TIDMAUSC
RNS Number : 3897K
abrdn UK Smaller Cos. Growth Trust
25 August 2023
abrdn UK Smaller Companies Growth Trust plc
Annual Financial Report for the year ended 30 June 2023
Legal Entity Identifier (LEI): 213800UUKA68SHSJBE37
Investment Objective
To achieve long-term capital growth by investment in UK-quoted
smaller companies
Reference Index
The Company's reference index is the Numis Smaller Companies
plus AIM (ex investment companies) Index.
Website
Up to date information can be found on the Company's website:
abrdnuksmallercompaniesgrowthtrust.co.uk
Performance Highlights and Financial Calendar
Net asset total return(AB) Share price total return(AB)
-7.4% -6.8%
2022 -27.3% 2022 -34.3%
Total dividends per share Discount to net asset value(AB)
11.00p 14.3%
2022 8.10p 2022 14.6%
Revenue return per share Ongoing charges ratio(ABC)
12.44p 0.95%
2022 9.07p 2022 0.82%
(A) Considered to be an Alternative Performance Measure.
(B) A Key Performance Indicator ("KPI").
(C) Calculated in accordance with AIC guidance issued in October 2020
to include the Company's share of costs of holdings in investment companies
on a look-through basis.
Financial Highlights
30 June 2023 30 June 2022 % change
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Capital return
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Total assets GBP451.5m GBP538.6m (16.2%)
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Equity shareholders' funds GBP426.6m GBP498.6m (14.4%)
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Market capitalisation(A) GBP365.7m GBP425.9m (14.1%)
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Net asset value per share 482.95p 530.37p (8.9%)
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Share price 414.00p 453.00p (8.6%)
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Discount to NAV(B) 14.3% 14.6%
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Net gearing(B) 2.5% 5.1%
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Reference index(C) 5,199.92 5,520.20 (5.8%)
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Dividends and earnings
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Revenue return per share(D) 12.44p 9.07p 37.2%
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Total dividends per share(E) 11.00p 8.10p 35.8%
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Operating costs
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Ongoing charges ratio(BF) 0.95% 0.82%
------------------------------------- --------------- --------------- ----------
(A) Represents the number of Ordinary shares in issue in the Company
multiplied by the Company's share price.
(B) Considered to be an Alternative Performance Measure.
(C) Numis Smaller Companies plus AIM (ex investment companies) Index.
(D) Measures the revenue earnings for the year divided by the weighted
average number of Ordinary shares in issue (see Statement of Comprehensive
Income).
(E) The figures for dividend per share reflect the years in which they
were earned (see note 8).
(F) Calculated in accordance with AIC guidance issued in October 2020
to include the Company's share of costs of holdings in investment companies
on a look-through basis.
For further information, please contact:
Stephanie Hocking
Evan Bruce-Gardyne
abrdn Fund Managers Limited
0131 372 2200
Please note that past performance is not necessarily a guide to
the future and that the value of investments and the income from
them may fall as well as rise. Investors may not get back the
amount they originally invested.
Chairman's Statement
Performance
I am disappointed to be reporting to shareholders that in the
year just ended, the Company has extended its period of
underperformance against its benchmark on both a net asset value
("NAV") and share price basis. We are very aware that the effect of
this underperformance, over one, three and five years, is that
anyone who made their initial investment in the Company in the last
five years will most likely have seen a reduction in the value of
their investment. This is clearly an uncomfortable position for
shareholders, and also for those of us who are responsible for the
portfolio and the Company.
For the year ended 30 June 2023, the Company's NAV total return,
calculated on the basis that all dividends received are reinvested
in additional shares, was -7.4%. The share price total return,
calculated on the same basis, was -6.8%. By contrast, the total
return of the Company's reference index, the Numis Smaller
Companies plus AIM (ex investment companies) Index (the "reference
index"), was -2.8%.
The Board and the Manager have discussed the investment strategy
at length over the past couple of years but this year, in addition,
your Board has spent a lot of time considering the root causes of
the underperformance in order to be confident that the Company's
investment thesis remains intact. It also carried out a detailed
review to assess whether the investment process itself is being
robustly implemented.
As a consequence of these reviews, the Board is able to support
the Manager's view that the drivers of current underperformance are
primarily a confluence of external events. These conditions reflect
the weak UK economy, rising inflation and the sequential increases
in interest rates we are experiencing as well as the political
turbulence. These have created a difficult macro environment for
investing in small companies generally, but particularly for the
Manager's investment style, which focuses on Quality, Growth and
Momentum factors - and we believe does so to a greater extent than
any of the peer group companies in the sector. Whereas this favours
the performance of the Company in growth oriented markets, it
creates very challenging conditions in the market conditions we
have seen, which have resulted in periods of rotation and a
continual de-rating of the highly rated growth companies which
typify our portfolio.
Detailed commentary on markets and performance for the year is
contained in the Investment Manager's Review.
Earnings and Dividends
The revenue return per share ("EPS") for the year ended 30 June
2023 was 12.44p (2022: 9.07p). The increase of 37.2% builds on the
41% increase in 2022 and has come from both an increase in the
ordinary dividends received, special dividends of GBP942,000 (7.2%
of investment income), and a material increase in interest income,
as for the first time since 2008 cash balances are delivering a
return. Included in the EPS is the enhancement to earnings of 0.34p
per share (2.8%) as a result of share buy backs undertaken during
the year.
The Board is pleased to announce that this significant increase
in EPS is flowing through to a substantial increase in dividends
for shareholders and it is declaring a final dividend of 8.00p per
share. Together with the interim dividend of 3.00p per share
already paid, the total distribution for the financial year will be
11.00p per share, representing a 35.8% increase on the 8.10p per
share paid last year. This still permits a proportion of earnings
to be transferred to revenue reserves which will help your Company
to withstand any future downturn such as we witnessed in 2020/21
or, indeed, simply manage any reduction in dividend receipts in
future as income receipts from smaller companies are generally more
variable than those of larger companies.
Following the payment of the final dividend, an amount of
approximately 2.0p per share will be transferred to revenue
reserves.
Subject to approval by shareholders at the Annual General
Meeting ("AGM"), the final dividend will be paid on 30 November
2023 to shareholders on the register on 3 November 2023, with an
associated ex-dividend date of 2 November 2023.
Management Fee and Company Secretarial Fee
The Board continually reviews the management fee structure and,
during the year, considered that the existing structure of fees
paid to the Manager made the Company insufficiently competitive
relative to its closest peers. Accordingly, the Board has
negotiated a lower fee structure with the Manager. With effect from
1 July 2023 fees will be 0.75% per annum (previously 0.85%) on the
first GBP175 million (previously GBP250 million) of net assets,
0.65% per annum (unchanged) on net assets between this amount and
GBP550 million (unchanged), and 0.55% per annum (unchanged) on net
assets above GBP550 million (unchanged). In addition, from 1
January 2024 the Manager will no longer charge for the provision of
company secretarial services, saving the Company a further
GBP75,000 (+ VAT) per annum. On a pro-forma basis, based on the NAV
at 30 June 2023, the change would represent a saving in a full year
of around GBP415,000, or approximately 12% of management fee costs.
The Board considers that this makes the fee structure more
competitive when compared to the other similar investment trusts in
the sector.
Ongoing Charges
The ongoing charges ratio ("OCR") for the year ended 30 June
2023 was 0.95% (2022: 0.82%). As I highlighted last year, we
expected that the OCR would increase this year with a fall in the
NAV. In addition, the promotional fee, which is set annually, was
based on a higher NAV. We expect that the OCR in the coming year
will be lower, partly because of the reduction to the fees referred
to above and partly because the promotional fee will be lower.
There will be a further diminution of cost to come following the
Manager's recent decision to discontinue its Share Plan with effect
from the end of the year, as your Company currently contributes to
the marketing and administration of this Plan which accounts for
some 7% of our shareholder base.
Discount Control and Share Buy Backs
At the year end the discount of the share price to the cum
income NAV was 14.3% (2022: 14.6%).
Over the year, the Company bought back almost 5.7 million
shares, equating to 6.0% of its issued share capital, at a total
cost of GBP25.8 million and a weighted average price of 449.7p per
share. The weighted average discount at which the shares were
repurchased was 12.8%. The Board calculates that this has added
4.0p per share to the NAV for remaining shareholders.
The Company has been more active in buying back shares in the
last 12 months than in any previous year since it last undertook a
tender offer in 2015, buying back shares on over 180 days last
year. The increased activity has been caused by the level of the
discount, which has been wider than the 8% target that the Board is
committed to in the long term in normal market conditions.
Given the backdrop has continued to be unfavourable for the UK
smaller companies sector as a whole, evidenced by outflows in the
open ended sector, it is to be expected that we would see the
discount widen as it has across most of our peer group. Whilst the
Board takes sector levels into account when implementing its
discount control mechanism, it remains committed to its long term
target of 8% and will continue to be active in the market when it
believes it to be in the best interests of shareholders.
Full details of the Board's discount control policy can be found
in the Overview of Strategy below.
Gearing
The Board has given the Investment Manager discretion to vary
the level of gearing between 5% net cash and 25% net gearing (at
the time of drawdown). On 1 November 2022 the Company renewed its
loan facility with the Royal Bank of Scotland International, giving
it access to a GBP40 million revolving credit facility ("RCF"),
GBP25 million of which was drawn down at the year end. The gross
level of borrowings was offset by cash and money market funds of
GBP14.4 million resulting in net gearing at 30 June 2023 of 2.5%
(2022: 5.1%).
The Board
After seven years as a Director, Caroline Ramsay has informed
the Board that she does not intend to stand for re-election at the
Company's AGM in November. Consequently, the Board undertook a
search to find a replacement and appointed Manju Malhotra, who
joined the Board on 1 May 2023. Manju is a Chartered Accountant and
it is intended that she will assume the role of Chair of Audit
Committee at the completion of the AGM. On behalf of the Board, I
would like to thank Caroline for her contribution over the last few
years and we wish her well for the future, and to welcome Manju to
the Board. Manju will stand for election at the AGM. This period
has also seen the completion in May of the one year term of the
Company's first Board Apprentice, Jessica Norell Neeson. We thank
Jessica for her pertinent contributions to our discussions and wish
her well in the next stage of her career path.
Annual General Meeting
The Company's AGM will be held at 12 noon on Thursday 23
November 2023 at Wallacespace Spitalfields, 15 Artillery Lane,
London E1 7HA. The meeting will include a presentation from the
Investment Manager and will be followed by a buffet lunch. This is
a good opportunity for shareholders to meet the Board and Manager
and we would encourage you to attend.
Shareholders will be able to submit questions in advance of the
AGM at the following email address:
abrdnuksmallercompaniesgrowthtrust@abrdn.com. Should you be unable
to attend the AGM, the Investment Manager's presentation will be
made available on the Company's website shortly after the meeting.
The results of the AGM will also be published on the website.
In the meantime, the Board strongly encourages all shareholders
to exercise their votes in respect of the AGM in advance of the
meeting, and to appoint the Chairman of the meeting as their proxy,
by completing the enclosed form of proxy form, or letter of
direction for those who hold shares through the abrdn Investment
Trust savings plans. This will ensure that your votes are
registered.
Outlook
The economic challenges that existed during the year seem set to
continue through the current financial year. Although starting to
fall, inflation remains high and interest rates have increased
since the year end, with further increases expected. This will
likely prove again to be a difficult backdrop for investing in
smaller UK companies.
The Board considers the Investment Manager's process to be tried
and tested and it has yielded good results over the past two
decades albeit interspersed with periods of underperformance at
times of market turbulence such as this. Predicting when these
challenging market conditions will change is very difficult and we
must acknowledge the possibility that they may continue for longer
than they have in the past two decades. We must accept that much of
this period was characterised by unprecedented low interest rates
and loose monetary conditions which is no longer the case.
Notwithstanding this uncertainty, company quality and growth
factors should ultimately prove themselves in such an environment,
through resilience and earnings delivery. Share price valuations of
companies with these characteristics remain very attractive in
historic terms, and the Investment Manager believes that this
presents a significant opportunity to investors. The Investment
Manager has seen positive signs across the portfolio, with a strong
reporting season and earnings upgrades for some of our core
positions, even though significant economic challenges remain. If
continued, over time this should lead to an improvement in investor
sentiment to UK equities and the small and mid-cap sector in
particular. In summary, the Board continues to believe that there
are opportunities for your Company to achieve superior returns over
the economic cycle.
Liz Airey
Chairman
24 August 2023
Overview of Strategy
Business
The Company is an investment trust with a premium listing on the
London Stock Exchange.
Investment Objective
The Company's objective is to achieve long-term capital growth
by investment in UK-quoted smaller companies.
Investment Policy
The Company intends to achieve its investment objective by
investing in a diversified portfolio consisting mainly of UK-quoted
smaller companies. The portfolio will normally comprise between
50-60 holdings representing the Investment Manager's highest
conviction investment ideas. In order to reduce risk in the Company
without compromising flexibility, no holding within the portfolio
should exceed 5% of total assets at the time of acquisition.
The Company may use derivatives for portfolio hedging purposes
(i.e. only for the purpose of reducing, transferring or eliminating
the investment risks in its investments in order to protect the
Company's portfolio).
Within the Company's Articles of Association, the maximum level
of gearing is 100% of net assets. The Directors have set parameters
of between 5% net cash and 25% net gearing (at the time of
drawdown) for the level of gearing that can be employed in normal
market conditions. The Directors have delegated responsibility to
the Investment Manager for the operation of the gearing level
within the above parameters.
Board Investment Limits
The Directors have set additional guidelines in order to reduce
the risk borne by the portfolio:
- Companies with a market capitalisation of below GBP50 million
should not represent more than 5% of total assets.
- Companies involved in "Blue Sky" products should not represent
more than 5% of total assets.
- No more than 50% of the portfolio should be invested in
companies that are constituents of the FTSE AIM All-Share
Index.
Investment Process
The Investment Manager's investment process combines asset
allocation, stock selection, portfolio construction, risk
management, and dealing. The investment process has evolved out of
the Investment Manager's 'Focus on Change' philosophy and is led by
Quality, Growth and Momentum. The Investment Manager's stock
selection led investment process involves compiling a shortlist of
potential investments using a proprietary screening tool known as
"The Matrix" which reflects Quality, Growth and Momentum based
factor analysis. The final portfolio is the result of intensive
research and includes face to face meetings with senior management
of these potential investments. This disciplined process has been
employed for many years and has delivered strong long term
performance.
Reference Index
The Company's reference index is the Numis Smaller Companies
plus AIM (ex investment companies) Index.
Delivering the Investment Objective
The Directors are responsible for determining the Company's
investment objective and investment policy. Day-to-day management
of the Company's assets has been delegated, via the Alternative
Investment Fund Manager (the "AIFM"), to the Investment
Manager.
Promoting the Success of the Company
The Board's statement below describes how the Directors have
discharged their duties and responsibilities over the course of the
financial year under section 172 (1) of the Companies Act 2006 and
how they have promoted the success of the Company for the benefit
of the members as a whole.
Key Performance Indicators ("KPIs")
The Board assesses the performance of the Company against the
range of KPIs shown below over a variety of timeframes, but has
particular focus on the long-term, which the Board considers to be
at least five years.
KPI Description
===================================== ===============================================
Net asset value ("NAV") total The Board measures the Company's NAV total
return performance return performance against the total return
of the reference index (the Numis Smaller
Companies plus AIM (ex investment companies)
Index) and its peer group of investment
trusts.
===================================== ===============================================
Share price total return performance The Board measures the Company's share
price total return performance against
the total return of the reference index
and its peer group of investment trusts.
===================================== ===============================================
Discount/premium to NAV The Board compares the discount or premium
of the Ordinary share price to the NAV
per share to the discount of the peer group
and also to the threshold of the Company's
discount target on a rolling 12 month basis.
===================================== ===============================================
Ongoing charges The Board monitors the Company's ongoing
charges ratio against prior years and other
similar sized companies in the peer group.
The Chairman's Statement contains details
of changes to the management fee arrangements
since the end of the year.
===================================== ===============================================
Principal and Emerging Risks and Uncertainties
The Board carries out a regular review of the risk environment
in which the Company operates, changes to the environment and
individual risks. The Board also considers emerging risks which
might affect the Company. During the year, the most significant
risks were, political instability, inflation and increasing
interest rates and the resultant volatility that this has created
in global stock markets. In addition, the conflict in Ukraine has
continued to create geo-political uncertainty which has further
increased market risk and volatility.
There are a number of other risks which, if realised, could have
a material adverse effect on the Company and its financial
condition, performance and prospects. The Board has carried out a
robust assessment of the Company's principal and emerging risks,
which include those that would threaten its business model, future
performance, solvency, liquidity or reputation.
The principal risks and uncertainties faced by the Company are
reviewed by the Audit Committee in the form of a risk matrix and
the Committee also gives consideration to the emerging risks facing
the Company.
The principal risks and uncertainties facing the Company at the
current time, together with a description of the mitigating actions
the Board has taken, are set out in the table below.
In terms of its appetite for risk, the Board has identified what
it considers to be the key risks to which the Company is exposed
and seeks to take a proportionate approach to the control of these
risks. In particular, by considering the likelihood and impact of a
specific risk, if the potential exposure is rated as Critical or
Significant, the Board ensures that significant mitigation is in
place to reduce the likelihood of occurrence whilst recognising
that this may not be possible in all cases.
The principal risks associated with an investment in the
Company's shares are published monthly in the Company's factsheet
and they can be found in the pre-investment disclosure document
("PIDD") published by the Manager, both of which are available on
the Company's website.
Risk Mitigating Action
================================== ==================================================
Strategy - the Company's Through regular updates from the Manager,
objectives or the investment the Board monitors the discount/ premium
trust sector as a whole at which the Company's shares trade relative
become unattractive to to the NAV. It also holds an annual strategy
investors, leading to a meeting and receives feedback from the
fall in demand for the Company's Stockbroker and shareholders
Company's shares. and updates from the Manager's investor
relations team at Board meetings.
