Henderson Smaller Companies Trust Regulatory News (HSL)

HENDERSON INVESTMENT FUNDS LIMITED

THE HENDERSON SMALLER COMPANIES INVESTMENT TRUST PLC

LEGAL ENTITY IDENTIFIER: 213800NE2NCQ67M2M998

THE HENDERSON SMALLER COMPANIES INVESTMENT TRUST PLC

ANNUAL FINANCIAL RESULTS FOR THE YEAR ENDED 31 MAY 2020

This announcement contains regulated information

KEY HIGHLIGHTS

The Henderson Smaller Companies Investment Trust plc has outperformed its benchmark by 7.7% (on a NAV total return basis) and is maintaining its final dividend, leading to a dividend increase of 2.2% for the year.

Chairman Jamie Cayzer-Calvin said:

"The Company has outperformed its benchmark in 15 of the 17 years in which Neil Hermon, your Fund Manager, has managed the investment portfolio, as well as outperforming over the last one, three, five and ten years. 

Over the last decade, the annualised NAV total return has been 14.3%, outperforming its benchmark by 5.8% per annum. The consistency of this outperformance reflects the quality of the investment style and approach of your Fund Manager and his team.

The Board proposes a total dividend for the year of 23.5p, an increase of 2.2%."

INVESTMENT OBJECTIVE

The Company aims to maximise shareholders' total returns (capital and income) by investing in smaller companies that are quoted in the United Kingdom.

PERFORMANCE

1 Net asset value ("NAV") per ordinary share total return with income reinvested

2 Share price total return using mid-market closing price with income reinvested

3 Numis Smaller Companies Index (excluding investment companies) total return

4 Average NAV total return of the AIC UK Smaller Companies sector

5 Average share price total return of the AIC UK Smaller Companies sector

6 Calculated using published daily NAVs with debt at par including current year revenue

7 This represents an interim dividend of 7.0p and a proposed final dividend of 16.5p

8 Based on the ordinary dividends paid and payable for the year and the mid-market share price at year end

A glossary of terms and explanations of alternative performance measures are included in the Annual Report.

Sources: Morningstar for the AIC, Janus Henderson, Refinitiv Datastream

CHAIRMAN'S STATEMENT

It is extraordinary how rapidly things can change. In my half-year report, my comments had an optimistic tone noting that the Conservative election victory had provided political clarity, removed the risk of a market-unfriendly Corbyn government and provided more certainty to our negotiations over Brexit, all of which would help UK smaller companies. All this changed in February and March as the market reacted negatively to the rapid spread of Covid-19 across the globe and both our net asset value ("NAV") and our share price fell sharply as global stock markets suffered a severe market correction.

Performance

During the year under review, your Company performed well in relative terms, outperforming its Numis Smaller Companies benchmark by 7.7% on a NAV total return basis, and its UK smaller companies investment trust peers by 3.1%. However, NAV total return fell by 8.2% and share price total return by 6.9%, reflecting a narrowing of the discount to NAV at which your Company's shares trade.

The Company has outperformed its benchmark in 15 of the 17 years in which Neil Hermon, your Fund Manager, has managed the investment portfolio, as well as outperforming over the last one, three, five and ten years. Over the last decade, the annualised NAV total return has been 14.3%, outperforming its benchmark by 5.8% per annum. The consistency of this outperformance reflects the quality of the investment style and approach of your Fund Manager and his team.

Revenue and dividend

There has been much press coverage about UK companies that are reducing or not declaring dividends. In line with most listed companies, your Company's revenues have been impacted by the economic downturn: the revenue return per share over the year under review was 16.7p, compared with 23.6p for the previous year. Your Company has a revenue reserve of £19.4 million at the year end, which can be used to smooth dividends in difficult years, and your Board proposes using some of that this year. The Board therefore recommends a maintained final dividend of 16.5p per share, making a total dividend for the year of 23.5p (2019: 23.0p), an increase of 2.2%. The final dividend is subject to shareholder approval at the AGM.

