Svm Uk Emerg Regulatory News (SVM)

SVM UK EMERGING FUND PLC - Annual Financial Report

PR Newswire

London, July 8

SVM UK EMERGING FUND PLC

(the “Fund”)

ANNUAL FINANCIAL RESULTS

FOR THE YEAR ENDED 31 MARCH 2015

The Board is pleased to announce the Annual Financial Results for the year ended 31 March 2015. The full Annual Report and Financial Statements, Notice of Annual General Meeting and Form of Proxy will be posted to shareholders and be available shortly on the Manager's website at www.svmonline.co.uk

Copies of the Annual Report have been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/nsm

HIGHLIGHTS

\* The benchmark index for the Fund was changed to the IMA UK All Companies Sector Average Index from 1 October 2013 prior to which the FTSE AIM Index was used.

*\* The Manager has waived its management fees for the year to 31 March 2015 and 2014.

***2015 figure reduced by an accrual in respect of a prior year; without this reduction, the ongoing charges ratio for 2015 would be 1.4%.

INVESTMENT OBJECTIVE

The investment objective of the Fund is long term capital growth from investments in smaller UK companies. Its aim is to outperform the IMA UK All Companies Sector Average Index on a total return basis.

CHAIRMAN’S STATEMENT

Over the 12 months to 31 March 2015, the Company’s net asset value increased by 2.0% to 75.38p per share, compared to a gain of 5.6% in the benchmark, the IMA UK All Companies Sector Average Index. Over the 12 months, the share price gained 2.2%. Since the current joint managers were appointed in September 2012, net asset value has risen 57.5%, versus a benchmark return of 28.6%. The benchmark was changed on 30 September 2013, following a shareholder vote. Since the period end, to 31 May 2015, net asset value per share has risen further, to 81.74p.

The Company entered the period under review with a fully invested position, in expectation of a strong performance by the UK economy. The position was maintained over the year, emphasising businesses that would benefit from growth in the UK economy and wage growth. UK growth beat most expectations, with stockmarkets making steady progress. At the end of May 2015 the FTSE All-Share Index reached an all-time high. After the Election, the Pound recovered strongly. This followed the sharp fall in the oil price in late 2014, providing a stimulus to consumers via lower energy prices. Although the fall in oil price helped stockmarkets overall, it caused weakness in shares of businesses in the energy and resource sectors. There is no portfolio exposure to these sectors.

The UK background of improving consumer and business confidence proved a favourable environment for many portfolio holdings. There was strong performance in particular from ITV, Whitbread, Restaurant Group and Ted Baker. Property groups, Unite and Workspace, also gained. In addition to domestic UK businesses, a number of portfolio investments with divisions exposed to the recovery in Europe performed well. Ryanair and Henderson Group benefited from this trend.

Global indicators improved; economic data now points to some inflation in Germany, and growth in Spain and Italy. Weaker US growth at the start of 2015 also now appears to have been weather-related, with more recent figures suggesting a resumption of good economic growth. That is encouraging for the global economy and UK exports. It should also help the portfolio holdings of global businesses with a high proportion of US Dollar earnings, including Shire Pharmaceuticals and Hikma Pharmaceuticals.

Review of the year

The most significant contributions to performance came from financials and consumer sectors. The Company has relatively low exposure to sectors with weaker growth prospects, such as mining and utilities. While demand for commodities and oil is growing, there remains ample supply, tending to keep a lid on prices. The main disappointments over the period under review were Flybe and Claremont. Flybe was sold as it appears the challenges to its businesses are increasing, and Claremont written-down as it put assets up for sale.

During the period, the Company made a new investment in Shire Pharmaceuticals. Although the bid approach for Shire from US group, AbbVie, was withdrawn, Shire has since made acquisitions itself, and its shares have moved to a new high. New investments were made in SSP Group, Hutchison China Meditech and Micro Focus. SSP runs catering and concession services globally, with an emphasis on stations and airports. Hutchison China Meditech has pharmaceutical research and a consumer pharmaceuticals business in China. Its research licence in China gives it an advantage over the major global groups in conducting cancer and inflammatory disease research. Software business, Micro Focus, has made an acquisition which offers good potential to improve profit margins. To fund new investments, sales were made of some smaller companies.