================================== ==================================================
Investment performance The Board meets the Manager on a regular
- the appointment or continuing basis and keeps investment performance
appointment of an investment under close review. Representatives of
manager with inadequate the Investment Manager attend all Board
resources, skills or experience, meetings and a detailed formal appraisal
the investment style or of the Manager is carried out by the Management
process being out of favour, Engagement Committee on an annual basis.
or the adoption of inappropriate The Board sets and monitors the investment
strategies in pursuit of restrictions and guidelines and receives
the Company's objectives, regular reports which include performance
could result in poor investment reporting on the implementation of the
performance, a loss of investment policy, the investment process,
value for shareholders ESG matters, risk management and application
and a widening discount. of the investment guidelines.
================================== ==================================================
Key person risk - a change The Board discusses key person risk and
in the key succession planning with the Manager and
personnel involved in Investment Manager on a regular basis.
the investment management The Investment Manager employs a standardised
of the portfolio could investment process for the management
impact of the portfolio. The well-resourced smaller
on future investment performance companies team has grown in size over
and a number of years. These factors mitigate
lead to loss of investor against the impact of the departure of
confidence. any one member of the investment team.
================================== ==================================================
Share price - failure to The Company operates a discount control
manage the discount effectively mechanism and aims to maintain a discount
or an inappropriate marketing level of less than 8% to the cum-income
strategy could lead to NAV under normal market conditions. Details
a fall in the share price of the discount control mechanism are
relative to the NAV per contained in the Overview of Strategy.
share. The Directors undertake a programme of
inviting major shareholders to discuss
issues of governance or strategy with
the Chairman or Senior Independent Director.
In addition, the Company participates
in the Manager's investment trust promotional
programme where the Manager has an annual
programme of meetings with institutional
shareholders and reports back to the Board
on these meetings.
================================== ==================================================
Financial instruments - As stated above, the Board sets investment
insufficient oversight guidelines and restrictions which are
or controls over financial reviewed regularly and the Manager reports
risks, including market on compliance with them at Board meetings.
price risk, liquidity risk Further details of the Company's financial
and credit risk could result instruments and risk management are included
in losses to the Company. in note 16 to the financial statements.
================================== ==================================================
Financial obligations - At each Board meeting, the Board reviews
inadequate controls over management accounts and receives a report
financial record keeping from the Administrator, detailing any
and forecasting, the setting breaches during the period under review.
of an inappropriate gearing The Board sets gearing limits and monitors
strategy or the breaching the level of gearing and compliance with
of loan covenants could the main financial covenants at Board
result in the Company being meetings.
unable to meet its financial The Audit Committee meets representatives
obligations, losses to from the Manager's Compliance and Internal
the Company and impact Audit teams on at least an annual basis
its ability to continue and discusses any findings and recommendations
trading as a going concern. relevant to the Company.
================================== ==================================================
Regulatory - failure to The Board receives updates on relevant
comply with relevant laws changes in regulation from the Manager,
and regulations could result industry bodies and external advisers
in fines, loss of reputation and the Board and Audit Committee monitor
and potential loss of investment compliance with regulations by review
trust status. of checklists and internal control reports
from the Manager. Directors keep up to
date in a variety of ways, including attendance
at training courses and seminars.
================================== ==================================================
Operational - the Company The Audit Committee reviews reports from
is dependent on third parties the Manager on its internal controls and
for the provision of all risk management (including an annual ISAE
systems and services (in Report) and considers assurances from
particular those of the all its other significant service providers
Manager and the Depositary) on at least an annual basis, including
and any control failures on matters relating to business continuity
and gaps in their systems and cyber security. The Audit Committee
and services could result meets representatives from the Manager's
in a loss or damage to Compliance and Internal Audit teams on
the Company. at least an annual basis and discusses
any findings and recommendations relevant
to the Company. Written agreements are
in place with all third party service
providers.
The Manager monitors closely the control
environments and quality of services provided
by third parties, including those of the
Depositary, through service level agreements,
regular meetings and key performance indicators,
and provides periodic updates to the Board
on this work.
A formal appraisal of the Company's main
third party service providers is carried
out by the Management Engagement Committee
on an annual basis.
================================== ==================================================
Geopolitical - the effects Current geopolitical risks include the
of geopolitical instability actions taken by governments in relation
or change could have an to climate change, the conflict in Ukraine
adverse impact on stock and the impact of increased inflation
markets and the value of and interest rates. The Investment Manager's
the Company's investment focus on quality companies, the diversified
portfolio. nature of the portfolio and a
managed level of gearing all serve to
provide a degree of protection in
times of market volatility.
================================== ==================================================
Promotional Activities
The Board recognises the importance of promoting the Company to
prospective investors both for improving liquidity and enhancing
the rating of the Company's shares. The Board believes one
effective way to achieve this is through subscription to, and
participation in, the promotional programme run by the Manager on
behalf of a number of investment trusts under its management. The
Company also supports the Manager's investor relations programme
which involves regional roadshows, promotional and public relations
campaigns. The Manager's promotional and investor relations teams
report to the Board on a quarterly basis giving analysis of the
promotional activities as well as updates on the shareholder
register and any changes in the make-up of that register.
The purpose of the promotional and investor relations programmes
is both to communicate effectively with existing shareholders and
to gain new shareholders, with the aim of improving liquidity and
enhancing the value and rating of the Company's shares.
Communicating the long-term attractions of the Company is key. The
promotional programme includes commissioning independent paid for
research on the Company, most recently from Edison Investment
Research Limited. A copy of the latest research note is available
from the Company's website.
The cost to the Company of participating in these programmes is
matched by the Manager through the provision of the necessary
resources to carry out the marketing and promotional
activities.
Employees and Human Rights
The Company has no employees as the Board has delegated the day
to day management and administrative functions to the Manager.
There are therefore no disclosures to be made in respect of
employees or human rights.
Modern Slavery Act
Due to the nature of its business, being a company that does not
offer goods and services to customers, the Board considers that the
Company is not within the scope of the Modern Slavery Act 2015
because it has no turnover. The Company is therefore not required
to make a slavery and human trafficking statement. In any event,
the Board considers the Company's supply chains, dealing
predominantly with professional advisers and service providers in
the financial services industry, to be low risk in relation to this
matter.
Environmental, Social and Governance ("ESG") Matters
The Board supports the Investment Manager's approach to ESG
considerations which are fully embedded into the investment
process.
The UK Stewardship Code and Proxy Voting
The Company supports the UK Stewardship Code, and seeks to play
its role in supporting good stewardship of the companies in which
it invests. Responsibility for actively monitoring the activities
of portfolio companies has been delegated by the Board to the
Manager which has sub-delegated that authority to the Investment
Manager. abrdn plc is a tier 1 signatory of the UK Stewardship Code
which aims to enhance the quality of engagement by investors with
investee companies in order to improve their socially responsible
performance and the long-term investment return to shareholders.
While delivery of stewardship activities has been delegated to the
Manager, the Board acknowledges its role in setting the tone for
the effective delivery of stewardship on the Company's behalf.
The Board has also given discretionary powers to the Manager to
exercise voting rights on resolutions proposed by the investee
companies within the Company's portfolio. The Manager reports on a
quarterly basis on stewardship (including voting) issues.
Global Greenhouse Gas Emissions
The Company has no greenhouse gas emissions to report from its
operations, nor does it have responsibility for any other emissions
producing sources under the Companies Act 2006 (Strategic Report
and Directors' Reports) Regulations 2013.
Task Force for Climate-Related financial Disclosures
("TCFD")
Under Listing Rule 15.4.29(R), the Company, as a closed ended
investment company, is exempt from complying with the Task Force on
Climate-related Financial Disclosures ("TCFD").
Whilst TCFD is currently not applicable to the Company, the
Manager has produced a product level report on the Company in
accordance with the FCA's rules and guidance regarding the
disclosure of climate-related financial information consistent with
TCFD Recommendations and Recommended Disclosures. These disclosures
are intended to help meet the information needs of market
participants, including institutional clients and consumers of
financial products, in relation to the climate-related impact and
risks of the Manager's TCFD in-scope business. The product level
report on the Company is available on the Manager's website at:
invtrusts.co.uk.
Discount Control Policy
The Board operates a discount control mechanism which targets a
maximum discount of the share price to the cum-income net asset
value of 8% under normal market conditions. In pursuit of this
objective, the Board closely monitors the level of the discount and
buys back shares in the market when it believes it is in the best
interests of shareholders as a whole to do so. At each Annual
General Meeting, the Board seeks shareholder approval to buy back
up to 14.99% of the Company's share capital. Share buy-backs will
only be made where the Board believes it to be in the best
interests of shareholders as a whole and the making and timing of
share buy-backs will be at the discretion of the Board.
The Board considers that, given the backdrop has continued to be
unfavourable for the UK smaller companies sector as a whole,
evidenced by outflows in the open ended sector, it is to be
expected that the Company's discount would widen as it has across
most of the peer group. Whilst the Board takes sector levels into
account when implementing its discount control mechanism, it
remains committed to its long term target of 8% and will continue
to be active in the market when it believes it to be in the best
interests of shareholders.
The Company has a tender offer mechanism in place and the Board
intends to continue to seek shareholder approval at each Annual
General Meeting to enable it to carry out tender offers on a
discretionary basis in circumstances where the Board believes that
share buy-backs are not sufficient to maintain the discount at an
appropriate level, although it expects that buy-backs should be the
primary mechanism for managing the discount.
Viability Statement
The Board considers that the Company, which does not have a
fixed life, is a long-term investment vehicle and, for the purposes
of this statement, has decided that five years is an appropriate
period over which to consider its viability. The Board considers
that this period reflects a balance between looking out over a
long-term horizon and the inherent uncertainties of looking out
further than
five years.
Taking into account the Company's current financial position and
the potential impact of its principal risks and uncertainties, the
Directors have a reasonable expectation that the Company will be
able to continue in operation and meet its liabilities as they fall
due for a period of five years from the date of this Report.
In assessing the viability of the Company over the review
period, the Directors have focused upon the following factors:
- The principal risks and uncertainties detailed above and the
steps taken to mitigate these risks, together with the emerging
risks identified by the Board.
- The Company is invested in listed securities that are
readily-realisable in normal market conditions and there is a
spread of investments held.
- The Company is closed ended in nature and therefore it is not
required to sell investments when shareholders wish to sell their
shares.
- The Company's long-term performance record.
- The Company's level of gearing. The Company had net gearing of
2.5% as at 30 June 2023. The Company has a GBP40 million unsecured
loan facility agreement with The Royal Bank of Scotland
International Limited which expires on 1 November 2025. The Board
has set overall limits for borrowing and reviews regularly the
Company's level of gearing, cash flow projections and compliance
with banking covenants. The Board has also performed stress testing
and liquidity analysis. In the event that the facility is not
refinanced, there is considered to be sufficient portfolio
liquidity to enable borrowings to be repaid.
- The Company has cash and money market funds which at 30 June
2023 amounted to GBP14.4 million. These balances allow the Company
to meet liabilities as they fall due.
- The level of ongoing charges (the Chairman's Statement
contains details of changes to the management fee arrangements
since the end of the year).
- There are no capital commitments currently foreseen that would alter the Board's view.
- The robustness of the operations of the Company's third party service suppliers.
The Directors have also reviewed the revenue and ongoing
expenses forecasts for the coming year and considered the Company's
Statement of Financial Position as at 30 June 2023 which shows net
current liabilities of GBP11.8 million at that date, and do not
consider this to be a concern due to the liquidity of the portfolio
which would enable the Company to meet any short term liabilities
if required.
In assessing the Company's future viability, the Board has
assumed that shareholders will wish to continue to have exposure to
the Company's activities in the form of a closed ended entity and
the Company will continue to have access to sufficient capital.
In making its assessment, the Board is also aware that there are
other matters that could have an impact on the Company's prospects
or viability in the future, including the conflict in Ukraine,
economic shocks or significant stock market volatility caused by
other factors, and changes in regulation or investor sentiment.
Future Strategy
The Board intends to maintain the strategic direction set out in
the Strategic Report for the year ending 30 June 2024 as it
believes that this is in the best interests of shareholders.
On behalf of the Board
Liz Airey
Chairman
24 August 2023
Promoting the Success of the Company
Introduction
Section 172 (1) of the Companies Act 2006 (the "Act") requires
each Director to act in the way he/she considers, in good faith,
would be most likely to promote the success of the Company for the
benefit of its members as a whole.
The Board is required to describe to the Company's shareholders
how the Directors have discharged their duties and responsibilities
over the course of the financial year under that provision of the
Act (the "Section 172 Statement"). This statement provides an
explanation of how the Directors have promoted the success of the
Company for the benefit of its members as a whole, taking into
account, among other things, the likely long-term consequences of
decisions, the need to foster relationships with all stakeholders
and the impact of the Company's operations on the environment.
The Purpose of the Company and Role of the Board
The purpose of the Company is to act as an investment vehicle to
provide, over time, financial returns (both income and capital) to
its shareholders. Investment trusts, such as the Company, are
long-term investment vehicles and are typically externally managed,
have no employees, and are overseen by an independent non-executive
board of directors.
The Board, which at the end of the year, comprised six
independent non-executive Directors with a broad range of skills
and experience across all major functions that affect the Company,
retains responsibility for taking all decisions relating to the
Company's investment objective and policy, gearing, corporate
governance and strategy, and for monitoring the performance of the
Company's service providers.
The Board's philosophy is that the Company should operate in a
transparent culture where all parties are treated with respect and
provided with the opportunity to offer practical challenge and
participate in positive debate which is focused on the aim of
achieving the expectations of shareholders and other stakeholders
alike. The Board reviews the culture and manner in which the
Manager and Investment Manager operate at its meetings and receives
regular reporting and feedback from the other key service
providers. The Board is very conscious of the ways it promotes the
Company's culture and ensures as part of its regular oversight that
the integrity of the Company's affairs is foremost in the way that
the activities are managed and promoted. The Board works very
closely with the Manager and Investment Manager in reviewing how
stakeholder issues are handled, ensuring good governance and
responsibility in managing the Company's affairs, as well as
visibility and openness in how the affairs are conducted.
The Company's main stakeholders have been identified as its
shareholders, the Manager (and Investment Manager), service
providers, investee companies, debt providers and, more broadly,
the environment and community at large.
How the Board Engages with Stakeholders
The Board considers its stakeholders at Board meetings and
receives feedback on the Manager's interactions with them.
Stakeholder How We Engage
========================== ============================================================
Shareholders Shareholders are key stakeholders and the Board
places great importance on communication with
them. The Board welcomes all shareholders' views
and aims to act fairly to all shareholders. The
Manager and Company's Stockbroker regularly meet
with current and prospective shareholders to discuss
performance and shareholder feedback is discussed
by the Directors at Board meetings. In addition,
Directors meet shareholders at the Annual General
Meeting and the Chairman offers to meet with the
Company's larger shareholders to discuss their
views.
The Company subscribes to the Manager's investor
relations programme in order to maintain communication
channels with the Company's shareholder base.
Regular updates are provided to shareholders through
the Annual Report, Half Yearly Report, monthly
factsheets, Company announcements, including daily
net asset value announcements, and the Company's
website.
The Company's Annual General Meeting provides
a forum, both formal and informal, for shareholders
to meet and discuss issues with the Directors
and Manager. The Board encourages as many shareholders
as possible to attend the Company's Annual General
Meeting and to provide feedback on the Company.
========================== ============================================================
Manager (and Investment The Investment Manager's Review details the key
Manager) investment decisions taken during the year. The
Investment Manager has continued to manage the
portfolio and other assets in accordance with
the mandate agreed with the Company, with oversight
provided by the Board.
The Board regularly reviews the Company's performance
against its investment objective and the Board
undertakes an annual strategy review meeting to
ensure that the Company is positioned well for
the future delivery of its objective for its stakeholders.
The Board receives presentations from the Investment
Manager at every Board meeting to help it to exercise
effective oversight of the Investment Manager
and the Company's strategy.
The Board, through the Management Engagement Committee,
formally reviews the performance of the Manager
at least annually.
========================== ============================================================
Service Providers The Board seeks to maintain constructive relationships
with the Company's service providers either directly
or through the Manager with regular communications
and meetings.
The Management Engagement Committee conducts an
annual review of the performance, terms and conditions
of the Company's main service providers to ensure
they are performing in line with Board expectations,
carrying out their responsibilities and providing
value
for money.
========================== ============================================================
Investee Companies Responsibility for monitoring the activities of
portfolio companies has been delegated by the
Board to the Manager which has sub-delegated that
authority to the Investment Manager.
The Board has also given discretionary powers
to the Manager to exercise voting rights on resolutions
proposed by the investee companies within the
Company's portfolio. The Manager reports on a
quarterly basis on stewardship (including voting)
issues.
Through engagement and exercising voting rights,
the Investment Manager actively works with companies
to improve corporate standards, transparency and
accountability.
The Board monitors investments made and divested
and questions the rationale for investment and
voting decisions made.
========================== ============================================================
Debt Providers On behalf of the Company, the Manager maintains
a positive working relationship with The Royal
Bank of Scotland International Limited, the provider
of the Company's loan facility, and provides regular
updates on business activity and compliance with
its loan covenants.
========================== ============================================================
Environment and Community The Board and Manager are committed to investing
in a responsible manner and the Investment Manager
embeds Environmental, Social and Governance ("ESG")
considerations into its research and analysis
as part of the investment decision-making process.
========================== ============================================================
Specific Examples of Stakeholder Consideration During the
Year
While the importance of giving due consideration to the
Company's stakeholders is not a new requirement, and is considered
during every significant Board decision, the Directors were
particularly mindful of stakeholder considerations as part of the
following decisions made during the year ended 30 June 2023. Each
of these decisions was made after taking into account the short and
long-term benefits for stakeholders.
Portfolio and Investment Performance
The Investment Manager's Review details the key investment
decisions taken during the year. The overall shape and structure of
the investment portfolio is an important factor in delivering the
Company's stated investment objective and is reviewed at every
Board meeting.
As explained in more detail in the Chairman's Statement, the
Board and Manager have discussed the investment strategy at length
over the past couple of years but during the year, in addition, the
Board spent time considering the root causes of the Company's
underperformance in order to be confident that the investment
thesis remained intact. It also carried out a detailed review to
assess whether the investment process itself was being robustly
implemented.
