Svm Uk Emerg Regulatory News (SVM)

SVM UK Emerging Fund Plc - Annual Financial Report

PR Newswire

London, July 14

SVM UK EMERGING FUND PLC

(the “Fund”)

ANNUAL FINANCIAL RESULTSFOR THE YEAR ENDED 31 MARCH 2020

The Board is pleased to announce the Annual Financial Results for the year ended 31 March 2020. 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 IA UK All Companies Sector Average Index from 1 October 2013 prior to which the FTSE AIM Index was used.

**The gearing figure indicates the extra amount by which shareholders’ funds would change if total assets (including CFD position exposure and netting off cash and cash equivalents) were to rise or fall. A figure of zero per cent means that the Company has a nil geared position

**\* The Manager waived its management fees up to 30 September 2018. Management fees have been reintroduced from 1 October 2018.

****Up to 30 September 2018 Directors waived their entitlement to half their fees. From 1 October 2018 Directors have received their full fees.

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 IA UK All Companies Sector Average Index on a total return basis.

CHAIRMAN’S STATEMENT

Over the 12 months to 31 March 2020, the Company’s net asset value fell by 25.6% to 81.9p per share, compared to a fall of 19.1% in the benchmark, the IA UK All Companies Sector Average Index. Over the 12 months, the share price fell 16.7%. Over the five years to 31 March 2020, net asset value has gained 8.6% and the share price 18.6%, against a benchmark return of minus 1.4%. The Company’s net asset value progressed in the three months since the year end to 99.6p at 30 June 2020. (total return, Lipper data). 

Review of the year

In late February and during March, the portfolio was impacted by the pandemic and fears of a sharp setback for the global economy. Stockmarkets and the portfolio had not fully recovered by 31 March 2020. Many businesses are now faced with uncertainty over demand and the timescale in which that might correct. For consumer services, in particular, prospects for this year and next remain uncertain. But the portfolio emphasises growth and includes companies with opportunity to benefit from current circumstances and potential longer term changes to the economy. Some consumer businesses in the portfolio have an online strategy or can use additional capital to build market share. The fund also has exposure to growing sectors such as technology and the digital economy. The Fund’s longer term track record demonstrates the value of the strategy and the Manager’s process. Following the reporting year end, April and May saw recovery in many share prices.

During the 12 months under review, there were positive contributions to performance from Learning Technologies Group, GB Group, Cranswick Foods, Hilton Food, Kerry Group, Genus, Flutter and Knights Group. The more resilient businesses tended to be in sectors of more stable demand such as food producers, or in growth areas providing online services and support for working from home.

Disappointments in the period included Burford, SSP, Workspace, Fevertree Drinks and Blue Prism. Typically, companies most affected by the lockdown took prompt action to cut costs and protect their balance sheets, in some cases raising additional capital. The travel sector was particularly badly hit in February and March. This affected portfolio holdings of Cineworld, On The Beach, Hostelworld, WH Smith and airlines.

New or additional investment was made in AJ Bell, Ceres Power, LondonMetric, Kerry Group and AB Dynamics. To fund the purchases, sales were made of Fevertree Drinks, GVC, ITV, Ted Baker and Burford Capital. A factor in some of these sales was reducing exposure to the economic cycle to reduce portfolio risk.

The Fund’s investment strategy recognises the pervasiveness of technology and the economic change it drives. The impact of change in technology and demographics is accelerating in a number of consumer and business sectors, particularly retail and finance. The Fund aims to avoid structurally challenged businesses. 

Annual General Meeting

The Annual General Meeting will be held on 11 September 2020 at SVM’s offices in Edinburgh. At the last General Meeting, shareholders approved powers for the Company to issue shares and to buy back for cancellation, or to hold in treasury. Your Board has directed the Manager to implement this arrangement, operating within Board guidelines and approvals. This aims to improve liquidity in our shares, and your Board does not expect this overall to be dilutive to shareholders. The Managers have reassessed prospects for each of the portfolio investments. In some cases, balance sheets are being repaired by share placings. 

Board Changes

During the 12 months under review, two new Directors were appointed; Jeremy Harris and Ian Gray. Jeremy is a solicitor and partner in Brian Harris & Co, and brings financial services, legal and governance experience to the Board. Ian is a chartered accountant with experience in strategic roles in a range of public and private companies and government agencies. He is a director of DX (Group) plc and a number or private companies. Ian brings commercial, financial and governance experience to the Board. I welcome these two Directors. Two of the founding Directors stood down during the year; Richard Bernstein and Tony Puckridge. I would like to thank Richard and Tony for their valuable contribution to the Company over a number of years.

Outlook

Lockdowns in response to the pandemic drove domestically-focused UK shares and the Pound itself down to low levels, initially indiscriminately. The crisis and response by the Government and Bank of England is disinflationary, putting a premium on companies with growth strategies. The lack of inflation is typically more of a challenge for global economically- sensitive businesses. Additionally, global supply chains must change – moving from a lean but risky model towards structures that are more resilient. 