The portfolio also has above average exposure to medium sized companies which are typically growing more rapidly than the largest FTSE 100 groups. Over the longer term, medium sized companies have significantly outperformed large ones. The current environment of low cost finance is encouraging businesses to restructure, facilitating acquisitions and disposals. In contrast, the larger groups tend to be more exposed to mature markets and lower growth prospects.

Annual General Meeting

The Annual General Meeting will be held on 11 September 2015 at SVM’s offices in Edinburgh. As prescribed by the Articles of Association, an ordinary resolution will be proposed that the Fund should continue for a further five year period.

Outlook

The global economy is growing, with the help of stimulation in Europe, China and Japan. Around the world, interest rates and inflation remain extremely low. Any renewal of strength in the US Dollar could put further pressure on emerging economies. Recovery in the US, Eurozone and UK continues to exceed most forecasts. Central banks remain vigilant about the risk of global deflation. Europe has followed the UK in taking measures to reduce the risk of deflation via bond buying and money printing. The Company emphasises exposure to the UK, and businesses with operations in the US and Europe. Returns on cash deposits and bonds will remain very low, and so equities that offer growth and attractive dividend yields are being sought by investors.

The Company remains fully invested, reflecting the potential for dividend growth, share re-ratings, and for self-help in many portfolio companies. Overall, a strengthening UK economy and the prospect of growth in the global economy offers a favourable background for UK equities.

Peter Dicks

Chairman

3 July 2015

MANAGER’S REVIEW

Summary

After a strong year, in both absolute and relative performance in the twelve months since March 31, 2014, the Fund was marginally behind its benchmark. Absolute and relative performance in the two months following the period end have been good, however, taking performance comparisons to a very favourable position for the period since September 2012, when the current investment managers, Margaret Lawson and Colin McLean, assumed portfolio responsibility.

The period from March to August saw some underperformance from smaller and medium sized companies, but there was subsequently a sharp recovery. In expectation of strong UK growth, and the potential for a boost to consumer confidence ahead of the UK general election, the Fund maintained a fully invested position. Additional investment was made in areas with more exposure to the economic cycle. The financing background for business remains favourable, with extremely low interest rates, and we expect more restructuring and merger activity. The Fund emphasises smaller and medium sized growth businesses that are typically less well researched, giving opportunity to identify value through company meetings and fundamental analysis.

Contributors to performance

Against a background of low inflation, the best performing businesses in the consumer sector were those with strong brands, or operating within a growth niche. Luxury group, Ted Baker, and Whitbread with its Costa Coffee division, are good examples of this. Both are expanding their footprint and have good management, offering some protection against deflationary pressure. The largest portfolio investment, ITV, offers growth and improving earnings quality. Historically, returns have been difficult, driven by advertising demand, but its investment in production facilities is generating a broad portfolio of content with consistent global earnings streams. This will also make it a more attractive takeover target for global media or cable groups. Other portfolio investments in consumer services include Domino Pizza, Restaurant Group and Cineworld. Consumer goods and services represent 51% of the total portfolio.

The gaming sector is undergoing restructuring internationally, as regulations change. It is a growing industry, and the portfolio includes investments in Betfair Group, GVC Holdings and Playtech. There are also investments in more disruptive business models where new entrants have an advantage in technology or business strategy. Investments in this group include clothing retailer, ASOS, and restaurant delivery business, Just Eat. Both are growing strongly. 4imprint supplies promotional merchandise via the internet. The lower oil cost and improving consumer confidence should benefit travel businesses, many of which have also proved able to manage costs aggressively. This is an area of focus for the Fund, and includes Ryanair, SSP, Tui Travel and Easyjet.

One-quarter of the portfolio is invested in the financial sector, with almost all of this in non-bank financials. The largest single group within this are Real Estate Investment Trusts and other property companies. These investments – Helical Bar, St Modwen, Workspace, Londonmetric Property and Unite - focus on effective management teams, typically with a specialisation. Workspace provides tailored business premises for early stage businesses in London, and Unite specialises in student residential accommodation throughout the UK. Londonmetric invests across the UK, with an emphasis on logistics and distribution properties.