Discount

Your Company's share price discount to NAV fluctuated widely over the year with highs and lows of -17.6% and a premium of +2.0% respectively, averaging -7.0%. This compares favourably with the sector average of -9.4%. The Company ended the year at a 9.6% discount compared with 10.5% on 31 May 2019. Your Board continues to monitor the discount and will consider the merits of buying back shares as markets evolve, though we do not currently believe that share buy-backs represent the most effective way of generating long-term shareholder value. During the reporting year, no shares in the Company were bought back.

Ongoing charge

The Board regularly reviews the ongoing charge and monitors the expenses incurred by the Company. For the year ended 31 May 2020, the base ongoing charge was 0.42%, with no performance fee payable. This charge was the same as in the previous year and remains well below the average ongoing charges ratio of the peer group. Further details of the ongoing charge are in the Annual Report.

Board

As I reported in my statement last year, Beatrice Hollond retired from the Board at the 2019 AGM, with Alexandra Mackesy succeeding her as Audit Chairman and David Lamb as Senior Independent Director. I shall have completed nine years on the Board at this year's AGM. The Board has agreed a staggered succession plan, extending the length of my tenure by a year. Given the current difficult market conditions, this will ensure continuity and an orderly succession for the role of Chairman. I shall, therefore, stand down as a director and your Chairman at the conclusion of the 2021 AGM. David is overseeing the process of selecting my successor and I hope to be able to report progress at the half year. The succession plan means that there will now be a 15-month period where David and I overlap as directors at Polar Capital Holdings plc and your Company. The Board has discussed this carefully, and does not believe it will give rise to any conflicts, given the different nature of the companies and the directors' roles.

Annual General Meeting

The Company's AGM will be held at 4.00 pm on Monday, 21 September 2020. In view of the ongoing restrictions on public gatherings, we invite our shareholders to attend the AGM via a Zoom webinar, and urge shareholders to submit proxy forms to ensure their vote counts, as there will be no live voting. Your Fund Manager will present his review of the year and thoughts on the future during the webinar, and answer your questions, as will I and my fellow directors. Instructions on joining the meeting and further information on AGM arrangements are included in the Notice of AGM sent with this Annual Report and on our website at www.hendersonsmallercompanies.com.

We commit to holding physical meetings in future when this is legally allowed and can be accomplished safely. But in case of any further crises like the Covid-19 lockdown, we are putting to shareholders a proposed amendment to our Articles of Association to enable a combination of virtual and physical shareholder meetings.

Outlook

At the time of writing, your Fund Manager and support team are still working remotely, and doing this most effectively and efficiently. On behalf of the Board, I thank Janus Henderson and all our service providers for their hard work during the year and particularly over these last few months. I also wish our shareholders good health at this challenging time, and thank you for your continued faith in your Company.

Inevitably, the Covid-19 outbreak has changed expectations dramatically for both UK and global economic growth and this will have an impact on UK smaller companies. That said, UK companies generally entered this crisis in better shape than they did in the financial crisis of 2008/09 and I am optimistic that most will weather the storm successfully. Other uncertainties remain, including the prospects for agreeing a Brexit deal. As always in these times, it is reassuring to be able to rely on the experience and disciplined stock-picking approach of your Fund Manager.

Jamie Cayzer-Colvin

Chairman

FUND MANAGER'S REPORT

Fund performance

The Company had a mixed year in performance terms - falling in absolute terms but significantly outperforming its benchmark. The share price fell by 6.9% and the net asset value by 8.2% on a total return basis. This compared with a fall of 15.9% (total return) by the Numis Smaller Companies Index (excluding investment companies). The outperformance came from strong stock selection, partially offset by a negative contribution from gearing and expenses. This year marks the 15th year of outperformance of the benchmark in the 17 years in which I have managed the investment portfolio.

Market - year under review

The year under review was a volatile but ultimately negative one for equity markets. Notable market highlights included the Conservatives, under the new leadership of Boris Johnson, winning a resounding victory in the General Election which removed the spectre of a Corbyn-led "equity market unfriendly" government. Market relief was also found in the agreement of a trade deal between the US and China after protracted negotiations. Notable market lowlights included the spectre of Corbyn being replaced by the spectre of "no deal" as the Government has to date refused an extension to the 31 December 2020 deadline to agree a trade deal with the EU. However, by early 2020 such headlines were to become the sideshow of our financial year.

