TIDMHRI
RNS Number : 1317X
Herald Investment Trust PLC
17 February 2017
ANNUAL FINANCIAL REPORT for the year ended
31 December 2016 (audited)
This is the Annual Financial Report of Herald Investment Trust
plc as required to be published under DTR 4 of the UKLA Listing
Rules.
Results and dividend
The net asset value (NAV) of the Company at 31 December 2016 was
1083.2p per ordinary share (2015 - 881.8p). This represented an
increase of 22.8% during the year. The discount was 18.5% (2015:
15.5%) and the share price increased by 18.4% to 882.5p.
The Company made a revenue profit of GBP430,000 (2015: loss of
GBP36,000) giving net earnings of 0.58p (2015: (0.05p)) per share.
The directors do not recommend a dividend (2015 - nil) for the year
ended 31 December 2016.
The financial information set out in this Annual Financial
Report does not constitute the Company's statutory accounts for
2015 or 2016. Statutory accounts for the years ended 31 December
2015 and 31 December 2016 have been reported on by the Independent
Auditor. The Independent Auditor's Reports on the Annual Report and
Financial Statements for 2015 and 2016 were unqualified, did not
draw attention to any matters by way of emphasis, and did not
contain a statement under 498(2) or 498(3) of the Companies Act
2006. Statutory accounts for the year ended 31 December 2015 have
been filed with the Registrar of Companies. The statutory accounts
for the year ended 31 December 2016 will be delivered to the
Registrar in due course.
The financial information in this Annual Financial Report has
been prepared using 'The Financial Reporting Standard applicable in
the UK and Republic of Ireland' (FRS102), which forms part of
revised Generally Accepted Accounting Practice ('New UK GAAP')
issued by the Financial Reporting Council in 2013, 2014 and 2015.
The financial statements have also been prepared in accordance with
The Companies Act 2006 and with the Statement of Recommended
Practice 'Financial Statements of Investment Trust Companies and
Venture Capital Trusts' issued by the Association of Investment
Companies (AIC) in November 2014.
STATISTICS AND PERFORMANCE - YEAR'S SUMMARY
31 December
31 December 2016 2015 % change
------------------------------------- ---------------- ------------ --------
Total assets (before deduction
of bank loans and derivative
financial instruments)* GBP816.4m GBP709.1m
------------------------------------- ---------------- ------------ --------
Bank loans GBP25.0m GBP25.0m
------------------------------------- ---------------- ------------ --------
Derivative financial instruments
* - GBP13.0m
------------------------------------- ---------------- ------------ --------
Shareholders' funds GBP791.4m GBP671.1m
------------------------------------- ---------------- ------------ --------
Net asset value per ordinary
share 1083.2p 881.8p 22.8
------------------------------------- ---------------- ------------ --------
Share price 882.5p 745.3p 18.4
------------------------------------- ---------------- ------------ --------
Numis Smaller Companies Index
plus AIM
(ex. investment companies) 5,049.8 4,628.6 9.1
------------------------------------- ---------------- ------------ --------
Russell 2000 (small cap) Technology
Index (in sterling terms) 2,307.0 1,540.2 49.8
------------------------------------- ---------------- ------------ --------
Composite comparative index 21.7
------------------------------------- ---------------- ------------ --------
Dividend per ordinary share - -
------------------------------------- ---------------- ------------ --------
Revenue earnings per ordinary
share 0.58p (0.05p)
------------------------------------- ---------------- ------------ --------
Ongoing charges ** 1.09% 1.08%
------------------------------------- ---------------- ------------ --------
Discount to NAV 18.5% 15.5%
------------------------------------- ---------------- ------------ --------
* The derivative financial instrument was closed on 29 July
2016.
** Ongoing charges calculated in accordance with AIC guidelines:
annualised charges, excluding interest, incurred by the Company,
expressed as a percentage of the average net asset value.
Long Term Performance Summary
The following table indicates how an investment in Herald has
performed relative to its comparative index (applied
retrospectively) and its underlying fully diluted net asset value
over the period since inception of the Company.
Inception
31 December 16 February
2016 1994 % change
------------------------------------- ----------- ------------ --------
Net asset value per ordinary share
(including current year income) 1083.2p 98.7p 997.5
------------------------------------- ----------- ------------ --------
Net asset value per ordinary share
(excluding current year income) 1082.6p 98.7p 996.9
------------------------------------- ----------- ------------ --------
Share price 882.5p 90.9p 870.8
------------------------------------- ----------- ------------ --------
Numis Smaller Companies Index plus
AIM (ex. investment companies) 5,049.8 1,750.0 188.6
------------------------------------- ----------- ------------ --------
Russell 2000 (small cap) Technology
Index (in sterling terms) 2,307.0 688.7 235.0
------------------------------------- ----------- ------------ --------
Chairman's Statement AND REVIEW OF 2016
I am pleased to report another successful year in 2016. The net
asset value per share closed at a high of 1083.2p, an uplift of
22.8% over the year. This is a milestone for the Company: the
capital return per share has decisively exceeded 10x from inception
in 1994. On a total return basis the net asset value per share has
risen more than 11.5x.
The year has been dominated by politics. Whilst we were not as
surprised by the outcome of the referendum in the UK and the
Presidential election in the US as many seem to have been, we did
not anticipate the positive effect that these events have had on
equity markets, particularly in the US. The main effect of the
referendum has been a sharp devaluation of sterling which was
predictable, and as a result we benefited from cash balances
intentionally held in overseas currencies. The total appreciation
on the portfolio was GBP144.5m in 2016. Of this return currency
gains represent some GBP41m. The indirect benefit by way of UK
companies' overseas earnings is more difficult to quantify.
The other significant feature of the year for the Company has
been takeovers. There have been fifteen in all - six in the US,
eight in the UK and one in France - with an aggregate takeout value
of GBP64.0m. The average holding period from first purchase was 8.2
years. Most of the UK takeovers were towards the end of the year.
It felt as though no decisions were made before and immediately
after the Brexit vote but, as business carried on normally after
the vote, buyers' confidence returned. The level of takeovers was
not as high as it was in 2015 (GBP92.3m), but it remains above the
long-term trend.
Takeover activity reflects the natural lifecycle of the
Company's investments. One of our aims has always been to provide
development capital to early stage quoted companies, and it is
inevitable that as they mature, some are acquired. However, there
is another phenomenon. The number of takeovers is now exceeding the
number of new issues: investors are withdrawing capital from the
quoted sector. Instead there are flows of capital into private
equity and venture capital. Private equity is able to use more
efficient capital structures with more financial leverage, and
lower taxes. In addition, the level of regulation in quoted markets
is increasingly burdensome for companies and investors alike.
Investors in private companies also have the advantage of investing
without the limitations of insider rules.
Fortunately, there are some counterbalancing positives. Firstly,
large companies driven by quarterly reporting are investing less in
new products and are happier to acquire smaller companies when they
have reached profitability. This leaves a larger gap for
entrepreneurial companies to fill. Secondly, both private equity
and large corporations are paying significant premiums to quoted
market valuations. Thirdly, many professional investors are
abandoning smaller quoted companies, and brokers are less energetic
about promoting secondary market activity due to reduced
commissions. Together these factors create opportunities for a
research-driven company like Herald. Finally, private equity is in
general not a good quality owner because its time horizon is
determined by the life of their fund. This can cause forced exits,
bringing companies back to the market at a later stage of
development. There could in due course be a flood of IPOs at
exciting valuations.
The UK continues to be the largest proportion of the portfolio
but, as a percentage, has fallen to 57% of net assets. The return
on the UK portfolio was 16.0%. Although this was a drag on the
overall return of the fund, we are pleased that it usefully
exceeded the Numis Smaller Companies Index (inc AIM but exc
investment companies) which grew by 9.1%. The North American return
was 38.4% in sterling. Although this was an impressive number in
absolute terms, we lagged the Russell 2000 Technology Index in
sterling which returned 49.8%. All the relative underperformance
occurred in the fourth quarter, and reflects our exposure to the
smaller companies in the Russell 2000 Index and companies too small
for this index. The Asian portfolio appreciated by 21.65% which was
largely related to currency. Europe was the star region, rising
56.7% in sterling, though it is a small proportion of our
portfolio.
We held net cash balances throughout the year (5+%) reflecting
caution around political uncertainties. Our cash grew even more in
Q4 as cash came in from takeovers. This held back the performance
of the Company overall.
We decided to close the remaining GBP25m of our interest rate
swap, having been offered favourable terms to close the position.
In 2008, the Company took out a GBP50m interest rate swap to fix
the level and cost of borrowing. Because interest rates
subsequently fell, the swap actually cost the Company money, an
aggregate 11.4% drag on performance since 2008. GBP25m of the swap
was cancelled in 2014. In 2016, the closure of the remaining swap
had no material effect on the valuation. However, the reduced
interest cost meant that the Company once again generated a
positive income from dividends received.
The share price discount has remained at a frustratingly wide
level, but broadly in line with UK smaller companies investment
trusts. Helped by the strong cash flows from takeovers in 2015 and
2016, the Board and the Manager have been purposeful in share
buybacks (GBP23.5m), representing 4% of the outstanding capital,
but overall volume has been limited. The illiquidity in the Trust's
shares mirrors the illiquidity in the underlying portfolio. In part
this reflects the fact that commission levels have been driven down
to such a low level that it does not pay brokers to broke stocks
actively. The burden of marketing is now moving even more to
companies including the Trust itself. Marketplaces adapt, but at
the moment in the UK the regulatory shock of the impending
introduction of MiFID II has led to dire illiquidity, and
commensurately wide discounts for smaller company trusts in
general. It will be interesting to see how markets evolve over the
next two years. In 2017, we intend to be more active in marketing
and broker engagement.
Over the life of the Company, total realised and unrealised
profits of GBP695m have been achieved on a maximum capital of
GBP95m, and nearly GBP367m has been invested in primary capital
helping businesses grow in a desirable way for the economy with
added value jobs. Herald is unique in the investment trust sector
with its focus on UK technology and its systemic importance in the
provision of capital to this important sector of the UK economy. We
believe that there is a very positive case to be made for the
Company.
The latest trading news from portfolio companies is generally
sound. Although valuations are not at the bargain levels of the
financial crisis, they are cheap compared to bonds and corporate
activity is occurring at such substantial premiums that we look
forward to 2017 with reasonable optimism.
Julian Cazalet
Chairman
Investment Manager's Report
The year started with a pronounced dip and the assets had
declined nearly 10% by mid February. Asia and Europe fell c.10% and
the North American portfolio by c.18% while the UK portfolio fell
only 6.7%. This was perceived to reflect worries about growth
slowing in China, but the technical effect of hedge fund
liquidations was probably the more significant factor. The UK
market was then dormant and was still down 5% by the end of June
reflecting Brexit worries, while overseas markets recovered so the
net asset value was broadly flat. The third quarter was sparkling
with a GBP122m uplift in value. A further GBP19m appreciation
occurred in Q4 taking the year's gain to GBP144.5m. This led to a
rise in net assets per share of 22.8%. We use a comparative index
of 2/3rds the Numis Smaller Companies Index (including AIM and
excluding investment companies) and 1/3(rd) the Russell 2000
Technology Index. This returned 21.7% on a total return basis in
sterling. The Company's return reflects the outperformance in the
UK and Europe - tempered somewhat by the overweight cash position.
Given the lack of correlation between the remit and the comparative
indices described below, the result for the Trust is really quite
pleasing.
UK
The UK produced a total return of 16.0%. The comparative
benchmark used is the Numis Smaller Companies index (including AIM
and excluding investment companies), which made a total return of
12.0%. Furthermore, the weighted return of the sectors targeted was
only 7.3%.