As a consequence of these reviews, the Board was able to support
the Investment Manager's view that the drivers of current
underperformance are primarily a confluence of external events
which have created a difficult macro environment for investing in
small companies generally, but particularly for the Investment
Manager's investment style, which focuses on Quality, Growth and
Momentum factors - and the Board believes does so to a greater
extent than any of its peer group companies in the sector. Whereas
this favours the performance of the Company in growth oriented
markets, it creates very challenging conditions in the market
conditions seen recently, which have resulted in periods of
rotation and a continual de-rating of the highly rated growth
companies which typify the portfolio.
During the year the Management Engagement Committee decided that
the continuing appointment of the Manager is in the best interests
of shareholders.
Management Fee
As explained in the Chairman Statement, during the year, the
Board considered that the existing structure of fees paid to the
Manager made the Company insufficiently competitive relative to its
closest peers. Accordingly, the Board negotiated a lower fee
structure with the Manager which the Board considers is more
competitive when compared to the other similar investment trusts in
the sector.
Dividends
The Board is recommending payment of a final dividend for the
year of 8.00p per Ordinary share. Following payment of the final
dividend, total dividends for the year will amount to 11.00p per
Ordinary share, an increase of 35.8% compared to the previous year.
Although the Company has a capital growth objective, the Board
recognises the importance of dividends to shareholders.
Share Buy Backs
In accordance with the discount control policy included in the
Overview of Strategy, during the year the Company bought back
5,682,136 Ordinary shares to be held in treasury, providing a small
accretion to the NAV per share and a degree of liquidity to the
market at times when the discount to the NAV per share has widened
in normal market conditions. It is the view of the Board that this
policy is in the interest of all shareholders.
Renewal of Bank Loan
On 1 November 2022 the Company renewed its loan facility with
the Royal Bank of Scotland International, giving it access to a
GBP40 million revolving credit facility ("RCF"), GBP25 million of
which was drawn down at the year end. The gross level of borrowings
was offset by cash and money market funds of GBP14.6 million
resulting in net gearing at 30 June 2023 of 2.5% (2022: 5.1%).
The Board continues to believe that gearing is beneficial to
long term net asset value returns and is one of the benefits of the
closed ended investment trust structure.
Consumer Duty
During the year, the FCA's Consumer Duty Regulations came into
effect, introducing new rules for FCA regulated firms which
manufacture or distribute products and services to retail
customers. The Consumer Duty rules do not apply to the Company but
do apply to the Manager,
The Board has reviewed the methodology employed by the Manager
to assess value of the Company under the Consumer Duty regulations
and will review the Manager's assessment of value an ongoing
basis.
Board Succession
As explained in the Directors' Report, a fter seven years as a
Director, Caroline Ramsay has informed the Board that she does not
intend to stand for re-election at the Company's Annual General
Meeting in November. Consequently, following a formal recruitment
process, the Board decided to appoint Ms Manju Malhotra as an
independent Director on 1 May 2023. New Board appointments seek to
achieve a good balance of skills, experience, gender and
ethnicity.
The Board believes that shareholders' interests are best served
by ensuring a smooth and orderly refreshment of the Board which
serves to provide continuity and maintain the Board's open and
collegiate style.
On behalf of the Board
Liz Airey
Chairman
24 August 2023
Performance
Performance (total return)
1 year return 3 years 5 years 10 years
return return return
% % % %
=================================== ============= ======= ======= ========
Net asset value(AB) -7.4 -4.4 -6.1 +98.9
=================================== ============= ======= ======= ========
Share price(B) -6.8 -10.1 -10.4 +72.9
=================================== ============= ======= ======= ========
Reference Index -2.8 +19.9 -0.7 +72.4
=================================== ============= ======= ======= ========
Peer Group weighted average (NAV) +1.0 +24.5 +3.3 +107.3
=================================== ============= ======= ======= ========
Peer Group weighted average (share
price) +1.4 +20.1 -0.4 +113.3
----------------------------------- ------------- ------- ------- --------
(A) Cum-income NAV with debt at fair value.
(B) Considered to be an Alternative Performance Measure.
Source: Morningstar
Ten Year Financial Record
Year to 30 June 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
================================= ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Per Ordinary share (p)
================================= ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Net revenue return 5.05 6.76 6.76 6.42 7.24 8.80 6.74 6.43 9.07 12.44
================================= ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ordinary dividends paid/proposed 4.50 5.80 6.60 6.70 7.00 7.70 7.70 7.70 8.10 11.00
================================= ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Net asset value(A) 298.92 336.89 345.43 456.60 552.93 539.54 527.73 737.97 530.37 482.95
================================= ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Share price 281.25 300.00 316.00 431.00 500.00 491.50 482.00 698.00 453.00 414.00
================================= ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Discount(%)(A) 5.9 10.9 8.5 5.6 9.6 8.9 8.7 5.4 14.6 14.3
================================= ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ongoing charges ratio
(%)(B) 1.19 1.19 1.13 1.08 1.04 0.90 0.91 0.88 0.82 0.95
================================= ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Gearing ratio (%)(C) (4.6) 4.1 3.6 1.7 3.6 1.5 (0.3) 5.7 5.1 2.5
================================= ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Shareholders' funds (GBPm)(D) 219 243 241 324 408 543 528 728 499 427
================================= ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Revenue reserves (GBPm)(E) 4.34 5.83 6.50 6.26 8.30 10.87 8.80 7.53 8.81 12.47
================================= ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
(A) Calculated with debt at par value and diluted for the effect of
Convertible Unsecured Loan Stock conversion from 01 July 2013 until
30 June 2017. From 30 June 2018, net asset value is calculated with
debt at par value.
(B) Calculated as an average of shareholders' funds throughout the
year and in accordance with updated AIC guidance issued in October
2020, to include the Company's share of costs of holdings in investment
companies on a look-through basis.
(C) Net gearing ratio calculated as debt less cash invested in AAA-rated
money market funds and short-term deposits divided by net assets at
the year end.
(D) Increase in 2018 included the effect of the merger with Dunedin
Smaller Companies Investment Trust PLC.
(E) Revenue reserves are reported prior to paying the final dividend
for the year.
Investment Manager's Review
The net asset value ("NAV") total return for the Company for the
year ended 30 June 2023 was -7.4%, while the share price total
return was -6.8%. By comparison, the UK smaller companies sector as
represented by the Numis Smaller Companies plus AIM (ex investment
companies) Index (the "reference index") delivered a total return
of -2.8%.
Equity Markets
During the year under review, markets were volatile and top down
driven, with the dominating narrative one of persistent inflation
and higher interest rates. Against this backdrop, bottom-up company
fundamentals have come second. Whilst the portfolio holdings have
been delivering well fundamentally, that has often not been
reflected in share prices.
The UK stock market, as represented by the FTSE All-Share Index,
gained a small amount of ground over the period, with a total
return of 7.9%. The FTSE 100 Index outperformed the FTSE 250 Index
(excluding investment companies), the latter of which generated a
total return of only 1.9%. Investors have remained cautious around
the UK economic picture, which has challenged the more domestically
focused small and mid-cap areas of the market.
The period was dominated by high inflation, rising interest
rates and fears of a sustained economic downturn. Inflation drivers
included the war in Ukraine as well as unsettled supply chains post
Covid. Political uncertainty in the UK did little to reduce
share-price volatility, with Boris Johnson's resignation as Prime
Minister in July and the tax-cutting strategy unveiled by his
successor Liz Truss in September adding to market turbulence.
Inflation reached 10.1% in July, and the Bank of England ("BoE")
warned that price rises could accelerate in the autumn as a result
of higher energy costs. The BoE continued to tighten monetary
policy by raising interest rates to combat inflation. Through late
2022, data showed successive falls in output in the UK
manufacturing sector, while retail spending weakened, and we saw a
sharp rise in mortgage rates.
In the aftermath of the disastrous mini-Budget presented by new
prime minister Liz Truss and her chancellor Kwasi Kwarteng at the
end of September, Truss was forced to sack Kwarteng, reverse her
tax-cutting policies and finally resign, to be replaced by Rishi
Sunak. These developments were welcomed by markets.
UK small and mid-cap equities enjoyed a positive final quarter
of calendar year 2022 as hopes rose that inflation had peaked and
central banks would soon slow the pace of monetary-policy
tightening. However, there remained significant difficulties and
recession risk for the UK economy. The mid-cap FTSE 250 Index rose
by 10.6% in the final quarter of 2022, reversing some of the heavy
losses seen earlier in the year, whilst the FTSE Small Cap Index
returned 8.9%. Officials said rates would continue to increase
until inflation was significantly closer to the 2% long-term
target, regardless of the short-term economic impact. Late 2022
also saw many industries battling with supply chain challenges, a
result of Covid shutdowns combining with increasing re-opening
demand. This provided many challenges for companies and was a
contributor to the inflationary pressures. As we turned into 2023,
many of the supply shortages and logistics challenges had eased -
one less headache for companies to try to navigate.
The turn of the year saw the strongest surprises coming through
in consumer-exposed companies; consumer spending proving more
resilient than expected. The fear of a tough two year recession
outlined by the BoE appeared behind us for now. Hopes rose that the
pace of interest rate rises would start to slow, while indicators
suggested the economy would avoid falling into recession.
Disappointingly, inflation remaining stubbornly high. March saw the
collapse of Silicon Valley Bank and a loss of confidence in Credit
Suisse sparked fears about the resilience of the global financial
system. Trading conditions in a number of sectors remained
challenging. Mortgage lending declined to its lowest level since
2016 in February, while in March house prices recorded their
steepest falls since 2009, a sharp reminder of the broad global
challenges.
However, with UK inflation remaining high and above other major
geographies, and interest rates continuing to increase, UK share
prices lagged major markets in Europe and North America. The big
question globally, but particularly in the UK, with GDP numbers
proving more resilient than many thought, is whether we get a
recession or not.
Performance
Overall through the year, the net asset value ("NAV") fell by
7.4% on a total return basis, underperforming the reference index
total return of -2.8%.
We had hoped for a more stable backdrop for the period, yet the
dominating market narrative has been one of UK inflation that
requires the BoE to increase interest rates. Through the period,
policymakers still expected inflation to be benign and central
banks to increase rates slowly. This, however, proved to be too
complacent as the UK suffered from high persistent inflation and
this changed the trajectory of interest rates. Inflation injects
uncertainty into stock markets, affecting investor confidence.
Value stocks typically have strong current cash flows which are
more likely to grow slowly or diminish over time, while growth
stocks are likely to represent fast growing companies that have
stronger cash flows in the future. When valuing companies' share
prices using the discounted cash flow method in times of rising
interest rates, growth stocks are hit harder by this effect than
value stocks, This has placed our Quality, Growth and Momentum
process out of favour.
Our quality focus has ensured that we have invested in companies
which have had supportive earnings and resilience. These companies
have also demonstrated pricing power with the ability to protect
margins. The portfolio has not been entirely immune from macro
shocks, but we have seen the overall resilience and growth
delivering robust dividend payments.
The final quarter of 2022 saw UK markets rebound sharply, and
the portfolio outperformed the reference index. That rally come
earlier than many would have expected, given the recession outlook.
We believe this highlighted the attractive valuations those growth
businesses are trading on, combined with the resilient earnings
growth they continue to provide.
Early 2023 saw market relief as consumers appeared resilient in
the face of the cost of living squeeze. This drove the market to
focus less on quality, and cheaper rated and more cyclical
companies performed well, proving a more difficult start to the
calendar year for the Company. As we moved through the remainder of
the financial year, macro top down influences continued to drive
the direction of the markets, however we have felt more comfortable
with the degree of rationalism in share price moves, and the focus
towards company fundamentals. Whilst the market remains wary of
companies which are trading at high valuations relative to their
history, we have seen overall less of a value bias to the market in
recent months, and we are seeing more importance placed back on
factors such as earnings revisions.
The five leading positive contributors to relative performance
during the year were as follows:
- 4imprint 198bps (shares +106%) delivered strong results
through the year exceeding expectations on many occasions, and also
providing strong dividend growth and a special dividend. Whilst
benefitting from increased face to face interactions at events
driving promotional product usage, self-help growth has been
enabled through spend on marketing in a highly fragmented market,
capturing market share and new repeat customers.
- Games Workshop 135bps (shares +60%) has delivered strong
growth despite consumer spending challenges globally. Its continued
investment in new product innovation and community engagement is
paying off, resulting in dividend increases and strong returns for
shareholders again this year. The shares were also supported by the
announcement of Amazon taking a license for Warhammer for TV
production.
- Diploma 99bps (shares +33%) traded well through the year,
proving itself as a quality industrial company. To complement
organic growth, it has also completed attractive bolt on
acquisitions, such as the TIE deal which was partly funded through
an equity raise.
- Kainos 95bps (shares + 11%) has successfully navigated the
macroeconomic environment this year, delivering consistent growth
and pricing power to offset wage inflation. Its customer base is
sticky, and digitisation spend remains a priority for corporates.
With the departure of long term respected CEO Brendan Mooney, it
has also demonstrated strong succession planning.
- discoverIE 88bps (shares + 27%) has proved another quality
industrial business, trading strongly through the year. It has
proactively chosen exposures to regulatory and structurally growing
areas, and with products being designed into its customers'
solutions, this provides stickiness of revenue and resultant
visibility of earnings. In addition, it has complemented organic
growth through bolt on acquisitions.
The five worst contributors to relative performance during the
year were as follows:
- Focusrite -130bp (shares -57%) the shares have struggled this
year, partly as a normalisation of Covid spending has impacted
demand for the company's products. It navigated supply chain issues
early in the year and continued to invest in new product solutions
to drive demand.
- Hilton Food -111bps (shares -38%) the shares suffered from a
short term inability to pass on all input cost inflation in the
fish division of the business. This was successfully navigated
within a few months, and in the second half of the period the
company traded strongly and also announced interesting new customer
wins.
- Future -106bps (shares -60%) the shares suffered from a lower
advertising spend environment, as well as concerns on consumer
spend softening. The CEO also announced her intention to leave the
company, which created more market uncertainty over the outlook for
the business.
- Mortgage Advice Bureau -99bps (shares -33%) was a casualty of
the Truss mini budget, driving interest rates up and causing
activity on housing and mortgages to fall sharply. Whilst activity
levels and its shares recovered in early 2023, they are still below
previous levels, and more recent mortgage rate increases will be
challenging in the short term. Over the medium term this remains a
very strong business, taking market share and with many levers for
growth.
- Marshalls -85bps (shares -46%) has suffered from reduced
activity in residential refurbishment and improvement work, as well
as lower new build housing activity. The commercial and
infrastructure side of the business has remained more resilient,
and the management team has taken cost and restructuring action to
support the business against the macro-economic challenges
currently being faced.
Dealing and Activity
Portfolio turnover was around 15%, which represents an average
holding period of almost seven years and is not out of line with
previous periods. Over the year, we added eight new positions, and
exited eleven holdings. There were no IPO participations this
period, in a quiet year in the markets for IPO activity.
We initiated positions in some holdings which have been held
historically in the portfolio. Ricardo has transformed its
business, now positioned as a leader in environmental and
engineering consultancy; working with governments, agencies and
corporates to implement sustainability agendas and strategies.
Paragon Banking is a specialist lender, with a focus on buy-to-let
markets in the UK. The business has demonstrated strong credit
quality through the years, and with a strong retail funding model
and capital support, it continues to take market share as a
specialist, particularly in the professional landlord arena. Smart
Metering Systems has two key divisions; household smart meters
which provide long term visible and inflation linked revenue
streams, along with the new exposure to battery storage in grid
networks - an attractive return and growth exposure for the
business. FDM Group is a specialist at recruiting, training and
deploying IT and business professionals, operating globally.
Craneware is a technology specialist operating in
the US healthcare market, focused on financial and operational
optimisation for hospitals. Coats is a global leader in thread
production, with exposure to apparel, footwear and specialty
markets. One key growth area for its business is its leading
position in sustainable thread, a product increasingly in demand as
industries move towards more sustainable production. Alpha Group
(previously called Alpha FX) is another business which has expanded
into interesting adjacent markets; now half fintech, half
consultancy. Whilst its FX (foreign exchange) risk management
business for corporates has gone from strength to strength, it has
also expanded into banking solutions for alternative asset
managers, and the corporate services and fund administration
companies that support them. Spirent is a leading provider of
automated testing and assurance solutions for networks, security
and positioning.
Key tops up in the period included the position in Volution (
leading supplier of ventilation products, with global exposure),
CVS (vet practices across the UK), and Serica Energy (North Sea gas
and oil producer). We also added to 4imprint (US promotional
products), Games Workshop (hobby business with Warhammer IP),
YouGov (data services business for market research), Gamma
Communications (telecommunication and services provider for
businesses), Midwich (audio visual value added reseller), Treatt
(natural flavours and fragrances), and Tatton Asset Management (a
leading provider to the UK's IFA community, including through
strong growth in its MPS (managed portfolio services)
offering).
Key reductions to positions were in companies across a range of
sectors. We trimmed the position in Kainos where the valuation of
the business left demanding earnings upgrades required, and the
environment has got tougher in some areas such as the NHS. Watches
of Switzerland showed resilient demand and order books, but some
weakness in its jewellery exposure, and we were conscious that the
market was looking to derate this business given consumer concern.
We also reduced the holding in Alpha Financial Markets but remain
very positive on the outlook and growth of this business. GB Group
was challenged by earnings downgrades from the normalisation in
cryptocurrency markets. Telecom Plus is a resilient revenue stream
business, but its valuation had increased considerably prior to the
period, and some market headwinds were increasing. We controlled
the position size in Diploma , which continued to deliver strong
results, but whose market capitalisation is now quite large. Real
Estate was a sector where we trimmed holdings in Safestore and
Sirius Real Estate , with the macro environment more challenging,
particularly with higher interest rates.
We exited a number of positions over the period, where we no
longer felt a high level of conviction in the investment cases.
Watkin Jones suffered from the mini budget crisis, which
highlighted the lumpiness of the business and the potential macro
driven risks. Hotel Chocolat struggled as consumer weakness in the
UK, combined with continued Covid disruption in its new market of
Japan, meant the revenue weakness drove earnings downgrades, all at
the same time as capacity expansion across the manufacturing base.