The impact of Covid-19 which spread from China to Western Europe before resulting in a global pandemic had profoundly negative repercussions for equity markets. In order to contain the outbreak, strict controls (including social distancing) were enforced to break human interactions and ultimately limit the movement of people. This resulted in a sharp drop in global economic activity as large parts of the global economy were shut down. To soften the impact of the virus, targeted fiscal and monetary measures were introduced in many countries including the UK where the Chancellor has put job retention schemes in place. These interventions, in conjunction with falling case numbers in Western Europe, contributed to markets rallying off their March 2020 lows.

Whilst the impact of the outbreak controls seems to have been effective, the short and long-term impact of Covid-19 on the global economy remains to be seen. Investors are rightly focused on how these controls will be reversed and when and by how much economic activity will resume. The economic impact of the much-used term "new normal" is something investors are still grappling to understand and quantify.

Smaller companies underperformed larger companies over the year. This is the fourth year in a row that the Numis Smaller Companies Index (excluding investment companies) has underperformed the FTSE All-Share Index, albeit by insignificant amounts.

Gearing

Gearing started the year at 8.4% and ended it at 11.0%. Debt facilities are a combination of £30 million 20-year unsecured loan notes at an interest rate of 3.33% and £60 million of short-term bank borrowings. As markets fell, the use of gearing was a negative contributor to performance in the year, a contrast with the significant positive contribution it has made over the 17 years I have managed the investment portfolio.

Attribution analysis

The tables below show the top five contributors to, and the top five detractors from, the Company's relative performance.

Team17 is a developer and publisher of video games for PC, console and mobile devices. The company focuses on the independent games market and selectively works with developers and third parties to launch new content on multiple platforms. The business listed in 2018 and has had a strong period of growth driven by well-received new games releases, the monetisation of new content and improved profitability as the portfolio expanded. With a balance sheet in a net cash position the company is well placed to acquire complementary assets in the sector.

Learning Technologies is a provider of e-learning services and learning software platforms. The company has grown strongly over the last few years through a combination of organic and acquisitive growth. The market it operates in is in a growth phase as corporate learning transitions from the classroom to online, a trend likely to accelerate post Covid-19. With an ambitious management team and strong balance sheet one can expect additional accretive merger and acquisition ("M&A") activity in the future.

Avon Rubber is a manufacturing business which specialises in the production of protection equipment, and ad-hoc products for the dairy industry. The company has a presence in the US, UK and Italy with long-term contracts with various military organisations globally. During 2019, the company undertook a large transaction acquiring Ceredyne, a designer and manufacturer of helmets and body plates for the US market. This deal has accelerated the company's earnings profile, provided an improved longer-term growth outlook and given further earnings upside potential from acquisition synergies.

Intermediate Capital is an alternative finance provider and asset manager. It is a leading provider of mezzanine finance to leverage buyout markets. It also owns a highly successful mezzanine, property lending and credit fund management operation. Its portfolio of investments is performing well but the primary growth engine of the business is the fund management operation. This division is having real success in asset gathering due to the strength of its performance track record, the quality of the team and underlying demand for its product in an income-hungry world.

Impax Asset Management is an environmental and socially responsible focused asset manager based in the UK. The company was formed in 1998 by the current CEO Ian Simm, and has several funds spanning public equities, bonds and infrastructure assets. 2019 was a period of strong growth for the business as a result of large mandate wins, stemming from the increased appetite of investors for this asset class, and enhanced profitability as the company scaled. Performance within the funds was also strong which benefited asset gathering during the period.

Cineworld is an international cinema operator. The company has market leading positions in the UK, Israel, Eastern Europe and the USA. The company undertook significant expansion in 2018 by acquiring Regal Entertainment, a leading US cinema chain. Cineworld also agreed to buy Cineplex, a large Canadian cinema chain, in later 2019. The combination of the high leverage taken on to acquire Regal, the debt-funded acquisition of Cineplex, and the closure of its entire estate due to Covid-19 caused the share price to drop. Recently Cineworld has agreed an increase in its debt facilities and a relaxation on covenants as well as terminating the acquisition of Cineplex, meaning it is highly likely to survive the current downturn and emerge in a strong position to recover.