The total returns within the Numis Index for the relevant
sectors for 2016 are as follows.
Electronic & Electrical
Equipment 11.6%
Media 20.7%
Telecommunications -9.3%
Technology 2.9%
Weighted return for TMT sectors 7.3%
Since inception in 1994, the fund has outperformed this index
(and its predecessor Hoare Govett indices). The compounding effect
is quite dramatic. Since inception, the UK has now delivered a
total return of 1,333% versus the index return of 438%. However the
"active share" of the portfolio is 91.2%. In other words, there is
very little overlap with the index - which is why we do not
consider it a benchmark. There are two strong messages from this.
We read about active versus passive management in a rather
bewildered way from our corner of the world. If you own a small
company you are overweight. If you buy a new issue it is not in the
index. This year we only invested GBP14.0m in primary offerings
because we were husbanding cash in an uncertain political world,
but the total since inception has been over GBP330m. I am not sure
how new issues will work in a passive world.
We are very grateful to the plethora of management teams in the
UK that have worked so hard on shareholders' behalves to have
delivered such good returns. Although the UK portfolio tends to lag
returns overseas when sterling weakness is pronounced, as has been
the case in 2016, UK companies do benefit on a delayed basis as
overseas profits are enhanced in sterling, and margins on exports
can expand. Over the long run, the UK outperformance in part
reflects more efficient use of balance sheets with companies
raising just enough capital. In contrast US companies tend to have
balance sheets bloated by excess cash, but it does contribute to
better liquidity in the US.
Seven holdings appreciated more than 100% during the year, of
which the two significant ones were Avesco and IQE. IQE recovered
from aberrantly low levels, while Avesco was the most significant
takeover. We were fortunate to acquire most of the Avesco holding
at distressed levels in June 2009 at the height of the financial
crisis at 22p. The take out value of 650p was most welcome, and the
premium on the price the day before the takeover was 125%. We
endeavour not to own more than 10% in any one company, in order to
have some discipline over liquidity. Avesco was an exception: our
holding crept up to 12.5% when the company bought back the shares
of one investor with our blessing. Servicepower Technologies was
another company where the Trust's stake crept over 10%, because we
bought some cumulative convertibles which we held longer than
anticipated, and the accrued coupon converted to ordinary shares at
a very low price. The takeover led to an appreciation for the year
of 209%. However the shares had fallen prior to the takeover
because the company was cash constrained to the point that we put
in a short term loan. We had confidence in the company longer term
and would have liked to have stood our corner in a fund raising,
but with an 11.5% stake were reluctant to invest alone. To our
frustration, the directors rationally on their part did not want to
be diluted at a derisory valuation, so chose to exit the company
before it was fully ripe. A Canadian company made a first offer at
5p, which was 100% higher than the price at which the shares had
been languishing, and a counter offer came in at 6p. This
colourfully illustrates the state of UK capital markets. Cash
everywhere except where it is needed. UK investors are particularly
poor at investing in break-even or loss making businesses. The take
out valuation was little more than one times revenue. Such a low
valuation is very unusual in US markets, so we were reluctant
sellers on this occasion. We wish there were more like minded long
term co-investors. At the other end of the spectrum, Alternative
Networks was the lemon of the year losing GBP2.4m in spite of a 17%
premium on a takeover at the year end. It is a pity it limped off
the market, because it has historically been a good performer, and
yielded nearly GBP8m in profit and dividends. There have been so
many UK takeovers that almost anything left of size is not
particularly appealing. The interest lies in the smaller emerging
companies so we expect to continue to hold a long list both to
avoid the risk associated with high stock specific risk positions
and to avoid holding stakes greater than 10% of the outstanding
capital in the investee companies.
North America
The portfolio appreciated by 38.4% in sterling terms. The
Russell 2000 Technology index rose even more - up 50.6%. I have for
the first time analysed the weightings in the index as I was
annoyed at our underperformance, but am reassured that half the
index is larger than our size remit, and the largest stock - AMD -
appreciated 371% in sterling terms during the year, and is way too
big for our small company fund. The active weight versus the index
we are comparing the North American portfolio to is 90.6%, so it is
surprising that we have correlated to the index to the extent we
have. Since we entered the North American market in 1996, the US
portfolio has appreciated 352%, and the index 230% in sterling
terms. The price/earnings ratio ("p/e") of the North American
portfolio was 37.1x on Bloomberg estimates at the year end, which
is much higher than the UK and EMEA portfolios (c.20x). The
American p/e has doubled over four years, reflecting the takeovers
of more mature lower p/e companies in part, whereas the UK multiple
has only risen a quarter. In comparison the Asian p/e has risen
from 8.6x to 12.3x. The multiples in the US do not seem to reflect
the scale of dilution from stock based compensation, albeit there
is strong growth.
There were nine companies in the US portfolio that appreciated
by more than 100% in sterling terms. These were Akoustis
Technologies, Apigee (bought and sold during the year), Energous,
Mentor Graphics, KEYW, Boingo Wireless, Amber Road, Impinj and
Fabrinet. (Interestingly Akoustis, Apigee, Boingo, and Energous are
not in the index). The most significant by value was the longest
held, Mentor Graphics. The largest holding in the portfolio -
Silicon Motion Technologies - performed satisfactorily,
appreciating 64% in share price terms, but profit taking at higher
levels helped give a total return of GBP7.8m during the year. Poor
performers were Hydrogenics and Adesto which are both early stage
companies.
EMEA
EMEA has been the star performing region appreciating 56.6% in
sterling terms.
In Europe Ordina, BE Semiconductor Industries (BE Semi) and
Devoteam all appreciated by more than 100%. By value the star was
BE Semi which was initially purchased in 2011. We would also have
done well owning more semiconductor equipment manufacturers on the
US market, but BE Semi was the preferred play in this sector, which
is so cyclical. It is a Dutch based back-end equipment
manufacturer. The sector has been strong, but BE Semi has gained
share as well. Cumulative profits on this holding including
dividends are now GBP11.5m. Second was Isra Vision, a German listed
company that has been held since 2004 and appreciated by 83.5%
(GBP2.2m during the year). The star performers have all been long
term holdings which have enjoyed multiple expansion. Although I
have high regard for the management teams, I wish they were not all
now on p/e multiples greater than 20x.
Asia
The Asian portfolio appreciated 21.8% in sterling terms, with
most of the gain coming from foreign exchange gains - aided by a
healthy contribution from Asian dividends.
Innox in South Korea appreciated more than 100% and made the
biggest individual positive contribution to the Asian performance.
PSK and Soulbrain, two other South Korean companies, also performed
well. Innox and Soulbrain are likely beneficiaries of the move to
the use of flexible AMOLED displays in smartphones and PSK is a
leading supplier of capital equipment into the DRAM and 3D NAND
memory industries. The worst performance came from 21Vianet, an
internet data centre services provider in China, where the
combination of a failed takeover and weak trading caused the share
price to more than halve.
Macro background
If politics has been an enduring overhang in 2016, regulation
continues to be the enduring headache. If AIFMD (Alternative
Investment Fund Managers Directive) meant our back office and
middle office had to be rebuilt, MAR (Market Abuse Regulation) and
MiFID II (Markets in Financial Instruments Directive) are impacting
the front office. The most significant impact has been that we have
opened a New York office this year, so that we have the opportunity
to meet companies who no longer come to London, and have a video
conferencing link to join in from London. It is evident that the
low level of commissions being paid has squeezed brokers selling
overseas investments into London particularly hard, to the point
where few companies bother to come to London anymore. It frustrates
us that the cost of the New York office and the extra costs
associated with corporate access and research required in overseas
markets will be adversely impacting the UK balance of payments and
HMRC's tax receipts.
Sector update
Smaller companies were in the shade for a period when the big
consumer names were in the limelight, and generalist fund managers
were investing in Facebook, Amazon, Netflix and Google (Alphabet).
This year has seen a bit of a catch up from the myriad of
technology companies that are behind the scenes enabling the
internet. We are moving to a period where internet growth is sub
10%, but that does not mean that at the smaller end there are not
still many opportunities. The automotive sector has become a hot
talking point as cars move towards being driverless. Batteries
remain the stumbling block for full electric vehicles but plug-in
hybrids are quite practical. The trends are evident. Cheap
electricity is incredibly exciting. Now that solar panels and wind
turbines have become so inexpensive, it opens the prospect of a
great proportion of the earth's population enjoying mobile phones,
and the technology that drives GDP growth.
In the UK (and Ireland) there has been a surge in venture
investing. Figures from Ascendant Corporate Finance suggest
GBP2,591m was invested in 2015 in 534 deals and GBP2,248m in the
first three quarters of 2016 in 459 companies. Meanwhile the
university funds continue to gain assets. I am doubtful whether
they will achieve good returns but optimistic that some of the
companies that have been seeded will require follow on funding in
due course and this will provide a pipeline of IPOs. In addition
there is a particularly entrepreneurial culture in the UK. In part,
this comes from bright graduates emerging from university with
debt, who struggle to find secure lucrative employment in the
conventional way and are eager to take the risk. Inward investment
by the US technology companies has become significant. We are in a
knowledge based world where skills are more valuable than capital.
This is reflected in huge pay packages in Silicon Valley in
particular. Bright developers prefer to work for a start-up with
share incentivisation rather than in established businesses. In
order to keep staff, established businesses have responded by
giving restricted stock units, or shares that vest after time. When
I hear companies justifying 5% dilution each year to keep good
staff I shiver, and think of adverts in 2007 for 125% mortgages. It
is a bubble and many valuations do not reflect the viciousness of
this dilution. The side effect is that large US companies want to
expand outside the Californian hotspots, and thanks to sterling
weakness, an available skill set and work ethic, London is a
target. I was initially dismayed that US companies kept buying the
UK's good companies cheaply, and now they are just buying the
people, including poaching staff from investee companies. On
reflection, it is good news because these big companies will train
people, and some will leave and start businesses. It is noticeable
that the last generation of tech companies including Microsoft,
Cisco and Oracle came to the M4 corridor. The new generation
including Google, Apple and Amazon are focused on central
London.
As far as Brexit is concerned, portfolio companies do not seem
perturbed. Regulation in its widest sense is the frustration and I
sense that is why so many of the entrepreneurial CEOs in our UK
portfolio seemed to vote for Brexit. I grew up as a child in an era
of militant trade unions. They were the managements' challenge.
Unions have long since ceased to be the headache, but the law in
its widest sense has become the big headache, because it encroaches
on business practices more intrusively than right and wrong.
Summary
The sector continues to provide attractive opportunities. On
valuation grounds the UK seems the most attractive, but at the
small end where illiquidity is at its most challenging. The
overseas listings have had the currency bounce, while UK companies
with overseas earnings should benefit over time on translation of
profits. Sterling weakness has meant that the Trust has had a
strong year relative to UK smaller companies funds, and a poor year
relative to the large capitalisation technology funds which are
dollar focussed. Some catch up occurred in Q4 and many UK companies
should benefit from a profits tailwind next year as well.
