However, Brexit’s impact is largely in the
past – the companies with which the Managers engage have learned to
live with it. Turning to the pandemic, recent revisions by the ONS
to its calculation of GDP reveal that the UK’s recovery compares
well with other members of the G7. Finally, the gap between the
UK’s inflation rate and that of comparable countries is now
narrowing to undermine arguments that the UK is the “sick man of
Europe”.
Third,
there is a concern that the UK stockmarket itself is dysfunctional.
Evidence cited includes its lack of technology companies,
infrequent and unsuccessful IPOs, low valuations, and outflows from
pension and open-ended funds. Some of this reasoning is circular,
but the issue has caught the attention of government, for better or
worse. Mooted solutions are mandated investment in UK listed
companies by pension funds, lower governance standards for UK
listings and the dilution of EU inspired regulation on UK capital
markets. For the Managers, it is not clear that the UK stockmarket
is broken and well-intended legislation is often undermined in due
course by the unintended consequences.
-
Within the
UK market, there is a pronounced valuation discount for size – the
lower the market capitalisation, the lower the valuation. Within
the NSCI (XIC), the average 2023 EV/EBITA ratio of companies with
market capitalisations above £600m (roughly the boundary between
the FTSE 250 and the FTSE SmallCap) is 11.0x. For those below the
£600m threshold, the “smaller small” companies, the average
multiple is 23% lower at 8.4x.
For
smaller companies, the general concerns about the UK are compounded
by their greater reliance on the domestic economy. Around 50% of
the aggregate revenues of NSCI (XIC)’s constituents are generated
within the UK, higher than the 20-25% or so for the entire UK
stockmarket. While companies close to the domestic housing market
have reported more difficult trading conditions for the past nine
months, it is notable that their share prices have often fallen by
less than the extent of the downgrade to profit expectations. This
is an indication that economic weakness is reflected in valuations,
which is a necessary, though not sufficient, condition for
recovery.
Against
the background of disinvestment from UK equities, there is a
heightened sensitivity towards liquidity on the part of many
investors. This is likely to have penalised the valuations of the
relatively illiquid asset class of smaller companies. However, such
an investment stance risks missing the small company premium, which
is the historical out-performance of small over large and which has
averaged 1.6% per annum over ASCoT’s 33 years. Investors are
rewarded for taking on liquidity risk over time and relative
illiquidity works both ways. Gaining exposure to the asset class
when sentiment turns is not straightforward – as so often in
investment, time in the market is more important than timing the
market.
-
Turning to
ASCoT’s portfolio, the 7.9x historical PE at 31 December 2023 was 38% below that of the NSCI
(XIC). This compares with an average discount of 12% since
1990.
ASCoT’s
portfolio is managed in accordance with the value investment style
and so a discount to the overall valuation of smaller companies is
to be expected. However, the discount today is unusually wide. Part
of this is explained by the better value on offer among the NSCI
(XIC)’s “smaller small” companies, to which ASCoT has a relatively
high exposure. Another factor is the Managers’ willingness to look
through general concern about near term corporate profitability by
investing in strong and growing but economically sensitive
companies. Unburdened by these distractions, ASCoT’s opportunity
set within the investment universe is presently towards its widest
in its history.
The
following table sets out further detail about the forward
valuations of the portfolio, the Tracked Universe and certain
subdivisions of the Tracked Universe. The metric displayed is
enterprise value to earnings before interest, tax and amortisation
(EV/EBITA), which the Managers use most often in valuing companies.
The ratios are based on the Managers’ profit forecasts for each
company that they track. The bullet points following the table
summarise its main messages.