Burford Capital is a provider of litigation finance. After a number of years of strong growth and positive share price performance the company came under attack from a short seller who published a negative report citing issues on liquidity, solvency and corporate governance. This report has had a negative effect on the market's short-term perspective on Burford with the result that the company's share price has fallen materially. We do not believe that most of the short report's arguments hold any merit and continue to hold a position in Burford, albeit materially lower than a year ago.

Centamin is an Egyptian gold miner. The company reported stronger production output after a period of disruption. In addition, the gold price rose as fears over Covid-19 led to investors buying perceived safe assets.

Plus 500 is a provider of CFD services for investors. The spike in market volatility resulted in increased volumes and profits for the business. Additionally, as Plus 500 does not hedge positions, they benefited from investor losses as markets fell. These factors are expected to fade over the course of the year.

Domino's Pizza holds the exclusive master franchise to own, operate and franchise Domino's Pizza stores in the UK and Ireland. Domino's also operates pizza delivery stores internationally. The business has been going through the process of management change and disposing of its loss-making international operations. In addition, the company has benefited from increased demand during the Covid-19 crisis.

Portfolio activity

Trading activity in the portfolio was consistent with an average holding period of six years. Our approach is to consider our investments as long-term in nature and to avoid unnecessary turnover. The focus has been on adding stocks to the portfolio that have good growth prospects, sound financial characteristics and strong management, at a valuation level that does not reflect these strengths. Likewise, we have been employing strong sell disciplines to cut out stocks that fail to meet these criteria.

During the year we have added a number of new positions to our portfolio. These include:

Chemring is a defence business which manufactures products and provides consultancy advice in the areas of countermeasures, defence security and safety markets. The company has a number of large-scale contracts with the US military and other governments globally. Our investment in Chemring provides us with exposure to a business which has increasing revenue visibility with the potential to improve profitability through tactical investments in manufacturing.

Frontier Developments is a developer and publisher of video games. Over the last few years the company has transformed from a work-for-hire business to a product-based company focusing on the development of simulation games which targets a range of audiences on multiple platforms. To date, the company has released 4 different titles and several expansion packs which has resonated well with consumers. Frontier is a company with high quality games, a rapidly expanding portfolio and the potential to expand further through tactical acquisitions.

Inspecs is a manufacturer and distributor of eyewear frames. The business supplies both branded and non-branded frames through production facilities in China and Vietnam to opticians globally. The company has a strong outlook as a result of the potential to sign new licence agreements with brands, acquire other similar businesses in this fragmented industry and grow with their existing set of customers. Management has also stepped up capacity in their Vietnam facility to allow for the strong growth potential of the business.

Knights is a UK regional legal services company. The business listed in mid-2018 and has since shown strong growth through a combination of organic growth and selective acquisitions. These acquisitions have been integrated into the regional network, and with operational improvement, cost efficiencies and acceleration of revenue growth, have achieved excellent returns on investment for Knights. The ambition is to continue the successful strategy aided by a market that is rapidly moving to a corporate, limited liability model.

Liontrust Asset Management is an asset manager based in the UK. The company is segmented into large franchises including Economic Advantage, Sustainable Investments, Global Equity and Multi-Asset. To accelerate growth, the company has historically made acquisitions to add scale to their assets under management ("AUM"). Acquired AUM is integrated into the Liontrust network and sold through their highly effective sales network. Liontrust has a solid growth outlook with a good performance track record, significant capacity to grow their existing business and potential for further deals in the future.

Volution manufactures and distributes ventilation products. Around half its sales are in the UK with the other half across numerous overseas territories including the Nordics, Germany, Belgium, Australia and New Zealand. The business is capital light and strongly cash generative allowing surplus cash generation to fund acquisitions, a strategy which has driven geographic diversification. Ventilation is a growing market driven by higher building standards and a desire for clean air. The company is well positioned to continue to produce solid growth in the future.