Time weighted total return by geography in sterling terms,
compared with indices
01/01/2016-
31/12/2016
----------------------------------------------- -----------
Asia 20.2%
----------------------------------------------- -----------
Europe Middle East and Africa 56.7%
----------------------------------------------- -----------
North America 37.5%
----------------------------------------------- -----------
UK 16.3%
----------------------------------------------- -----------
Foreign Bonds 16.6%
----------------------------------------------- -----------
Numis Smaller companies index plus AIM (ex
investment trusts) 12.0%
----------------------------------------------- -----------
Russell 2000 (small cap) Technology Index 50.6%
----------------------------------------------- -----------
Investment Changes (GBP'000)
Valuation Valuation
at Net at
31 December acquisitions/ Appreciation/ 31 December
2015 (disposals) (depreciation) 2016
--------------------- ------------ -------------- --------------- ------------
Equities*
--------------------- ------------ -------------- --------------- ------------
UK 429,453 (34,821) 59,880 454,512
--------------------- ------------ -------------- --------------- ------------
EMEA 26,008 (4,139) 12,612 34,481
--------------------- ------------ -------------- --------------- ------------
North America 150,746 (28,458) 55,062 177,350
--------------------- ------------ -------------- --------------- ------------
Asia Pacific 35,944 (3,387) 6,028 38,585
--------------------- ------------ -------------- --------------- ------------
Total equities 642,151 (70,805) 133,582 704,928
--------------------- ------------ -------------- --------------- ------------
Bonds:
--------------------- ------------ -------------- --------------- ------------
US bonds - 6,940 1,101 8,041
--------------------- ------------ -------------- --------------- ------------
Total bonds - 6,940 1,101 8,041
--------------------- ------------ -------------- --------------- ------------
Total investments 642,151 (63,865) 134,683 712,969
--------------------- ------------ -------------- --------------- ------------
Liquid assets** 66,988 28,506 7,951 103,445
--------------------- ------------ -------------- --------------- ------------
Total assets 709,139 (35,359) 142,634 816,414
--------------------- ------------ -------------- --------------- ------------
The total assets figure above comprises assets less current
liabilities before deduction of the GBP25m bank loan.
* Equities includes convertibles and warrants.
** Liquid assets comprise cash, debtors and creditors excluding
bank loans and derivative financial instruments.
Katie Potts
Top Twenty Equity Holdings
AT 31 DECEMBER 2016
A brief description of the twenty largest equity holdings in
companies is as follows:
Diploma
-------------------------------------------------------------- -----------------------
Diploma is a group of specialised distribution businesses Country United Kingdom
serving industries with long term growth potential and % of total assets
with the opportunity for sustainable superior margins 2.9
through the quality of customer service, depth of technical % of issued share
support and value-adding activities. The three sectors capital held 2.0
the company focuses on are life sciences, seals and controls.
31/12/16 31/12/15
Valuation (GBPm) 23.74
17.39
Shares (m) 2.29 2.29
-------------------------------------------------------------- -----------------------
IDOX
---------------------------------------------------------------- -----------------------
Idox plc is a supplier of specialist document management Country United Kingdom
collaboration solutions and services to the public sector % of total assets
and increasingly to highly regulated asset intensive industries 2.3
around the world in the wider corporate sector. The Public % of issued share
Sector Software Division is the leading applications provider capital held 7.9
to UK local government for core functions relating to
land, people and property, including its market leading 31/12/16 31/12/15
planning systems and election management software. Over Valuation (GBPm) 18.46
90% of UK local authorities are now customers. The Division 14.59
provides public sector organisations with tools to manage Shares (m) 28.52 28.62
information and knowledge, documents, content, business
processes and workflow as well as connecting directly
with the citizen via the web. The Engineering Information
Management Division delivers engineering document control,
project collaboration and facility management applications
to many leading companies in industries such as oil &
gas, architecture and construction, mining, utilities,
pharmaceuticals and transportation in North America and
around the world. The Group employs over 660 staff located
in the UK, the USA, Canada, Europe, India and Australia.
---------------------------------------------------------------- -----------------------
Imagination Technologies
--------------------------------------------------------------- -----------------------
Imagination Technologies is a global leader in multimedia, Country United Kingdom
processor and communication technologies. It creates and % of total assets
licenses market-leading processor solutions. This silicon 2.2
IP (intellectual property) is used to create the SoCs % of issued share
(Systems on Chips) that sit at the heart of a wide range capital held 2.5
of mobile, consumer and embedded electronics solutions.
Imagination's unique graphics and multimedia (PowerVR), 31/12/16 31/12/15
general purpose processor (MIPs) and connectivity technologies Valuation (GBPm) 17.98
(Ensigma) enable its customers to get to market quickly 13.05
with complete and highly differentiated semiconductors. Shares (m) 7.14 9.89
Imagination's licensees include many of the world's leading
semiconductor manufacturers, network operators and OEMs/ODMs
who are creating some of the world's most iconic products.
Corporate headquarters are located in the United Kingdom,
with sales and R&D offices worldwide. Apple is a significant
customer and an investor in Imagination Technologies.
--------------------------------------------------------------- -----------------------
GB Group
---------------------------------------------------------------- -----------------------
GB Group is a global specialist in Identity Data Intelligence. Country United Kingdom
This is the data that reveals who a person really is, % of total assets
what they like - and what they don't. GBG helps organisations 2.2
realise the full value of their customer base by recognising % of issued share
and verifying all elements of a consumer's identity at capital held 4.9
every interaction. GBG combines trillions of data records
from all over the world relating to people's identity 31/12/16 31/12/15
to help their clients make the right decisions about the Valuation (GBPm) 17.89
customers they serve and the people they employ. The company 18.58
operates in 3 main areas: supporting fraud, risk and compliance Shares (m) 6.57 6.91
management; managing data quality through location intelligence
and customer behaviour insights; and offering HR professionals
superior employee screening capability. Through the application
of technology, GB Group protects, predicts and provides
information that is used to maximise customer value for
some of the largest companies in the UK. The company provides
an integrated and comprehensive range of data services
to clients allowing them to interact effectively with
their customers, improve long term profitability and reduce
fraud. Headquartered in Chester (UK) and with 21 offices
in 13 countries across the world, GBG provides solutions
to many of the world's biggest organisations, including
established brands like Nike, Ford and HSBC.
---------------------------------------------------------------- -----------------------
M&C Saatchi
----------------------------------------------------------- -----------------------
M&C Saatchi is a global marketing services business working Country United Kingdom
for clients across a wide variety of industry sectors. % of total assets
The Company was founded in 1995. Starting with a strong 1.8
base in the UK and Australia, M & C Saatchi have added % of issued share
new agencies and disciplines in Asia, USA and Europe. capital held 5.3
M&C Saatchi currently has 30 offices worldwide.
31/12/16 31/12/15
Valuation (GBPm) 14.92
13.16
Shares (m) 3.94 4.14
----------------------------------------------------------- -----------------------
Silicon Motion Technology
------------------------------------------------------------------- -----------------------
Silicon Motion Technology is a global leader and pioneer Country United States
in developing NAND flash controller ICs for solid-state % of total assets
storage devices and specialty RF ICs for mobile devices. 1.8
They supply more NAND flash controllers than any other % of issued share
company and have one of the broadest portfolios of controller capital held 1.2
solutions and technologies. Key products are controllers
used in embedded storage products such as SSDs and eMMCs, 31/12/16 31/12/15
as well as in expandable storage products such as memory Valuation (GBPm) 14.75
cards and USB flash drives. Products are widely used in 11.70
consumer devices such as smartphones, tablets and PCs Shares (m) 0.43 0.55
and for industrial, enterprise, commercial and other applications.
Customers include most of the NAND flash makers, leading
technology OEMs, and the majority of storage device module
makers. More NAND flash products - especially next-generation
flash - produced by Intel, Micron, Samsung, SanDisk, SK
Hynix and Toshiba are supported by Silicon Motion controllers
than any other company. Silicon Motion is the world's
leading merchant supplier of controllers for eMMC embedded
memory used in smartphones and tablets, and the leading
merchant supplier of controllers for client SSDs used
in PCs and other applications. The acquisition of Shannon
Systems expanded the product portfolio to now include
enterprise-grade PCIe SSDs for the Chinese hyperscale
data center market. Silicon Motion was founded in 1995
in San Jose, California and is now headquartered in Taiwan,
with design centers and sales offices in Taiwan, Korea,
China, Hong Kong, Japan and the US.
------------------------------------------------------------------- -----------------------
SQS Software Quality Stsyems
------------------------------------------------------------------- -----------------------
The SQS Group (SQS) is a leading specialist in software Country United Kingdom
quality providing end-to-end business process quality % of total assets
assurance for software-based systems. SQS consultants 1.6
identify and mitigate business risk in technology-led % of issued share
transformations utilising standardised methodology, industrialised capital held 6.9
automation solutions, global delivery and deep domain
knowledge across multiple industries. With over 30 years 31/12/16 31/12/15
experience and over 10,000 completed projects, SQS has Valuation (GBPm) 13.36
a strong global customer base. Founded in Cologne in 1982, 11.12
SQS employs around 4,600 staff. SQS has offices in Germany, Shares (m) 2.19 1.89
the UK, Australia, Egypt, Finland, France, India, Ireland,
Italy, Malaysia, the Netherlands, Norway, Austria, Singapore,
Sweden, Switzerland, South Africa, the UAE and the US.
In addition, SQS maintains a minority stake in a company
in Portugal.
------------------------------------------------------------------- -----------------------
Next Fifteen Communications
--------------------------------------------------------------------- -----------------------
Next 15 aims to become the world's largest and most respected Country United Kingdom
specialist communications group. To do this, the Group % of total assets
continues to build a portfolio of businesses that cater 1.6
to the subtly different needs of the various market sectors % of issued share
and geographies in which it operates. Next 15 employs capital held 5.7
over 1,350 people across 32 offices in 14 countries. The
Group incorporates 17 subsidiary agencies, spanning digital 31/12/16 31/12/15
content, marketing, PR, consumer, technology, marketing Valuation (GBPm) 12.76
software, market research, public affairs and policy communications. 13.76
Of the Group's businesses, five are independent communications Shares (m) 4.18 5.78
brands, with three specialising in the technology sector
(Bite, Text 100 and The OutCast Agency), and two in the
consumer space (Lexis and M Booth). The Group also owns
three agencies with a focus on digital (Beyond, bDA and
Connections Media), a B2B marketing agency (Twogether),
a programmatic advertising technology business (Encore),
a market research company (Morar), a digital content marketing
agency (Story), a policy communications firm (Vrge), a
creative agency (ODD London), a B2B technical marketing
communications agency (Publitek) and an investor relations
consultancy (The Blueshirt Group). Lastly the Group has
established its first marketing software business in agent3.
All brands operate as autonomous businesses, allowing
the Group to service competing clients.
--------------------------------------------------------------------- -----------------------
IQE
---------------------------------------------------------------- -----------------------
IQE is the leading global supplier of advanced compound Country United Kingdom
semiconductor wafers. These wafers are atomically engineered % of total assets
to provide IQE's customers with the materials from which 1.5
they produce high performance wireless, photonic and electronic % of issued share
devices or "chips." It is IQE's epitaxial layer processes capital held 5.0
that enable chips to operate at the high frequencies (radio
frequencies or RF) that are used for all forms of wireless 31/12/16 31/12/15
communications. IQE's "epi" processes also manufacture Valuation (GBPm) 12.56
materials that enable the conversion of energy to light 5.86
or light to energy for sensing, lighting and power generation Shares (m) 33.50 33.50
technologies. IQE produces materials with precisely controlled
atomic compositions to emit or detect/receive light from
the infrared, through the visible and into the ultraviolet
range of wavelengths. IQE's products cover a diverse range
of applications, supported by an innovative outsourced
foundry services portfolio that allows the Group to provide
a 'one stop shop' for the contract wafer manufacturing
needs of the world's leading semiconductor manufacturers.
Possessing the largest independent manufacturing capacity
worldwide, IQE are able to achieve enhanced economies
of scale that no other merchant epiwafer manufacturer
can realize and few in-house capabilities can match.
