ABERFORTH SMALLER COMPANIES TRUST PLC
Aberforth Smaller Companies Trust plc
Audited Final Results for the year to 31 December 2015
The following is an extract from the Company's Annual Report and Accounts for
the year to 31 December 2015. The Annual Report is expected to be posted to
shareholders on 2 February 2016. Members of the public may obtain copies from
Aberforth Partners LLP, 14 Melville Street, Edinburgh EH3 7NS or from its
website: http://www.aberforth.co.uk/. A copy will also shortly be available for
inspection at the National Storage Mechanism at: www.morningstar.co.uk/uk/NSM
facility.
FINANCIAL HIGHLIGHTS
Net Asset Value Total +10.2%
Return
Numis Smaller Companies Index (Excl. Investment +10.6%
Companies) Total Return
Ordinary Share Price Total +13.9%
Return
Total Dividends increased to 28.75p per Ordinary Share
(including a Special Dividend of 2.75p per Ordinary
Share)
The objective of Aberforth Smaller Companies Trust plc (ASCoT) is to achieve a
net asset value total return (with dividends reinvested) greater than that of
the Numis Smaller Companies Index (excluding Investment Companies) over the
long term. ASCoT is managed by Aberforth Partners LLP.
CHAIRMAN'S STATEMENT TO SHAREHOLDERS
Review of 2015 performance
Small UK quoted companies performed well in 2015, more so when compared with
the returns of larger companies. The FTSE 100 Index gave a total return of
-1.3%, while the FTSE All-Share Index, which is heavily weighted towards large
companies, delivered a return of +1.0%. By comparison, the Numis Smaller
Companies Index excluding Investment Companies (NSCI (XIC)), ASCoT's benchmark,
produced a return of +10.6%. Over the same period, the Company's net asset
value total return was +10.2%, while the share price total return was +13.9%.
The share price total return out-performance benefited from a narrowing in the
discount during the year, which was also seen by a number of other investment
trusts in the sector.
ASCoT's modest under-performance against the NSCI (XIC) came in a year that
proved to be one of the most challenging for value investors in the Company's
twenty five year history. Importantly, the Board is confident that the year's
outcome did not reflect any dilution of the Managers' dedication to their value
investment principles. The Managers' Report expands on the factors that
affected performance in 2015.
Dividends
The Company continues to benefit from the positive dividend environment within
the UK small company sector. In this context, the Board is pleased to propose a
final ordinary dividend of 17.85p. This results in total ordinary dividends for
the year of 26.0p, which represents an increase of +5.1% on 2014.
In 2015, the revenue account benefited from the receipt of seven special
dividends paid by investee companies. This embarrassment of riches has led the
Board to propose the payment of a special dividend of 2.75p per share in
addition to the final ordinary dividend. This will ensure that the
all-important retention test is passed and allow the Company to continue to
operate as an investment trust in the eyes of HMRC.
The Board remains committed to a progressive dividend policy. The Company's
revenue reserves, after adjusting for payment of both the final ordinary and
special dividends, amount to 45.1p per share (up from 38.6p as at 31 December
2014) and provide a degree of flexibility for the future. To be clear, I would
highlight that the base level for the Company's progressive dividend policy in
2016 is 26.0p, i.e. excluding the special dividend.
Both dividends are subject to Shareholder approval at the 2016 Annual General
Meeting and, if approved, will be paid on 4 March 2016 to Shareholders on the
register at the close of business on 12 February 2016. Their ex dividend date
is 11 February 2016. ASCoT operates a Dividend Reinvestment Plan. Details of
the plan, including the Form of Election, are available from Capita Registrars.
Contact details can be found on the inside back cover.
Gearing
Throughout its life it has been the Company's policy to use gearing in a
tactical manner. The Royal Bank of Scotland facility is due to expire on 15
June 2017. The facility provides the Managers with flexibility in accessing
liquidity for investment purposes, as well as the ability to fund share buy-ins
without disturbing the underlying portfolio. At the year end, gearing stood at
0.3% of Shareholders' funds. During the year, the level of gearing ranged from
nil to 4.8% with an average of 2.1%.
Share buy-in
At the Annual General Meeting in February 2015, the authority to buy in up to
14.99% of the Company's Ordinary Shares was approved. During the year, 321,000
Ordinary Shares (0.3% of issued share capital) were bought in at a total cost
of £3.7 million. Those Shares have been cancelled rather than held in Treasury.
Once again, the Board will be seeking to renew the buy-in authority at the
Annual General Meeting on 1 March 2016.
Costs
Costs are also a significant influence on net returns. During the year the
Board agreed with the Managers a simplified and reduced fee structure for the
Company. The Board continues to monitor how the Company compares against its
peers in fee terms but is always cognisant that delivering outperformance is of
most importance. The fee adjustment helps to offset the ever increasing burden
of regulatory costs.