That consumer weakness was a concern across a few of the exits;
Moonpig where we felt it made the likelihood of increasing the gift
attach rate to orders harder to progress, Gear4Music which had
benefitted a lot from the shift to ecommerce during Covid, which
was then normalising, Inspecs where we had started to see
discretionary spend cause weakness in the demand for glasses, and
Jet2 where the cost-of-living crisis presented challenges to the
security of demand and the ability to pass on inflationary cost
pressures. Molten Ventures struggled with its share price falling,
reflecting the concern of investors that the pricing of private
assets falling given market conditions wasn't being reflected in
the listed market. In the case of Gooch and Housego, supply chain
and inflationary pressures were challenging, as well as the need to
invest in the business, driving earnings downgrades. With Big
Yellow we felt the environment for the business was more
challenging, combined with the pressures from higher interest
rates. Alliance Pharma's shares were challenged by Covid-related
Chinese issues, as well as a historic investigation into the CEO.
Lastly, we exited the holding in Intermediate Capital , a company
which has done very well for the portfolio over the years but is
really now a large company, where the macro environment presented
some challenges.
Discount
As at 30 June 2023, the cum-income discount to NAV stood at
14.3%. The simple average discount for the close peers as a whole
was 13.6%. Whilst we have been disappointed with the steeper
discount, it has not been out of line with the sector. The discount
is more or less unchanged from where it was this time last year.
The width of the discount is indicative of the issue where UK
domestic companies are out of favour with investors as the Company
has been active in buying back shares throughout the period.
Gearing
The level of gearing (net of cash) at 30 June 2023 was 2.5%.
Gearing was reduced in late 2022, repaying GBP15 million of the
GBP40 million previously drawn down under the loan facility. We
remain positive on the medium to long-term potential of the asset
class and would consider increasing gearing at an appropriate point
dependent on macro-economic conditions. We have continued to hold
cash in the portfolio due to market uncertainty and to ensure we
can participate in market opportunities and are not liquidity
constrained.
Revenue Account
Dividend income generated by the portfolio increased by 18.5%
over the year. At the same time, the increase in base rates has had
a knock-on effect on the interest income generated on cash balances
held by the company. After 10 years of virtually nil returns on
cash, we received GBP526,000 in interest income during the
year.
The dividend outlook of the Company, seen through its income
generation from the underlying holdings, has remained strong. We
were pleased with the resilience seen through the challenging Covid
period, and the income generation from companies has continued to
strengthen. The earnings resilience and growth being delivered by
the companies in the portfolio is being reflected in the dividend
growth they are providing. Despite tricky macro-economic
conditions, which often temper the wording in company outlook
statements, the strong dividend payments from the portfolio
companies have been a real sign of the underlying confidence of
management teams. The ability to deliver these dividend returns to
shareholders has been supported by balance sheet strength.
There are currently eight holdings in the portfolio which we
don't expect to be dividend payers in the near future, currently
re-investing back into their businesses to drive growth; Auction
Technology, Big Technologies, Ergomed, LBG Media, Marlowe ,
Motorpoint , Team17 and Watches of Switzerland . We have seen
special dividends from three holdings this year; Bytes Technology ,
Hollywood Bowl and 4imprint , which in aggregate amounted to
GBP942,000 or 7.2% of investment income.
Outlook
Stock markets continue to be dominated by macro conditions,
predominantly the pathway of inflation and interest rates,
globally. The UK appears to be showing stickier inflation than many
other key markets. Whilst energy prices have stepped back, we are
seeing areas such as food inflation in the UK remain at high
levels, and wage inflation and a strong labour market continue to
support consumer spending. Without a recession, there remains the
challenge of how inflation gets controlled; interest rates having
already been increased significantly, but often taking some time to
have an impact. UK valuations have derated significantly and are at
attractive levels relative to other regions, providing an
opportunity for investors to look at the value inherent in the UK
market. If UK inflation reduces to a lower level, comparable to the
Eurozone and the US, this could drive UK markets to recover and
refocus on company fundamentals. Falling inflation could be that
catalyst for our style to perform better and cause flows to shift
into the UK market.
We'd also remind investors of the geographic exposures of the
portfolio companies' revenues. At the time of writing, 51% of
revenues are generated in the UK, with 49% overseas. This is not
too far away from the exposure within the reference index. Many of
the companies in the portfolio, as has been true through time and a
result also of our investment process, have strong international
growth exposure. Some are global leaders in what they do. Whilst
overseas exposure is a positive factor, given healthier economic
outlooks in some geographies, and diversification benefits, we are
mindful of recent Sterling strength which may cause some currency
headwinds for overseas exposures.
In a recession, or low economic growth environment, we believe
the market will look towards resilience, reliability, visible
revenue streams and strong balance sheets. We've seen these
characteristics fundamentally demonstrated by the portfolio
companies over this period, clear also through the dividend
strength delivered. Where economic growth becomes scarcer,
companies which continue to generate strong growth will be rarer
assets. Our ability to identify companies which can deliver
sustained earnings growth in that environment should be rewarded,
and we believe even the last 18 months of challenging market times
has shown evidence of our judgement on the fundamental performance
of the investee companies.
In a period of more positivity in markets, small and mid-cap
stocks tend to lead, and the outlook for the asset class should be
attractive. Small and mid-caps in the UK have lagged large
companies in the market moves since the start of 2022.
We continue to believe there are opportunities for businesses
which deliver well on earnings expectations, to outperform, with
many currently trading on undemanding valuations. The valuations
currently being paid for growth companies in UK small mid-cap
markets remain significantly below historic levels, whereas in
other regions the market is now paying a 10 year median valuation
for growth businesses again. We therefore believe there is a
re-rating opportunity.
Since our appointment as Investment Manager in 2003, including
the current downturn, there have been falls in the market of over
40% on three occasions. Markets anticipate improvements, and indeed
turning points in the past have always been when the outlook is
bleakest. In the UK small and mid-caps sector, the turn of the
calendar year looks to have seen the direction of earnings
revisions change positively. This isn't out of line with previous
market rotations where, on average, markets start to recover a few
months before the turn in earnings. We take this as a positive
indicator of market direction, although the risks of recession
still remain given the macro-economic c hallenges.
The Company's discount to NAV is at a level not seen since 2009,
with both the UK Small Cap sector being out of favour with
investors, as well as disappointing underperformance by the Company
this year, particularly driven by our style of investment not being
favoured in a period where Value has been in focus.
Smaller company markets have higher levels of risk and
volatility, which in part reflects the potential for higher returns
in the long run. Thus, Smaller Companies as an asset class should
be viewed as a long-term multi-year investment to achieve these
potential strong returns that have historically been available.
Market timing is challenging, particularly in the small cap area,
and often it is "time in" rather than "timing" which is
critical.
As mentioned in last year's Annual Report, but sadly still an
important factor, UK markets really need to see inflation come
under control and the shape of any potential imminent recession.
The UK is already pricing in a lot of negativity; therein lies the
longer term opportunity, particularly when coupled with the
Company's current discount level.
Whilst we constantly challenge short-term influences and how
macroeconomic conditions impact factors driving the market, we
remain confident that our Quality, Growth and Momentum investment
process generates strong returns from smaller companies in the
long-term. Our process has been seasoned by five economic
cycles.
Abby Glennie and Amanda Yeaman
abrdn
24 August 2023
Investment Portfolio
As at 30 June 2023
================================================================================================
Valuation Total Valuation
2023 portfolio 2022
Company Sector GBP'000 % GBP'000
4imprint Media 18,408 4.2 8,336
=========================== ================================== ========= ========= =========
Bytes Technology Software and Computer Services 15,071 3.5 12,934
=========================== ================================== ========= ========= =========
Technology Hardware and
discoverIE Equipment 15,023 3.4 11,662
=========================== ================================== ========= ========= =========
Games Workshop Leisure Goods 14,771 3.4 7,770
=========================== ================================== ========= ========= =========
Investment Banking and Brokerage
JTC Services 14,562 3.3 12,196
=========================== ================================== ========= ========= =========
Alpha Financial Markets Industrial Support Services 14,542 3.3 20,033
=========================== ================================== ========= ========= =========
Diploma Industrial Support Services 13,709 3.1 13,064
=========================== ================================== ========= ========= =========
Hill & Smith Industrial Metals and Mining 13,317 3.0 10,841
=========================== ================================== ========= ========= =========
CVS Consumer Services 13,071 3.0 8,715
=========================== ================================== ========= ========= =========
Ergomed Pharmaceuticals and Biotechnology 12,859 2.9 13,189
--------------------------- ---------------------------------- --------- --------- ---------
Top ten investments 145,333 33.1
--------------------------------------------------------------- --------- --------- ---------
Cranswick Food Producers 12,482 2.8 14,181
=========================== ================================== ========= ========= =========
Telecommunications Service
Gamma Communications Providers 12,015 2.7 11,110
=========================== ================================== ========= ========= =========
Hilton Food Food Producers 11,518 2.6 18,858
=========================== ================================== ========= ========= =========
Telecommunications Service
Telecom Plus Providers 11,247 2.6 20,999
=========================== ================================== ========= ========= =========
Big Technologies Software and Computer Services 11,053 2.5 8,701
=========================== ================================== ========= ========= =========
Morgan Sindall Construction and Materials 10,980 2.5 10,896
=========================== ================================== ========= ========= =========
Kainos Software and Computer Services 9,623 2.2 21,199
=========================== ================================== ========= ========= =========
Hollywood Bowl Travel and Leisure 9,550 2.2 7,923
=========================== ================================== ========= ========= =========
Coats General Industrials 9,036 2.1 -
=========================== ================================== ========= ========= =========
GlobalData Media 8,998 2.1 9,593
--------------------------- ---------------------------------- --------- --------- ---------
Top twenty investments 251,835 57.4
--------------------------------------------------------------- --------- --------- ---------
Next 15 Communications Media 8,657 2.0 12,477
=========================== ================================== ========= ========= =========
Investment Banking and Brokerage
Paragon Banking Services 8,500 1.9 -
=========================== ================================== ========= ========= =========
Safestore Real Estate Investment Trusts 8,430 1.9 21,795
=========================== ================================== ========= ========= =========
Midwich Industrial Support Services 8,420 1.9 10,012
=========================== ================================== ========= ========= =========
Auction Technology Software and Computer Services 8,278 1.9 10,204
=========================== ================================== ========= ========= =========
Smart Metering Systems Industrial Support Services 8,046 1.8 -
=========================== ================================== ========= ========= =========
Treatt Chemicals 7,966 1.8 8,921
=========================== ================================== ========= ========= =========
Investment Banking and Brokerage
Mortgage Advice Bureau Services 7,803 1.8 -
=========================== ================================== ========= ========= =========
Investment Banking and Brokerage
Impax Asset Management Services 6,831 1.6 8,451
=========================== ================================== ========= ========= =========
YouGov Media 6,602 1.5 2,265
--------------------------- ---------------------------------- --------- --------- ---------
Top thirty investments 331,368 75.5
--------------------------------------------------------------- --------- --------- ---------
Volution Construction and Materials 6,524 1.5 2,458
=========================== ================================== ========= ========= =========
Real Estate Investment and
Sirius Real Estate Services 6,384 1.4 11,855
=========================== ================================== ========= ========= =========
Electronic and Electrical
XP Power Equipment 6,107 1.4 13,121
=========================== ================================== ========= ========= =========
Watches of Switzerland Personal Goods 6,071 1.4 12,018
=========================== ================================== ========= ========= =========
Serica Energy Oil, Gas and Coal 5,951 1.4 3,483
=========================== ================================== ========= ========= =========
Robert Walters Industrial Support Services 5,943 1.4 8,363
=========================== ================================== ========= ========= =========
Team 17 Leisure Goods 5,771 1.3 7,264
=========================== ================================== ========= ========= =========
Investment Banking and Brokerage
AJ Bell Services 5,577 1.3 4,663
=========================== ================================== ========= ========= =========
Marshalls Construction and Materials 5,495 1.3 12,567
=========================== ================================== ========= ========= =========
Investment Banking and Brokerage
Mattioli Woods Services 5,331 1.2 6,118
--------------------------- ---------------------------------- --------- --------- ---------
Top forty investments 390,522 89.1
--------------------------------------------------------------- --------- --------- ---------
Craneware Health Care Providers 4,510 1.0 -
=========================== ================================== ========= ========= =========
Real Estate Investment and
Henry Boot Services 4,471 1.0 7,942
=========================== ================================== ========= ========= =========
Marlowe Industrial Support Services 4,376 1.0 5,861
=========================== ================================== ========= ========= =========
Future Media 4,239 1.0 13,377
=========================== ================================== ========= ========= =========
Focusrite Leisure Goods 4,187 0.9 14,143
=========================== ================================== ========= ========= =========
Investment Banking and Brokerage
Tatton Asset Management Services 4,000 0.9 2,555
=========================== ================================== ========= ========= =========
Alpha Group Industrial Support Services 3,799 0.9 -
=========================== ================================== ========= ========= =========
Ricardo Construction and Materials 3,566 0.8 -
=========================== ================================== ========= ========= =========
FDM Group Software and Computer Services 3,401 0.8 -
=========================== ================================== ========= ========= =========
Investment Banking and Brokerage
Liontrust Asset Management Services 3,391 0.8 5,769
--------------------------- ---------------------------------- --------- --------- ---------
Top fifty investments 430,462 98.2
--------------------------------------------------------------- --------- --------- ---------
LBG Media Media 3,064 0.7 3,451
=========================== ================================== ========= ========= =========
GB Group Software and Computer Services 2,328 0.5 8,570
=========================== ================================== ========= ========= =========
Technology Hardware and
Spirent Equipment 1,499 0.4 -
=========================== ================================== ========= ========= =========
Motorpoint Retailers 1,055 0.2 3,640
--------------------------- ---------------------------------- --------- --------- ---------
Total portfolio 438,408 100.0
=============================================================== ========= ========= =========
All investments are equity investments.
Sector Distribution of Investments
As at 30 June 2023
========================================== ========== =========
Portfolio weighting
========================================== =====================
2023 2022
% %
========================================== ========== =========
Basic Materials 4.8 3.8
------------------------------------------ ---------- ---------
Chemicals 1.8 1.7
========================================== ========== =========
Industrial Metals and Mining 3.0 2.1
========================================== ========== =========
Consumer Discretionary 23.9 24.7
------------------------------------------ ---------- ---------
Consumer Services 3.0 1.7
========================================== ========== =========
Household Goods and Home Construction - 0.5
========================================== ========== =========
Leisure Goods 5.6 5.8
========================================== ========== =========
Media 11.5 9.5
========================================== ========== =========
Personal Goods 1.4 3.0
========================================== ========== =========
Retailers 0.2 1.6
========================================== ========== =========
Travel and Leisure 2.2 2.6
========================================== ========== =========
Consumer Staples 5.4 7.3
------------------------------------------ ---------- ---------
Food Producers 5.4 7.3
========================================== ========== =========
Energy 1.4 0.7
------------------------------------------ ---------- ---------
Oil, Gas and Coal 1.4 0.7
========================================== ========== =========
Financials 12.8 12.0
------------------------------------------ ---------- ---------
Finance and Credit Services - 2.6
========================================== ========== =========
Investment Banking and Brokerage Services 12.8 9.4
========================================== ========== =========
Health Care 3.9 2.9
------------------------------------------ ---------- ---------
Health Care Providers 1.0 -
========================================== ========== =========
Pharmaceuticals and Biotechnology 2.9 2.9
========================================== ========== =========
Industrials 23.0 18.4
------------------------------------------ ---------- ---------
Construction and Materials 6.1 5.0
========================================== ========== =========
Electronic and Electrical Equipment 1.4 2.5
========================================== ========== =========
General Industrials 2.1 -
========================================== ========== =========
Industrial Support Services 13.4 10.9
========================================== ========== =========
Real Estate 4.3 9.5
------------------------------------------ ---------- ---------
Real Estate Investment and Services 2.4 3.8
========================================== ========== =========
Real Estate Investment Trusts 1.9 5.7
========================================== ========== =========
Technology 15.2 14.6
------------------------------------------ ---------- ---------
Software and Computer Services 11.4 11.7
========================================== ========== =========
Technology Hardware and Equipment 3.8 2.9
========================================== ========== =========
Telecommunications 5.3 6.1
------------------------------------------ ---------- ---------
Telecommunications Service Providers 5.3 6.1
------------------------------------------ ---------- ---------
Total 100.0 100.0
------------------------------------------ ---------- ---------
Directors' Report (extract)
The Directors present their report and the audited financial
statements of the Company for the year ended 30 June 2023.
Results and Dividends
The financial statements for the year ended 30 June 2023 are
contained below. An interim dividend of 3.00p per Ordinary share
was paid on 14 April 2023 and the Directors recommend a final
dividend of.8.00p per Ordinary share, payable on 30 November 2023
to shareholders on the register on 3 November 2023. The ex-dividend
date is 2 November 2023.
Principal Activity and Status
The Company is registered as a public limited company in
Scotland under company number SC145455, is an investment company
within the meaning of Section 833 of the Companies Act 2006 and
carries on business as an investment trust.
The Company has applied for and has been accepted as an
investment trust under Sections 1158 and 1159 of the Corporation
Tax Act 2010 and Part 2 Chapter 1 of Statutory Instrument
2011/2999. This approval relates to accounting periods commencing
on or after 1 July 2012. The Directors are of the opinion that the
Company has conducted its affairs so as to be able to retain such
approval.
The Company intends to manage its affairs so that its Ordinary
shares continue to be a qualifying investment for inclusion in the
stocks and shares component of an Individual Savings Account.
Capital Structure and Voting Rights
The Company's issued share capital at 30 June 2023 consisted of
88,329,911 (2022: 94,012,047) Ordinary shares of 25 pence each and
there were 15,834,511 (2022: 10,152,375) Ordinary shares held in
treasury, representing 17.9% of the issued share capital as at that
date (excluding treasury shares).
During the year, 5,682,136 Ordinary shares were bought back into
treasury.
Since the year end, the Company has bought back a further
1,995,572 Ordinary shares into treasury. Accordingly, as at the
date of this Report, the Company's issued share capital consisted
of 86,334,339 Ordinary shares of 25 pence each and 17,830,083
Ordinary shares held in treasury.
Each ordinary shareholder is entitled to one vote on a show of
hands and, on a poll, to one vote for every Ordinary share
held.