---------------------------------------------------------------- -----------------------
Pegasystems
----------------------------------------------------------------- -----------------------
Pegasystems develops strategic applications for sales, Country United States
marketing, service and operations. Pega's applications % of total assets
streamline critical business operations, connect enterprises 1.3
to their customers seamlessly in real-time across channels, % of issued share
and adapt to meet rapidly changing requirements. Pega's capital held 0.5
Global 2000 customers include many of world's most sophisticated
and successful enterprises. Pega's applications, available 31/12/16 31/12/15
on-premises or in the cloud, are built on its unified Valuation (GBPm) 10.79
Pega 7 platform, which uses visual tools to easily extend 6.90
and change applications to meet clients' strategic business Shares (m) 0.37 0.37
needs. Customers include industry leaders in banking,
capital markets, credit cards, insurance, healthcare and
pharmaceutical, the public sector, communications, media
and entertainment, travel and hospitality, consumer packaged
goods, utilities, manufacturing, and oil and gas. Founded
in 1983 with the Head Office in Massachusetts, Pega is
based in 30 locations around the world and has 3,500 staff.
----------------------------------------------------------------- -----------------------
Telit Communications
---------------------------------------------------------------- -----------------------
Telit is a leading global enabler of the Internet of Things Country United Kingdom
(IoT). The company offers the industry's broadest portfolio % of total assets
of integrated products and services for end-to-end IoT 1.2
deployments - including cellular communication modules % of issued share
in all technologies, GNSS, short-to-long range wireless capital held 3.2
modules, IoT connectivity plans and IoT platform services.
Through the IoT Portal, Telit makes IoT onboarding easy, 31/12/16 31/12/15
reduces risk, time to market, complexity and costs for Valuation (GBPm) 10.13
asset tracking, remote monitoring and control, telematics, 7.91
industrial automation and others, across many industries Shares (m) 3.70 3.70
and vertical markets worldwide. The unique combination
of products and services feed data directly into applications
and business IT systems to deliver real-time intelligence
to businesses across industries. With over 14 years exclusively
in m2m, Telit constantly advances technology through nine
R&D centres around the globe, marketing products and services
in over 80 countries. Telit provides customer support
and design-in assistance from 35 sales and support offices
and a global distributor network.
---------------------------------------------------------------- -----------------------
Euromoney Institutional Investor
----------------------------------------------------------------- ----------------------
Euromoney magazine was founded in 1969 by Sir Patrick Country United Kingdom
Sergeant, the then City editor of the Daily Mail. In the % of total assets
decades since, the idea to launch a publication to reflect 1.2
the growth in global capital flows has flourished alongside % of issued share
the development of banking and capital markets. Today, capital held 0.7
Euromoney Institutional Investor PLC is an international
business-to-business information and events group listed 31/12/16 31/12/15
on the London Stock Exchange, with 2,300 employees worldwide Valuation (GBPm) 9.68
and a portfolio of over 50 specialist businesses spanning 8.41
macroeconomic data, investment research, news and market Shares (m) 0.85 0.85
analysis, industry forums and institutes, financial training
and excellence awards. Euromoney's primary sectors include
asset management, banking and capital markets, specialist
finance, metals, mining, energy and commodities. The portfolio
includes brands such as Euromoney, Institutional Investor,
BCA Research, Ned Davis Research, Metal Bulletin, American
Metal Market, CEIC Data, EMIS, Petroleum Economist, Insurance
Insider, Gulf Publishing Company, Mining INDABA and IJ
Global among others. The company headquarters are in the
City of London, with additional main offices in Manhattan,
Montreal, Hong Kong, Singapore and Shanghai. The group
has a further 20 regional offices. Around a third of Euromoney's
revenues are derived from emerging markets.
----------------------------------------------------------------- ----------------------
Telecom Plus
-------------------------------------------------------------- ----------------------
Telecom Plus, which owns and operates the Utility Warehouse Country United Kingdom
brand, is the UK's only fully integrated provider of a % of total assets
wide range of competitively priced utility services, spanning 1.2
both the communications and energy markets. Telecom Plus % of issued share
provides homes and small businesses throughout the UK capital held 1.0
with Home Phone, Broadband, Mobile, Gas and Electricity
all on a unified bill. Telecom Plus was incorporated in 31/12/16 31/12/15
1996 and began operations in 1997 providing a unique range Valuation (GBPm) 9.57
of low-cost telephony services to the residential and 8.73
SOHO markets. They use the collective buying power of Shares (m) 0.82 0.82
individual users to negotiate bulk buying deals with major
suppliers, passing the benefit back to their customers.
Telecom Plus does not advertise and has no shops. Instead,
they rely on word of mouth recommendations from satisfied
customers and distributors to grow its market share.
-------------------------------------------------------------- ----------------------
BE Semiconductor Industries
-------------------------------------------------------------------- ----------------------
Besi was incorporated in the Netherlands in May 1995 and Country Netherlands
is engaged in one line of business, the development, manufacturing, % of total assets
marketing, sales and service of semiconductor assembly 1.1
equipment for the global semiconductor and electronics % of issued share
industries. Besi's customers are primarily leading multinational capital held 0.8
chip manufacturers, assembly subcontractors and electronics
and industrial companies. Besi's equipment performs critical 31/12/16 31/12/15
functions in customers' assembly operations and in many Valuation (GBPm) 8.90
cases represents a significant percentage of their installed 5.68
base of assembly equipment. Besi is a global company with Shares (m) 0.33 0.42
headquarters in Duiven, the Netherlands. It operates seven
facilities for production and development activities,
as well as eight sales and service offices across Europe,
Asia and North America. At the end of 2015 Besi employed
a total staff of 1,539 fixed and temporary personnel of
whom approximately 62% were based in Asia and 38% were
based in Europe and North America.
-------------------------------------------------------------------- ----------------------
Wilmington
---------------------------------------------------------------- ----------------------
Wilmington Group plc is one of the UK's leading providers Country United Kingdom
and partner of choice for information, education and networking % of total assets
in Risk & Compliance, Finance and Legal as well as the 1.1
Insight leader in a number of chosen industries. The Group % of issued share
provides business intelligence, information, training, capital held 3.8
education, events and support services for a variety of
markets including the accountancy, banking, charities, 31/12/16 31/12/15
financial services, healthcare, insurance, legal, and Valuation (GBPm) 8.82
pensions sectors. 10.75
Shares (m) 3.29 4.09
---------------------------------------------------------------- ----------------------
Ceva
----------------------------------------------------------------------- ----------------------
CEVA is a leading licensor of signal processing IP. Ceva Country United States
partners with semiconductor companies and OEMs worldwide % of total assets
to create power-efficient, intelligent and connected devices 1.1
for a range of end markets, including mobile, consumer, % of issued share
automotive, industrial and IoT. Ceva's ultra-low-power capital held 1.5
IP for vision, audio, communications and connectivity
include comprehensive DSP-based platforms for LTE/LTE-A/5G 31/12/16 31/12/15
baseband processing in handsets, infrastructure and machine-to-machine Valuation (GBPm) 8.67
devices, computer vision and computational photography 5.04
for any camera-enabled device, audio/voice/speech and Shares (m) 0.32 0.32
ultra-low power always-on/sensing applications for multiple
IoT markets. For connectivity, Ceva offers the industry's
most widely adopted IP for Bluetooth (Smart and Smart
Ready), Wi-Fi (802.11 b/g/n/ac up to 4x4) and serial storage
(SATA and SAS). With more than 300 licensees to date,
CEVA's customer base includes many of the world's leading
semiconductor and consumer electronics companies such
as; Broadcom, Intel, LG Electronics, Mediatek, NXP, Samsung,
Sharp, Sony, STMicroelectronics and Toshiba. These companies
incorporate Ceva's IP into application-specific integrated
circuits ("ASICs") and application-specific standard products
("ASSPs") that they manufacture, market and sell to consumer
electronics companies. Headquartered in Mountain View,
California, CEVA has more than 250 employees worldwide,
with design centers in Israel, Ireland and France, and
sales and support offices located in Europe, the U.S.
and throughout Asia. To date, more than 7 billion CEVA-powered
chips have been shipped worldwide, for a range of diverse
end markets..
----------------------------------------------------------------------- ----------------------
Radware
----------------------------------------------------------------------- ----------------------
Radware is a global leader of application delivery and Country United States
cyber security solutions for virtual, cloud and software % of total assets
defined data centers. Its award-winning solutions portfolio 1.0
delivers service level assurance for business-critical % of issued share
applications, while maximising IT efficiency. Radware's capital held 1.6
solutions empower more than 10,000 enterprise and carrier
customers worldwide to adapt to market challenges quickly, 31/12/16 31/12/15
maintain business continuity and achieve maximum productivity Valuation (GBPm) 8.49
while keeping costs down. 6.45
Shares (m) 0.72 0.62
----------------------------------------------------------------------- ----------------------
Craneware
----------------------------------------------------------------------- ----------------------
Craneware is the leader in automated value cycle solutions Country United Kingdom
that help US healthcare provider organisations discover, % of total assets
convert and optimise assets to achieve best clinical outcomes 1.0
and financial performance. Craneware's market-driven, % of issued share
SaaS solutions normalise disparate data sets, bringing capital held 2.4
in up-to-date regulatory and financial compliance data
to deliver value at the points where clinical and operational 31/12/16 31/12/15
data transform into financial transactions, creating actionable Valuation (GBPm) 8.42
insights that enable informed tactical and strategic decisions. 5.02
Founded in 1999, Craneware has its headquarters in Edinburgh, Shares (m) 0.64 0.64
Scotland with offices in Atlanta, Boston and Phoenix employing
over 200 staff.
----------------------------------------------------------------------- ----------------------
Descartes Systems
-------------------------------------------------------------------------- ------------------------
Descartes is a global leader in providing on-demand, software-as-a-service Country United States
solutions focused on improving the productivity, performance % of total assets
and security of logistics-intensive businesses. Descartes 1.0
has over 220,000 connected parties using its cloud-based % of issued share
services. Customers use Descartes modular, software-as-a-service capital held 0.6
solutions to route, schedule, track and measure delivery
resources; plan, allocate and execute shipments; rate, 31/12/16 31/12/15
audit and pay transportation invoices; access global trade Valuation (GBPm) 8.28
data; file customs and security documents for imports 7.49
and exports; and complete numerous other logistics processes Shares (m) 0.48 0.55
by participating in the world's largest, collaborative
multimodal logistics community. Descartes headquarters
are in Waterloo, Ontario, Canada and they have offices
and partners around the world.
-------------------------------------------------------------------------- ------------------------
Statpro
-------------------------------------------------------------------------- ------------------------
StatPro is a global provider of award winning portfolio
analytics solutions for the investment community. The Country United Kingdom
Group's cloud-based platform provides vital analysis of % of total assets
portfolio performance, attribution, risk and compliance. 1.0
This multi-asset class analytics platform helps StatPro's % of issued share
clients increase assets under management, improve client capital held 11.7
service, meet tough regulations and reduce costs. The
Group's integrated and global data coverage includes over
3.2 million securities such as equities, bonds, mutual
funds, FX rates, futures, options, OTCs, sector classifications 31/12/16 31/12/15
and much else besides. StatPro also covers most families Valuation (GBPm) 7.78
of benchmarks including MSCI, FTSE, Russell, NASDAQ and 5.67
the open source Freedom Index. The Group has operations Shares (m) 7.56 7.56
in Europe, North America, South Africa, Asia and Australia,
with hundreds of clients in 38 countries around the world.
Approximately 80% of recurring revenues are generated
outside the UK.