The Managers' Report comments on transaction costs incurred during the year.
Again, the Board and the Managers discuss the extent of these costs regularly.
We expect and welcome an industry trend to increased transparency of
transaction costs in coming years.
Conclusion
ASCoT celebrated its quarter century in December 2015. Since the Company's
formation in 1990, the NSCI (XIC) has generated a total return of +11.2% per
annum. By comparison, the Company's net asset value total return has been
+13.9% per annum. Outperformance of this magnitude over such a long period is
beyond the realm of chance and credit must be paid to the Managers' consistent
and diligent application of investment style, coupled with sound research.
During the past 25 years, the Company has experienced periods when small UK
quoted companies have been in and out of fashion, and, in a similar vein, when
the value investing style has waxed and waned. Consequently not every investor
has the benefit of the 25 year record and some will have more difficult
performance histories depending on the timing of their purchases. This will
always be the case, no matter how successful the Manager or diligent the Board,
but it serves to emphasise that investment in ASCoT should be viewed as a
medium to long term opportunity for exposure to a sector and style that tend to
reward the patient investor.
In the years since the global financial crisis, high absolute returns from
small UK quoted companies have come against the background of leadership by the
growth style. This has also been a period of extraordinary monetary policy. It
is difficult to calibrate the precise effects of zero interest rates and
quantitative easing on investment styles, but a relationship beyond pure
coincidence seems plausible. With the Federal Reserve increasing interest rates
in December 2015, we are at least reminded that nothing remains constant in
financial markets: interest rates do not just fall and strong style leadership
does not last forever.
As I alluded to earlier, 2015 has been an extremely challenging year for the
value investor. None of us know what 2016 will deliver. The Board remains
firmly of the view that the Company is extremely well served by the Managers.
The value investment style has been applied consistently through cycles while
the focus and evolution of the investment team continue to serve shareholders
well. The experienced team, and its financial commitment to the Company,
underpins a business structure that in the Board's view has been of great
importance in delivering an excellent long term performance record.
Finally, the Board very much welcomes the views of Shareholders and we are
always available to talk to Shareholders directly. My email address is noted
below.
Paul Trickett
Chairman
27 January 2016
paul.trickett@aberforth.co.uk
MANAGERS' REPORT
Introduction
Benefiting from a resilient domestic economy and its low exposure to the
struggling resources industries, the Numis Smaller Companies Index (excluding
investment companies) performed well in 2015, securing a total return of 10.6%.
This was well ahead of the FTSE All-Share's 1.0% and, indeed, compared well
with the results for many major stockmarkets, particularly when assessed in
sterling. ASCoT's NAV rose by 10.2% in total return terms. While acceptable in
the broader context of 2015, this outcome is below that of the benchmark.
Reasons for this are set out in the Performance section of this report.
Returning, for the time being, to the broader investment environment, risk
assets tended to struggle in 2015, especially in the second half. Uncertainty
continued as to the strength of recovery in the Eurozone, notwithstanding the
introduction of quantitative easing long promised by Mario Draghi. Meanwhile,
the pace of growth in the US ebbed even as speculation about the first rise in
interest rates in the present cycle mounted. Adding to these undercurrents came
the Autumn's tide of concern about China and the emerging markets in general.
Uncertainty rose as to the rate of deceleration in the Chinese economy
following a loosening of its currency peg with the strong dollar, which fuelled
recurrent fears about years of investment financed by unsustainable levels of
debt. The slowdown in China's rate of growth added to pressure on the resources
industry, as diminishing demand met still rising supply, a legacy of the boom
years. In turn, plummeting commodity prices and a stronger dollar intensified
the woes of emerging markets, several of which have relied on dollar
denominated debt to fund their growth.
The UK has proved a haven of comparative tranquillity: domestic demand has been
boosted by wages rising above the rate of inflation and has offset austerity
policies, which have in any case been watered down. However, the FTSE All-
Share, which is dominated by large companies, has been weighed down by its
significant exposure to the resources industries. This factor helps explain the
out-performance of smaller companies in 2015: the NSCI (XIC) has a relatively
low exposure to resources companies and a much greater exposure to sectors,
such as retailing, that address the domestic economy. That said,
overseas-facing companies within the NSCI (XIC) are showing signs of stress as
patchy demand growth in other economies combines with the lagged effects of
sterling's revaluation over the past four years.
Against this backdrop of modest economic growth and mounting pessimism,
government bond yields ended 2015 little changed from the levels at which they
started the year. These are very low in the long term historical context and
are also influenced by the prevailing monetary regime of zero interest rate
policy and quantitative easing. The impact of bond yields on a portfolio of
small UK quoted companies constructed in accordance with a value investment
discipline is twofold.