Management Agreement
The Company has appointed abrdn Fund Managers Limited ("aFML"),
a wholly owned subsidiary of abrdn plc, as its Alternative
Investment Fund Manager (the "Manager"). aFML has been appointed to
provide investment management, risk management, administration and
company secretarial services, and promotional activities to the
Company. The Company's portfolio is managed by abrdn Investment
Management Limited (the "Investment Manager") by way of a group
delegation agreement in place between it and aFML. In addition,
aFML has sub-delegated administrative and secretarial services to
abrdn Holdings Limited and promotional activities to abrdn
Investments Limited.
During the year, the management fee was calculated quarterly in
arrears as 0.85% per annum applying to the first GBP250 million of
the Company's net assets, 0.65% per annum applying to net assets
above this threshold until GBP550 million, and 0.55% applying to
net assets above this threshold. In addition, the Manager received
a secretarial and administration fee of GBP75,000 plus VAT.
The Manager also receives a separate fee for the provision of
promotional activities to the Company. This fee amounted to
GBP301,000 plus VAT for the year (2022: GBP246,000 plus VAT).
Further details of the fees payable to the Manager are shown in
notes 4 and 5 to the financial statements and the Chairman's
Statement contains details of changes to the management fee
arrangements since the end of the year.
The management agreement is terminable on not less than six
months' notice. In the event of termination by the Company on less
than the agreed notice period, compensation is payable to the
Manager in lieu of the unexpired notice period.
Directors
Manju Malhotra was appointed as an independent non-executive
Director of the Company on 1 May 2023. Liz Airey is the Chairman
and Tim Scholefield is the Senior Independent Director.
Manju Malhotra will stand for election at the Annual General
Meeting on 23 November 2023. Other than Caroline Ramsay, all of the
other Directors will retire and, being eligible, will offer
themselves for re-election at the Annual General Meeting. As
explained in the Chairman's Statement, Caroline Ramsay will retire
as a Director following the conclusion of the Annual General
Meeting.
The Directors attended scheduled Board and Committee meetings
during the year ended 30 June 2023 as follows (with their
eligibility to attend the relevant meetings
in brackets):
Management
Audit Engagement Nomination
Board Committee Committee Committee
Meetings Meetings Meetings Meetings
================ ========= ========== =========== ============
Liz Airey 5 (5) - (-)(A) 1 (1) 3 (3)
================ ========= ========== =========== ============
Ashton
Bradbury 5 (5) 2 (2) 1 (1) 3 (3)
================ ========= ========== =========== ============
Alexa
Henderson 5 (5) 2 (2) 1 (1) 3 (3)
================ ========= ========== =========== ============
Manju
Malhotra 1 (1) - (-) 1 (1) 1 (1)
================ ========= ========== =========== ============
Caroline
Ramsay 5 (5) 2 (2) 1 (1) 3 (3)
================ ========= ========== =========== ============
Tim Scholefield 5 (5) 2 (2) 1 (1) 3 (3)
================ ========= ========== =========== ============
(A) Liz Airey is not a member of the Audit Committee but attends
the meetings by invitation
The Board meets more frequently when business needs require.
During the year ended 30 June 2023 this included a Board meeting to
approve the appointment of a new Director. In addition, there were
two Board Committee meetings to approve the annual and half yearly
financial statements. All Directors attended the Annual General
Meeting held on 20 October 2022.
The Board believes that all the Directors seeking re-election
remain independent of the Manager and free from any relationship
which could materially interfere with the exercise of their
judgement on issues of strategy, performance, resources and
standards of conduct. The Board believes that each Director has the
requisite high level and range of business, investment and
financial experience which enables the Board to provide clear and
effective leadership and proper governance of the Company.
Following formal performance evaluations, each Director's
performance continues to be effective and demonstrates commitment
to the role, and their individual performances contribute to the
long-term sustainable success of the Company. In addition, all
Directors have demonstrated that they have sufficient time to
fulfil their directorial roles with the Company. The Board
therefore recommends the re-election of each of the Directors at
the Annual General Meeting.
External Agencies
The Board has contractually delegated to external agencies,
including the Manager and other service providers, certain services
including: the management of the investment portfolio, the
day-to-day accounting and company secretarial requirements, the
depositary services (which include cash monitoring, the custody and
safeguarding of the Company's financial instruments and monitoring
the Company's compliance with investment limits and leverage
requirements) and the share registration services. Each of these
contracts was entered into after full and proper consideration by
the Board of the quality and cost of services offered in so far as
they relate to the affairs of the Company. In addition, ad hoc
reports and information are supplied to the Board as requested.
Board Diversity
The Board recognises the importance of having a range of skilled
and experienced individuals with the right knowledge represented on
the Board in order to allow it to fulfil its obligations. The Board
also recognises the benefits and is supportive of the principle of
diversity in its recruitment of new Board members. The Board will
not display any bias for age, gender, race, sexual orientation,
socio-economic background, religion, ethnic or national origins or
disability in considering the appointment of its Directors. In view
of its size, the Board will continue to ensure that all
appointments are made on the basis of merit against the
specification prepared for each appointment. In doing so, the Board
will take account of the targets set out in the FCA's Listing
Rules, which are set out in the tables below.
The Board has resolved that the Company's year end date is the
most appropriate date for disclosure purposes. The following
information has been provided by each Director through the
completion of questionnaires. There have been no changes since the
year end.
Board Gender as at 30 June 2023
Number of Percentage Number of Number Percentage
Board members of the Board senior positions in executive of executive
on the Board management management
(note 3)
===================== ============== ============= ================== ============= =============
Men 2 33% 1
===================== ============== ============= ================== ============= =============
Women 4 67% 3
(note 1)
===================== ============== ============= ==================
Not specified/prefer - - -
not to say n/a n/a
===================== ============== ============= ================== ============= =============
Board Ethnic Background as at 30 June 2023
Number of Percentage Number of Number Percentage
Board members of the Board senior positions in executive of executive
on the Board management management
(note 3)
=========================== ============== ============= ================== ============= =============
White British or other
White
(including minority-white
groups) 5 83% 4
=========================== ============== ============= ================== ============= =============
Asian/Asian British 1 17% -
(note 2)
=========================== ============== ============= ==================
Not specified/prefer - - -
not to say n/a n/a
=========================== ============== ============= ================== ============= =============
Notes:
1. Meets target of at least 40% as set out in LR 9.8.6R (9)(a)(i)
2. Meets target of at least 1 as set out in LR 9.8.6R (9)(a)(iii)
3. The Company considers that the role of Chairman, Senior
Independent Director ("SID") who is also Chairman of the Management
Engagement Committee, and the chairmen of the Audit Committee and
Nomination Committee are senior positions.
Board's Policy on Tenure
I n normal circumstances, it is the Board's expectation that
Directors will not serve beyond the Annual General Meeting
following the ninth anniversary of their appointment. However, the
Board takes the view that independence of individual Directors is
not necessarily compromised by length of tenure on the Board and
that continuity and experience can add significantly to the Board's
strength. The Board believes that recommendation for re-election
should be on an individual basis following a rigorous review which
assesses the contribution made by the Director concerned, but also
taking into account the need for regular refreshment and
diversity.
It is the Board's policy that the Chairman of the Board will not
normally serve as a Director beyond the Annual General Meeting
following the ninth anniversary of his or her appointment to the
Board. However, this may be extended in certain circumstances or to
facilitate effective succession planning and the development of a
diverse Board. In such a situation the reasons for the extension
will be fully explained to shareholders and a timetable for the
departure of the Chairman clearly set out.
The Role of the Chairman and Senior Independent Director
The Chairman is responsible for providing effective leadership
to the Board, by setting the tone of the Company, demonstrating
objective judgement and promoting a culture of openness and debate.
The Chairman facilitates the effective contribution and encourages
active engagement by each Director. In conjunction with the Company
Secretary, the Chairman ensures that Directors receive accurate,
timely and clear information to assist them with effective
decision-making. The Chairman acts upon the results of the Board
evaluation process by recognising strengths and addressing any
weaknesses and also ensures that the Board engages with major
shareholders and that all Directors understand shareholder
views.
The Senior Independent Director acts as a sounding board for the
Chairman and acts as an intermediary for other Directors, when
necessary. Working closely with the Nomination Committee, the
Senior Independent Director takes responsibility for an orderly
succession process for the Chairman, and leads the annual appraisal
of the Chairman's performance. The Senior Independent Director is
also available to shareholders to discuss any concerns they may
have.
Management of Conflicts of Interest
The Board has a procedure in place to deal with a situation
where a Director has a conflict of interest. As part of this
process, each Director prepares a list of other positions held and
all other conflict situations that may need to be authorised either
in relation to the Director concerned or his or her connected
persons. The Board considers each Director's situation and decides
whether to approve any conflict, taking into consideration what is
in the best interests of the Company and whether the Director's
ability to act in accordance with his or her wider duties is
affected. Each Director is required to notify the Company Secretary
of any potential, or actual, conflict situations that will need
authorising by the Board. Authorisations given by the Board are
reviewed at each Board meeting.
No Director has a service contract with the Company although all
Directors are issued with letters of appointment. Other than the
deeds of indemnity referred to above, t here were no contracts
during, or at the end of the year, in which any Director was
interested.
The Company has a policy of conducting its business in an honest
and ethical manner. The Company takes a zero-tolerance approach to
bribery and corruption and has procedures in place that are
proportionate to the Company's circumstances to prevent them. The
Manager also adopts a group-wide zero-tolerance approach and has
its own detailed policy and procedures in place to prevent bribery
and corruption. Copies of the Manager's anti-bribery and corruption
policies are available on
its website.
In relation to the corporate offence of failing to prevent tax
evasion, it is the Company's policy to conduct all business in an
honest and ethical manner. The Company takes a zero-tolerance
approach to facilitation of tax evasion whether under UK law or
under the law of any foreign country and is committed to acting
professionally, fairly and with integrity in all its business
dealings and relationships.
Directors' and Officers' Liability Insurance
The Company's Articles of Association provide for each of the
Directors to be indemnified out of the assets of the Company
against any liabilities incurred by them as a Director of the
Company in defending proceedings, or in connection with any
application to the Court in which relief is granted. In addition,
the Company has entered into separate deeds of indemnity with each
of the Directors, reflecting the scope of the indemnity in the
Articles. Directors' and Officers' liability insurance cover has
been maintained throughout the financial year at the expense of the
Company.
Corporate Governance
The Company is committed to high standards of corporate
governance. The Board is accountable to the Company's shareholders
for good governance and this statement describes how the Company
has applied the principles identified in the UK Corporate
Governance Code as published in July 2018 (the "UK Code"), which is
available on the Financial Reporting Council's (the "FRC") website:
frc.org.uk
The Board has also considered the principles and provisions of
the AIC Code of Corporate Governance as published in February 2019
(the "AIC Code"). The AIC Code addresses the principles and
provisions set out in the UK Code, as well as setting out
additional provisions on issues that are of specific relevance to
the Company. The AIC Code is available on the AIC's website:
theaic.co.uk. It includes an explanation of how the AIC Code adapts
the principles and provisions set out in the UK Code to make them
relevant for investment companies.
The Board confirms that, during the year, the Company complied
with the principles and provisions of the AIC Code and the relevant
provisions of the UK Code, except as set out below.
The UK Code includes provisions relating to:
- interaction with the workforce (provisions 2, 5 and 6);
- the role and responsibility of the chief executive (provisions 9 and 14);
- the need for an internal audit function (provision 25);
- previous experience of the chairman of a remuneration committee (provision 32); and
- executive directors' remuneration (provisions 33 and 36 to 41).
The Board considers that these provisions are not relevant to
the position of the Company, being an externally managed investment
company. In particular, all of the Company's day-to-day management
and administrative functions are outsourced to third parties. As a
result, the Company has no executive directors, employees or
internal operations. The Company has therefore not reported further
in respect of these provisions.
The Board considers that reporting against the principles and
provisions of the AIC Code, which has been endorsed by the FRC,
provides more relevant information to shareholders. Full details of
the Company's compliance with the AIC Code of Corporate Governance
can be found on its website.
Matters Reserved for the Board
The Board sets the Company's objectives and ensures that its
obligations to its shareholders are met. It has formally adopted a
schedule of matters which are required to be brought to it for
decision, thus ensuring that it maintains full and effective
control over appropriate strategic, financial, operational and
compliance issues.
These matters include:
- the maintenance of clear investment objectives and risk management policies;
- the monitoring of the business activities of the Company
ranging from analysis of investment performance through to review
of quarterly management accounts;
- monitoring requirements such as approval of the Half-Yearly
Report and Annual Report and financial statements and approval and
recommendation of any dividends;
- setting the range of gearing in which the Manager may operate;
- major changes relating to the Company's structure including
share buy-backs and share issuance;
- Board appointments and removals and the related terms;
- authorisation of Directors' conflicts or possible conflicts of interest;
- terms of reference and membership of Board Committees;
- appointment and removal of the Manager and the terms and
conditions of the Management Agreement relating thereto; and
- London Stock Exchange/Financial Conduct Authority -
responsibility for approval of all circulars, listing particulars
and other releases concerning matters decided by the Board.
Full and timely information is provided to the Board to enable
it to function effectively and to allow the Directors to discharge
their responsibilities.
Substantial Interests
Information provided to the Company by major shareholders
pursuant to the FCA's Disclosure, Guidance and Transparency Rules
are published by the Company via a Regulatory Information
Service.
The table below sets out the interests in 3% or more of the
issued share capital of the Company, of which the Board was aware
as at 30 June 2023.
Number of % held
Ordinary
Shareholder shares
========================== ========= ======
Hargreaves Lansdown 9,589,569 10.8
========================== ========= ======
Interactive Investor 8,791,381 9.9
========================== ========= ======
1607 Capital Partners 6,915,877 7.8
========================== ========= ======
RBC Brewin Dolphin 6,820,513 7.7
========================== ========= ======
abrdn Retail Plans 6,383,480 7.2
========================== ========= ======
AJ Bell 4,239,158 4.8
========================== ========= ======
Rathbones 3,621,425 4.1
========================== ========= ======
City of London Investment
Management 3,173,607 3.5
========================== ========= ======
WM Thomson 3,088,233 3.5
========================== ========= ======
The Company has not been notified of any changes to the above
holdings since the end of the year.
Going Concern
The Company's assets consist mainly of equity shares in
companies listed on recognised stock exchanges and are considered
by the Board to be realisable within a short timescale under normal
market conditions. The Board has set overall limits for borrowing
and reviews regularly the Company's level of gearing, cash flow
projections and compliance with banking covenants. The Board has
also performed stress testing and liquidity analysis.
As at 30 June 2023, the Company had a GBP40 million unsecured
revolving credit facility with The Royal Bank of Scotland
International Limited which expires on 1 November 2025.
The Directors are mindful of the Principal Risks and
Uncertainties disclosed in the Strategic Report and they believe
that the Company has adequate financial resources to continue in
operational existence for a period of not less than 12 months from
the date of approval of this Report. They have arrived at this
conclusion having confirmed that the Company's diversified
portfolio of realisable securities is sufficiently liquid and could
be used to meet short-term funding requirements were they to arise.
The Directors have also reviewed the revenue and ongoing expenses
forecasts for the coming year and considered the Company's
Statement of Financial Position as at 30 June 2023 which shows net
current liabilities of GBP11.8 million at that date, and do not
consider this to be a concern due to the liquidity of the portfolio
which would enable the Company to meet any short term liabilities
if required.
Taking all of this into account, the Directors believe that it
is appropriate to continue to adopt the going concern basis in
preparing the financial statements.
Accountability and Audit
The Directors who held office at the date of approval of this
Directors' Report confirm that, so far as they are each aware,
there is no relevant audit information of which the Company's
Auditor is unaware and each Director has taken all the steps that
they ought to have taken as a Director to make themselves aware of
any relevant audit information and to establish that the Company's
Auditor is aware of that information.
Independent Auditor
Shareholders approved the re-appointment of KPMG LLP as the
Company's Independent Auditor at the AGM on 20 October 2022 and
resolutions to approve its re-appointment for the year to 30 June
2024 and to authorise the Directors to determine its remuneration
will be proposed at the Annual General Meeting.
Financial Instruments
The financial risk management objectives and policies arising
from financial instruments and the exposure of the Company to risk
are disclosed in note 16 to the financial statements.
Relations with Shareholders
The Directors place a great deal of importance on communications
with shareholders. Shareholders and investors may obtain up to date
information on the Company through its website and the Manager's
Customer Services Department (see Contact Addresses).
abrdn Holdings Limited has been appointed Company Secretary to
the Company. Whilst abrdn Holdings Limited is a wholly owned
subsidiary of abrdn plc, there is a clear separation of roles
between the Manager and Company Secretary with different board
compositions and different reporting lines in place. The Board
notes that, in accordance with Market Abuse Regulations, procedures
are in place to control the dissemination of information within the
abrdn plc group of companies when necessary. Where correspondence
addressed to the Board is received there is full disclosure to the
Board. This is kept confidential if the subject matter of the
correspondence requires confidentiality.
The Board's policy is to communicate directly with shareholders
and their representative bodies without the involvement of the
management group (including the Company Secretary or the Manager)
in situations where direct communication is required, and
representatives from the Manager meet with major shareholders on at
least an annual basis in order to gauge their views, and report
back to the Board on these meetings.
The Company's Annual General Meeting provides a forum for
communication primarily with private shareholders and is attended
by the Board. The Investment Manager makes a presentation at the
meeting and all shareholders have the opportunity to put questions
to both the Board and the Manager at the meeting. The Board also
hosts a regular 'Meet the Manager' session at which the Investment
Manager and members of the Board are present and to which all
shareholders are invited, last held in May 2022.
The notice of the Annual General Meeting is sent out at least 20
working days in advance of the meeting. All shareholders have the
opportunity to put questions to the Board and Manager at the
meeting.
Additional Information
Where not provided elsewhere in the Directors' Report, the
following provides the additional information required to be
disclosed by Part 15 of the Companies Act 2006.
There are no restrictions on the transfer of, or voting rights
attaching to, Ordinary shares in the Company other than certain
restrictions which may from time to time be imposed by law (for
example, the Market Abuse Regulation). The Company is not aware of
any agreements between shareholders that may result in a transfer
of securities and/or voting rights.