Over the year, the Fund increased its exposure to pharmaceuticals, with investments in Shire, Hikma, Dechra and BTG. A new investment was made in Hutchison China Meditech which has research and consumer divisions in China.

Portfolio changes

During the year, new investments were made in Just Eat, Restaurant Group, Howden Joinery, SSP Group, Micro Focus and Allied Minds. Additional investment was also made in several pharmaceutical businesses. Themes in the purchases include exposure to global recovery, potential for restructuring or self-help, and US Dollar earnings. Each new investment has at least one of these characteristics, and all have growth potential. Sales of some smaller and medium sized companies were made, to fund these new investments.

Portfolio exposure to unquoted investments has been steadily reduced. The remaining unquoted investment, Claremont Partners, represents 0.7% of the Fund. Claremont has property in the US, secured against bank loans, and also owns land in Taiwan. The Managers do not plan to make any new unquoted investments in the current year.

Outlook

Recovery in the US, Eurozone and UK continues to exceed most forecasts. Many UK-listed international companies are also benefiting from the recovery in the global economy. The Pound was strong during the year. However, inflation remains extremely low and is running below the Bank of England’s 2% target.

Your Fund remains fully invested, reflecting the potential for dividend growth and share re-ratings in many portfolio companies. The portfolio emphasises consumer sectors, property, healthcare and business services. Overall, a strengthening UK economy and the prospect of growth in the global economy offers a favourable background for UK equities.

INVESTMENT PORTFOLIO

as at 31 March 2015

Investments are UK equity listed investments. A full portfolio listing as at 31 March 2015 is detailed on the website.

PRINCIPAL RISKS AND UNCERTAINTIES

The Directors review policies for identifying and managing the principal risks faced by the Fund.

Many of the Fund’s investments are in small companies and may be seen as carrying a higher degree of risk than their larger counterparts. These risks are mitigated through portfolio diversification, in-depth analysis, the experience of the Manager and a rigorous internal control culture. Further information on the internal controls operated for the Fund is detailed in the Report of the Directors.

The principal risks facing the Fund relate to the investment in financial instruments and include market, liquidity, credit and interest rate risk. An explanation of these risks and how they are mitigated is explained in note 9 to the financial statements. Additional risks faced by the Fund are summarised below:

Investment strategy – The risk that an inappropriate investment strategy may lead to the Fund underperforming its benchmark, for example in terms of stock selection, asset allocation or gearing. The Board have given the Manager a clearly defined investment mandate which incorporates various risk limits regarding levels of borrowing and the use of derivatives. The Manager invests in a diversified portfolio of holdings and monitors performance with respect to the benchmark. The Board regularly reviews the Fund’s investment mandate and long term strategy.

Discount – The risk that a disproportionate widening of discount in comparison to the Fund’s peers may result in loss of value for shareholders. The discount varies depending upon performance, market sentiment and investor appetite. The Board regularly reviews the discount and the Fund operates a share buy-back programme.

Accounting, Legal and Regulatory – Failure to comply with applicable legal and regulatory requirements could lead to a suspension of the Fund’s shares, fines or a qualified audit report. In order to qualify as an investment trust the Fund must comply with section 1158 of the Corporation Tax Act 2010 (“CTA”). Failure to do so may result in the Fund losing investment trust status and being subject to Corporation Tax on realised gains within the Fund’s portfolio. The Manager monitors movements in investments, income and expenditure to ensure compliance with the provisions contained in section 1158. Breaches of other regulations, including the Companies Act 2006, the Listing Rules of the UK Listing Authority or the Disclosure and Transparency Rules of the UK Listing Authority, could lead to regulatory and reputational damage. The Board relies on the Manager and its professional advisers to ensure compliance with section 1158 CTA, Companies Act 2006 and UKLA Rules.

Operational – The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. Like most other Investment Trusts, the Fund has no employees and relies upon the services provided by third parties. The Manager has comprehensive internal controls and processes in place to mitigate operational risks. These are regularly monitored and are reviewed to give assurance regarding the effective operation of the controls.

Corporate Governance and Shareholder Relations – Details of the Fund’s compliance with corporate governance best practice, including information on relations with shareholders, are set out in the Directors’ Statement on Corporate Governance.