EV/EBITA
|
2022
|
2023
|
2024
|
2025
|
ASCoT
|
6.8x
|
8.1x
|
6.8x
|
6.0x
|
Tracked
Universe (234 stocks)
|
9.6x
|
10.0x
|
8.5x
|
7.5x
|
-
35 growth
stocks
|
18.4x
|
16.7x
|
13.4x
|
11.9x
|
-
199 other
stocks
|
8.7x
|
9.2x
|
7.9x
|
7.0x
|
-
83 stocks
> £600m market cap
|
10.7x
|
11.0x
|
9.5x
|
8.5x
|
-
151 stocks
< £600m market cap
|
7.7x
|
8.4x
|
7.0x
|
6.0x
|
-
The higher
multiples for 2023 compared with 2022 are consistent with earlier
comments about lower company profits in 2023. The Managers’
forecasts currently point to a profit recovery in 2024, but the
precise timing of a rebound relies on the domestic and overseas
economic backdrop.
-
The
average EV/EBITA multiples of the portfolio are lower than those of
the Tracked Universe. This has been a consistent feature over
ASCoT’s history and is consistent with the Managers’ value
investment style.
-
The
portfolio’s 8.1x EV/EBITA ratio for 2023 is considerably lower than
the average multiple of 12.4x at which the year’s completed M&A
deals were struck.
-
Each year,
the Managers identify a cohort of growth stocks within the NSCI
(XIC). These stocks are on much higher multiples than both the
portfolio and the rest of the Tracked Universe.
Outlook
and conclusion
The
financial markets enter 2024 in much the same way as they did 2023
– focused on US interest rates and hopeful that a turn in the cycle
towards looser monetary policy is near at hand. In contrast to
twelve months ago, today there is a declining rate of inflation in
most economies as energy prices subside and global supply chains
improve. A cut in US interest rates in the first quarter of the
year is now priced into markets. If this is achieved, the
probability rises of a “soft landing” – the Federal Reserve,
despite much criticism for having been slow to respond to
inflation, may yet be able to loosen monetary policy without first
tipping the US economy into recession.
However,
some circumspection is necessary. In particular, the US continues
its ambitious fiscal programmes, with government spending in the
final months of 2023 rising at double digit rates. This contributed
to annualised growth in nominal GDP of almost 9% in the third
quarter. With full employment and the US electoral cycle to
consider, so robust an economic backdrop is not one normally
associated with quiescent inflation. Therefore, financial markets
may continue to be troubled by inflation and US monetary policy
over the next twelve months. Moreover, it would be bold to assume
that the recent easing of price pressures means that inflation will
return to the very low single digit rates of the pre-pandemic
period.
US
interest rates are likely to dictate the near term mood of global
financial markets, the UK’s included. But equity returns over time
are heavily influenced by starting valuations, which stockmarkets
can take to extreme levels in their fits of despondency and
elation. As the previous section of this report described, the low
valuations ascribed to UK equities, smaller companies and, in
particular, ASCoT’s portfolio bode well for returns over the medium
term. It is not straightforward to identify what will change to
shine the spotlight on the value on offer in the UK – were it easy,
after all, valuations would not now be so attractive. However,
while acknowledging the present debate about the relevance of the
UK stockmarket, the Managers retain confidence in its ability to
reflect fairer valuations in due course. Awaiting a general
re-rating of the UK listed companies, ASCoT is well placed to
prosper in the meantime.
-
With the
outlook for inflation and interest rates more nuanced than in the
pre-pandemic period, there is reason to believe that the value
investment style can help ASCoT’s returns, as it has over the past
three years. The Managers’ commitment to value investment sets
ASCoT apart from most other funds in the small company
arena.
-
ASCoT’s
portfolio is skewed towards resilient companies with strong balance
sheets and experienced boards of directors who proved themselves
amid the challenges of the pandemic. If, as seems likely, this is a
period of more difficult trading conditions, it is plausible that
the investee companies emerge in a stronger competitive position as
they have in previous cycles.
-
The
investee companies’ resilience should support their dividends and
by extension the income ASCoT earns. ASCoT also benefits from its
revenue reserves, which have been carefully nurtured to allow the
dividend record to continue when the macro-economic environment
deteriorates. These characteristics support the Board’s ambition to
grow ASCoT’s dividends at a rate above that of
inflation.