* First, as already implied, bond yields are a gauge of underlying economic
activity: yields tend to rise to reflect and compete with the returns
available from a stronger economy and vice versa. In an environment of low
growth across the economy, secular growth companies stand out and can be
rewarded by the stockmarket with higher than normal valuations. A rising
tide of improving prospects for the general economy should erode that
growth premium.
* Second, value stocks may be considered "short duration" equities, which
means that more of their worth is determined by near term cash flows from
the underlying businesses. In contrast, growth stocks tend to be "long
duration" equities, with a greater portion of their value derived from cash
flows that are forecast to grow often over many years into the future. As
such, the valuation of a growth company is more sensitive to the rate at
which the cash flows are discounted to arrive at the business's present
value. To this extent, the present climate of very low interest rates and
bond yields is likely to result in valuations for growth companies that are
even higher than normal.
The theory has translated into practice since the global financial crisis: the
value investment style has fared well in years such as 2013 when bond yields
rose, but has faced a challenge over the period as a whole as yields have
declined. This report's initial focus on the big picture should not be mistaken
for a change in the Managers' investment approach: the portfolio remains a
collection of individual businesses selected for their attractive valuations
and prospects. However, it is clear that the performance of the portfolio,
whether Aberforth likes it or not, is influenced by factors beyond its control.
Some of this is by design: ASCoT ought to benefit from the value premium, which
is the out-performance that value stocks have enjoyed over growth stocks over
the long term both in the NSCI (XIC) and in equity markets around the world.
Investment performance
To recap, ASCoT's NAV total return in 2015 was 10.2%, which compares with 10.6%
from the NSCI (XIC). This section of the report analyses some of the factors
behind the relative performance.
For the 12 months ended 31 December 2015 Basis
points
Stock selection (16)
Sector selection 27
-----
Attributable to the portfolio of investments, based on mid 11
prices
(after transaction costs of 35 basis points)
Movement in mid to bid price spread 8
Cash/gearing 24
Purchase of Ordinary Shares 4
Management fee (79)
Other expenses (7)
-----
Total attribution based on bid prices (39)
-----
Note: 100 basis points = 1%. Total Attribution is the difference between the
total return of the NAV and the Benchmark Index (i.e. NAV = 10.22%; Benchmark
Index = 10.61%; difference is -0.39% being -39 basis points).
Style & size
With government bond yields remaining at very low levels over the year, the
value investment style under-performed in 2015. An additional handicap came
from the rebalancing of the NSCI (XIC) on 1 January 2015: this saw the
admission of several resources companies, whose share prices had fallen steeply
in 2014. According to the price-to-book methodology employed by the London
Business School, which maintains the NSCI (XIC), these were classified as value
companies. Their continued struggles in 2015 therefore represented a headwind
to the value style. As explained in the Sectors paragraph below, the Managers
are not slaves to third party definitions of what makes a value investment and
choose to avoid many of these troubled resources businesses.
The Managers' consistent application of their value style has led to a
significantly larger exposure than that of the NSCI (XIC) to the smaller
constituents of the index. One way to illustrate this is to focus on the NSCI
(XIC)'s overlap with the FTSE 250. This overlap accounts for 63% of the NSCI
(XIC) but for just 40% of the portfolio. This under-weight position in "larger
small" companies and the accompanying over-weight position in "smaller small"
companies reflects the strong performance of mid caps over the past 15 years.
Consequently, the more attractive valuations are now on offer down the scale of
market capitalisations, often irrespective of an individual company's
prospects. In part, this state of affairs is a result of the global financial
crisis: fears of illiquidity have remained exaggerated and deterred many market
participants from venturing below the FTSE 250. With little to choose between
the returns from the FTSE 250 and the FTSE SmallCap in 2015, size was not a
significant influence on the ASCoT's relative performance.
Sectors
The resources sectors represent a conundrum for the value investor. Their
constituents often look very cheap on metrics such as price-to-book, but their
prospects are clouded by macro economic and political influences on underlying
commodity prices. The Managers have differentiated between the oil companies
and the miners, adopting a higher weight than the index in the former - for the
first time in a decade - and remaining under-weight in the latter. An important
means of differentiation is the balance sheet: the oil companies in the NSCI
(XIC) tend to have stronger balance sheets, with net cash, modest debt or long
term borrowing arrangements. In contrast, the miners' balance sheets tend to be
stretched. As a consequence, the miners in many cases require higher commodity
prices sooner rather than later in order to survive, whereas it is possible to
adopt a longer term investment horizon with the oil companies, most of which
remain cash flow positive with the oil price at today's depressed levels. On a
one year view, the decision to add to the portfolio's position in oil was
unhelpful. However, this was out-weighed by the benefit of avoiding the worst
of the miners.