The Company's Articles of Association may only be amended by a
special resolution passed at a general meeting of shareholders.
The Company is not aware of any significant agreements to which
it is a party that take effect, alter or terminate upon a change of
control of the Company following a takeover. Other than the
management agreement with the Manager, the Company is not aware of
any contractual or other agreements which are essential to its
business which could reasonably be expected to be disclosed in the
Directors' Report.
Annual General Meeting
The Notice of the Annual General Meeting ("AGM") will be held at
12 noon on Thursday, 23 November 2023.
By order of the Board
abrdn Holdings Limited
Company Secretary
1 George Street
Edinburgh EH2 2LL
24 August 2023
Statement of Directors' Responsibilities in Respect of the
Annual Report and the Financial Statements
The Directors are responsible for preparing the Annual Report
and the financial statements in accordance with applicable law and
regulations. Company law requires the Directors to prepare
financial statements for each financial year. Under that law they
have elected to prepare the financial statements in accordance with
UK Accounting Standards, including FRS 102 'The Financial Reporting
Standard Applicable in the UK and Republic of Ireland' and
applicable law.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Company and of the profit or
loss of the Company for that period.
In preparing these financial statements, the Directors are
required to:
- select suitable accounting policies and then apply them consistently;
- make judgments and estimates that are reasonable, relevant and reliable;
- state whether applicable UK accounting standards have been
followed, subject to any material departures disclosed and
explained in the financial statements;
- assess the Company's ability to continue as a going concern,
disclosing, as applicable, matters related to going concern;
and
- prepare the financial statements on the going concern basis of
accounting unless they either intend to liquidate the Company or to
cease operations, or have no realistic alternative but to do
so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
its financial statements comply with the Companies Act 2006. They
are responsible for such internal control as they determine is
necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error,
and have general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Company and
to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors' Report,
Directors' Remuneration Report and Statement of Corporate
Governance that comply with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company's website, but not for the content of any information
included on the website that has been prepared or issued by third
parties. Legislation in the UK governing the preparation and
dissemination of financial statements may differ from legislation
in
other jurisdictions.
Responsibility Statement of the Directors in Respect of the
Annual Financial Report
The Directors confirm that to the best of their knowledge:
- the financial statements have been prepared in accordance with
applicable accounting standards and give a true and fair view of
the assets, liabilities, financial position and profit or loss of
the Company;
- the Strategic Report and Directors' Report include 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 the Company faces; and
- the Annual Report taken as a whole, is fair, balanced and
understandable and it provides the information necessary for
shareholders to assess the Company's position and performance,
business model and strategy.
On behalf of the Board
Liz Airey
Chairman
24 August 2023
Statement of Comprehensive Income
Year ended 30 June Year ended 30 June
2023 2022
============================== ===== =========================== =============================
Revenue Capital Total Revenue Capital Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
============================== ===== ======= ======== ======== ======= ========= =========
Net losses on investments
held at fair value 10 - (46,435) (46,435) - (196,773) (196,773)
============================== ===== ======= ======== ======== ======= ========= =========
Income 3 13,649 - 13,649 11,123 - 11,123
============================== ===== ======= ======== ======== ======= ========= =========
Investment management fee 4 (848) (2,542) (3,390) (1,190) (3,569) (4,759)
============================== ===== ======= ======== ======== ======= ========= =========
Other administrative expenses 5 (1,115) - (1,115) (889) - (889)
------------------------------ ----- ------- -------- -------- ------- --------- ---------
Net return before finance
costs and taxation 11,686 (48,977) (37,291) 9,044 (200,342) (191,298)
============================== ===== ======= ======== ======== ======= ========= =========
Finance costs 6 (315) (945) (1,260) (278) (833) (1,111)
------------------------------ ----- ------- -------- -------- ------- --------- ---------
Return before taxation 11,371 (49,922) (38,551) 8,766 (201,175) (192,409)
============================== ===== ======= ======== ======== ======= ========= =========
Taxation 7 - - - - - -
------------------------------ ----- ------- -------- -------- ------- --------- ---------
Return after taxation 11,371 (49,922) (38,551) 8,766 (201,175) (192,409)
------------------------------ ----- ------- -------- -------- ------- --------- ---------
Return per Ordinary share
(pence) 9 12.44 (54.63) (42.19) 9.07 (208.10) (199.03)
------------------------------ ----- ------- -------- -------- ------- --------- ---------
The total column of this statement represents the profit and loss account
of the Company. The 'Revenue' and 'Capital' columns represent supplementary
information prepared under guidance issued by the Association of Investment
Companies.
All revenue and capital items in the above statement derive from continuing
operations.
The accompanying notes are an integral part of the Financial Statements.
Statement of Financial Position
As at As at
30 June 2023 30 June 2022
Notes GBP'000 GBP'000
================================================ ===== ============ ============
Non-current assets
================================================ ===== ============ ============
Investments held at fair value through profit
or loss 10 438,408 524,137
------------------------------------------------ ----- ------------ ------------
Current assets
================================================ ===== ============ ============
Debtors 11 1,637 2,413
================================================ ===== ============ ============
Investments in AAA-rated money market funds 14,129 14,414
================================================ ===== ============ ============
Cash and short term deposits 294 582
------------------------------------------------ ----- ------------ ------------
16,060 17,409
------------------------------------------------ ----- ------------ ------------
Current liabilities
================================================ ===== ============ ============
Creditors: other amounts falling due within one
year 12 (2,943) (2,947)
================================================ ===== ============ ============
Bank loan 12 (24,938) (39,988)
------------------------------------------------ ----- ------------ ------------
(27,881) (42,935)
------------------------------------------------ ----- ------------ ------------
Net current liabilities (11,821) (25,526)
------------------------------------------------ ----- ------------ ------------
Total assets less current liabilities 426,587 498,611
================================================ ===== ============ ============
Net assets 426,587 498,611
------------------------------------------------ ----- ------------ ------------
Capital and reserves
================================================ ===== ============ ============
Called-up share capital 13 26,041 26,041
================================================ ===== ============ ============
Share premium account 170,146 170,146
================================================ ===== ============ ============
Capital reserve 14 217,927 293,616
================================================ ===== ============ ============
Revenue reserve 12,473 8,808
------------------------------------------------ ----- ------------ ------------
Equity shareholders' funds 426,587 498,611
------------------------------------------------ ----- ------------ ------------
Net asset value per Ordinary share (pence) 15 482.95 530.37
------------------------------------------------ ----- ------------ ------------
The financial statements were approved by the Board of Directors on
24 August 2023 and were signed on its behalf by:
Liz Airey
Chairman
The accompanying notes are an integral part of
the Financial Statements.
Statement of Changes in Equity
For the year ended 30 June 2023
==============================================================================================
Share
Share premium Capital Revenue
capital account reserve reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
================================ ======== ======== ========= ========= ======= =========
Balance at 30 June 2022 26,041 170,146 293,616 8,808 498,611
================================ ======== ======== ========= ========= ======= =========
Return after taxation - - (49,922) 11,371 (38,551)
================================ ======== ======== ========= ========= ======= =========
Buyback of Ordinary shares
into Treasury (see note 13) - - (25,767) - (25,767)
================================ ======== ======== ========= ========= ======= =========
Dividends paid (see note
8) - - - (7,706) (7,706)
-------------------------------- -------- -------- --------- --------- ------- ---------
Balance at 30 June 2023 26,041 170,146 217,927 12,473 426,587
-------------------------------- -------- -------- --------- --------- ------- ---------
For the year ended 30 June
2022
================================ ======== ======== ========= ========= ======= =========
Share
Share premium Special Capital Revenue
capital account reserve reserve reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
================================ ======== ======== ========= ========= ======= =========
Balance at 30 June 2021 26,041 170,146 20,132 504,395 7,532 728,246
================================ ======== ======== ========= ========= ======= =========
Return after taxation - - - (201,175) 8,766 (192,409)
================================ ======== ======== ========= ========= ======= =========
Buyback of Ordinary shares
into Treasury (see note 13) - - (20,132) (9,604) - (29,736)
================================ ======== ======== ========= ========= ======= =========
Dividends paid (see note
8) - - - - (7,490) (7,490)
-------------------------------- -------- -------- --------- --------- ------- ---------
Balance at 30 June 2022 26,041 170,146 - 293,616 8,808 498,611
-------------------------------- -------- -------- --------- --------- ------- ---------
The capital reserve at 30 June 2023 is split between realised of GBP169,058,000
and unrealised of GBP48,869,000 (30 June 2022 - realised GBP198,874,000
and unrealised GBP94,742,000).
The Company's reserves available to be distributed by way of dividends
or buybacks which includes the revenue reserve and the realised element
of the capital reserve amount to GBP181,531,000 (30 June 2022 - GBP207,682,000).
The accompanying notes are an integral part of the financial statements.
Statement of Cash Flows
Year ended Year ended
30 June 2023 30 June 2022
GBP'000 GBP'000
=============================================== ============ ============
Operating activities
=============================================== ============ ============
Net return before taxation (38,551) (192,409)
=============================================== ============ ============
Adjustment for:
=============================================== ============ ============
Losses on investments 46,435 196,773
=============================================== ============ ============
Decrease/(increase) in accrued dividend income 772 (792)
=============================================== ============ ============
Finance costs 1,260 1,111
=============================================== ============ ============
Decrease/(increase) in other debtors 3 (2)
=============================================== ============ ============
(Decrease)/increase in other creditors (304) 920
----------------------------------------------- ------------ ------------
Net cash inflow from operating activities 9,615 5,601
----------------------------------------------- ------------ ------------
Investing activities
=============================================== ============ ============
Purchases of investments (83,777) (94,258)
=============================================== ============ ============
Sales of investments 122,718 144,236
=============================================== ============ ============
Purchases of AAA-rated money market funds (91,974) (137,040)
=============================================== ============ ============
Sales of AAA-rated money market funds 92,259 145,262
----------------------------------------------- ------------ ------------
Net cash inflow from investing activities 39,226 58,200
----------------------------------------------- ------------ ------------
Financing activities
=============================================== ============ ============
Bank and loan interest paid (1,193) (1,088)
=============================================== ============ ============
Repurchase of Ordinary shares into Treasury (25,230) (29,736)
=============================================== ============ ============
Repayment of loan (15,000) (25,000)
=============================================== ============ ============
Equity dividends paid (7,706) (7,490)
----------------------------------------------- ------------ ------------
Net cash outflow from financing activities (49,129) (63,314)
----------------------------------------------- ------------ ------------
(Decrease)/increase in cash (288) 487
----------------------------------------------- ------------ ------------
Analysis of changes in cash during the year
=============================================== ============ ============
Opening balance 582 95
=============================================== ============ ============
(Decrease)/increase in cash as above (288) 487
----------------------------------------------- ------------ ------------
Closing balance 294 582
----------------------------------------------- ------------ ------------
The accompanying notes are an integral part
of the financial statements.
Notes to the Financial Statements
For the year ended 30 June 2023
1. Principal activity
The Company is a closed-end investment company, registered in Scotland
No SC145455, with its Ordinary shares being listed on the London
Stock Exchange.
2. Accounting policies
a) Basis of accounting and going concern. The financial statements
have been prepared in accordance with Financial Reporting Standard
102 and with the Statement of Recommended Practice 'Financial
Statements of Investment Trust Companies and Venture Capital
Trusts' issued in July 2022. They have also been prepared on
the assumption that approval as an investment trust will continue
to be granted.
The Company's assets consist mainly of equity shares in companies
listed on recognised stock exchanges and are considered by the
Board to be realisable within a short timescale under normal
market conditions. The Board has set overall limits for borrowing
and reviews regularly the Company's level of gearing, cash flow
projections and compliance with banking covenants. The Board
has also performed stress testing and liquidity analysis.
As at 30 June 2023, the Company had a debt with The Royal Bank
of Scotland International Limited. This consists of a five year
revolving credit facility of GBP40 million of which GBP25 million
is being utilised. The Board has reviewed its options and a range
of proposals and is expecting to refinance the facility when
it expires. However, in the event that the facility is not refinanced,
there is considered to be sufficient portfolio liquidity to enable
borrowings to be repaid.
The Directors are mindful of the Principal Risks and Uncertainties
disclosed in the Strategic Report and they believe that the Company
has adequate financial resources to continue its operational
existence for a period of not less than 12 months from the date
of approval of this Report. They have arrived at this conclusion
having confirmed that the Company's diversified portfolio of
realisable securities is sufficiently liquid and could be used
to meet short-term funding requirements were they to arise. The
Directors have also reviewed the revenue and ongoing expenses
forecasts for the coming year and considered the Company's Statement
of Financial Position as at 30 June 2023 which shows net current
liabilities of GBP11.8 million at that date. Taking all of this
into account, the Directors believe that it is appropriate to
continue to adopt the going concern basis in preparing the financial
statements.
The accounting policies applied are unchanged from the prior
year and have been applied consistently.
b) Investments. Investments have been designated upon initial recognition
as fair value through profit or loss in accordance with IAS 39.
As permitted by FRS 102, the Company has elected to apply the
recognition and measurement provisions of IAS 39 Financial Instruments.
This is done because all investments are considered to form part
of a group of financial assets which is evaluated on a fair value
basis, in accordance with the Company's documented investment
strategy, and information about the grouping is provided internally
on that basis.
Investments are recognised and de-recognised at trade date where
a purchase or sale is under a contract whose terms require delivery
to be made within the timeframe established by the market concerned,
and are measured initially at fair value. Subsequent to initial
recognition, investments are valued at fair value. For listed
investments, this is deemed to be bid market prices or closing
prices for SETS stocks sourced from the London Stock Exchange.
SETS is the London Stock Exchange electronic trading service
covering most of the market including all the FTSE All-Share
and the most liquid AIM constituents.
Gains and losses arising from changes in fair value are included
in net profit or loss for the period as a capital item in the
Statement of Comprehensive Income and are ultimately recognised
in the capital reserve.
c) AAA-rated money market funds. The AAA money market funds are
used by the Company to provide additional short term liquidity.
Due to their short term nature, they are recognised in the Financial
Statements as a current asset and are included at fair value
through profit and loss.
d) Income. Income from equity investments (other than special dividends),
including taxes deducted at source, is included in revenue by
reference to the date on which the investment is quoted ex-dividend.
Special dividends are credited to revenue or capital in the Statement
of Comprehensive Income, according to the circumstances of the
underlying payment. Foreign income is converted at the exchange
rate applicable at the time of receipt. Interest receivable on
short-term deposits and money market funds is accounted for on
an accruals basis.
e) Expenses and interest payable . Expenses are accounted for on
an accruals basis. Expenses are charged to the capital column
of the Statement of Comprehensive Income when they are incurred
in connection with the maintenance or enhancement of the value
of investments. In this respect, the investment management fee
and relevant finance costs are allocated 25% to revenue and 75%
to the capital columns of the Statement of Comprehensive Income
in line with the Board's expectation of returns from the Company's
investments over the long term in the form of revenue and capital
respectively (see notes 4 and 6).
Transaction costs incurred on the purchase and disposal of investments
are recognised as a capital item in the Statement of Comprehensive
Income.
f) Dividends payable . Dividends are recognised in the period in
which they are paid.
g) Nature and purpose of reserves
Called-up share capital. The Ordinary share capital on the Statement
of Financial Position relates to the number of shares in issue
and in treasury. Only when the shares are cancelled, either from
treasury or directly, is a transfer made to the capital redemption
reserve. This reserve is not distributable.
Share premium account . The balance classified as share premium
includes the premium above nominal value from the proceeds on
issue of any equity share capital comprising Ordinary shares
of 25p. This reserve is not distributable.
Special reserve . The special reserve arose following court approval
for the cancellation of the share premium account balance at
24 June 1999 and on 13 October 2009. Court of Session approval
was granted for the cancellation of the Company's entire share
premium account and capital redemption reserve and subsequent
creation of a special distributable capital reserve. The special
reserve is used to fund share purchases of its own Ordinary shares
by the Company and was fully utilised during the year ended 30
June 2022.
Capital reserve. Gains or losses on disposal of investments and
changes in fair values of investments are transferred to the
capital reserve. The capital element of the management fee and
relevant finance costs are charged to this reserve. Any associated
tax relief is also credited to this reserve. The part of this
reserve represented by realised capital gains is available for
distribution by way of share buybacks and dividends.
Revenue reserve . Income and expenses which are recognised in
the revenue column of the Statement of Comprehensive Income are
transferred to the revenue reserve. The revenue reserve is available
for distribution including by way of dividend.
h) Taxation . Tax expense represents the sum of tax currently payable
and deferred tax. Any tax payable is based on taxable profit
for the period. Taxable profit differs from profit before tax
as reported in the Statement of Comprehensive Income because
it excludes items of income or expenses that are taxable or deductible
in other years and it further excludes items that are never taxable
or deductible. The Company's liability for current tax is calculated
using tax rates that have been enacted or substantively enacted
by the year end date.
Deferred taxation is recognised in respect of all timing differences
that have originated but not reversed at the year end date where
transactions or events that result in an obligation to pay more
or a right to pay less tax in future have occurred at the year
end date measured on an undiscounted basis and based on enacted
tax rates. This is subject to deferred tax assets only being
recognised if it is considered more likely than not that there
will be suitable profits from which the future reversal of the
underlying timing differences can be deducted. Timing differences
are differences arising between the Company's taxable profits
and its results as stated in the Financial Statements which are
capable of reversal in one or more subsequent periods.