-------------------------------------------------------------------------- ------------------------
DISTRIBUtion Of Investments
Classification UK North Japan 2016 2015
% EMEA America & Asia Total Total
% % Pacific % %
%
------------------------------- ------ ------- --------- --------- ------- ---------
OIL & GAS 0.6 - 0.3 - 0.9 2.0
------------------------------- ------ ------- --------- --------- ------- -------
Oil Equipment, Services
& Distribution - - - - - 0.8
------------------------------- ------ ------- --------- --------- ------- -------
Alternative Energy 0.6 - 0.3 - 0.9 1.2
------------------------------- ------ ------- --------- --------- ------- -------
BASIC MATERIALS 0.2 - - 0.3 0.5 0.5
------------------------------- ------ ------- --------- --------- ------- -------
Chemicals 0.2 - - 0.3 0.5 0.5
------------------------------- ------ ------- --------- --------- ------- -------
INDUSTRIALS 7.8 - 1.8 1.2 10.8 11.4
------------------------------- ------ ------- --------- --------- ------- -------
Construction & Materials - - 0.1 - 0.1 0.1
------------------------------- ------ ------- --------- --------- ------- -------
Aerospace & Defence 0.7 - - - 0.7 0.7
------------------------------- ------ ------- --------- --------- ------- -------
Electronic & Electrical
Equipment 1.5 - 1.2 0.6 3.3 3.5
------------------------------- ------ ------- --------- --------- ------- -------
Industrial Engineering - - - 0.1 0.1 0.1
------------------------------- ------ ------- --------- --------- ------- -------
Support Services 5.6 - 0.5 0.5 6.6 7.0
------------------------------- ------ ------- --------- --------- ------- -------
CONSUMER GOODS 0.6 0.2 0.3 - 1.1 0.6
------------------------------- ------ ------- --------- --------- ------- -------
Household Goods
& Home Construction - 0.2 - - 0.2 -
------------------------------- ------ ------- --------- --------- ------- -------
Leisure Goods 0.6 - 0.3 - 0.9 0.6
------------------------------- ------ ------- --------- --------- ------- -------
HEALTH CARE 0.9 0.1 0.1 - 1.1 1.1
------------------------------- ------ ------- --------- --------- ------- -------
Health Care Equipment
& Services 0.9 0.1 0.1 - 1.1 1.1
------------------------------- ------ ------- --------- --------- ------- -------
CONSUMER SERVICES 11.5 0.1 0.8 0.6 13.0 14.8
------------------------------- ------ ------- --------- --------- ------- -------
General Retailers - - - 0.4 0.4 0.3
------------------------------- ------ ------- --------- --------- ------- -------
Media 11.5 0.1 0.8 0.2 12.6 14.5
------------------------------- ------ ------- --------- --------- ------- -------
TELECOMMUNICATIONS 2.3 - 0.4 - 2.7 4.7
------------------------------- ------ ------- --------- --------- ------- -------
Fixed Line Telecommunications 2.2 - 0.4 - 2.6 4.6
------------------------------- ------ ------- --------- --------- ------- -------
Mobile Telecommunications 0.1 - - - 0.1 0.1
------------------------------- ------ ------- --------- --------- ------- -------
FINANCIALS 0.8 - 0.1 - 0.9 1.3
------------------------------- ------ ------- --------- --------- ------- -------
Financial Services 0.1 - 0.1 - 0.2 0.4
------------------------------- ------ ------- --------- --------- ------- -------
Equity Investment
Instruments 0.6 - - - 0.6 0.7
------------------------------- ------ ------- --------- --------- ------- -------
Nonequity Investment
Instruments 0.1 - - - 0.1 0.2
------------------------------- ------ ------- --------- --------- ------- -------
TECHNOLOGY 31.0 3.8 17.9 2.6 55.3 54.2
------------------------------- ------ ------- --------- --------- ------- -------
Software & Computer
Services 23.1 2.3 10.2 0.8 36.4 36.9
------------------------------- ------ ------- --------- --------- ------- -------
Technology Hardware
& Equipment 7.9 1.5 7.7 1.8 18.9 17.3
------------------------------- ------ ------- --------- --------- ------- -------
TOTAL EQUITIES
(including convertibles
and warrants) 55.7 4.2 21.7 4.7 86.3 -
------------------------------- ------ ------- --------- --------- ------- -------
Total equities -
2015
(including convertibles
and warrants) 60.6 3.6 21.3 5.1 - 90.6
------------------------------- ------ ------- --------- --------- ------- -------
BONDS - - 1.0 - 1.0 -
------------------------------- ------ ------- --------- --------- ------- -------
LIQUID ASSETS * 12.7 - - - 12.7 9.4
------------------------------- ------ ------- --------- --------- ------- -------
TOTAL ASSETS
(before deduction
of bank loans and
derivative financial
instruments) 68.4 4.2 22.7 4.7 100.0 -
------------------------------- ------ ------- --------- --------- ------- -------
Total assets - 2015 70.0 3.6 21.3 5.1 - 100.0
------------------------------- ------ ------- --------- --------- ------- -------
BANK LOANS (3.1) - - - (3.1) (3.5)
------------------------------- ------ ------- --------- --------- ------- -------
DERIVATIVE FINANCIAL
INSTRUMENTS - - - - - (1.8)
------------------------------- ------ ------- --------- --------- ------- -------
SHAREHOLDERS' FUNDS 65.3 4.2 22.7 4.7 96.9 -
------------------------------- ------ ------- --------- --------- ------- -------
Shareholders' Funds
- 2015 64.7 3.6 21.3 5.1 - 94.7
------------------------------- ------ ------- --------- --------- ------- -------
Number of equity
investments
(including convertibles
and warrants) 138 15 62 37 252 276
------------------------------- ------ ------- --------- --------- ------- -------
* Cash, debtors and creditors excluding bank loans and derivative
financial instruments
----------------------------------------------------------------------------------------
Income Statement
FOR THE YEARED 31 DECEMBER
2016 2015
Revenue Capital Total Revenue Capital Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------------- -------- -------- -------- -------- -------- --------
Gains on investments - 134,969 134,969 - 50,105 50,105
-------------------------------- -------- -------- -------- -------- -------- --------
Currency gains - 7,951 7,951 - 592 592
-------------------------------- -------- -------- -------- -------- -------- --------
Gains on derivative instruments - 464 464 - 532 532
-------------------------------- -------- -------- -------- -------- -------- --------
Income 9,541 - 9,541 9,136 - 9,136
-------------------------------- -------- -------- -------- -------- -------- --------
Investment management
fee (7,133) - (7,133) (6,692) - (6,692)
-------------------------------- -------- -------- -------- -------- -------- --------
Other administrative expenses (545) (6) (551) (454) (5) (459)
-------------------------------- -------- -------- -------- -------- -------- --------
Profit before finance
costs and taxation 1,863 143,378 145,241 1,990 51,224 53,214
-------------------------------- -------- -------- -------- -------- -------- --------
Finance costs of borrowings (1,187) - (1,187) (1,793) - (1,793)
-------------------------------- -------- -------- -------- -------- -------- --------
Profit before taxation 676 143,378 144,054 197 51,224 51,421
-------------------------------- -------- -------- -------- -------- -------- --------
Tax (246) - (246) (233) - (233)
-------------------------------- -------- -------- -------- -------- -------- --------
Profit/(loss) after taxation 430 143,378 143,808 (36) 51,224 51,188
-------------------------------- -------- -------- -------- -------- -------- --------
Profit/(loss) per ordinary
share (basic and diluted) 0.58p 191.75p 192.33p (0.05)p 66.44p 66.39p
-------------------------------- -------- -------- -------- -------- -------- --------
There is no final dividend proposed (2015 - nil).
The total column of this statement is the profit and loss
account of the Company, prepared in accordance with UK Accounting
Standards.
The profit after taxation is the total comprehensive income and
therefore no additional statement of comprehensive income is
presented. The supplementary revenue and capital columns are
presented for information purposes in accordance with the Statement
of Recommended Practice issued by the Association of Investment
Companies. All items in the above statement derive from continuing
operations and the Company. No operations were acquired or
discontinued in the year.
Balance Sheet
AT 31 DECEMBER
2016 2016 2015 2015
GBP'000 GBP'000 GBP'000 GBP'000
---------------------------- --------- --------- --------- ---------
Fixed assets
---------------------------- --------- --------- --------- ---------
Investments held at
fair value through
profit or loss 712,969 642,151
---------------------------- --------- --------- --------- ---------
Current assets
---------------------------- --------- --------- --------- ---------
Cash and cash equivalents 82,448 69,360
---------------------------- --------- --------- --------- ---------
Other receivables 23,529 1,411
---------------------------- --------- --------- --------- ---------
105,977 70,771
---------------------------- --------- --------- --------- ---------
Current liabilities
---------------------------- --------- --------- --------- ---------
Derivative financial
instruments - (13,002)
---------------------------- --------- --------- --------- ---------
Other payables (27,532) (28,783)
---------------------------- --------- --------- --------- ---------
(27,532) (41,785)
---------------------------- --------- --------- --------- ---------
Net current assets 78,445 28,986
---------------------------- --------- --------- --------- ---------
TOTAL NET ASSETS 791,414 671,137
---------------------------- --------- --------- --------- ---------
Capital and reserves
---------------------------- --------- --------- --------- ---------
Called up share capital 18,266 19,028
---------------------------- --------- --------- --------- ---------
Share premium 73,738 73,738
---------------------------- --------- --------- --------- ---------
Capital redemption
reserve 3,686 2,924
---------------------------- --------- --------- --------- ---------
Capital reserve 695,049 575,202
---------------------------- --------- --------- --------- ---------
Revenue reserve 675 245
---------------------------- --------- --------- --------- ---------
SHAREHOLDERS' FUNDS 791,414 671,137
---------------------------- --------- --------- --------- ---------
NET ASSET VALUE PER
ORDINARY SHARE (including
current year revenue) 1083.21p 881.78p
---------------------------- --------- --------- --------- ---------
NET ASSET VALUE PER
ORDINARY SHARE (excluding
current year revenue) 1082.63p 881.83p
---------------------------- --------- --------- --------- ---------
STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 DECEMBER 2016
Called
up Capital Share-
share Share redemption Capital Revenue holders'
capital premium reserve reserve reserve funds
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------- -------- -------- ----------- -------- -------- ---------
Shareholders' funds
at 1 January 2016 19,028 73,738 2,924 575,202 245 671,137
---------------------- -------- -------- ----------- -------- -------- ---------
Profit after taxation - - - 143,378 430 143,808
---------------------- -------- -------- ----------- -------- -------- ---------
Shares bought back (762) - 762 (23,531) - (23,531)
---------------------- -------- -------- ----------- -------- -------- ---------
Shareholders' funds
at
31 December 2016 18,266 73,738 3,686 695,049 675 791,414
---------------------- -------- -------- ----------- -------- -------- ---------
FOR THE YEARED 31 DECEMBER 2015
Called
up Capital Share-
share Share redemption Capital Revenue holders'
capital premium reserve reserve reserve funds
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------- -------- -------- ----------- -------- -------- ---------
Shareholders' funds
at 1 January 2015 19,335 73,738 2,617 532,946 281 628,917
-------------------- -------- -------- ----------- -------- -------- ---------
Profit/(loss) after
taxation - - - 51,224 (36) 51,188
-------------------- -------- -------- ----------- -------- -------- ---------
Shares bought back (307) - 307 (8,968) - (8,968)
-------------------- -------- -------- ----------- -------- -------- ---------
Shareholders' funds
at
31 December 2015 19,028 73,738 2,924 575,202 245 671,137
-------------------- -------- -------- ----------- -------- -------- ---------
Cash Flow Statement
FOR THE YEARED 31 DECEMBER
2016 2016 2015 2015
GBP'000 GBP'000 GBP'000 GBP'000
---------------------------------------------------- ---------- --------- --------- ---------
Profit before finance costs and taxation 145,241 53,214
---------------------------------------------------- ---------- --------- --------- ---------
Gains on investments (134,969) (50,105)
---------------------------------------------------- ---------- --------- --------- ---------
Realised losses on interest rate swap (464) (532)
---------------------------------------------------- ---------- --------- --------- ---------
Decrease/(increase) in accrued income 242 (120)
---------------------------------------------------- ---------- --------- --------- ---------
Purchase of investments (66,449) (88,164)
---------------------------------------------------- ---------- --------- --------- ---------
Sale of investments 107,087 135,118
---------------------------------------------------- ---------- --------- --------- ---------
Increase in other receivables (39) (32)
---------------------------------------------------- ---------- --------- --------- ---------
Increase in other payables 120 4
---------------------------------------------------- ---------- --------- --------- ---------
Amortisation of fixed income book cost 1 33
---------------------------------------------------- ---------- --------- --------- ---------
Income tax suffered - (5)
---------------------------------------------------- ---------- --------- --------- ---------
Overseas tax suffered (246) (233)
---------------------------------------------------- ---------- --------- --------- ---------
Net cash inflow from operating activities 50,524 49,178
---------------------------------------------------- ---------- --------- --------- ---------
Finance activities
---------------------------------------------------- ---------- --------- --------- ---------
Interest paid on loan and derivatives (1,394) (1,700)
---------------------------------------------------- ---------- --------- --------- ---------
Swap repayment (12,538) -
---------------------------------------------------- ---------- --------- --------- ---------
Shares repurchased (23,504) (8,968)
---------------------------------------------------- ---------- --------- --------- ---------
Net cash outflow from financing activities (37,436) (10,668)
---------------------------------------------------- ---------- --------- --------- ---------
Increase in cash and cash equivalents 13,088 38,510
---------------------------------------------------- ---------- --------- --------- ---------
Cash and cash equivalents at the start of the year 69,360 30,850
---------------------------------------------------- ---------- --------- --------- ---------
Cash and cash equivalents at the end of the year 82,448 69,360
---------------------------------------------------- ---------- --------- --------- ---------
Comprised of:
---------------------------------------------------- ---------- --------- --------- ---------
Cash and cash equivalents 82,448 69,360
---------------------------------------------------- ---------- --------- --------- ---------
Income
2016 2015
GBP'000 GBP'000
---------------------------------------------------------- -------- --------
Income from investments and interest receivable
---------------------------------------------------------- -------- --------
Total income 9,541 9,136
---------------------------------------------------------- -------- --------
Total income comprises:
---------------------------------------------------------- -------- --------
Dividends from equity securities designated at fair value
through profit or loss 9,155 8,899
---------------------------------------------------------- -------- --------
Interest from financial assets designated at fair value
through profit or loss 360 232
---------------------------------------------------------- -------- --------
Other income 26 5
---------------------------------------------------------- -------- --------
9,541 9,136
========================================================== -------- --------
Business model and status
The Company is an investment company within the meaning of
Section 833 of the Companies Act 2006.