Elsewhere, it has been challenging to find value in the healthcare sectors.
Healthcare companies offer the benefits of secular growth dynamics and are able
to stand apart from concerns about the economic cycle that afflict the majority
of stockmarket sectors. As a consequence, they have attracted large amounts of
capital, as resources companies were able to do a decade ago, and their
valuations have risen to high levels. Other buoyant areas of the small cap
universe in recent years have been those sectors addressing the domestic UK
economy. Housebuilders and retailers have tended to perform well and ASCoT has
benefited from significant exposure to those industries. However, it would
appear that the good news about the UK's recovery is now fully reflected in the
valuations of several domestic cyclicals. As a consequence, the portfolio's
exposure has fallen as valuation targets have been achieved.
Corporate activity
M&A staged a substantial recovery in 2015. Bids for 27 members of the NSCI
(XIC) were completed in the year, against 12 in 2014 and just 5 in 2013. On top
of the completed deals, approaches for another 8 companies were outstanding at
the year end. Acquirers were predominantly other corporates rather than private
equity and takeover premiums were generally fair. Of the 27 completed deals,
ASCoT held 8. The net effect of the takeover premiums collected by ASCoT less
those missed was positive, though amounted to less than 100 basis points of
relative performance.
The year under review was also noteworthy for the refreshment of the NSCI
(XIC): the initial public offerings of 29 companies eligible for inclusion in
the index were completed. This compares with 27 in 2014. As at 31 December
2015, ASCoT held four of 2015's IPOs. It would appear that the pipeline of
potential future IPOs is full, though its realisation clearly relies on
acceptable price expectations on the part of the vendors and on general
stockmarket conditions - neither of which is a given.
Income
The dividend performance of small companies in recent years has been very
strong. In an investment world starved of income by zero interest rate
policies, the dividend characteristics offered by the constituents of the NSCI
(XIC) have been increasingly sought after. It is scarcely necessary to look
further when attempting to understand the good share price performance of the
asset class since the global financial crisis. The same logic applies when
assessing the performance of small companies against large. Double digit per
annum dividend growth and numerous special dividends from the NSCI (XIC) since
2009 contrast with the fortunes of the FTSE All-Share, which is dominated by
large sectors, such as the banks and resources companies, whose dividends have
been under considerable pressure.
ASCoT continues to benefit from this favourable backdrop. Its investment income
rose by 25% in 2015, boosted by seven special dividends and also by the impact
of companies resuming dividend payments after having suspended them during the
2009 recession. Given this performance, the general craving for income and the
higher than average yields of the portfolio's investee companies, it would seem
likely that ASCoT's income characteristics have been beneficial to both its
total return and capital NAV performance in recent years. This would have
mitigated to an extent the broader headwinds facing the value style that are
associated with low interest rates and bond yields.
It is worth reiterating the caveats about income made in previous reports.
First, the double digit growth in small company dividends since 2009 is
unsustainable: the long term average is 2.5% per annum adjusted for inflation
and there is little reason to believe that the future average should be any
higher. Second, the Managers detect an element of faddishness to the
rediscovered fondness for dividends: at the risk of too much cynicism, it may
be the case that certain dividend decisions are being made with an eye to the
shorter term fillip they might afford to a share price rather than to the
longer term good of the company. Such situations may only be revealed when the
next recession hits. Third, if interest rates and bond yields can begin a
journey of normalisation, income becomes less scarce and the income
characteristics of small companies become less sought after. This, though,
should be a price worth paying by a value investor.
Significant stakes
Throughout ASCoT's 25 years, the Managers have been prepared to take large
stakes in investee companies across Aberforth's client base. These stakes can
rise as high as around 25% of a company's outstanding share capital. The
primary motivation relates to the value investment philosophy: the Managers
want valuation to be the main determinant of a company's position in the
portfolio. A 25% ownership limit offers flexibility in this regard, though
stakes of this size are a relatively small part of the portfolio and are
usually amassed slowly, taking advantage of share price weakness.
Clearly, significant stakes can bring additional opportunities and
responsibilities. The Managers have an established means of engagement with
investee companies that focuses on the role of the chairman, which is the most
important position in the UK's corporate governance structure. The Managers may
have a view on dividend policy or balance sheet structure, but, with the right
person in the chair, they are generally happy to let the board run the company.
Engagement is frequently time consuming, but the Managers are well resourced
and believe that the investment of time provides a good payback. Significant
stakes, with the inevitable mix of successes and failures, have made a net
positive contribution to ASCoT's returns over the years.