The portfolio emphasises exposure to scalable businesses with a competitive edge and potential for self-help that can deliver above average growth. It has low exposure to mining, oil and traditional banks. The Fund remains fully invested, making use of its ability to apply gearing to increase market exposure.

Peter Dicks

Chairman

10 July 2020

MANAGER’S REVIEW

Summary

The period under review captured the sharp stockmarket fall of late February and March, but ended before the recovery of April and May. Portfolio strategy has been modified to reduce exposure to the economic cycle, but increase emphasis on businesses with a strong competitive edge or serving the digital economy. The Fund focuses on growth; companies with better control over their own destiny. In contrast, many large FTSE 100 businesses have been forced into dividend cuts, with income having been a key reason for holding the shares previously. Despite money printing, the background is disinflationary – typically more of a challenge for global economically-sensitive businesses. In addition, global supply chains must change – moving from a lean but risky model towards structures that are more resilient. These trends support the portfolio strategy.

Portfolio review and investment strategy

A central theme to the portfolio strategy has been a focus on companies we view as category champions. These businesses typically dominate their field and would be viewed as best in class. That field may represent a niche or specific service in which a company has specialised, creating a genuine competitive edge. Portfolio investments in this class include Rentokil Initial, Experian, Ocado and Kerry Group. Experian adds value to credit information and has a strong position in the US.

Ocado is an ecommerce delivery platform supporting a growing number of major retail groups around the world. Kerry Group specialises in food flavourings, helping customers to develop unique, higher value- added products. Companies in this group have a degree of pricing power conferred by their specialist skills. Typically, they also operate in growth areas – important when the global economy is challenged, and was growing slowly even before the pandemic.

While most businesses have been hit by the pandemic, some are well-adapted to this changed economic background. Businesses that focus on business support in the digital economy, or with strong mobile, data-driven customer offerings, should emerge stronger from the disruption. Many of these businesses were already disrupters in their categories and have proven their agility in offering differentiated services in scalable ways. Portfolio investments in this group include Codemasters, Team17 and Hilton Foods. For example, Team17 is a leader in premium independent video games, and its low costs have also allowed it to capitalise successfully in industry growth. It has seen demand grow during the crisis.

Home

The lockdown and increased remote working have generated renewed interest in the home. More time is being spent in the home and we expect some part of this change in work/life balance to continue into the recovery. There has been increased demand for online entertainment, e-commerce and home delivery. Companies that should benefit from this include Games Workshop, JD Sports and LondonMetric. LondonMetric supports delivery logistics, which may involve shorter supply chains.

Office of the future

Following from this change in office/remote working balance, businesses are likely to demand more enterprise support services; supporting cloud, data, information technology and virtual operations. Many firms will move their existing remote work onto more robust systems, and strengthen cyber security. Businesses providing solutions for these changes include Softcat and Gamma Communications. Some businesses in other areas are well placed to compete using more flexible models, and we expect Keystone Law to benefit.

Sustainability, wellbeing and resilience

History shows that economic shocks often drive long term social change. While the lockdown has damaged the economy, there have been identifiable benefits to wellbeing and the environment. More emphasis is likely on sustainability and health. At the same time, in many companies the governance model has failed to deliver genuine resilience. Shareholders may encourage boards to do more for resilience and sustainability. Government intervention in the economy will create the potential for greater national influence on some businesses and industries. This may reinforce the pace of change. Companies we expect to benefit include Ceres Power, Genus and DiscoverIE Group.

Outlook

While the financial crisis was largely a credit problem, some businesses are now faced with uncertainty over demand and the timescale in which that might correct. For consumer services and hospitality – pub chains for example - prospects this year and next are very uncertain. The Fund has low exposure to this area, although it does include some travel businesses.

Despite all the money being pumped into economies by governments around the world, even lower inflation and interest rates are now likely. Low inflation and dividend cuts have a big impact on pension fund liabilities and the balance sheets of many big companies. Younger growth businesses typically suffer less from these legacy problems.

Where consumer businesses also have an online strategy, or can use additional capital to take market share from weaker rivals, the outlook is more positive. Many growth businesses have had to operate with lean capital-lite business models. They may be in a position to acquire weaker rivals. We believe that many portfolio businesses will emerge strongly from the current challenges.

Your Fund remains fully invested, focused on resilient growing businesses, with low exposure to commodities, oil and banks.

INVESTMENT PORTFOLIO

as at 31 March 2020

Market exposure for equity investments held is the same as fair value and for contracts of difference (“CFDs”) held is the market value of the underlying shares to which the portfolio is exposed via the contract. The investment portfolio is grossed up to include CFDs and the net CFD position is then deducted in arriving at the net asset total. Further information is given in note 6 to the Financial Statements. A full portfolio listing as at 31 March 2020 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 10 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 has 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. In common with 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 10 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, are fair, balanced and understandable and provide 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, give a true and fair view of the assets, liabilities, financial position and gain or loss of the Fund and;

• the Strategic Report 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.

By Order of the BoardPeter DicksChairman

10 July 2020

Income statementfor the year to 31 March 2020

for the year to 31 March 2019

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 Comprehensive Income is not required as all gains and losses of the Fund have been reflected in the above statement.