-
In the
absence of a widespread revaluation of companies listed on the UK
stockmarket, takeover activity is likely to continue. This is an
obvious means through which the value gaps that characterise
ASCoT’s portfolio can be realised. Takeovers are appropriate as
long as the offer terms reflect the target company’s true value and
are not anchored by the prevailing stockmarket price.
-
Both in
M&A situations and more broadly, the Managers will continue to
engage with the boards of investee companies in order to improve
outcomes for investors. Discreet, purposeful and constructive
engagement is all the more relevant today when valuations are so
low and directors are frustrated by what the stockmarket appears to
be saying about the companies that they run.
These
factors contribute to the strength and relevance of ASCoT’s
investment proposition, which the Managers believe can produce good
returns for investors as we wait for a re-rating of the UK equity
market and its smaller companies. When that re-rating does arrive,
ASCoT’s attractively valued portfolio and tactical gearing mean
that it is well-placed to take full advantage.
Aberforth
Partners
Managers
31 January 2024
DIRECTORS’ RESPONSIBILITY STATEMENT
Each of
the Directors confirms to the best of their knowledge
that:
(a) the
financial statements, which have been prepared in accordance with
applicable accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company;
(b) the
Strategic 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; and
(c) the
Annual Report, taken as a whole, is fair, balanced and
understandable and provides information necessary for Shareholders
to assess the Company’s position, performance, business model and
strategy.
On behalf
of the Board
Richard
Davidson
Chairman
31 January
2024
PRINCIPAL RISKS
The Board
carefully considers the risks faced by the Company and seeks to
manage these risks through continual review, evaluation, mitigating
controls and action as necessary. A risk matrix for the Company is
maintained. It groups risks into the following categories:
portfolio management; investor relations; regulatory and legal; and
financial reporting. Further information regarding the Board’s
governance oversight of risk and the context for risks can be found
in the Corporate Governance Report on page 35 of the Annual Report.
The Audit Committee Report (pages 36 to 38 of the Annual Report)
details the committee's review process, matters considered, and
actions taken on internal controls and risks during the year. The
Audit Committee completed a significant review and reassessment of
the risk register in the year. This included assessing the risks
and supporting documentation, and enhancing the detailed risk
register reporting. The Company outsources all the main operational
activities to recognised, well-established firms and the Board
receives internal control reports from these firms, where
available, to review the effectiveness of their control
frameworks.
Emerging
risks are those that are still evolving, and are not fully
understood, but that could have a future impact on the Company. The
Board regularly reviews them and, during the year, it added to the
risk matrix the potential risks arising from reduced market demand
for UK listed companies and also the risks arising in the
investment company sector from reduced investor demand. The Board
monitors these risks and how the Managers integrate such risks into
their investment decision making.
Principal
risks are those risks in the matrix that have the highest ratings
based on likelihood and impact. They tend to be relatively
consistent from year to year given the nature of the Company and
its business. The principal risks faced by the Company, together
with the approach taken by the Board towards them, are summarised
below. To indicate the extent to which the principal risks change
during the year and the level of monitoring required, each
principal risk has been categorised as either dynamic risk,
requiring detailed monitoring as it can change regularly, or stable
risk.
Investment strategy/performance risk
|
Risk–this
is a portfolio management risk
|
Mitigation
|
The
Company’s investment policy and strategy exposes the portfolio to
share price movements. The performance of the investment portfolio
typically differs from the performance of the benchmark and is
influenced by investment strategy and policy, investment style,
stock selection, liquidity and market risk (see Market risk below
and Note 19 of the Annual Report for further details). Investment
in small companies is generally perceived to carry more risk than
investment in large companies. While this is reasonable when
comparing individual companies, it is much less so when comparing
the risks inherent in diversified portfolios of small and large
companies.
|
The Board
monitors performance against the investment objective over the long
term by ensuring the investment portfolio is managed appropriately,
in accordance with the investment policy and strategy. The Board
has outsourced portfolio management to experienced investment
managers with a clearly defined investment philosophy and
investment process. The Board receives regular and detailed reports
on investment performance including detailed portfolio analysis,
risk profile and attribution analysis. Senior representatives of
Aberforth Partners attend each Board meeting. Peer group
performance is also regularly monitored by the Board. This remains
a dynamic risk, with detailed consideration during the year.