To balance the additions to our portfolio, we have disposed of positions in companies which we felt were set for poor price performance. We sold our holding in Lookers, a car retailer, where the company was hit by a combination of the loss of its CEO and finance director, difficult trading, a FCA investigation into its credit finance operations and a fraud at one of its subsidiaries. We also disposed of our holding in SIG, a building materials distributor, as the company removed its executive management team after failure to hit financial targets. Other companies that we sold due to a belief that they were structurally challenged or suffering from poor operational performance included: Costain, a building contractor; Xaar, an ink jet technology business; Jupiter Fund Management, a fund manager; and Ibstock, a brick and concrete products producer. We also sold our positions, in line with our stated policy, in Aveva, an engineering design software company, as it was elevated to the FTSE 100.

There was a reduced level of takeover activity in the portfolio in the year. This was consistent with the wider mid and small cap equity market where M&A activity decreased due to election and Brexit uncertainty. A takeover bid was received for Consort Medical, a medical device company, from Recipharm.

Portfolio outlook

The following table shows the Company's top 10 stock positions and their active positions versus the Numis Smaller Companies Index (excluding investment companies) at the end of May 2020.

A brief description of the largest active positions (excluding Intermediate Capital, Team17, Learning Technologies and Avon Rubber, which were covered earlier) follows:

Bellway is a national UK housebuilder. Before the Covid-19 pandemic, the UK new housing market was robust, due to low interest rates and Government initiatives, particularly the "Help to Buy" scheme. Although the housing market has slowed temporarily, underlying market conditions for Bellway remain strong, aided by a benign land market due to the reduction in competitors from the previous cycle, the structural under-supply of housing in the UK, and the capital discipline Bellway and its peers are displaying. Bellway is looking to exploit these conditions by expanding its national footprint, whilst maintaining a strong land-bank and balance sheet.

Clinigen is a global speciality pharmaceutical services business. Its core activity is providing comparator drugs and other services for clinical trials and providing market access for drugs that are difficult to obtain or yet to be licensed. It also has a speciality pharmaceutical division, which looks to acquire niche drugs from major pharmaceutical companies, where management thinks they can enhance performance through additional regulatory approval or increased targeted marketing. The company has seen strong growth since its initial public offering ("IPO") in 2012 and this is likely to continue given the positive structural growth of its end markets.

RWS is a translation services business with particular strengths in intellectual property, life sciences and technology. The company has demonstrated long-term sustainable growth through a combination of organic and acquisitive expansion which has generated substantial shareholder returns over the long term.

IntegraFin provides an investment platform to independent financial advisers and their clients in the UK. The platform is designed as an aggregation tool to hold a range of different assets and tax wrappers in an easy-to-use format. The business has bespoke technology and is continually lowering fees which makes it a compelling proposition for users. The company has been through a period of consistent growth through the acquisition of new customers and clients which has translated to steady asset flows onto the platform. IntegraFin has a compelling long-term outlook with little capital required to grow; it is a high-returns business which should be able to consistently return cash to shareholders.

Ultra Electronics is a supplier of electronic equipment and systems which are primarily used for defence and security applications globally. The company has a unique set of products with high levels of intellectual property in the marine, aerospace and communications sectors. With significant exposure to the expanding US military budget, the business has a strong order book and good visibility as it is attached to long-term military programs. The company is also improving its earnings potential through a restructuring of the business and focusing on its core area of expertise. The outlook for Ultra Electronics is positive with upside from new contract wins, improving margins and a more flexible balance sheet.

John Laing is an international originator, active investor and manager of infrastructure projects. Its business is focused on major transport, social and environmental infrastructure projects awarded under governmental public-private partnership ("PPP") programmes and renewable energy projects. It does this across a range of international markets including the UK, Europe, Asia Pacific and North America. Our investment in the company provides us with exposure to growing infrastructure expenditure globally. The company has a large and growing pipeline of opportunities and raised further equity in 2018 to capitalise on these opportunities. The company is delivering healthy NAV growth, driven by new projects, the discount rate unwind and an ability to improve project returns throughout their life.

As at 31 May 2020, the portfolio was weighted by company size as follows:

Market outlook

The Covid-19 outbreak has dramatically changed expectations for global economic growth. The lockdown measures we are seeing across the globe are having a profound effect on economic growth and causing an unprecedented demand shock. Government actions to protect consumers and businesses from the worst impact of the shock will soften the blow but ultimately can only be short term in nature given the scale of the bail-out required.