The Company carries on business as an investment trust. It was
approved by HM Revenue & Customs as an investment trust under
Section 1158 of the Corporation Tax Act 2010 for the year ended 31
December 2015, subject to matters that may arise from any
subsequent enquiry by HM Revenue & Customs into the Company's
tax return. In the opinion of the directors the Company has
subsequently conducted its affairs so as to enable it to continue
to seek such approval. In accordance with recent changes to Section
1158, the Company has obtained approval as an investment trust from
HM Revenue & Customs for accounting periods commencing on or
after 1 January 2016.
Objective
The Company's objective is to achieve capital appreciation
through investments in smaller quoted companies, in the areas of
telecommunications, multi-media and technology (TMT). Investments
may be made across the world. The business activities of investee
companies will include information technology, broadcasting,
printing and publishing and the supply of equipment and services to
these companies.
Investment policy - strategy
While the policy is global investment in the above target areas,
the approach is to construct a diversified portfolio through the
identification of individual companies which offer long term growth
potential, typically over a five year horizon or more. The
portfolio is actively managed and does not seek to track any
comparative index. With a remit to invest in smaller companies with
market capitalisation generally below $2bn, there tends to be a
correlation with the performance of smaller companies, as well as
those of the technology sector. A degree of volatility relative to
the overall market should be expected.
The risk associated with the illiquidity of smaller companies is
reduced by generally restricting the stake in any one company to
less than 10% of the shares in issue. A number of investments are
in early stage companies, which have a higher stock specific risk
but the potential for above average growth. Stock specific risk is
reduced by having a diversified portfolio of over 250 holdings. In
addition, to contain the risk of any one holding, the manager
generally takes profits when a holding reaches more than 5% of the
portfolio. The manager actively manages the exposure within the
constraint that illiquid positions cannot be traded for short term
movements.
The Company has a policy not to invest more than 15% of gross
assets in other UK listed investment companies.
From time to time, fixed interest holdings, non equity or
unlisted investments may be held on an opportunistic basis.
The Company recognises the long term advantages of gearing and
has a maximum gearing limit of 50% of net assets. Borrowings are
invested primarily in equity markets but the Manager is entitled to
invest in other securities in the companies in the target areas
when it is considered that the investment grounds merit the Company
taking a geared position. The board's intention is to gear the
portfolio when appropriate. Gearing levels are monitored closely by
the manager and reviewed by directors at each board meeting.
The Company may use derivatives which will be principally, but
not exclusively, for the purpose of efficient portfolio management
(i.e. for the purpose of reducing, transferring or eliminating
investment risk in its investments, including protection against
currency risk).
Share capital
At 31 December 2016 the Company's capital structure consisted of
73,061,801 ordinary shares of 25p each (2015 - 76,111,546 ordinary
shares). During the year 3,049,745 (2015 - 1,228,000) shares were
bought back and cancelled. There are no restrictions concerning the
holding or transfer of the Company's ordinary shares and there are
no special rights attached to any of the shares. On a winding up,
after meeting the liabilities of the Company, the surplus assets
would be paid to ordinary shareholders in proportion to their
shareholdings.
Investment management agreement
The management of the Company and the implementation of its
investment strategy is contracted to Herald Investment Management
Limited ('HIML'). HIML is authorised and regulated by the Financial
Conduct Authority.
The management contract is subject to 12 months' notice by
either party. The senior director of HIML with prime responsibility
for the management of the Company's portfolio is Katie Potts, who
is also a substantial shareholder of HIML Holdings Limited, the
parent company of HIML. HIML is remunerated at an annual rate of
1.0% of the Company's net asset value calculated using middle
market prices. Compensation fees would only be payable in respect
of this 12 month period if termination were to occur sooner.
Careful consideration has been given by the board as to the basis
on which the management fee is charged. The board considers that
maintaining an appropriate level of ongoing charges for a
specialist trust is in the best interest of all shareholders. The
board is also of the view that calculating the fee with reference
to performance would be unlikely to exert a positive influence over
the long term performance.
The board is of the opinion that the continued appointment of
HIML as investment manager, on the terms agreed, is in the
interests of shareholders due to the experience of the manager and
the quality of information provided to the board.
Acquisition of own shares
At the Company's AGM held on 19 April 2016 the Company was
authorised to purchase up to 14.99% of the Company's ordinary
shares. During the year to 31 December 2016 the Company bought back
3,049,745 ordinary shares (which comprised 4.01% of the issued
share capital at 1 January 2016) on the London Stock Exchange for
cancellation. The board continues to believe that the ability of
the Company to purchase its own ordinary shares in the market will
potentially benefit all shareholders of the Company. The repurchase
of ordinary shares at a discount to the underlying net asset value
('NAV') should enhance the NAV per ordinary share of the remaining
shares and may also enable the Company to address more effectively
any imbalance between supply and demand for the Company's ordinary
shares.
Significant financial issues relating to the 2016 financial
statements
The UK Corporate Governance Code requires us to describe any
significant issues considered in relation to the financial
statements and how those issues were addressed. There were no
significant issues.
Borrowings
The Company has a sterling loan facility of GBP25 million and a
GBP25 million multi-currency revolving advance loan maturing 31
December 2017. As at 31 December 2016 the sterling loan was drawn
down.
The interest on the facilities had been fixed for the long term
through a 30 year interest rate swap. This was closed out on 29
July 2016 at a cost of GBP12.5 million. As at 31 December 2015 the
fair value of the interest rate swap contract was an estimated
liability of GBP13.0 million which was based on the swap provider's
valuation.
At 31 December 2016, there were no drawings on the
multi-currency loan (2015 - nil). Interest on the sterling loan is
payable in quarterly instalments in January, April, July and
October. The estimated repayment value of the loan at 31 December
2016 was GBP25 million. The indicative costs of repaying the loan
as at 31 December 2016 were not materially different in the context
of the above figures.
The sterling loan has been disclosed as due within one year as
the Company has an unconditional and irrevocable right to prepay
the advance under the terms and conditions of the loan agreement.
In connection with the revolving facility, the duration of the
advance is 3 or 6 months and the decision to rollover the loan is
made at quarterly board meetings based on circumstances prevailing
at the time.
Principal risks and uncertainties
In accordance with the corporate objective of maximising capital
appreciation the Company invests in securities on a worldwide
basis. The Company makes use of gearing to achieve improved
performance in rising markets and has an interest rate swap, the
purpose of which is to hedge the variability in cash flows arising
from interest rate fluctuations on bank loans. The Company's other
financial instruments consist of cash, short term debtors and
creditors.
The main risks arising from the Company's financial instruments
are:
A. Market Risk
(i) Other price risk, being the risk that the value of
investment holdings will fluctuate as a result of changes in market
prices caused by factors other than interest rate or currency rate
movement;
(ii) Interest rate risk, being the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates; and
(iii) Foreign currency risk, being the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.
B. Credit Risk
Being the risk that one party to a financial instrument will
cause a financial loss for the other
party by failing to discharge an obligation.
The Company is exposed to counterparty credit risk from the
parties with which it trades and will bear the risk of settlement
default. Counterparty credit risk to the Company arises from
transactions to purchase or sell investments and through interest
rate swap transactions held within the portfolio.
There were no past or impaired assets as of 31 December 2016 (31
December 2015: nil).
The counterparties engaged with the Company are well recognised
and regulated entities.
C. Liquidity Risk
Being the risk that an entity will encounter difficulty in
meeting obligations associated with financial liabilities.
These risks and the policies for managing them have been applied
throughout the year and are summarised below.
A. Market Risk
(i) Other Price Risk
The Company's investment portfolio is exposed to market price
fluctuations which are monitored by the
Manager in pursuance of the corporate objective. Securities held
by the Company are valued at bid prices, hereas material unlisted
investments are valued by the directors on the basis of the latest
information in line with the relevant principles of the
International Private Equity and Venture Capital Valuation
Guidelines. These valuations also represent the fair value of the
investments.
Other Price Risk Sensitivity
20.6% of the Company's equity investments at 31 December 2016
(2015 - 20.0%) were listed on the main list of the London Stock
Exchange and a further 42.2% (2015 - 44.1%) on AIM. The NASDAQ
Stock Exchange accounts for 19.3% (2015 - 19.0%), New York Stock
Exchange for 5.0% (2015 -3.9%) and other stock exchanges 12.9%
(2015 - 13.0%). A 10% increase in stock prices at 31 December 2016
would have increased total net assets and profit & loss after
taxation by GBP70,493,000 (2015 - GBP64,215,000). A decrease of 10%
would have had an equal but opposite effect. The portfolio does not
target any exchange as a comparative index, and the performance of
the portfolio has a low correlation to generally used indices.