The
Managers’ Report contains information on portfolio investment
performance and risk.
|
Market risk
|
Risk–this
is a portfolio management risk
|
Mitigation
|
Investment
performance is affected by external market risk factors, including
those creating uncertainty about future price movements of
investments, geo-political stability and economic conditions. The
Board delegates consideration of market risk to the Managers to be
carried out as part of the investment process.
|
The
Managers regularly assess the exposure to market risk when making
investment decisions and the Board monitors the results via the
Managers’ quarterly and other reporting. The Board and Managers
closely monitor significant economic and political developments
including the potential effects of climate change (see pages 14 to
16 of the Annual Report). This remained a dynamic risk during the
year, in which the Managers reported on market risks including
inflation, energy security, recession and other geopolitical issues
as addressed in the Managers’ Report.
|
Share price discount
|
Risk–this
is an investor relations risk
|
Mitigation
|
Investment
trust shares tend to trade at discounts to their underlying net
asset values, but a significant share price discount, related
volatility, or a discount significantly beyond peers’, could reduce
shareholder returns and confidence.
|
The Board
and the Managers monitor the discount daily, both in absolute terms
and relative to ASCoT’s peers. In this context, the Board intends
to continue to use the buyback authority as described in the
Directors’ Report contained in the Annual Report. This is
considered a dynamic risk as the discount moves daily. The Board
discussed with the Managers a detailed analysis and assessment of
this risk during the year.
|
Gearing risk
|
Risk–this
is a portfolio management risk
|
Mitigation
|
Tactical
gearing can negatively affect investment performance. In rising
markets, gearing enhances returns, but in falling markets it
reduces returns to shareholders.
|
The Board
and the Managers have specifically considered the gearing strategy
and associated risks during the year. At present this is a dynamic
risk as the Company’s tactical gearing facility is partially
deployed.
|
Reputational risk
|
Risk–this
is an investor relations risk
|
Mitigation
|
The risk
of an event damaging the Company's reputation and shareholder
demand. The reputation of the Company is important in maintaining
the confidence of shareholders.
|
The Board
and the Managers regularly monitor factors that may affect the
reputation of the Company and/or of its main service providers and
take action if appropriate. The Board reviews relevant internal
control reporting for critical outsourced service providers. This
has been monitored as a stable risk.
|
Regulatory risk
|
Risk–this
is a regulatory and legal risk
|
Mitigation
|
Failure to
comply with applicable legal, tax and regulatory requirements could
lead to suspension of the Company’s share price listing, financial
penalties or a qualified audit report. A breach of Section 1158 of
the Corporation Tax Act 2010 could lead to the Company losing
investment trust status and, as a consequence, any capital gains
would then be subject to capital gains tax.
|
The Board
receives quarterly compliance reports from the Secretaries to
evidence compliance with rules and regulations, together with
information on future developments. This is a stable
risk.
|
Going Concern
The Audit
Committee has undertaken and documented an assessment of whether
the Company is a going concern for the period of at least 12 months
from the date of approval of the financial statements. The
Committee reported the results of its assessment to the Board. The
Company’s business activities, capital structure and borrowing
facilities, together with the factors likely to affect its
development and performance, are set out in the Strategic Report
contained in the Annual Report. In addition, the Annual Report
includes the Company’s objectives, policies and processes for
managing its capital and financial risk, along with details of its
financial instruments and its exposures to credit risk and
liquidity risk. The Company’s assets comprise mainly readily
realisable equity securities and funding flexibility can typically
be achieved through the use of the borrowing facilities, which are
described in notes 12 and 13 to the financial statements in the
Annual Report. The Company has adequate financial resources to
enable it to meet its day-to-day working capital requirements. In
summary and taking into consideration all available information,
the Directors have concluded it is appropriate to continue to
prepare the financial statements on a going concern
basis.
The Income
Statement, Balance Sheet, Reconciliation of Movements in
Shareholders’ Funds and summary Cash Flow Statement are set out
below.