Financial – The Fund’s investment activities expose it to a variety of financial risks including market, credit and interest rate risk. These risks are explained in note 9 to the financial statements. The Board seeks to mitigate and manage these risks through continuous review, policy setting and enforcement of contractual obligations. The Board receives both formal and informal reports from the Manager and third party service providers addressing these risks. The Board believes the Fund has a relatively low risk profile as it has a simple capital structure; invests principally in UK quoted companies; does not use derivatives other than CFDs and uses well established and creditworthy counterparties.

The capital structure comprises only ordinary shares that rank equally. Each share carries one vote at general meetings.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

The Directors consider that the Annual Report and Financial Statements, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Fund’s performance, business model and strategy.

The Directors each confirm to the best of their knowledge that:

• the financial statements, prepared in accordance with the applicable accounting standards, on a going concern basis, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Fund and;

• the Annual Report and Financial Statements includes a fair review of the development and performance of the business and the position of the Fund together with a description of the principal risks and uncertainties that it faces.

• the Annual Report and Financial Statements includes details of related party transactions, if any.

By Order of the Board

Peter Dicks

Chairman

3 July 2015

Income statement

for the year to 31 March 2015

for the year to 31 March 2014

The Total column of this statement is the profit and loss account of the Fund. All revenue and capital items are derived from continuing operations. No operations were acquired or discontinued in the year. A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Fund have been reflected in the above statement.

Balance sheet

as at 31 March 2015

Reconciliation of movements in shareholders’ funds

for the year to 31 March 2015

For the year to 31 March 2014

Cash flow statement

for the year to 31 March 2015

Accounting policies

Basis of preparation

The financial statements are prepared in accordance with UK Generally Accepted Accounting Practice (‘‘GAAP’’) and with the 2009 Statement of Recommended Practice ‘‘Financial Statements of Investment Trust Companies and Venture Capital Trusts’’ (‘‘SORP’’).

Income

Income is included in the Income Statement on an ex-dividend basis. Income on fixed interest securities is included on an effective interest rate basis. Deposit interest is included on an accruals basis.

Expenses and interest

Expenses and interest payable are dealt with on an accruals basis.

Investment management fees

Investment management fees, if any, are allocated 100 per cent to capital. The allocation is in line with the Board’s expected long-term return from the investment portfolio. Due to the size of the Fund, the Manager has waived its management fee. The terms of the investment management agreement are detailed in the Report of the Directors.

Taxation

Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions or events that result in an obligation to pay more or a right to pay less tax in the future have occurred at the balance sheet date measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. Timing differences are differences arising between the taxable profits and the results as stated in the financial statements which are capable of reversal in one or more subsequent periods.

Investments

The investments have been categorised as ‘‘fair value through profit or loss’’. All investments are held at fair value. For listed investments this is deemed to be at bid prices. Contracts for Differences are synthetic equities and are valued with reference to the investment’s underlying bid prices. Unlisted investments are valued at fair value based on the latest available information and with reference to International Private Equity and Venture Capital Valuation Guidelines.

All changes in fair value and transaction costs on the acquisition and disposal of portfolio investments are included in the Income Statement as a capital item. Purchases and sales of investments are accounted for on trade date.

Capital reserve

Gains and losses on realisations of fixed asset investments, and transactions costs, together with appropriate exchange differences, are dealt with in this reserve. All incentive fees and investment management fees, together with any tax relief, is also taken to this reserve. Increases and decreases in the valuation of fixed asset investments are dealt with in this reserve.

Notes to the financial statements

1. Income

Income from shares and securities

2. Other expenses

Revenue

† The figure for 2015 has been reduced by an accrual for Auditor’s fees in respect of a prior year of £20,000.

Capital

3. Taxation

The tax assessed for the year is different from the standard small company rate of corporation tax in the UK. The differences are noted below:

At 31 March 2015, the Fund had unutilised management expenses and non trade loan relationship (“NTLR”) deficits of £910,000 (2014 – £900,000).

A deferred tax asset of £182,000 (2014 - £180,000) has not been recognised on the unutilised management expenses as it is unlikely that there would be suitable taxable profits from which the future reversal of the deferred tax asset could be deducted.