Turnover
Defined as the lower of purchases and sales divided by average month end net
asset value over the past twelve months, turnover was 37% over the twelve
months to 31 December 2015, which compares with 36% in 2014. In both years,
turnover was boosted by situations in which ASCoT is in effect a forced seller
but which represent good outcomes for shareholders. First, companies that have
grown too large to remain in the NSCI (XIC) on its annual 1 January rebalancing
are sold in an orderly fashion. Second, companies subject to takeover bids are
sold to the acquirer. Adjusting for these circumstances, ASCoT's underlying
turnover over the long term has been 25% and in 2015 was 20%. The underlying
turnover figure of 25% implies an average holding period of four years, though
the portfolio contains many holdings that have been there for much longer.
The rise in overall turnover had a large influence on the rise in transaction
costs from £3,346k in 2014 to £3,890k in 2015. Higher asset values, consistent
with the positive return from the NSCI (XIC), also had an important effect.
Other factors were less significant; these include the proportion of purchases
incurring stamp duty, the mix of dealing venues, the impact of selling
companies to bidders in M&A situations, and the significance within purchases
of participation in issues of new equity.
The Managers are acutely conscious of transaction costs, not least because they
affect the achievability of ASCoT's investment objective - to out-perform the
NSCI (XIC) over the long term. The Managers assess these costs, which represent
a combination of commissions for execution and stamp duty reserve tax, together
with underlying investment opportunities: in keeping with the value investment
discipline, holdings are reduced when they no longer offer further upside and
the proceeds are recycled into other positions. In the round, this process of
recycling should be of benefit to shareholders: this was certainly the case in
2015, when so much of the turnover was a result of M&A and the sales of
companies that had performed sufficiently well to be ejected from the NSCI
(XIC).
Active share
Active share is a gauge of how different a portfolio is from an index. A higher
active share ratio indicates a greater difference and increases the probability
that the portfolio's performance will diverge from that of the index. That
divergence could be positive or negative. The Managers monitor active share to
ensure that ASCoT's portfolio does not inadvertently become too similar to the
NSCI (XIC). They target a ratio of at least 70%, though will tolerate a
temporarily depressed number. The target is assessed without the benefit of
holdings that are not constituents of the index - such holdings flatter active
share. At 31 December 2015, the ratio stood at 77%.
Valuation
31 December 2015 31 December 2014
Characteristics ASCoT NSCI (XIC) ASCoT NSCI
(XIC)
Number of companies 86 349 88 369
Weighted average market £567m £750m £614m £754m
capitalisation
Price earnings ratio or PE 12.5x 14.6x 13.0x 13.2x
(historic)
Dividend yield (historic) 3.1% 2.7% 2.5% 2.5%
Dividend cover 2.6x 2.5x 3.1x 3.0x
The table above contains historic valuation data for ASCoT's portfolio and for
the NSCI (XIC). The portfolio's historic PE fell over the course of 2015,
while the NSCI (XIC)'s rose. This is consistent with the style dynamics
already described: the small cap universe was led higher by the growth stocks,
while value stocks performed less well. Meanwhile, the PE of large companies,
represented by the FTSE All-Share, rose from 13.8x to 16.6x over the year. As
a consequence, small companies ended the year 12% cheaper than large in terms
of PE, which compares with a 4% discount twelve months earlier. As recently as
September 2012, small companies were 24% more expensive than large on the basis
of PEs.
The average portfolio yield rose in 2015, while the dividend cover dropped. An
important influence on these movements is the impact of previously nil yielding
companies resuming or starting dividends payments. At 2.6x, cover is now back
closer to the long term average of 2.5x, having spent the years since the
global financial crisis at above 3.0x.
2016 enterprise value / earnings before interest, tax and amortisation
43 growth companies 244 other companies Tracked Universe* ASCoT's portfolio
16.0x 11.1x 11.8x 9.8x
* Companies followed closely by the Managers accounting for 96% by value of the
NSCI (XIC).
The table above sets out the forward EV/EBITA ratio for the portfolio, the
tracked universe and two subdivisions of the tracked universe, 43 growth
companies and the 244 other companies. EV/EBITA is the Managers' favoured
valuation metric. It is unaffected by how a company is funded, whether through
equity or debt, and it is closer to how a corporate acquirer values a target
business. This latter point may explain the important contribution to ASCoT's
performance over the years from M&A. Consistent with the Managers' value
investment style, the portfolio is valued on a large discount to the tracked
universe as a whole. This discount to the growth companies is wider, at 39%. A
corollary of growth's leadership in 2015 is that the population of potential
investments for ASCoT has increased. It is the value investor's contention that
discounts will narrow over time to the benefit of the relative returns of
portfolios managed in accordance with the style.