INCOME STATEMENT
For
the year ended 31 December 2023
(audited)
|
For
the year ended
|
For the
year ended
|
|
31
December 2023
|
31
December 2022
|
|
Revenue
|
Capital
|
Total
|
Revenue
|
Capital
|
Total
|
|
£’000
|
£’000
|
£’000
|
£’000
|
£’000
|
£’000
|
|
|
|
|
|
|
|
Net
gains/(losses) on investments
|
-
|
58,432
|
58,432
|
-
|
(195,756)
|
(195,756)
|
Investment
income
|
56,423
|
-
|
56,423
|
53,188
|
-
|
53,188
|
Other
income
|
91
|
-
|
91
|
7
|
-
|
7
|
Investment
management fee
|
(3,350)
|
(5,583)
|
(8,933)
|
(3,513)
|
(5,855)
|
(9,368)
|
Portfolio
transaction costs
|
-
|
(1,855)
|
(1,855)
|
-
|
(2,078)
|
(2,078)
|
Other
expenses
|
(823)
|
-
|
(823)
|
(808)
|
-
|
(808)
|
|
--------
|
--------
|
--------
|
--------
|
--------
|
--------
|
Net
return before finance costs
|
52,341
|
50,994
|
103,335
|
48,874
|
(203,689)
|
(154,815)
|
and
tax
|
|
|
|
|
|
|
Finance
costs
|
(1,578)
|
(2,631)
|
(4,209)
|
(704)
|
(1,173)
|
(1,877)
|
|
--------
|
--------
|
--------
|
--------
|
--------
|
--------
|
|
|
|
|
|
|
|
Return
on ordinary activities
|
50,763
|
48,363
|
99,126
|
48,170
|
(204,862)
|
(156,692)
|
before
tax
|
|
|
|
|
|
|
Tax on
ordinary activities
|
(82)
|
-
|
(82)
|
-
|
-
|
-
|
|
--------
|
--------
|
--------
|
--------
|
--------
|
--------
|
Return
attributable to
|
|
|
|
|
|
|
equity
shareholders
|
50,681
|
48,363
|
99,044
|
48,170
|
(204,862)
|
(156,692)
|
|
======
|
=======
|
=======
|
======
|
=======
|
=======
|
|
|
|
|
|
|
|
Returns
per Ordinary Share (Note 4)
|
59.79p
|
57.05p
|
116.84p
|
55.64p
|
(236.64)p
|
(181.00)p
|
The Board
declared on 31 January 2024 a final dividend of 28.55p per Ordinary
Share and a special dividend of 9.00p per Ordinary Share. The Board
declared on 26 July 2023 an interim dividend of 12.95p per Ordinary
Share.
The total
column of this statement is the profit and loss account of the
Company. All revenue and capital items in the above statement
derive from continuing operations. No operations were acquired or
discontinued in the year. A Statement of Comprehensive Income is
not required as all gains and losses of the Company have been
reflected in the above statement.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’
FUNDS
For
the year ended 31 December 2023
(audited)
|
|
Capital
|
|
|
|
|
|
Share
|
redemption
|
Special
|
Capital
|
Revenue
|
|
|
capital
|
reserve
|
reserve
|
reserve
|
reserve
|
Total
|
|
£’000
|
£’000
|
£’000
|
£’000
|
£’000
|
£’000
|
|
|
|
|
|
|
|
Balance as
at 31 December 2022
|
853
|
135
|
50,481
|
1,109,683
|
89,718
|
1,250,870
|
Return on
ordinary activities after taxation
|
-
|
-
|
-
|
48,363
|
50,681
|
99,044
|
Equity
dividends paid (Note 3)
|
-
|
-
|
-
|
-
|
(41,046)
|
(41,046)
|
Purchase
of Ordinary Shares
|
(9)
|
9
|
(11,641)
|
-
|
-
|
(11,641)
|
|
--------
|
--------
|
--------
|
--------
|
--------
|
--------
|
Balance
as at 31 December 2023
|
844
|
144
|
38,840
|
1,158,046
|
99,353
|
1,297,227
|
|
======
|
======
|
======
|
======
|
======
|
======
|
For the
year ended 31 December 2022
(audited)
|
|
Capital
|
|
|
|
|
|
Share
|
redemption
|
Special
|
Capital
|
Revenue
|
|
|
capital
|
reserve
|
reserve
|
reserve
|
reserve
|
Total
|
|
£’000
|
£’000
|
£’000
|
£’000
|
£’000
|
£’000
|
|
|
|
|
|
|
|
Balance as
at 31 December 2021
|
879
|
109
|