4. Returns per share

Returns per share are based on a weighted average of 6,005,000 (2014 – 6,005,000) ordinary shares in issue during the year.

Total return per share is based on the total gain for the year of £87,000 (2014 – gain of £1,202,000).

Capital return per share is based on the net capital gain for the year of £26,000 (2014 – gain of £1,194,000).

Revenue return per share is based on the revenue gain after taxation for the year of £61,000 (2014 – gain of £8,000).

The net asset value per share is based on the net assets of the Fund of £4,526,000 (2014 – £4,439,000) divided by the number of shares in issue at the year end as shown in note 8.

5. Investments at fair value through profit or loss

6. Debtors

7. Creditors: amounts falling due within one year

8. Share capital

As at the date of publication of this document, there was no change in the issued share capital and each ordinary share carries one vote.

9. Financial instruments

Risk Management

The Fund’s investment policy is to hold investments, CFDs and cash balances with gearing being provided by a bank overdraft. All financial instruments are denominated in Sterling and are carried at fair value. The fair value is the same as the carrying value of all financial assets and liabilities. Where appropriate, gearing can be utilised in order to enhance net asset value. It does not invest in short dated fixed rate securities other than where it has substantial cash resources. Fixed rate securities held at 31 March 2015 were valued at £nil (2014 – £nil). Investments, which comprise principally equity investments, are valued as detailed in the accounting policies.

The major risks inherent within the Fund are market risk, liquidity risk, credit risk and interest rate risk. It has an established environment for the management of these risks which are continually monitored by the Manager. Appropriate guidelines for the management of its financial instruments and gearing have been established by the Board of Directors. It has no foreign currency assets and therefore does not use currency hedging. It does not use derivatives within the portfolio with the exception of CFDs.

Market risk

The risk that the Fund may suffer a loss arising from adverse movements in the fair value or future cash flows of an investment. Market risks include changes to market prices, interest rates and currency movements. The Fund invests in a diversified portfolio of holdings covering a range of sectors. The Manager conducts continuing analysis of holdings and their market prices with an objective of maximising returns to shareholders. Asset allocation, stock selection and market movements are reported to the Board on a regular basis.

Liquidity risk

The risk that the Fund may encounter difficultly in meeting obligations associated with financial liabilities. The Fund is permitted to invest in shares traded on AIM or similar markets; these tend to be in companies that are smaller in size and by their nature less liquid than larger companies. The Manager conducts continuing analysis of the liquidity profile of the portfolio and the Fund maintains an overdraft facility to ensure that it is not a forced seller of investments.

Credit risk

The risk that the counterparty to a transaction fails to discharge its obligation or commitment to the transaction resulting in a loss to the Fund. Investment transactions are entered into using brokers that are on the Manager’s approved list, the credit ratings of which are reviewed periodically in addition to an annual review by the Manager’s board of directors. The Fund’s principal bankers are State Street Bank & Trust Company, the main broker for CFDs is UBS and other approved execution broker organisations authorised by the Financial Conduct Authority.

Interest rate risk

The risk that interest rate movements may affect the level of income receivable on cash deposits. At most times the Fund operates with relatively low levels of gearing, this has and will only be increased where an opportunity exists to substantially add to the net asset value performance.

10. The financial information contained within this announcement does not constitute statutory accounts as defined in sections 434 and 435 of the Companies Act 2006. The results for the years ended 31 March 2015 and 2014 are an abridged version of the statutory accounts for those years. The Auditor has reported on the 2015 and 2014 accounts, their reports for both years were unqualified and did not contain a statement under section 498 of the Companies Act 2006. Statutory accounts for 2014 have been filed with the Registrar of Companies and those for 2015 will be delivered in due course.

11. The Annual Report and Accounts for the year ended 31 March 2015 will be mailed to shareholders shortly and copies will be available from the Manager’s website http://www.svmonline.co.uk/ and the Fund’s registered office at 7 Castle Street, Edinburgh, EH2 3AH.

The Annual General Meeting of the Fund will be held at 9.30am on Friday 11 September 2015 at 7 Castle Street, Edinburgh, EH2 3AH.

For further information, please contact:

Colin McLean SVM Asset Management 0131 226 6699

Roland Cross Broadgate Mainland 0207 726 6111

3 July 2015