Owing to the Company's status as an investment trust company,
and the intention to continue meeting the conditions required
to obtain approval in the foreseeable future, the Company has
not provided deferred tax on any capital gains and losses arising
on the revaluation or disposal of investments.
i) Foreign currency . Non-monetary assets and liabilities denominated
in foreign currency carried at fair value through profit or loss
are converted into Sterling at the rate of exchange ruling at
the year end date. Transactions during the year involving foreign
currencies are converted at the rate of exchange ruling at the
transaction date. Any gain or loss arising from a change in exchange
rates subsequent to the date of the transaction is included as
an exchange gain or loss in the Statement of Comprehensive Income.
j) Judgements and key sources of estimation uncertainty . Disclosure
is required of judgements and estimates made by management in
applying the accounting policies that have a significant effect
on the Financial Statements. There are no significant estimates
or judgements which impact these Financial Statements.
k) Cash and cash equivalents . Cash comprises bank balances and
cash held by the Company. Cash equivalents are short-term, highly
liquid investments that are readily convertible to known amounts
of cash and which are subject to an insignificant risk of changes
in value.
l) Bank borrowing . Interest bearing bank loans and overdrafts are
recorded initially at fair value, being the proceeds received,
net of direct issue costs. They are subsequently measured at
amortised cost. Finance charges, including premiums payable on
settlement or redemption and direct issue costs, are accounted
for on an accruals basis in the Statement of Comprehensive Income
using the straight line method and are added to the carrying
amount of the instrument to the extent that they are not settled
in the period in which they arise.
m) Treasury shares . When the Company purchases its Ordinary shares
to be held in treasury, the amount of the consideration paid,
which includes directly attributable costs, is net of any tax
effect, and is recognised as a deduction from the special reserve.
During the year the special reserve was utilised in full with
subsequent costs being recognised as a deduction from the capital
reserve. When these shares are sold subsequently, the amount
received is recognised as an increase in equity, and any resulting
surplus on the transaction is transferred to the share premium
account and any resulting deficit is transferred from the capital
reserve.
3. Income
=========================================== ======= =======
2023 2022
GBP'000 GBP'000
=========================================== ======= =======
Income from investments
=========================================== ======= =======
UK dividend income 10,706 9,139
=============================================== ======= =======
Property income distributions 431 734
=============================================== ======= =======
Overseas dividend income 1,043 1,034
=============================================== ======= =======
Special dividends 943 166
----------------------------------------------- ------- -------
13,123 11,073
----------------------------------------------- ------- -------
Other income
=========================================== ======= =======
Interest from AAA-rated money market funds 516 50
=============================================== ======= =======
Bank interest 10 -
----------------------------------------------- ------- -------
Total income 13,649 11,123
----------------------------------------------- ------- -------
4. Investment management fee
2023 2022
=========================== ======== ======= ======= ======= ======= =======
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
=========================== ======== ======= ======= ======= ======= =======
Investment management fee 848 2,542 3,390 1,190 3,569 4,759
=============================== ======== ======= ======= ======= ======= =======
The balance due to abrdn Fund Managers Limited ("aFML") at the
year end in respect of investment management fees was GBP1,667,000
(2022 - GBP2,083,000). For further details see the Directors' Report
and note 20.
5. Administrative expenses (inclusive of VAT)
======================================================= ======== ========
2023 2022
GBP'000 GBP'000
======================================================= ======== ========
Secretarial fees(A) 90 90
=========================================================== ======== ========
Promotional activities(A) 362 295
=========================================================== ======== ========
Directors' fees 154 145
=========================================================== ======== ========
Auditor's remuneration:
======================================================= ======== ========
- fees payable to the Company's Independent
Auditor for the audit of the annual accounts
(excluding VAT) 60 40
=========================================================== ======== ========
- VAT on audit fees 12 8
=========================================================== ======== ========
Registrar's fees 27 27
=========================================================== ======== ========
Professional fees 89 12
=========================================================== ======== ========
Custody fees 28 32
=========================================================== ======== ========
Depositary fees 56 79
=========================================================== ======== ========
Other expenses 237 161
----------------------------------------------------------- -------- --------
1,115 889
----------------------------------------------------------- -------- --------
(A) The Company has an agreement with aFML for the provision of
secretarial services and promotional activities. Secretarial fees
payable during the year, inclusive of VAT, were GBP90,000 (2022
- GBP90,000) and the amount due to aFML at the year end was GBP90,000
(2022 - GBP45,000). Costs relating to promotional activities during
the year, inclusive of VAT, were GBP362,000 (2022 - GBP295,000)
and the amount due to aFML at the year end was GBP132,000 (2022
- GBP115,000).
6. Finance costs
================================= ======= ======= ======= ======= ======= =======
2023 2022
================================= ========================= =========================
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
================================= ======= ======= ======= ======= ======= =======
Bank loan interest 282 846 1,128 258 774 1,032
===================================== ======= ======= ======= ======= ======= =======
Non-utilisation fees 25 76 101 11 31 42
===================================== ======= ======= ======= ======= ======= =======
Amortisation of loan arrangement
expenses 8 23 31 9 28 37
------------------------------------- ------- ------- ------- ------- ------- -------
315 945 1,260 278 833 1,111
------------------------------------- ------- ------- ------- ------- ------- -------
7. Taxation
(a) Analysis of charge for year
================================== ======= ======== ======== ======= ========= =========
2023 2022
================================== =========================== =============================
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------------------- ------- -------- -------- ------- --------- ---------
Tax charge - - - - - -
---------------------------------- ------- -------- -------- ------- --------- ---------
Given the Company's continued investment trust status and there
being no taxable income generated from its operations, no tax
has been paid in the year (2022 - same).
(b) Provision for deferred taxation. At 30 June 2023, the Company
had unutilised management expenses and loan relationship losses
of GBP80,344,000 (2022 - GBP75,537,000). A deferred tax asset
has not been recognised on the unutilised management expenses
and loan relationship losses as it is unlikely there will be
suitable future taxable profits against which these tax losses
could be deducted. Therefore, it is unlikely that the Company
will generate future taxable revenue that would enable the existing
tax losses to be utilised.
(c) Factors affecting the tax charge for the year. The main rate
of UK corporation tax increased from 19% to 25% from 1 April
2023. The tax charge for the year is higher (2022 - higher) than
the standard rate of UK corporation tax for the period of 20.5%
(2022 - 19%). The differences are explained in the following
table:
==============================================================================================
2023 2022
================================== =========================== =============================
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------------------- ------- -------- -------- ------- --------- ---------
Net return before taxation 11,371 (49,922) (38,551) 8,766 (201,175) (192,409)
------------------------------------------- ------- -------- -------- ------- --------- ---------
Corporation tax at an effective
rate of 20.50% (2022 - 19%) 2,331 (10,234) (7,903) 1,666 (38,223) (36,557)
=========================================== ======= ======== ======== ======= ========= =========
Effects of:
================================== ======= ======== ======== ======= ========= =========
Non-taxable UK dividend
income (2,388) - (2,388) (1,768) - (1,768)
=========================================== ======= ======== ======== ======= ========= =========
Non-taxable overseas dividend
income (214) - (214) (196) - (196)
=========================================== ======= ======== ======== ======= ========= =========
Management expenses and
loan relationship losses
not utilised 271 715 986 298 836 1,134
=========================================== ======= ======== ======== ======= ========= =========
Non-taxable losses on investments - 9,519 9,519 - 37,387 37,387
------------------------------------------- ------- -------- -------- ------- --------- ---------
Total tax charge - - - - - -
------------------------------------------- ------- -------- -------- ------- --------- ---------
8. Dividends
======================================================= ========= ========
2023 2022
GBP'000 GBP'000
======================================================= ========= ========
Amounts recognised as distributions to
equity holders in the period:
======================================================= ========= ========
2022 final dividend of 5.40p per share
(2021 - 5.00p) paid on 28 October 2022 5,000 4,885
=========================================================== ========= ========
2023 interim dividend of 3.00p per share
(2022 - 2.70p) paid on 14 April 2023 2,706 2,605
----------------------------------------------------------- --------- --------
7,706 7,490
----------------------------------------------------------- --------- --------
The proposed 2023 final dividend is subject to approval by shareholders
at the Annual General Meeting and has not been included as a liability
in these Financial Statements.
Set out below are the total dividends paid and proposed in respect
of the financial year, which is the basis on which the requirements
of Section 1158-1159 of the Corporation Taxes Act 2010 are considered.
The net revenue available for distribution by way of dividend for
the year is GBP11,371,000 (2022 - GBP8,766,000).
2023 2022
GBP'000 GBP'000
======================================================= ========= ========
Interim dividend 2023 of 3.00p per share
(2022 - 2.70p) paid on 14 April 2023 2,706 2,605
=========================================================== ========= ========
Proposed final dividend 2023 of 8.00p per
share (2022 - 5.40p) payable on 30 November
2023 6,907 5,000
----------------------------------------------------------- --------- --------
9,613 7,605
----------------------------------------------------------- --------- --------
The amount payable for the proposed final dividend is based on
the Ordinary shares in issue as the date of approval of this Report,
245 August 2023, which satisfies the requirement of Section 1159
of the Corporation Tax Act 2010.
9. Return per Ordinary share
==================================== ======= ========== ======== ==========
2023 2022
==================================== =================== ====================
p GBP000 p GBP000
==================================== ======= ========== ======== ==========
Basic
==================================== ======= ========== ======== ==========
Revenue return 12.44 11,371 9.07 8,766
======================================== ======= ========== ======== ==========
Capital return (54.63) (49,922) (208.10) (201,175)
---------------------------------------- ------- ---------- -------- ----------
Total return (42.19) (38,551) (199.03) (192,409)
---------------------------------------- ------- ---------- -------- ----------
Weighted average number of Ordinary
shares in issue 91,387,673 96,670,077
---------------------------------------- ------- ---------- -------- ----------
10. Investments held at fair value through
profit or loss
================================================== =========== ===========
2023 2022
GBP'000 GBP'000
================================================== =========== ===========
Opening book cost 429,395 444,749
=================================================== === =========== ===========
Opening investment holdings gains 94,742 325,254
--------------------------------------------------- --- ----------- -----------
Opening fair value 524,137 770,003
=================================================== === =========== ===========
Additions at cost 83,423 94,523
=================================================== === =========== ===========
Disposals - proceeds (122,717) (143,616)
=================================================== === =========== ===========
Losses on investments (46,435) (196,773)
--------------------------------------------------- --- ----------- -----------
Closing fair value 438,408 524,137
--------------------------------------------------- --- ----------- -----------
2023 2022
GBP'000 GBP'000
================================================== =========== ===========
Closing book cost 389,539 429,395
=================================================== === =========== ===========
Closing investment holding gains 48,869 94,742
--------------------------------------------------- --- ----------- -----------
Closing fair value 438,408 524,137
--------------------------------------------------- --- ----------- -----------
All investments are in equity shares listed on the London Stock
Exchange.
The Company received GBP122,717,000 (2022 - GBP143,616,000) from
investments sold in the period. The book cost of these investments
when they were purchased was GBP123,279,000 (2022 - GBP109,878,000
). These investments have been revalued over time and until they
were sold any unrealised gains/losses were included in the fair
value of the investments.
Transaction costs. During the year, expenses were incurred in acquiring
or disposing of investments classified as fair value through profit
or loss. These have been expensed through capital and are included
within losses on investments in the Statement of Comprehensive
Income. The total costs were as follows:
2023 2022
GBP'000 GBP'000
================================================== =========== ===========
Purchases 235 259
=================================================== === =========== ===========
Sales 94 110
--------------------------------------------------- --- ----------- -----------
329 369
------------------------------------------------------- ----------- -----------
11. Debtors
=================================================== =========== ===========
2023 2022
GBP'000 GBP'000
=================================================== =========== ===========
Amounts due from brokers 10 11
=================================================== =========== ===========
Dividends receivable 1,608 2,380
=================================================== =========== ===========
Other debtors 19 22
--------------------------------------------------- ----------- -----------
1,637 2,413
--------------------------------------------------- ----------- -----------
12. Creditors: amounts falling due within one
year
======================================================= ======== ========
2023 2022
GBP'000 GBP'000
======================================================= ======== ========
Amounts payable to brokers 31 385
============================================================ ======== ========
Amounts payable in relation to share buybacks 537 -
============================================================ ======== ========
Interest payable 225 108
============================================================ ======== ========
Investment management fee payable 1,667 2,083
============================================================ ======== ========
Sundry creditors 483 371
------------------------------------------------------------ -------- --------
2,943 2,947
------------------------------------------------------------ -------- --------
2023 2022
Bank loan GBP'000 GBP'000
======================================================= ======== ========
Bank loan 25,000 40,000
============================================================ ======== ========
Unamortised loan arrangement expenses (62) (12)
------------------------------------------------------------ -------- --------
24,938 39,988
------------------------------------------------------------ -------- --------
On 1 November 2017 the Company entered into a GBP45 million unsecured
loan facility agreement arranged with The Royal Bank of Scotland
International Limited ("RBSI"), which was increased to GBP65 million
effective 10 May 2021. The facilities consisted of a five year
fixed-rate term loan facility of GBP25 million (the "Term Loan")
and a five year revolving credit facility of GBP40 million (the
"RCF").
On 3 October 2022 the GBP15 million drawn down from the RCF was
repaid and on 1 November 2022 the GBP25 million term loan was repaid
from a new RCF of GBP40 million, provided by RBSI, which expires
on 1 November 2025. At 30 June 2023, the Company had drawn down
GBP25 million from the RCF at an interest rate of 5.477% with a
maturity date of 2 August 2023. At the date of this Report, the
Company had drawn down GBP25 million at an interest rate of 6.231%.
The terms of the unsecured loan facility agreement ("the agreement")
contain covenants that the Consolidated Net Tangible Assets as
defined in the agreement must not be less than GBP200 million,
the percentage of borrowings against the Adjusted Portfolio Value
as defined in the agreement shall not exceed 30%, and the portfolio
contains a minimum of thirty eligible investments (investments
made in accordance with the Company's investment policy). The Company
complied with all covenants throughout the year.
13. Called-up share capital
============================ =========== =========== =========== ===========
2023 2022
============================ ======================== ========================
Number GBP'000 Number GBP'000
============================ =========== =========== =========== ===========
Authorised 150,000,000 37,500 150,000,000 37,500
--------------------------------- ----------- ----------- ----------- -----------
Issued and fully paid:
============================ =========== =========== =========== ===========
Ordinary shares of 25p each 88,329,911 22,082 94,012,047 23,503
================================= =========== =========== =========== ===========
Held in treasury: 15,834,511 3,959 10,152,375 2,538
--------------------------------- ----------- ----------- ----------- -----------
104,164,422 26,041 104,164,422 26,041
--------------------------------- ----------- ----------- ----------- -----------
Ordinary Treasury
shares shares Total
Number Number Number
============================ =========== =========== =========== ===========
Opening balance 94,012,047 10,152,375 104,164,422
================================= =========== =========== =========== ===========
Share buybacks (5,682,136) 5,682,136 -
--------------------------------- ----------- ----------- ----------- -----------
Closing balance 88,329,911 15,834,511 104,164,422
--------------------------------- ----------- ----------- ----------- -----------
During the year the Company repurchased 5,682,136 (2022 - 4,670,519)
Ordinary shares to treasury at a cost of GBP25,767,000 (2022 -
GBP29,736,000)..
14. Capital reserve
=============================================== ============ ===============
2023 2022
GBP'000 GBP'000
=============================================== ============ ===============
Opening balance 293,616 504,395
==================================================== ============ ===============
Unrealised losses on investment holdings (45,873) (230,512)
==================================================== ============ ===============
(Loss)/gains on realisation of investments
at fair value (562) 33,739
==================================================== ============ ===============
Management fee charged to capital (2,542) (3,569)
==================================================== ============ ===============
Finance costs charged to capital (945) (833)
==================================================== ============ ===============
Buyback of Ordinary shares into treasury (25,767) (9,604)
---------------------------------------------------- ------------ ---------------
Closing balance 217,927 293,616
---------------------------------------------------- ------------ ---------------
The capital reserve includes investment holding gains amounting
to GBP48,869,000 (2022 - gains of GBP94,742,000) as disclosed in
note 10.
15. Net asset value per share
Total shareholders' funds have been calculated in accordance with
the provisions of applicable accounting standards. The analysis
of total shareholders' funds on the face of the Statement of Financial
Position reflects the rights, under the Articles of Association,
of the Ordinary shareholders on a return of assets.
2023 2022
=============================================== ============ =============
Net assets attributable (GBP'000) 426,587 498,611
---------------------------------------------------- ------------ -------------
Number of Ordinary shares in issue at year
end(A) 88,329,911 94,012,047
---------------------------------------------------- ------------ -------------
Net asset value per share 482.95p 530.37p
---------------------------------------------------- ------------ -------------
(A) Excluding shares held in treasury.
16. Financial instruments
The Company's financial instruments comprise securities and other
investments, cash balances, loans and debtors and creditors that
arise directly from its operations; for example, in respect of
sales and purchases awaiting settlement, and debtors for accrued
income. The Company also has the ability to enter into derivative
transactions for the purpose of managing currency and market risks
arising from the Company's activities. No such transactions took
place during the year.
The main risks the Company faces from its financial instruments
are i) market price risk (comprising interest rate risk, currency
risk and other price risk), ii) liquidity risk and iii) credit
risk. There was no material currency risk to the Company for the
period given its investing and financing activities are in the
UK.
The Board regularly reviews and agrees policies for managing each
of these risks. The Manager's policies for managing these risks
are summarised below and have been applied throughout the year.
i) Market price risk . The fair value or future cash flows of a
financial instrument held by the Company may fluctuate because
of changes in market prices. This market risk comprises three
elements - interest rate risk, currency risk and other price
risk.
Interest rate risk
Interest rate movements may affect:
- the level of income receivable on cash deposits and money market
funds;
- interest payable on the Company's variable rate borrowings.
The possible effects on fair value and cash flows that could
arise as a result of changes in interest rates are taken into
account when making investment and borrowing decisions.
As at 30 June 2023, the Company had drawn down GBP25 million
(2022 - GBP40 million) from the GBP40 million revolving credit
facility with The Royal Bank of Scotland International Limited.
During the year the GBP25 million term loan with The Royal Bank
of Scotland International Limited was repaid.