83,777
|
1,314,545
|
73,255
|
1,472,565
|
Return on
ordinary activities after taxation
|
-
|
-
|
-
|
(204,862)
|
48,170
|
(156,692)
|
Equity
dividends paid (Note 3)
|
-
|
-
|
-
|
-
|
(31,707)
|
(31,707)
|
Purchase
of Ordinary Shares
|
(26)
|
26
|
(33,296)
|
-
|
-
|
(33,296)
|
|
--------
|
--------
|
--------
|
--------
|
--------
|
--------
|
Balance
as at 31 December 2022
|
853
|
135
|
50,481
|
1,109,683
|
89,718
|
1,250,870
|
|
======
|
======
|
======
|
======
|
======
|
======
|
BALANCE SHEET
As
at 31 December 2023
(audited)
|
31
December
|
31
December
|
|
2023
|
2022
|
|
£‘000
|
£‘000
|
Fixed
assets
|
|
|
Investments
at fair value through profit or loss (Note 5)
|
1,363,980
|
1,322,261
|
|
----------
|
----------
|
Current
assets
|
|
|
Debtors
|
2,661
|
2,145
|
Cash at
bank
|
2,734
|
1,668
|
|
----------
|
----------
|
|
5,395
|
3,813
|
Creditors
(amounts falling due within one year)
|
(305)
|
(75,204)
|
|
----------
|
----------
|
Net
current assets/(liabilities)
|
5,090
|
(71,391)
|
|
----------
|
----------
|
Total
Assets less Current Liabilities
|
1,369,070
|
1,250,870
|
Creditors
(amounts falling due after more than one year)
|
(71,843)
|
-
|
|
----------
|
----------
|
Total
Net Assets
|
1,297,227
|
1,250,870
|
|
=======
|
=======
|
|
|
|
Capital
and reserves: equity interests
|
|
|
Called up
share capital
|
844
|
853
|
Capital
redemption reserve
|
144
|
135
|
Special
reserve
|
38,840
|
50,481
|
Capital
reserve
|
1,158,046
|
1,109,683
|
Revenue
reserve
|
99,353
|
89,718
|
|
----------
|
----------
|
Total
Shareholders’ Funds
|
1,297,227
|
1,250,870
|
|
=======
|
=======
|
|
|
|
Net
Asset Value per Ordinary Share (Note 6)
|
1,536.73p
|
1,465.67p
|
CASH FLOW STATEMENT
For
the year ended 31 December 2023
(audited)
|
31
December 2023
|
31
December 2022
|
|
|
£’000
|
|
£’000
|
Operating
activities
|
|
|
|
|
Net
revenue return before finance costs and tax
|
|
52,341
|
|
48,874
|
Tax
withheld from income
|
|
(82)
|
|
-
|
Investment
management fee charged to capital
|
|
(5,583)
|
|
(5,855)
|
(Increase)
in debtors
|
|
(516)
|
|
(365)
|
Increase/(decrease)
in other creditors
|
|
-
|
|
(24)
|
|
|
--------
|
|
--------
|
Net
cash inflow from operating activities
|
|
46,160
|
|
42,630
|
|
|
=====
|
|
=====
|
Investing
activities
|
|
|
|
|
Purchases
of investments
|
|
(255,193)
|
|
(250,161)
|
Sales of
investments
|
|
270,051
|
|
284,746
|
|
|
--------
|
|
--------
|
Cash
inflow from investing activities
|
|
14,858
|
|
34,585
|
|
|
=====
|
|
=====
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
Purchases
of Ordinary Shares
|
|
(11,641)
|
|
(34,026)
|
Equity
dividends paid (Note 3)
|
|
(41,046)
|
|
(31,707)
|
Interest
and fees paid
|
|
(4,265)
|
|
(1,732)
|
Gross
drawdowns of bank debt facilities (before any costs)
|
52,000
|
|
126,000
|
Gross
repayments of bank debt facilities (before any costs)
|
|
(55,000)
|
|
(137,500)
|
|
|
--------
|
|
--------
|
Cash
(outflow) from financing activities
|
|
(59,952)
|
|
(78,965)
|
|
|
=====
|
|
=====
|
|
|
|
|
|
|
|
|
|
|
Change
in cash during the period
|
|
1,066
|
|
(1,750)
|
|
|
=====
|
|
=====
|
Cash at
the start of the period
|
|
1,668
|
|
3,418
|
Cash at
the end of the period
|
|
2,734
|
|
1,668
|
|
|
======
|
|
======
|
SUMMARY
NOTES TO THE FINANCIAL STATEMENTS
1.