Outlook & conclusion
Although the Managers' day-to-day focus is on individual businesses and their
valuations, it is likely that the performance of ASCoT over the coming year
will be significantly influenced by developments on a larger scale. If the
recent interest rate increase in the US heralds a gradual normalisation of
monetary conditions around the world and bond yields are higher in twelve
months' time, it is probable that ASCoT will have benefited from tailwinds for
the value investment style. If, however, the rate increase proves more than the
economy can take and bond yields stay the same or decline, then ASCoT will
probably face headwinds similar to those of 2015. The outcome is not one that
the Managers are able to call. However, the challenge that the interest rate
rise in the US represents to the broader investment world's safe and consensual
preference for growth stocks is intriguing.
Closer to home, the outlook for the UK's corporate sector is undeniably cloudy.
Demand is challenged by the uncertain pace of growth in much of the world,
while costs are, at last, coming under pressure from wages rising above the
rate of inflation. Sliding commodity prices - particularly that of oil - offer
some mitigation, but a squeeze on margins is plausible. It should not come as a
surprise if the profit growth expected by the market for small companies in
2016 - currently around 9% - once again proves too ambitious. In mitigation,
balance sheets do not appear stretched across the portfolio and the investment
universe in general. Moreover, another year of above average dividend growth
from small companies looks likely.
For the Managers, the most encouraging factor is that of valuation. The
investment universe continues to offer up numerous attractively valued
investment opportunities. Indeed, the consolation of a year in which growth
stocks have led the NSCI (XIC) higher is that the valuation gap between growth
and value has widened and the number of candidates for inclusion in the
portfolio has risen. It is plausible that elements of the undoubted top-down
risks are already discounted in valuations of today's portfolio. Accordingly,
without becoming hostage to the vagaries of equity returns over one year, the
Managers look to the future with confidence and believe that ASCoT can continue
to benefit from the careful stock selection and exploitation of the value
premium that have characterised the first 25 years of your Company's life.
Aberforth Partners LLP Managers
27 January 2016
DIRECTORS' RESPONSIBILITY STATEMENT
Each of the Directors confirm to the best of their knowledge that:
(a) the financial statements, which have been prepared in accordance with
applicable accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company; and
(b) the Stategic 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 it faces. A summary of
these can be found below.
(c) the Annual Report, taken as a whole, is fair, balanced and understandable
and provides information necessary for Shareholders to assess the Company's
performance, business model and strategy.
On behalf of the Board
Paul Trickett
Chairman
27 January 2016
PRINCIPAL RISKS AND RISK MANAGEMENT
The Board carefully considers the principal risks faced by the Company and
seeks to manage these risks through continual review, evaluation and taking
action as necessary.
Investment in small companies is generally perceived to carry more risk than
investment in large companies. While this is reasonable when comparing
individual companies, it is much less so when comparing the volatility of
returns from diversified portfolios of small and large companies. In addition,
the Company has a simple capital structure and outsources all the main
operational activities to recognised, well-established firms.
The principal risks faced by the Company, together with the approach taken by
the Board towards them, have been summarised below. Further information
regarding the review process can be found in the Corporate Governance and Audit
Committee Reports.
(i) Investment policy/performance risk - the performance of the
investment portfolio will typically differ from the performance of the
benchmark and will be influenced by market related risks including market price
and liquidity (refer to Note 18 for further details). The Board's aim is to
achieve the investment objective over the long term by ensuring the investment
portfolio is managed appropriately. The Board has outsourced portfolio
management to experienced managers with a clearly defined investment philosophy
and investment process. The Board receives regular and detailed reports on
investment performance including detailed portfolio analysis, risk profile and
attribution analysis. Senior representatives of Aberforth Partners attend each
Board meeting. Peer group performance is also regularly monitored by the Board.
(ii) Share price discount - investment trust shares tend to trade at
discounts to their underlying net asset values. The Board and the Managers
monitor the discount on a daily basis. The Board intends to continue to use the
share buy- in facility to seek to sustain as low a discount as seems possible.
(iii) Gearing risk - in rising markets, gearing will enhance returns;
however, in falling markets the gearing effect will adversely affect returns to
Shareholders. The Board and the Managers consider the gearing strategy and
associated risk on a regular basis.
(iv) Reputational risk - the Board and the Managers monitor external
factors outwith the Company's control affecting the reputation of the Company
and/or the key service providers and take action if appropriate. The
Secretaries monitor regulatory developments and provide regular updates to the
Board.