The virus will pass and the global economy will start to see a recovery. However, the timing and magnitude of the recovery are, at this point, uncertain. In the UK there are encouraging signs that measures taken on social distancing and lockdown are having a positive impact on infection and death rates but as yet a comprehensive exit strategy has yet to be articulated by the Government.

Outside of Covid-19 there are a number of other issues for the UK and global economy. Brexit negotiations are making limited progress and the threat of a no-deal Brexit is rising. The US election outcome is becoming increasingly unclear and the Sino-American relationship has deteriorated once again, raising the prospect of a new trade war.

In the corporate sector, conditions are intrinsically stronger than they were during the financial crisis of 2008/09. Balance sheets, in particular, are more robust. However, the scale of economic shock means that this 'strength' will be severely tested and key questions for investors today revolve around a company's available liquidity, leverage, bank covenants and ability to see through the economic downturn.

In terms of valuations, the equity market is now trading well below long-term averages if we apply historic earnings. However, corporate earnings will be sharply down in 2020 and the extent of recovery in 2021 and beyond is uncertain. Additionally, dividend support is illusory as the vast majority of corporates suspend or cancel dividends, preserving cash to shore up their balance sheets.

Although economic conditions are very difficult at this point the virus will pass and we will see a recovery. The declines in equity markets have thrown up some fantastic buying opportunities and some companies will emerge stronger from the downturn. However, it is important to be selective as any recovery will be uneven and strength of franchise, market positioning and balance sheet will determine the winners from the losers in a post Covid-19 world.

In conclusion, the year under review has been a mixed one for the Company. Absolute performance was negative but the Company materially outperformed its benchmark. Our portfolio companies have performed robustly, are soundly financed and attractively valued. Additionally, the smaller companies market continues to throw up exciting growth opportunities in which the Company can invest. We remain confident in our ability to generate significant value from a consistent and disciplined investment approach.

Neil Hermon

Fund Manager

INVESTMENT PORTFOLIO AT 31 MAY 2020

There were no convertible or fixed interest securities at 31 May 2020 (2019: None)

1 Quoted on the Alternative Investment Market

PRINCIPAL RISKS AND UNCERTAINTIES

The Board, with the assistance of the Manager, regularly carries out a robust assessment of the principal risks facing the Company which relate to the activity of investing in the shares of smaller companies that are listed (or quoted) in the United Kingdom. The Board has drawn up a risk matrix which identifies the substantial risks to which the Company is exposed and methods of mitigating against them as far as practicable. It does not consider the principal risks to have changed during the course of the reporting period and up to the date of the report, other than through new 'Investment activity and strategy' and 'Operational' risks caused by pandemics and geo-political events.

The Board has met frequently during the Covid-19 crisis to monitor and manage risks related to the Covid-19 pandemic and considers it to be a major event with an ongoing impact on the likelihood and severity of the Company's principal risks. Covid-19 will continue to affect the value of the Company's investments due to the disruption of supply chains and demand for products and services, increased costs and cash flow problems, and changed legal and regulatory requirements for companies. The pandemic has triggered a sharp fall in global stock markets and created uncertainty around future dividend income. The Board notes that the Fund Manager's investment process remains unchanged by the Covid-19 pandemic and he continues to focus on long-term company fundamentals and detailed analysis of current and future investments. In light of current circumstances, Covid-19 is specifically referred to in 'Investment activity and strategy' and 'Operational' risks.

EMERGING RISKS

The Board also considers regularly potential emerging risks which it defines as potential trends, sudden events or changing risks which are characterised by a high degree of uncertainty in terms of occurrence probability and possible effects on the Company. Once emerging risks become sufficiently clear, they may be treated as specific risks and enter the Company’s matrix of significant risks. During the year, Covid-19 was identified initially as an emerging risk, but quickly moved to become a current significant risk.