Interest risk profile. The interest rate risk profile of the
portfolio of financial assets and liabilities at the year end
date was as follows:
Weighted
average Weighted
period for average Fixed Floating
which
rate is interest rate rate
fixed rate
As at 30 June 2023 Years % GBP'000 GBP'000
==================================== ========== ========= ======= ========
Assets
==================================== ========== ========= ======= ========
Investments in AAA-rated money
market funds - 4.92 - 14,129
============================================= ========== ========= ======= ========
Cash deposits - 3.93 - 294
--------------------------------------------- ---------- --------- ------- --------
Total assets - - - 14,423
--------------------------------------------- ---------- --------- ------- --------
Liabilities
==================================== ========== ========= ======= ========
Bank loan 0.09 5.48 25,000 -
--------------------------------------------- ---------- --------- ------- --------
Total liabilities - - 25,000 -
--------------------------------------------- ---------- --------- ------- --------
Weighted
average Weighted
period for average Fixed Floating
which
rate is fixed interest rate rate
rate
As at 30 June 2022 Years % GBP'000 GBP'000
============================== =============== ========= ======== =========
Assets
============================== =============== ========= ======== =========
Investments in AAA-rated
money market funds - 1.17 - 14,414
============================== =============== ========= ======== =========
Cash deposits - - - 582
------------------------------ --------------- --------- -------- ---------
Total assets - - - 14,996
------------------------------ --------------- --------- -------- ---------
Liabilities
============================== =============== ========= ======== =========
Bank loan 0.33 2.35 25,000 -
============================== =============== ========= ======== =========
Bank loan 0.08 2.09 15,000 -
------------------------------ --------------- --------- -------- ---------
Total liabilities - - 40,000 -
------------------------------ --------------- --------- -------- ---------
The weighted average interest rate is based on the current yield
of each asset, weighted by its market value.
The floating rate assets consist of investments in AAA-rated money
market funds and cash deposits on call earning interest at prevailing
market rates.
All financial liabilities are measured at amortised cost.
Interest rate sensitivity . The sensitivity analyses below have
been determined based on the exposure to interest rates at the
year end date and with the stipulated change taking place at the
beginning of the financial year and held constant throughout the
reporting period in the case of instruments that have floating
rates.
If interest rates had been 100 basis points higher or lower and
all other variables were held constant, the Company's result for
the year ended 30 June 2023 and net assets would increase/decrease
by GBP144,000 (2022 - increase/decrease by GBP150,000). This is
mainly attributable to the Company's exposure to interest rates
on its floating rate cash balances and money market funds.
Other price risk . Other price risks (ie changes in market prices
other than those arising from interest rate or currency risk)
may affect the value of the quoted investments.
It is the Board's policy to hold an appropriate spread of investments
in the portfolio in order to reduce the risk arising from factors
specific to a particular sector. The allocation of assets and
the stock selection process both act to reduce market risk. The
Manager actively monitors market prices throughout the year and
reports to the Board, which meets regularly in order to review
investment strategy. The investments held by the Company are mainly
listed on the London Stock Exchange.
Other price risk sensitivity. If market prices at the year end
date had been 10% higher or lower while all other variables remained
constant, the return attributable to Ordinary Shareholders for
the year ended 30 June 2023 would have increased/decreased by
GBP43,841,000 (2022 - increase/decrease of GBP52,414,000). This
is based on the Company's equity portfolio held at each year end.
ii) Liquidity risk. This is the risk that the Company will encounter
difficulty in meeting obligations associated with financial liabilities.
Liquidity risk is not considered to be significant as the Company's
assets comprise mainly readily realisable securities and AAA-rated
money market funds, which can be sold to meet funding commitments
if necessary. Subject to compliance with the terms of the revolving
credit facility, including relevant covenant compliance, the
Company has the ability to make future loan drawdowns during
the period until the expiry of the facility on 1 November 2025.The
maturity of the Company's existing borrowings is set out in the
credit risk profile section of this note.
Due between
Expected Due within 3 months Due after
cash flows 3 months and 1 year 1 year
As at 30 June 2023 GBP'000 GBP'000 GBP'000 GBP'000
================================ ============= ============= ============== ==========
Bank loan 28,309 342 1,027 26,940
------------------------------------------ ------------- ------------- -------------- ----------
Due between
Expected Due within 3 months Due after
cash flows 3 months and 1 year 1 year
As at 30 June 2022 GBP'000 GBP'000 GBP'000 GBP'000
================================ ============= ============= ============== ==========
Bank loan 40,318 15,170 25,148 -
------------------------------------------ ------------- ------------- -------------- ----------
iii) Credit risk. This is failure of the counter party to a transaction
to discharge its obligations under that transaction that could
result in the Company suffering a loss.
The risk is not significant, and is managed as follows:
- investment transactions are carried out with a number of brokers,
whose credit-standing is reviewed periodically by the investment
manager, and limits are set on the amount that may be due from
any one broker;
- the risk of counterparty exposure due to failed trades causing
a loss to the Company is mitigated by the review of failed trade
reports on a monthly basis. In addition, both stock and cash
reconciliations to the Custodians' records are performed on a
daily basis to ensure discrepancies are investigated on a timely
basis.
- cash is held only with reputable banks with high quality external
credit enhancements.
None of the Company's financial assets are secured by collateral
or other credit enhancements.
Credit risk exposure . In summary, compared to the amounts in
the Statement of Financial Position, the maximum exposure to
credit risk at 30 June was as follows:
2023 2022
======================================= ========================= ======================
Statement Maximum Statement Maximum
of of
Financial exposure Financial exposure
Position Position
Current assets GBP'000 GBP'000 GBP'000 GBP'000
======================================= ============= ========== ========== ==========
Debtors 10 10 11 11
================================================= ============= ========== ========== ==========
Investments in AAA-rated money
markets funds 14,129 14,129 14,414 14,414
================================================= ============= ========== ========== ==========
Cash and short term deposits 294 294 582 582
------------------------------------------------- ------------- ---------- ---------- ----------
14,433 14,433 15,007 15,007
------------------------------------------------- ------------- ---------- ---------- ----------
None of the Company's financial assets is past due or impaired.
17. Analysis of changes in net debt
================================ ======== ========== ========= ========
At Non-cash At
30 June Cash flows movements 30 June
2022 2023
GBP'000 GBP'000 GBP'000 GBP'000
================================ ======== ========== ========= ========
Cash and cash equivalents 582 (288) - 294
===================================== ======== ========== ========= ========
Investments in AAA-rated money
market funds 14,414 (285) - 14,129
===================================== ======== ========== ========= ========
Debt due in less than one year (39,988) 15,080 (30) (24,938)
------------------------------------- -------- ---------- --------- --------
(24,992) 14,507 (30) (10,515)
------------------------------------- -------- ---------- --------- --------
At Non-cash At
30 June Cash flows movements 30 June
2021 2022
GBP'000 GBP'000 GBP'000 GBP'000
================================ ======== ========== ========= ========
Cash and cash equivalents 95 487 - 582
===================================== ======== ========== ========= ========
Investments in AAA-rated money
market funds 22,636 (8,222) - 14,414
===================================== ======== ========== ========= ========
Debt due in less than one year (40,000) 25,000 (24,988) (39,988)
===================================== ======== ========== ========= ========
Debt due after more than one
year (24,951) - 24,951 -
------------------------------------- -------- ---------- --------- --------
(42,220) 17,265 (37) (24,992)
------------------------------------- -------- ---------- --------- --------
A statement reconciling the movement in net funds to the net cash
flow has not been presented as there are no differences from the
above analysis.
18. Capital management
The investment objective of the Company is to achieve long term
capital growth by investment in UK quoted smaller companies.
The Company manages its capital to ensure that it will be able
to continue as a going concern while maximising the return to Shareholders
through the optimisation of the debt and equity balance.
The Company's capital comprises the following:
2023 2022
GBP'000 GBP'000
======================================================== ========== ==========
Equity
======================================================== ========== ==========
Equity share capital 26,041 26,041
============================================================= ========== ==========
Reserves 400,546 472,570
============================================================= ========== ==========
Liabilities
======================================================== ========== ==========
Bank loan 24,938 39,988
------------------------------------------------------------- ---------- ----------
451,525 538,599
------------------------------------------------------------- ---------- ----------
The Company's net gearing comprises the
following:
2023 2022
GBP'000 GBP'000
======================================================== ========== ==========
Bank loans (24,938) (39,988)
============================================================= ========== ==========
Cash and investments in AAA-rated money
market funds 14,423 14,996
============================================================= ========== ==========
Amounts due from brokers 10 11
============================================================= ========== ==========
Amounts payable to brokers (31) (385)
------------------------------------------------------------- ---------- ----------
Net gearing (borrowings less cash and cash
equivalents) (10,536) (25,366)
------------------------------------------------------------- ---------- ----------
Net assets 426,587 498,611
------------------------------------------------------------- ---------- ----------
Net gearing (%) 2.5 5.1
------------------------------------------------------------- ---------- ----------
The Board monitors and reviews the broad structure of the Company's
capital on an ongoing basis. This review includes:
- the planned level of gearing which takes account of the Investment
Manager's views on the market;
- the level of equity shares;
- the extent to which revenue in excess of that which is required
to be distributed should be retained.
The Company's objectives, policies and processes for managing capital
are unchanged from the preceding accounting period.
The Company does not have any externally imposed capital requirements.
19. Fair value hierarchy
FRS 102 requires an entity to classify fair value measurement using
a fair value hierarchy that reflects the significance of the inputs
used in making the measurements. The fair value hierarchy has the
following classifications:
Level 1: unadjusted quoted prices 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 (ie developed using market data) for the asset
or liability, either directly or indirectly.
Level 3: inputs are unobservable (ie for which market data is unavailable)
for the asset or liability.
All of the Company's investments are in quoted equities (2022 -
same) that are actively traded on recognised stock exchanges, with
their fair value being determined by reference to their quoted bid
prices at the reporting date. The total value of the investments
(2023 - GBP438,408,000; 2022 - GBP524,137,000) have therefore been
deemed as Level 1.
The investment in AAA rated money market funds of GBP14,129,000
(2022 - GBP14,414,000 ) is considered to be Level 2 under the fair
value hierarchy of FRS 102 due to not trading in an active market.
The fair value of the GBP25 million revolving credit facility loan
as at the 30 June 2023 is GBP25,000,000, due to it being short-term
in nature, with a par value per Statement of Financial Position
of GBP24,938,000. Under the fair value hierarchy in accordance with
FRS 102, these borrowings can be classified at Level 2.
20. Transactions with the Manager
The Company has an agreement with abrdn Fund Managers Limited for
the provision of management services. The management fee is calculated
and payable quarterly in arrears at a rate of 0.85% per annum on
the first GBP250 million of net assets, 0.65% per annum on net assets
between GBP250 million and GBP550 million and 0.55% on net assets
above GBP550 million.
The Manager also receives a separate fee for the provision of secretarial
services and promotional activities as disclosed in note 5..
21. Related party transactions
The Directors of the Company received fees for their services. Further
details are provided in the Directors' Remuneration Report which
also includes the Directors' shareholdings.
22. Subsequent events
Subsequent to the year end, a further 1,995,572 Ordinary shares
were repurchased to treasury at a cost of GBP8,413,000.
As noted in the Chairman's Statement, with effect from 1 July 2023
the management fee will be calculated and payable quarterly in arrears
at a rate of 0.75% per annum on the first GBP175 million of net
assets, 0.65% per annum on net assets between GBP175 million and
GBP550 million and 0.55% on net assets above GBP550 million and
it has also been agreed that the Manager would not charge the Company
for the provision of secretarial services with effect from 1 January
2024.
Alternative Performance Measures
Alternative performance measures ("APMs") are numerical measures of
the Company's current, historical or future performance, financial
position or cash flows, other than financial measures defined or specified
in the applicable financial framework. The Company's applicable financial
framework includes FRS 102 and the AIC SORP.
The Directors assess the Company's performance against a range of criteria
which are viewed as particularly relevant for closed-end investment
companies. Where the calculation of an APM is not detailed within the
financial statements, an explanation of the methodology employed is
provided below:
Discount
A discount is the percentage by which the market price is lower than
the Net Asset Value ("NAV") per share.
30 June 2023 30 June 2022
==================================================== ============= ============
Share price 414.00p 453.00p
==================================================== ============= ============
Net Asset Value per share 482.95p 530.37p
==================================================== ============= ============
Discount 14.3% 14.6%
---------------------------------------------------- ------------- ------------
Net gearing
Net gearing measures the total borrowings less cash and cash equivalents
divided by shareholders' funds, expressed as a percentage. Under AIC
reporting guidance cash and cash equivalents includes amounts due from
and to brokers at the period end as well as cash and short-term deposits.
30 June 2023 30 June 2022
GBP'000 GBP'000
==================================================== ============= ============
Total borrowings (A) (24,938) (39,988)
---------------------------------------------------- ------------- ------------
Cash and short term deposits 294 582
==================================================== ============= ============
Investments in AAA-rated money market funds 14,129 14,414
==================================================== ============= ============
Amounts due from brokers 10 11
==================================================== ============= ============
Amounts payable to brokers (31) (385)
---------------------------------------------------- ------------- ------------
Total cash and money market fund investments(B) 14,402 14,622
---------------------------------------------------- ------------- ------------
Net gearing (borrowings less cash and money
market fund investments)(C=A+B) (10,536) (25,366)
---------------------------------------------------- ------------- ------------
Shareholders' funds(D) 426,587 498,611
---------------------------------------------------- ------------- ------------
Net gearing(C/D) 2.5% 5.1%
---------------------------------------------------- ------------- ------------
Ongoing charges ratio
The ongoing charges ratio has been calculated in accordance with guidance
issued by the AIC, which is defined as the total of investment management
fees and recurring administrative expenses and expressed as a percentage
of the average of published daily net asset values throughout the year.
30 June 2023 30 June 2022
GBP'000 GBP'000
==================================================== ============= ============
Investment management fee(A) 3,390 4,759
==================================================== ============= ============
Administrative expenses(B) 1,115 889
==================================================== ============= ============
Less: non-recurring charges(C) (40) (6)
---------------------------------------------------- ------------- ------------
Ongoing charges 4,465 5,642
---------------------------------------------------- ------------- ------------
Average daily net assets 471,984 696,750
---------------------------------------------------- ------------- ------------
Ongoing charges ratio (excluding look-through
costs) 0.95% 0.81%
---------------------------------------------------- ------------- ------------
Look-through costs(D) - 0.01%
---------------------------------------------------- ------------- ------------
Ongoing charges ratio (including look-through
costs) 0.95% 0.82%
---------------------------------------------------- ------------- ------------
(A) See note 4.
(B) See note 5.
(C) Comprises professional fees not expected
to recur.
(D) Calculated in accordance with AIC guidance issued in October 2020
to include the Company's share of costs of holdings in investment companies
on a look-through basis.
The ongoing charges ratio differs from the other ongoing costs figure
reported in the Company's Key Information Document calculated in line
with the PRIIPs regulations, which includes the ongoing charges ratio
and the financing and transaction costs.
Total return
NAV and share price total returns show how the NAV and share price
have performed over a period of time in percentage terms, taking into
account both capital returns and dividends paid to shareholders. NAV
total return assumes reinvesting the net dividend paid by the Company
back into the NAV of the Company with debt at fair value on the date
on which that dividend goes ex-dividend. Share price total return assumes
reinvesting the net dividend back into the share price of the Company
on the date on which that dividend goes ex-dividend.
NAV total return
Year ended 30 June 2023 2023 2022
==================================================== ============= ============
Opening NAV 530.37p 737.97p
==================================================== ============= ============
Closing NAV 482.95p 530.37p
==================================================== ============= ============
Decrease in NAV -47.42p -207.60p
==================================================== ============= ============
% Decrease in NAV -8.9% -28.1%
==================================================== ============= ============
Uplift from reinvestment of dividends(A) 1.5% 0.8%
==================================================== ============= ============
NAV total return decrease -7.4% -27.3%
---------------------------------------------------- ------------- ------------
(A) The uplift from reinvestment of dividends assumes that the dividends
of 5.4p in October 2022 and 3.0p in April 2023 (5.0p and 2.7p in 2021/22)
paid by the Company were reinvested in the NAV of the Company on the
ex-dividend date.
Share price total return
Year ended 30 June 2023 2023 2022
==================================================== ============= ============
Opening share price 453.00p 698.00p
==================================================== ============= ============
Closing share price 414.00p 453.00p
==================================================== ============= ============
Decrease in share price -39.00p -245.00p
==================================================== ============= ============
% Decrease in share price -8.6% -35.1%
==================================================== ============= ============
Uplift from reinvestment of dividends(A) 1.8% 0.8%
==================================================== ============= ============
Share price total return decrease -6.8% -34.3%
---------------------------------------------------- ------------- ------------
(A) The uplift from reinvestment of dividends assumes that the dividends
of 5.4p in October 2022 and 3.0p in April 2023 (5.0p and 2.7p in 2021/22)
paid by the Company were reinvested in the shares of the Company on
the ex-dividend date.
Additional Notes to the Annual Financial Report
The Annual General Meeting will be held at Wallacespace
Spitalfields, 15 Artillery Lane, London E1 7HA on Thursday 23
November 2023 at 12 noon.
If approved at the Annual General Meeting, the final dividend of
8.00p per share will be paid on 30 November 2023 to holders of
Ordinary shares on the register at the close of business on 3
November 2023. The relevant ex-dividend date is 2 November
2023.
The Annual Financial Report Announcement is not the Company's
statutory accounts. The above results for the year ended 30 June
2023 have been agreed with the auditor and are an abridged version
of the Company's full accounts, which have been approved and
audited with an unqualified report. The 2022 and 2023 statutory
accounts received unqualified reports from the Company's auditor
and did not include any reference to matters to which the auditor
drew attention by way of emphasis without qualifying the reports,
and did not contain a statement under s.498(2) or 498(3) of the
Companies Act 2006. The financial information for 2022 is derived
from the statutory accounts for 2022 which have been delivered to
the Registrar of Companies. The 2023 accounts will be filed with
the Registrar of Companies in due course.
The Annual Report and Accounts will be posted to shareholders in
September 2023. Copies will be available during normal business
hours from the Secretary, abrdn Holdings Limited, 1 George Street,
Edinburgh EH2 2LL or from the Company's website,
www.abrnuksmallercompaniesgrowthtrust.co.uk *.
Please note that past performance is not necessarily a guide to
the future and that the value of investments and the income from
them may fall as well as rise and may be affected by exchange rate
movements. Investors may not get back the amount they originally
invested.
By order of the Board
abrdn Holdings Limited
Company Secretary
24 August 2023
* Neither the Company's website nor the content of any website
accessible from hyperlinks on it (or any other website) is (or is
deemed to be) incorporated into, or forms (or is deemed to form)
part of this announcement.
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END
FR SEUFILEDSELA
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August 25, 2023 02:00 ET (06:00 GMT)
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