(v) Regulatory risk - failure to comply with applicable legal and
regulatory requirements could lead to suspension of the Company's share price
listing, financial penalties or a qualified audit report. A breach of Section
1158 of the Corporation Tax Act 2010 could lead to the Company losing
investment trust status and, as a consequence, any capital gains would then be
subject to capital gains tax. The Board receives quarterly compliance reports
from the Secretaries to evidence compliance with rules and regulations,
together with information on future developments.
The Income Statement, Balance Sheet, Reconciliation of Movements in
Shareholders' Funds and summary Cash Flow Statement are set out below:-
INCOME STATEMENT
For the year ended 31 December 2015 (audited)
For the year ended For the year ended
31 December 2015 31 December 2014
Revenue Capital Total Revenue Capital Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Gains/(losses) on - 87,132 87,132 - (24,628) (24,628)
investments
Investment income 37,652 1,462 39,114 30,166 291 30,457
Other income - - - 1 - 1
Investment management fee (3,283) (5,472) (8,755) (3,240) (5,399) (8,639)
Transaction costs - (3,890) (3,890) - (3,346) (3,346)
Other expenses (778) - (778) (661) - (661)
-------- -------- -------- -------- -------- --------
Net return on ordinary 33,591 79,232 112,823 26,266 (33,082) (6,816)
activities
before finance costs and
tax
Finance costs (242) (403) (645) (289) (482) (771)
-------- -------- -------- -------- -------- --------
Return on ordinary 33,349 78,829 112,178 25,977 (33,564) (7,587)
activities
before tax
Tax on ordinary activities - - - - - -
-------- -------- -------- -------- -------- --------
Return attributable to
equity shareholders 33,349 78,829 112,178 25,977 (33,564) (7,587)
====== ======= ======= ====== ======= =======
Returns per Ordinary Share 35.03p 82.80p 117.83p 27.24p (35.19)p (7.95)p
The Board declared on 27 January 2016 a final dividend of 17.85p per Ordinary
Share and a special dividend of 2.75p per Ordinary Share. The Board also
declared on 29 July 2015 an interim dividend of 8.15p per Ordinary Share.
The total column of this statement is the profit and loss account of the
Company. All revenue and capital items in the above statement derive from
continuing operations. No operations were acquired or discontinued in the year.
A Statement of Comprehensive Income is not required as all gains and losses of
the Company have been reflected in the above statement.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
For the year ended 31 December 2015 (audited)
Capital
Share redemption Special Capital Revenue
Capital reserve reserve reserve reserve Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Balance as at 31 December 2014 953 35 176,300 877,052 53,000 1,107,340
Return on ordinary activities - - - 78,829 33,349 112,178
after taxation
Equity dividends paid - - - - (23,964) (23,964)
Purchase of Ordinary Shares (3) 3 (3,675) - - (3,675)
-------- -------- -------- -------- -------- --------
Balance as at 31 December 2015 950 38 172,625 955,881 62,385 1,191,879
====== ====== ====== ====== ====== ======
For the year ended 31 December 2014 (audited)
Capital
Share redemption Special Capital Revenue
Capital reserve reserve reserve reserve Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Balance as at 31 December 2013 954 34 176,703 910,616 49,818 1,138,125
Return on ordinary activities - - - (33,564) 25,977 (7,587)
after taxation
Equity dividends paid - - - - (22,795) (22,795)
Purchase of Ordinary Shares (1) 1 (403) - - (403)
-------- -------- -------- -------- -------- --------
Balance as at 31 December 2014 953 35 176,300 877,052 53,000 1,107,340
====== ====== ====== ====== ====== ======
BALANCE SHEET
As at 31 December 2015 (audited)
31 December 31 December
2015 2014
£ 000 £ 000
Fixed assets:
Investments at fair value through profit or 1,195,581 1,138,793
loss
---------- ----------
Current assets
Debtors 2,725 2,670
Cash at bank 1,025 238
---------- ----------
3,750 2,908
Creditors (amounts falling due within one (510) (209)
year)
---------- ----------
Net current assets 3,240 2,699
---------- ----------
Total Assets less Current Liabilities 1,198,821 1,141,492
Creditors (amounts falling due after more (6,942) (34,152)
than one year)
---------- ----------
Total Net Assets 1,191,879 1,107,340
======= =======
Capital and reserves: equity interests
Called up share capital (Ordinary Shares) 950 953
Reserves:
Capital redemption reserve 38 35
Special reserve 172,625 176,300
Capital reserve 955,881 877,052
Revenue reserve 62,385 53,000
---------- ----------
Total Shareholders' Funds 1,191,879 1,107,340
======= =======
Net Asset Value per Ordinary Share 1,254.30p 1,161.41p
CASH FLOW STATEMENT
For the year ended 31 December 2015 (audited)
31 December 2015 31 December 2014
£ 000 £ 000
Operating activities
Net revenue before finance costs and 33,591 26,266