The Board receives reporting on risks from the Manager and other service providers, in addition to any ad hoc reports on specialist topics from professional advisors. Reports to the Board at its regular meetings, ad hoc reporting as required between board meetings, and external insights gained from directors’ attendance at and feedback from industry and shareholder events, as well as drawing upon their own experience, enable the Board to monitor effectively the changing risk landscape and potential threats to the Company on an ongoing basis. Moreover, the directors ensure that the culture of the Board supports and encourages constant horizon scanning and sharing of information and challenge, to identify and manage risks.

VIABILITY STATEMENT

The Company is a long-term investor. The Board believes it is appropriate to assess the Company's viability over a five-year period in recognition of the Company's long-term horizon and what the Board believes to be investors' horizons, taking account of the Company's current position and the potential impact of the principal risks and uncertainties as documented in the Strategic Report. The assessment has considered the impact of the likelihood of the principal risks and uncertainties facing the Company, in particular investment strategy and performance against benchmark, whether from asset allocation or the level of gearing, and market risk, in severe but plausible scenarios, and the effectiveness of any mitigating controls in place.

The Board took into account the liquidity of the portfolio and the borrowings in place when considering the viability of the Company over the next five years and its ability to meet liabilities as they fall due. This included consideration of the duration of the Company's loan and borrowing facilities and how a breach of any covenants could impact on the Company's NAV and share price. The Board does not expect there to be any significant change in the current principal risks and adequacy of the mitigating controls in place, and nor does the Board envisage any change in strategy or objective or any events that would prevent the Company from continuing to operate over that period - the Company's assets are liquid, its commitments are limited and the Company intends to continue to operate as an investment trust. Only a sustained financial crisis affecting the global economy could have an impact on this assessment. In coming to this conclusion, the Board has considered the current Covid-19 pandemic and the UK's ongoing negotiations having left the European Union. The Board does not believe that they will have a long-term impact on the viability of the Company and its ability to continue in operation, notwithstanding the short-term uncertainty they have caused in the markets.

Based on this assessment, the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the next five-year period.

FUTURE DEVELOPMENTS

The future success of the Company is dependent primarily on the performance of its investment portfolio, which will to a significant degree reflect the performance of the stock market and the Manager. While the Company invests in companies that are listed (or quoted) in the United Kingdom, the underlying businesses of those companies are affected by various external factors, many of an international nature, and including the Covid-19 related disruption to the global economy. The Board's intention is that the Company will continue to pursue its stated investment objective and strategy as explained in the Annual Report. The Chairman's Statement and the Fund Manager's Report in the Annual Report give commentary on the outlook for the Company. Other information on recommended dividends and financial risks are detailed in the Strategic Report.

RELATED-PARTY TRANSACTIONS

The Company's transactions with related parties in the year were with the directors and the Manager. There have been no material transactions between the Company and its directors during the year and the only amounts paid to them were in respect of remuneration, for which there were no outstanding amounts payable at the year end. The directors did not claim any expenses during the years to 31 May 2020 or 31 May 2019. Directors' shareholdings are disclosed in the Annual Report.

In relation to the provision of services by the Manager, other than fees payable by the Company in the ordinary course of business and the facilitation of marketing activities with third parties, there have been no material transactions with the Manager affecting the financial position of the Company during the year under review. More details on transactions with the Manager, including amounts outstanding at the year end, are given in the Notes to the financial statements in the Annual Report.

STATEMENT UNDER DISCLOSURE GUIDANCE AND TRANSPARENCY RULE 4.1.12

Each director confirms that, to the best of his or her knowledge:

· the financial statements, which have been prepared in accordance with IFRS as adopted by the European Union on a going concern basis, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

· the Strategic Report and financial statements in the Annual Report include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

For and on behalf of the Board

Jamie Cayzer-Colvin

Chairman

AUDITED STATEMENT OF COMPREHENSIVE INCOME

The total columns of this statement represent the Statement of Comprehensive Income, prepared in accordance with IFRS as adopted by the European Union.

The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

AUDITED STATEMENT OF CHANGES IN EQUITY

AUDITED BALANCE SHEET

AUDITED STATEMENT OF CASH FLOWS

1 In accordance with IAS 7.31, cash flow from dividends was £16,852,000 (2019: £19,357,000) and cash inflow from interest was £4,000 (2019: £6,000).

NOTES TO THE FINANCIAL STATEMENTS

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