The shares of the Company have an underlying NAV per share. The
NAV per share of the Company fluctuates on a daily basis. In
addition, there is volatility in the discount/premium the share
price has to NAV.
(ii) Interest Rate Risk
The majority of the Company's assets are equity shares and other
investments which neither pay interest nor have a maturity date.
However, the Company does hold convertible and Government bonds,
the interest rate and maturity dates of which are detailed below.
Interest is accrued on sterling cash balances at a rate linked to
the UK base rate.
The Company has borrowings. The aim of the use of gearing is to
enhance long term returns to shareholders by investing borrowed
funds in equities and other assets. Gearing is actively managed.
How and where borrowings are invested is reviewed by the board in
consultation with the Manager at every board meeting. In light of
the decisions made, appropriate adjustments to the gearing position
are then made by the Manager.
At the year end the Company had borrowings of GBP25 million
(2015 - GBP25 million). Prior to it being closed out on 29th July
2016, under the terms of an interest rate swap, the interest
payable on the bank loans had been fixed.
The interest rate risk profile of the financial assets and
financial liabilities at 31 December was:
Financial Assets
2016 2015
2016 Weighted 2015 Weighted
Weighted average Weighted average
average period average period
2016 interest until 2015 interest until
Fair rate/ maturity/ Fair rate/ maturity/
value interest maturity value interest maturity
GBP'000 rate date GBP'000 rate date
--------------- -------- --------- ---------- -------- --------- ----------
Fixed rate:
--------------- -------- --------- ---------- -------- --------- ----------
6.6
US bonds 8,041 2.6% Years - - -
--------------- -------- --------- ---------- -------- --------- ----------
UK convertible 1.6 2.3
bonds 2,782 11.2% Years 2,182 9.7% years
=============== -------- --------- ---------- -------- --------- ----------
Cash:
--------------- -------- --------- ---------- -------- --------- ----------
Other overseas
currencies 52,675 32,439
--------------- -------- --------- ---------- -------- --------- ----------
Sterling 29,773 0.3% 36,921 1.0%
=============== -------- --------- ---------- -------- --------- ----------
82,448 69,360
=============== -------- --------- ---------- -------- --------- ----------
The cash deposits generally comprise call or short term money
market deposits with original maturities of less than 3 months
which are repayable on demand. The benchmark rate which determines
the interest payments received on cash balances is the bank base
rate.
Financial Liabilities
2016 2015
2016 Loan 2015 Loan
2016 Net interest facility 2015 Net interest facility
GBP'000 rate paid expired/expires GBP'000 rate paid expired/expires
------------------- -------- ------------- ---------------- -------- ------------- ----------------
Bank Loan 25,000 1.6% Dec 2017 25,000 1.7% Dec 2017
------------------- -------- ------------- ---------------- -------- ------------- ----------------
1.6% 1.7%
------------------- -------- ------------- ---------------- -------- ------------- ----------------
Interest rate swap - 0.0% 25,000 4.3%
------------------- -------- ------------- ---------------- -------- ------------- ----------------
Total 1.6% 6.0%
=================== -------- ------------- ---------------- -------- ------------- ----------------
At 31 December 2016, the Company had a committed revolving
credit facility of GBP25 million (2015: GBP25m), with a cost
associated cost rate of 0.63% for unutilised amounts.
The effective fixed rate of interest on the loans of 1.5% (2015
- 6.00%) reflects a weighted average variable interest rate paid of
1.5% (2015 - 1.68% with a further weighted average of 4.32% paid on
the swap). The Company's facilities are rolling on a quarterly
basis with the facilities expiring in December 2017.
The swap was closed out on 29 July 2016 at a cost of GBP12.5
million
2016 2016 2016 2016 2015 2015 2015 2015
Notional Fair Fair Fair Notional Fair Fair Fair
contract value value value contract value value value
amount assets liabilities balance amount assets liabilities balance
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
--------------------- -------- ------- ----------- ------- -------- ------- ----------- --------
Total derivative
assets/(liabilities) - - - - 25,000 9,928 (22,930) (13,002)
===================== -------- ------- ----------- ------- -------- ------- ----------- --------
Interest rate risk sensitivity
a) Cash
An increase of 100 basis points in interest rates as at 31
December 2016 would have a direct effect on net assets. Based on
the position at 31 December 2016, over a full year, an increase of
100 basis points would have increased the profit & loss after
taxation by GBP824,000 (2015 - GBP694,000) and would have increased
the net asset value per share by 1.13p (2015 - 0.91p). The
calculations are based on the cash balances as at the respective
balance sheet dates and are not representative of the year as a
whole.
b) Fixed rate bonds
An increase of 100 basis points in bond yields as at 31 December
2016 would have decreased total net assets and profit & loss
after taxation by GBP80,000 (2015 - GBPnil) and would have
decreased the net asset value per share by 0.11p (2015 - nil). A
decrease in bond yields would have had an equal and opposite
effect. The convertible loan stocks having an element of equity are
not included in this analysis as given the nature of the businesses
and the risk profile of the balance sheets they are considered to
have more equity like characteristics.
c) Bank Loans
An increase of 100 basis points in 3 month LIBOR interest rates
as at 31 December 2016 on the interest cost of the bank loans would
have decreased total net assets and profit & loss after
taxation by GBP250,000 and would have decreased the net asset value
per share by 0.34p (2015 - The effect of an increase or decrease of
100 basis points in 3 month LIBOR interest rates as at 31 December
2015 on the interest cost of the bank loans and the net income
return had been eliminated through a 30 year floating interest rate
to fixed interest rate swap. The swap generated payments or charges
that offset changes in the 3 month LIBOR interest rate, so that the
interest payable on the bank loans were effectively converted to a
fixed rate loan at 4.8975% plus margin cost. The initial term of
the swap on commencement at 30 years did not match the term of the
loans, therefore, hedge accounting was not used and changes in the
fair value of the swap were captured in the profit & loss after
taxation as set out in (d) below).
d) Floating interest rate to fixed interest rate swap
The interest rate swap was closed out on 29 July 2016. Based on
the position as at 31 December 2015, over a full year, a decrease
of 100 basis points on 30 year interest rates would have decreased
the gains on investments and profit & loss after taxation by
GBP5,993,000 and would have decreased the net asset value per share
by 7.87p. An increase of 100 basis points would have had an equal
but opposite effect.
iii. Foreign Currency Risk
The Company's reporting currency is sterling, but investments
are made in overseas markets as well as the United Kingdom and the
asset value can be affected by movements in foreign currency
exchange rates.
Furthermore many companies trade internationally both through
foreign subsidiaries, and through exports. The greatest foreign
currency risk occurs when companies have a divergence in currencies
for costs and revenues. A much less risky exposure to currency is
straight translation of sales and profits. The list of investments
on pages 16 to 20 breaks down the portfolio by geographic listing.
However the location of the stock market quote only has a limited
correlation to the costs, revenues and even activities of those
companies, and so this note should not be regarded as a reliable
guide to the sensitivity of the portfolio to currency movements.
For example, the holdings in the portfolio that have suffered most
from US$ weakness are UK companies with dollar revenues and
sterling costs.
The Company does not hedge the sterling value of investments
that are priced in other currencies. Overseas income is subject to
currency fluctuations. The Company does not hedge these currency
fluctuations because it is impossible to quantify the effect for
the reasons stated above. However, from time to time the Manager
takes a view by holding financial assets or liabilities in overseas
currencies.
Exposure to currency risk through asset allocation by currency
of listing is indicated below:
At 31 December 2016
Other
receivables
Cash and and Net
Investments deposits Loans payables* exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------------- ------------ ---------- --------- ------------- ----------
US dollar 190,106 42,034 - 44 232,184
-------------------------------- ------------ ---------- --------- ------------- ----------
Norwegian krone 5,692 4,698 - - 10,390
-------------------------------- ------------ ---------- --------- ------------- ----------
Korean won 11,669 - - 119 11,788
-------------------------------- ------------ ---------- --------- ------------- ----------
Taiwan dollar 11,586 5,920 - - 17,506
-------------------------------- ------------ ---------- --------- ------------- ----------
Euro 25,369 21 - 117 25,507
-------------------------------- ------------ ---------- --------- ------------- ----------
Other overseas currencies 14,035 2 - 13 14,050
-------------------------------- ------------ ---------- --------- ------------- ----------
Exposure to currency risk on
translation of valuations of
securities listed in overseas
currencies 258,457 52,675 - 293 311,425
-------------------------------- ------------ ---------- --------- ------------- ----------
Sterling 454,512 29,773 (25,000) 20,704 479,989
-------------------------------- ------------ ---------- --------- ------------- ----------
712,969 82,448 (25,000) 20,997 791,414
-------------------------------- ------------ ---------- --------- ------------- ----------
*Includes net non-monetary assets of GBPnil.
At 31 December 2015
Other
receivables
Cash and and Net
Investments deposits Loans payables* exposure
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------------- ------------ ---------- --------- ------------- ----------
US dollar 156,000 22,123 - 23 178,146
-------------------------------- ------------ ---------- --------- ------------- ----------
Norwegian krone 7,362 3,833 - - 11,195
-------------------------------- ------------ ---------- --------- ------------- ----------
Korean won 11,410 - - 138 11,548
-------------------------------- ------------ ---------- --------- ------------- ----------
Taiwan dollar 8,451 6,469 - - 14,920
-------------------------------- ------------ ---------- --------- ------------- ----------
Euro 17,259 12 - 72 17,343
-------------------------------- ------------ ---------- --------- ------------- ----------
Other overseas currencies 12,217 2 - 12 12,231
-------------------------------- ------------ ---------- --------- ------------- ----------
Exposure to currency risk on
translation of valuations of
securities listed in overseas
currencies 212,699 32,439 - 245 245,383
-------------------------------- ------------ ---------- --------- ------------- ----------
Sterling 429,452 36,921 (25,000) (15,619) 425,754
-------------------------------- ------------ ---------- --------- ------------- ----------
642,151 69,360 (25,000) (15,374) 671,137
-------------------------------- ------------ ---------- --------- ------------- ----------
*Includes net non-monetary assets of GBPnil.
Foreign currency risk sensitivity
At 31 December 2016, had sterling strengthened by 10% (2015
-10%) in relation to all currencies, with all other variables held
constant, total net assets and profit & loss after taxation
would have decreased by the amounts shown below based solely on
translation of securities quoted in currencies overseas. A 10%
(2015 - 10%) weakening of sterling against all currencies, with all
other variables held constant, would have had an equal but opposite
effect on the financial statement amounts. However, companies whose
cost base diverges in currency terms from its sales will in the
longer term have a significantly greater effect on valuation than
simple translation. In the short term investee companies generally
cover their currency exposure to varying degrees. There is
insufficient publicly disclosed information to quantify this, but
in the long term this effect is expected to dwarf simple
translation of foreign listings in terms of both risk and reward,
because many investee companies trade globally. Furthermore, the
country of listing is not necessarily an indication of the
geography of some or even any operational activities for investee
companies. The Manager does not use financial instruments to
protect against currency movements. From time to time financial
leverage has been made using debt in overseas currencies.
2016 2015
GBP'000 GBP'000
-------------------------- -------- --------
US dollar 23,218 17,815
-------------------------- -------- --------
Norwegian krone 1,039 1,120
-------------------------- -------- --------
Korean won 1,179 1,155
-------------------------- -------- --------
Taiwan dollar 1,751 1,492
-------------------------- -------- --------
Euro 2,551 1,734
-------------------------- -------- --------
Other overseas currencies 1.405 1,223
-------------------------- -------- --------
31,143 24,539
========================== -------- --------
B. Credit Risk
Credit risk is the risk that a counterparty to a financial
instrument will fail to discharge an obligation or commitment which
it has entered into with the Company. The Manager monitors
counterparty risk on an ongoing basis.