SIGNIFICANT ACCOUNTING POLICIES
The
financial statements have been presented under Financial Reporting
Standard 102 ("FRS 102") and under the AIC’s Statement of
Recommended Practice “Financial Statements of Investment Trust
Companies and Venture Capital Trusts” ("SORP"). The financial
statements have been prepared on a going concern basis under the
historical cost convention, modified to include the revaluation of
the Company’s investments as described below. The Directors'
assessment of the basis of going concern is described above. The
functional and presentation currency is pounds sterling, which is
the currency of the environment in which the Company operates. The
Board confirms that no critical accounting judgements or
significant sources of estimation uncertainty have been applied to
the financial statements and therefore there is not a significant
risk of a material adjustment to the carrying amounts of assets and
liabilities within the next financial year.
2.
INVESTMENT MANAGEMENT FEE AND BANK BORROWINGS
The
Managers, Aberforth Partners LLP, receive an annual management fee,
payable quarterly in advance, equal to 0.75% of net assets up to £1
billion, and 0.65% thereafter.
The
investment management fee and finance costs of bank borrowings have
been allocated 62.5% to capital reserve and 37.5% to revenue
reserve, in line with the Board’s expected long term split of
returns, in the form of capital gains and income respectively, from
the investment portfolio of the Company.
3.
DIVIDENDS
|
Year
to 31 December 2023
£’000
|
Year to 31
December 2022
£’000
|
Amounts
recognised as distributions to equity holders in the
period:
|
Final
dividend for the year ended 31 December 2022 of 26.95p (2021:
24.25p) paid on 8 March 2023
|
23,000
|
21,262
|
Special
dividend for the year ended 31 December 2022 of 8.30p (2021: nil)
paid on 8 March 2023
|
7,084
|
-
|
Interim
dividend for the year ended 31 December 2023 of 12.95p (2022:
12.05p) paid on 25 August 2023
|
10,962
|
10,445
|
|
------------
|
------------
|
|
41,046
|
31,707
|
|
------------
|
------------
|
The final
dividend of 28.55p (2022: 26.95p) and special dividend of 9.00p
(2022: 8.30p) for the year ended 31 December 2023 will be paid,
subject to shareholder approval, on 8 March 2024. The final and
special dividends for 2023 and 2022 have not been included as
liabilities in the financial statements.
4.
RETURNS PER ORDINARY SHARE
|
Year
to 31 December 2023
|
Year to 31
December 2022
|
The
returns per Ordinary Share are based on:
Returns
attributable to Ordinary Shareholders
|
£99,044,000
|
£(156,692,000)
|
Weighted
average number of shares in issue during the year
|
84,766,084
|
86,570,115
|
Returns
per Ordinary Share
|
116.84p
|
(181.00)p
|
There are
no dilutive or potentially dilutive shares in issue.
5.