Balance sheet

as at 31 March 2020

Statement of Changes in Equity

for the year to 31 March 2020

for the year to 31 March 2019

Accounting policies

Basis of preparation

The Financial Statements have been prepared on a going concern basis in accordance with FRS 102, the “Financial Reporting Standard applicable in the UK and Republic of Ireland” and under the AIC’s Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts” (SORP) issued in October 2019. The requirements have been met to qualify for the exemptions to prepare a Cash Flow Statement, this therefore has been removed.

Significant judgements and estimates

Preparation of financial statements can require management to make significant judgements and estimates. There are no significant judgements or sources of estimation uncertainty the Board considers need to be disclosed.

Income

Income is included in the Income Statement on an ex-dividend basis and includes dividends on both direct equity investments and synthetic equity holdings via Contracts for Differences.

Expenses and interest

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

Investment management fees

Investment management fees are allocated 100 per cent to capital. The allocation is in line with the Board’s expected long-term return from the investment portfolio. The terms of the investment management agreement are detailed in the Report of the Directors.

Taxation

Current tax is provided at the amounts expected to be paid or received. 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 or substantively enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered probable 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. A Contract for Difference (CFD) is a synthetic equity comprising of a future contract to either purchase or sell a specific asset at a specified future date for a specified price. The Company can hold long and short positions in CFDs which are held at fair value, based on the bid prices of the underlying securities in respect of long positions, and the offer prices of the underlying securities in respect of short positions. Profits and losses on CFDs are recognised in the Income Statement. Amounts receivable from and payable to brokers re CFDs are disclosed in Note 7 Debtors, being the margin call account and Note 8 Creditors, being the fair value position of the holdings respectively. 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.

Financial instruments

In addition to the investment transactions described above, basic financial instruments are entered into that result in recognition of other financial assets and liabilities, such as investment income due but not received, other debtors and other creditors. These financial instruments are receivable and payable within one year and are stated at cost less impairment.

Foreign currency translation

Transanctions involving foreign currencies are converted at the rate ruling as at the date of the transaction. Foreign currency monetary assets and liabilities are retranslated into Sterling at the rate ruling on the financial reporting 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.

Special reserve

On 29 June 2001, the court approved the redesignation of the Share Premium Account, at that date, as a fully distributable Special Reserve.

Notes to the financial statements

1. Income

2. Investment Management Fees

3. Other expenses

Revenue

4. 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 2020, the Fund had unutilised management expenses and non trade loan relationship (“NTLR”) deficits of £1,260,000 (2019 – £1,116,000).

A deferred tax asset of £239,000 (2019 - £190,000) has not been recognised on 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.

5. Returns per share

Returns per share are based on a weighted average of 5,999,836 (2019 – 6,005,000) ordinary shares in issue during the year.

During the year 10,000 Ordinary Shares were bought back and placed in treasury.

Total return per share is based on the total loss for the year of £1,692,000 (2019 – loss of £120,000).

Capital return per share is based on the net capital loss for the year of £1,685,000 (2019 – loss of £130,000).

Revenue return per share is based on the revenue loss after taxation for the year of £7,000 (2019 – gain of £10,000).

The net asset value per share is based on the net assets of the Fund of £4,909,000 (2019 – £6,609,000) divided by the number of shares in issue at the year end as shown in note 9.

6. Investments at fair value through profit or loss

The transaction costs in acquiring investments during the year were £10,000 (2019: £2,000). For disposals, transaction costs were £3,000 (2019: £2,000).

The company received £2,910,000 (2019 £1,166,000) from investments sold in the year. The book cost of these investments when they were purchased was £2,592,000 (2019 £1,228,000). These investments have been revalued over time and, until they were sold, any unrealised gains/losses were included in the fair value of the investments.

7. Debtors

8. Creditors: amounts falling due within one year

9. 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.

During the year 10,000 Ordinary Shares with a nominal value of £500 and representing 0.17% of the issued share capital were bought back and placed in treasury for an aggregate consideration of £8,650 (2019 – nil shares, £nil).

10. Financial instruments

Risk Management

The Fund’s investment policy is to hold investments, CFDs and cash balances with gearing being provided by the use of CFDs and a bank overdraft. Over 94.8% of the Fund's net asset value is held in investments that are denominated in Sterling and are carried at fair value. 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 2020 were valued at £nil (2019 – £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 bank gearing, this has and will only be increased where an opportunity exists to substantially add to the net asset value performance.

11. 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 2020 and 2019 are an abridged version of the statutory accounts for those years. The Auditor has reported on the 2020 and 2019 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 2019 have been filed with the Registrar of Companies and those for 2020 will be delivered in due course.

12. The Annual Report and Accounts for the year ended 31 March 2020 will be mailed to shareholders shortly and copies will be available from the Manager’s website 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 2020 at 7 Castle Street, Edinburgh, EH2 3AH.

For further information, please contact:

Colin McLean SVM Asset Management 0131 226 6699Roland Cross Four Broadgate 0207 726 6111

10 July 2020