The Company has investments in convertible loan stocks that have
an element of equity. These securities are viewed as having a risk
profile similar to the equity holdings. This is because the
convertibles held are in nascent technology companies that may be
loss making and may have weak balance sheets. For this reason these
stocks are categorised as equity holdings.
Credit Risk Exposure
The exposure to credit risk at 31 December was:
2016 2015
GBP'000 GBP'000
--------------------------- -------- --------
Fixed interest investments 8,041 -
--------------------------- -------- --------
Cash and cash equivalents 82,448 69,360
--------------------------- -------- --------
Other receivables 23,529 1,411
--------------------------- -------- --------
114,018 70,771
=========================== -------- --------
During the year the maximum exposure in fixed interest
investments was GBP8,041,000 (2015 - GBP4,342,000) and the minimum
GBPnil (2015 - GBPnil). The maximum exposure in cash was
GBP82,448,000 (2015 - GBP72,998,000) and the minimum GBP60,243,000
(2015 - GBP25,942,000).
None of the Company's financial assets are past due or
impaired.
C. Liquidity Risk
The Company's policy with regard to liquidity is to provide a
degree of flexibility so that the portfolio can be repositioned
when appropriate and that most of the assets can be realised
without an excessive discount to the market price.
(a) Equity securities
The Company's unlisted investments are not readily realisable,
but these only amount to 1.4% of the Company's total assets at 31
December 2016 (2015 - 1.8%).
In practice, liquidity in investee companies is imperfect,
particularly those with a market value of less than GBP100 million.
To reduce this liquidity risk it is the policy to diversify the
holdings and generally to restrict the holding in any one company
to less than 10% of the share capital of that company. Furthermore
the guideline is for no single investment to account for more than
5% of the assets of the Company.
The market valuation of each underlying security gives an
indication of value, but the price at which an investment can be
made or realised can diverge materially from the bid or offer price
depending on market conditions generally and particularly to each
investment.22.8% (GBP158 million) (2015 - 25.9% (GBP163 million))
of the portfolio is invested in listed stocks with a market
capitalisation below GBP100 million, where liquidity is expected to
be more limited. If these stocks had on average a realisable value
20% below the bid price the value of the total fund would be
adversely affected by 4.0% (2015 - 4.9%).
(b) Floating interest rate to fixed interest rate swap
The value of the swap was estimated by RBS, the provider of the
swap, and was compared to an external model and external prices. We
believed the RBS valuation to be reasonable. The valuations
previously used in the report and accounts were the external
model.
The swap valuation gave an indication of fair value, but the
price at which the swap could have been unwound or realised may
have diverged materially from the valuation depending on market
conditions and liquidity.
Liquidity Risk Exposure
Contractual maturities of the financial liabilities at the year
end, based on the earliest date on which payment can be required
are as follows:
2016 2015
One year One year
or less or less
GBP'000 GBP'000
-------------------------------------- --------- ---------
Bank loans 25,101 25,106
-------------------------------------- --------- ---------
Derivative financial instruments - 13,271
-------------------------------------- --------- ---------
Other payables 2,532 3,508
-------------------------------------- --------- ---------
27,633 41,885
====================================== --------- ---------
Fair Value of Financial Instruments
The Company's investments, as disclosed in the Company's balance
sheet, are valued at fair value.
Nearly all of the Company's portfolio of investments are in the
Level 1 category as defined in FRS 102 as amended for fair value
hierarchy disclosures (March 2016).
The three levels set out in FRS102 follow:
Level 1 The unadjusted quoted price in an active market for
identical assets or liabilities that the entity can access at the
measurement date.
Level 2 Inputs other than quoted prices included within Level 1
that are observable (i.e. developed using market data) for the
asset or liability, either directly or indirectly.
Level 3 Inputs are unobservable (i.e. for which market data is
unavailable) for the asset or liability.
The Investment Manager considers observable data to be that
market data that is readily available, regularly distributed or
updated, reliable and verifiable, not proprietary, and provided by
independent sources that are actively involved in the relevant
market.
The analysis of the valuation basis for the financial
instruments based on the hierarchy as at 31 December is as
follows:
At 31 December 2016
Level 1 Level 2 Level 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
---------------------------- --------- --------- --------- ---------
Financial assets
---------------------------- --------- --------- --------- ---------
Equity investments 693,198 - 7,656 700,854
---------------------------- --------- --------- --------- ---------
Government debt securities 8,041 - - 8,041
---------------------------- --------- --------- --------- ---------
Other debt securities - - 4,074 4,074
---------------------------- --------- --------- --------- ---------
Other receivables 105,977 - - 105,977
---------------------------- --------- --------- --------- ---------
Total assets 807,216 - 11,730 818,946
---------------------------- --------- --------- --------- ---------
Financial liabilities
---------------------------- --------- --------- --------- ---------
Bank loans 25,000 - - 25,000
---------------------------- --------- --------- --------- ---------
Other payables 2,532 - - 2,532
---------------------------- --------- --------- --------- ---------
Total liabilities 27,532 - - 27,532
---------------------------- --------- --------- --------- ---------
Total net assets 779,684 - 11,730 791,414
---------------------------- --------- --------- --------- ---------
A reconciliation of fair value measurements in Level 3 is set
out below:
At 31 December 2016
GBP'000
-------------------------------------- --------
Opening balance at 1 January 2016 12,438
-------------------------------------- --------
Purchases 2,115
-------------------------------------- --------
Sales (1,028)
-------------------------------------- --------
Total losses:
-------------------------------------- --------
- on assets sold during the year (1,412)
-------------------------------------- --------
- on assets held at 31 December 2016 (383)
-------------------------------------- --------
Closing balance at 31 December 2016 11,730
-------------------------------------- --------
At 31 December 2015
Level 1 Level 2 Level 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
----------------------- --------- --------- --------- ---------
Financial assets
----------------------- --------- --------- --------- ---------
Equity investments 629,713 - 10,256 639,969
----------------------- --------- --------- --------- ---------
Other debt securities - - 2,182 2,182
----------------------- --------- --------- --------- ---------
Other receivables 70,771 - - 70,771
----------------------- --------- --------- --------- ---------
Total assets 700,484 - 12,438 712,922
----------------------- --------- --------- --------- ---------
Financial liabilities
----------------------- --------- --------- --------- ---------
Bank loans 25,000 - - 25,000
----------------------- --------- --------- --------- ---------
Derivatives - - 13,002 13,002
----------------------- --------- --------- --------- ---------
Other payables 3,783 - - 3,783
----------------------- --------- --------- --------- ---------
Total liabilities 28,783 - 13,002 41,785
----------------------- --------- --------- --------- ---------
Total net assets 671,701 - (564) 671,137
----------------------- --------- --------- --------- ---------
A reconciliation of fair value measurements in Level 3 is set
out below:
At 31 December 2015
GBP'000
-------------------------------------- --------
Opening balance at 1 January 2015 9,665
-------------------------------------- --------
Purchases 2,639
-------------------------------------- --------
Sales (1,073)
-------------------------------------- --------
Total gains or (losses):
-------------------------------------- --------
- on assets sold during the year (790)
-------------------------------------- --------
- on assets held at 31 December 2015 2,886
-------------------------------------- --------
Assets reclassified during the year (889)
-------------------------------------- --------
Closing balance at 31 December 2015 12,438
-------------------------------------- --------
Other risks
Other risks to the Company's model, future performance, solvency
or liquidity include the following:
Regulatory risk - failure to comply with applicable legal and
regulatory requirements could lead to suspension of the Company's
Stock Exchange Listing, financial penalties or a qualified audit
report. Breach of Sections 1158 and 1159 of the Corporation Tax Act
2010 could lead to the Company being subject to tax on capital
gains. The manager, depositary and administrator provide regular
reports to the audit committee on their monitoring programmes. The
manager monitors investment positions and the manager and company
secretary monitor the level of forecast income and expenditure to
ensure the provisions of Sections 1158 and 1159 are not
breached.
Major regulatory change could impose disproportionate compliance
burdens on the Company. In such circumstances representation would
be made to seek to ensure that special circumstances of investment
trusts are recognised.
Operational/financial/custody risk - failure of the
administrator's accounting systems or those of other third party
service providers could lead to an inability to provide accurate
reporting and monitoring or a misappropriation of assets. The
manager, administrator and company secretary each have
comprehensive business continuity plans which facilitate continued
operation of the business in the event of a service disruption or
major disruption. The audit committee receives the administrator's
report on internal controls and the reports by other key third
party providers are reviewed by the manager and company secretary
on behalf of the audit committee.
Discount volatility - the discount at which the Company's shares
trade can widen. The board monitors the level of discount and the
Company has authority to buy back its own shares.
Gearing risk - the Company may borrow money for investment
purposes. If the investments fall in value, any borrowings will
magnify the extent of this loss. If borrowing facilities are not
renewed, the Company may have to sell investments to repay
borrowings.
All borrowings require the prior approval of the board and
gearing levels are discussed by the board and manager at every
meeting. The majority of the Company's investments are in quoted
securities.
Viability statement
The UK Corporate Governance Code and Listing Rules require that
the Company should publish a longer-term statement on the viability
of the Company.
The directors consider that three years is an appropriate
forward looking time period. This recognises the Company's current
position, the investment strategy, which includes investment in
smaller companies and start-ups where a three year horizon is a
meaningful period over which to judge prospects, the board's
assessment of the main risks that threaten the business model and
the relatively fast moving nature of the sectors in which the
Company invests.
The directors confirm that, based on reviews conducted as part
of the detailed internal controls and risk management processes,
they have a reasonable expectation that the Company will continue
to maintain its status as an investment trust, to implement its
investment strategy and to operate and be able to meet its
liabilities as they fall due for at least the next three financial
years. Their consideration also takes into account the Company's
gearing and financing arrangements and its projected income and
expenditure.
There are no current plans to amend the investment strategy,
which has delivered good investment performance for shareholders
over many years and, the directors believe, should continue to do
so. The investment strategy and its associated risks are kept under
constant review by the board. Those reviews take into account the
possible impact on the Company's objectives of any new investment
decisions made by the investment manager.
By definition, investment in smaller and start-up companies
carries higher risks, both in terms of stock liquidity and
longer-term business viability and this risk is accepted by the
board. In addition, it should be noted that under the Company's
articles of association, shareholders are required to vote
triennially on whether the Company should continue as an investment
trust, so the longer-term viability statement is contingent upon
shareholders voting to support any continuation vote falling within
the relevant three year period. The next continuation vote will be
at the AGM in 2019.
Directors' responsibility statement pursuant to DTR4
The directors confirm that to the best of their knowledge:
-- The financial statements have been prepared in accordance
with United Kingdom Accounting Standards (United Kingdom Generally
Accepted Accounting Practice), including FRS 102 'The Financial
Reporting Standard applicable to the UK and Republic of Ireland'
and give a true and fair view of the assets, liabilities, financial
position and profit or loss of the Company; and
-- The management report includes a fair review of the
development and performance of the business and the position of the
Company, together with a description of the principal risks and
uncertainties that it faces.
Copies of the Company's annual report and financial statements
will be available from the Company's registered office or at
www.heralduk.com once published on 6 March 2017.
By order of the board
Law Debenture Corporate Services Limited
Secretary
17 February 2017
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SFIFAMFWSEIE
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February 17, 2017 02:00 ET (07:00 GMT)
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