INVESTMENTS AT FAIR VALUE
In
accordance with FRS 102 fair value measurements have been
classified using the fair value hierarchy:
Level 1 -
using unadjusted quoted prices for identical instruments in an
active market;
Level 2 -
using inputs, other than quoted prices included within Level 1,
that are directly or indirectly observable (based on market data);
and
Level 3 -
using inputs that are unobservable (for which market data is
unavailable).
Investments
held as fair value through profit or loss
As
at 31 December 2023
|
Level
1
£’000
|
Level
2
£’000
|
Level
3
£’000
|
Total
£’000
|
Listed
equities
|
1,363,980
|
-
|
-
|
1,363,980
|
Unlisted
equities
|
-
|
-
|
-
|
-
|
|
------------
|
------------
|
------------
|
------------
|
Total
financial asset investments
|
1,363,980
|
-
|
-
|
1,363,980
|
|
------------
|
------------
|
------------
|
------------
|
As at 31
December 2022
|
Level
1
£’000
|
Level
2
£’000
|
Level
3
£’000
|
Total
£’000
|
Listed
equities
|
1,322,261
|
-
|
-
|
1,322,261
|
Unlisted
equities
|
-
|
-
|
-
|
-
|
|
------------
|
------------
|
------------
|
------------
|
Total
financial asset investments
|
1,322,261
|
-
|
-
|
1,322,261
|
|
------------
|
------------
|
------------
|
------------
|
6.
NET ASSET VALUE PER SHARE
The Net
Asset Value per share and the net assets attributable to the
Ordinary Shares at the year end are calculated in accordance with
their entitlements in the Articles of Association and were as
follows.
|
31
December 2023
|
31
December 2022
|
Net assets
attributable
|
£1,297,227,000
|
£1,250,870,000
|
Ordinary
Shares in issue at the end of the year
|
84,414,605
|
85,344,605
|
Net Asset
Value per Ordinary Share
|
1,536.73p
|
1,465.67p
|
7.
SHARE CAPITAL
During the
year, the Company bought back and cancelled 930,000 shares (2022:
2,603,661) at a total cost of £11,641,000 (2022: £33,296,000).
During the period 1 January to 31 January 2024, 30,000 shares have
been bought back for cancellation.
8.
RELATED PARTY TRANSACTIONS
The
Directors have been identified as related parties and their fees
and shareholdings are detailed in the Directors’ Remuneration
Report on pages 40 and 41 of the Annual Report. During the year no
Director was interested in any contract or other matter requiring
disclosure under section 412 of the Companies Act 2006.
9.
Alternative Performance Measures
Alternative
Performance Measures ("APMs") are measures that are not defined by
FRS 102 and FRS 104. The Company believes that APMs, referred to as
‘Key Performance Indicators’ on page 5 of the Annual Report,
provide Shareholders with important information on the Company and
are appropriate for an investment trust company. These APMs are
also a component of reporting to the Board. A glossary of APMs can
be found in the 2023 Annual Report.
10.
FURTHER INFORMATION
The
foregoing do not constitute statutory accounts (as defined in
section 434(3) of the Companies Act 2006) of the Company. The
statutory accounts for the year ended 31 December 2022 which
contained an unqualified Report of the Auditors, have been lodged
with the Registrar of Companies and did not contain a statement
required under section 498(2) or (3) of the Companies Act
2006.
Certain
statements in this announcement are forward looking
statements. By
their nature, forward looking statements involve a number of risks,
uncertainties or assumptions that could cause actual results or
events to differ materially from those expressed or implied by
those statements.
Forward
looking statements regarding past trends or activities should not
be taken as representation that such trends or activities will
continue in the future.
Accordingly,
undue reliance should not be placed on forward looking
statements.
The Annual
Report is expected to be posted to shareholders by 8 February
2024.
Members of
the public may obtain copies from Aberforth Partners LLP, 14
Melville Street, Edinburgh EH3 7NS or from its website:
www.aberforth.co.uk.
CONTACT:
Euan Macdonald or Jeremy Hall, Aberforth Partners LLP, 0131 220
0733
ANNOUNCEMENT
ENDS