tax
Tax withheld from income (59) -
Tax recovered - 15
Receipt of special dividend taken to 1,462 291
capital
Investment management fee charged to (5,472) (5,399)
capital
Increase in debtors (432) (129)
Increase in other creditors 47 36
-------- --------
Net cash inflow from operating 29,137 21,080
activities
===== =====
Investment activities
Purchases of investments (452,925) (419,879)
Sales of investments 480,102 420,312
-------- --------
Net cash inflow from investment 27,177 433
activities
===== =====
Financing activities
Purchase of Ordinary Shares (3,675) (403)
Equity dividends paid (23,964) (22,795)
Interest and fees paid (638) (863)
Net (repayment)/drawdown of bank debt (27,250) 2,250
facilities
(before any costs)
-------- --------
Cash outflow from financing (55,527) (21,811)
activities
===== =====
Change in cash during the period 787 (298)
===== =====
Cash at the start of the period 238 536
Cash at the end of the period 1,025 238
====== ======
SUMMARY NOTES TO THE FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING STANDARDS
This is the first year that the Company has presented its financial statements
under Financial Reporting Standard 102 (FRS 102) issued by the Financial
Reporting Council and under the AIC's Statement of Recommended Practice
"Financial Statements of Investment Trust Companies and Venture Capital trust
(SORP) issued in 2014. The last financial statements under previous UK GAAP
were for the year ended 31 December 2014 and the date of transition to FRS 102
was therefore 1 January 2015. There have been no changes in accounting policies
as a consequence of adopting FRS 102. The Cash Flow Statement for 31 December
2014, has been re-presented to be consistent with the format of FRS 102. The
financial statements have been prepared on a going concern basis. The
functional and presentation currency is pounds sterling, which is the currency
of the environment in which the Company operates.
2. DIVIDENDS
Year to Year to
31 December 2015
31 December 2014
£000
£000
Amounts recognised as distributions to
equity holders in the period:
Final dividend of 17.00p for the year ended
16,209 15,404
31 December 2014 (2013: 16.15p)
Interim dividend of 8.15p for the year
7,755 7,391
ended 31 December 2015 (2014: 7.75p)
--------- --------
23,964 22,795
===== =====
The special (2.75p per share) and final dividend (17.85p per share) for the
year ended 31 December 2015 will be paid, subject to shareholder approval, on 4
March 2016. These dividends have not been included as a liability in these
financial statements.
3. RETURNS PER ORDINARY
SHARE
The returns per Ordinary Share are based on:
Year to Year
to
31 December 2015 31
December 2014
Returns attributable to Ordinary Shareholders
£ 112,178,000 £ (7,587,000)
Weighted average number of shares in issue
during the year
95,200,792 95,367,970
Return per Ordinary Share
117.83p (7.95)p
4. NET ASSET
VALUES
The net assets and the net asset value per share attributable to the Ordinary
Shares at each year end are calculated in accordance with their entitlements in
the Articles of Association and were as follows:
31 December 31 December
2015 2014
Net assets attributable
£1,191,879,000 £1,107,340,000
Ordinary Shares in issue at the end of the year
95,023,792 95,344,792
Net asset value attributable per Ordinary Share
1,254.30p 1,161.41p
No shares have been bought back for cancellation between 31 December 2015 and
27 January 2016.
5. FURTHER INFORMATION
The foregoing do not constitute statutory accounts (as defined in section 434
(3) of the Companies Act 2006) of the Company. The statutory accounts for the
year ended 31 December 2014, which contained an unqualified Report of the
Auditors, have been lodged with the Registrar of Companies and did not contain
a statement required under section 498(2) or (3) of the Companies Act 2006.
Certain statements in this announcement are forward looking statements. By
their nature, forward looking statements involve a number of risks,
uncertainties or assumptions that could cause actual results or events to
differ materially from those expressed or implied by those statements. Forward
looking statements regarding past trends or activities should not be taken as
representation that such trends or activities will continue in the future.
Accordingly, undue reliance should not be placed on forward looking statements.
The Annual Report is expected to be posted to shareholders on 2 February 2016.
Members of the public may obtain copies from Aberforth Partners LLP, 14
Melville Street, Edinburgh EH3 7NS or from its website: http://
www.aberforth.co.uk/.
CONTACT: Alistair Whyte/Euan Macdonald, Aberforth Partners LLP, 0131 220
0733
Aberforth Partners LLP, Secretaries - 27 January 2016
ANNOUNCEMENT ENDS
ABERFORTH SMALLER : Annual Financial Report
January 27, 2016 at 11:34 am
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