Svm Uk Emerg Regulatory News (SVM)

SVM UK Emerging Fund Plc - Annual Financial Report

PR Newswire

London, July 9

SVM UK EMERGING FUND PLC

(the “Fund”)

ANNUAL FINANCIAL RESULTS

FOR THE YEAR ENDED 31 MARCH 2019

The Board is pleased to announce the Annual Financial Results for the year ended 31 March 2019. 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 for the six months to 30 September 2018 and for the year to 31 March 2018. Management fees have been introduced from 1 October 2018.

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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 2019, the Company’s net asset value fell by 1.8% to 110.1p per share, compared to a gain of 2.8% in the benchmark, the IA UK All Companies Sector Average Index. Over the 12 months, the share price fell 6.7%. Over the five years to 31 March 2019, net asset value has gained 48.8% and the share price 45.5%, against a benchmark return of 28.7%. The Company’s net asset value progressed in the three months since the year end to 112.38p at 30 June 2019. 

Review of the year

After a strong start to the year under review, the UK stockmarket fell back towards the end of 2018. While Brexit and UK political uncertainty were factors in this, slowing of the global economy also concerned investors. The portfolio was impacted by this weak sentiment and had not fully recovered by 31 March 2019. The portfolio is very different from the market, emphasising growth. The Fund’s longer term track record, however, demonstrates the value of the strategy and the Manager’s selection process.

During the 12 months, there were positive contributions to performance from Ocado Group, Fevertree Drinks, Burford Capital, Knights Group, Aquis Exchange, 4Imprint and Manolete. Fevertree, in particular, gained as the potential for US growth was recognised since the US premium mixer market is much larger than the UK. Litigation finance specialist, Burford, announced it had secured additional funding which should enhance profits. Ocado gained on new distribution partnerships in the US, Australia, UK and France. Ocado could achieve further distribution partnerships in a number of other countries using its proprietary technology. There was also a new portfolio investment in private equity fund, Draper Esprit, which invests across the UK and Europe with an emphasis on technology.

The main disappointments in the period were ASOS, Superdry, Hostelworld and GVC. GVC fell on the unexpected change in fixed odds betting terminals. That impacts 2019, but there is significant potential from US deregulation. The travel sector was adversely impacted by a warm summer in 2018 and labour disputes within the industry. Brexit was also a negative for consumer services and leisure, but many portfolio companies are now seeing the benefits of the return of real wage growth.

New investments were made in Manolete, a litigation finance business, Knights Group, Aquis Exchange, Ocado, AB Dynamics and Boku. To fund the purchases, sales were made of Superdry, Ted Baker, Mattioli Woods, CVS, Animalcare Group, Quiz and Dignity. A factor in some of these sales is reducing portfolio risk.

The Fund has a growth-oriented portfolio based on fundamental analysis. The forces favouring growth businesses have been in place for more than 20 years. In contrast, the biggest global companies have been impacted by disinflation and, more recently, disruption. This trend seems likely to continue despite the recent uptick in inflation, due to ongoing technology change and global competition. There have been periods of reversal of this growth pattern, particularly in 2012 and 2016, but the Fund has rebounded on each occasion. 

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

Annual General Meeting

The Annual General Meeting will be held on 13 September 2019 at SVM’s offices in Edinburgh. At the last Annual 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 the Fund’s shares, and your Board does not expect this overall to be dilutive to shareholders. 

Outlook

Sentiment has driven domestically-focused UK shares and the decline in sterling to low levels. Foreign investors are likely to return when there is clarity on Brexit, given that the UK is a major global economy, with a stockmarket which includes many companies growing internationally. 

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

Peter Dicks

Chairman

5 July 2019

MANAGER’S REVIEW

After the weakness of late 2018, stockmarkets rebounded over the first quarter of 2019, with many shares ending the year under review little changed. Growth stocks particularly gained as it became clear that central banks were unlikely to tighten monetary policy in 2019. Small and mid-cap companies typically performed well. Although international investors remain concerned on UK political risks, the UK economy is still growing.

Portfolio changes

Growth businesses in the portfolio take time to benefit from their strategy and for progress to be recognised in the stockmarket. Investments typically are held for several years and, as a result, portfolio turnover is relatively low. During the twelve months under review, the aim of portfolio changes was to reduce risk and improve liquidity in investments. The opportunity was also taken to increase investment in emerging sub-sectors that offer growth. 

Portfolio review and investment strategy

A focus of our investment research is identifying tomorrow’s industries. Today’s sectors represent past success - in time many will disappear. Future consumers’ needs will be met by new technology and business structures. Some of these emerging areas are already listed on the stockmarket, but typically in small and medium sized firms that are easily overlooked. For some, the edge is in technology, but more often change comes from disruptive business models using capital differently or offering innovative customer services. 

Once a few businesses have listed in a sub-sector, analyst research and investor interest gradually builds up. This can lead to a re-rating, as investors become more comfortable with the new business models, and growth prospects are better understood. Interesting areas include student accommodation, legal services and videogames. Each has key differences with traditional business models, gaining a competitive edge that allows the new businesses to disrupt the incumbents. 

Greater specialisation has been forced on all but the largest law firms, requiring more structured capital management than the old partnership model. Long-running court cases can prove extremely expensive; capital raising for legal cases is now a specialist activity in its own right. These changes have spawned new businesses, such as Burford Holdings, Manolete Partners, Keystone Law Group and Knights Group Holdings. Keystone and Knights are growing organically and by acquisition. Burford focuses on financing major US cases, where litigation might span years. Manolete addresses the need for company administrators to value claims. It has identified opportunity pursuing claims against companies and their directors. 

The property sector includes a number of specialist niches, such as student accommodation. Students now demand a good overall university experience, and to provide this universities must work in close partnership with developers and managers of student accommodation. Investing institutions, including overseas pension funds, find the long-term nature and stable occupancy of these properties attractive, allowing developers to sell-on but retain management. This allows the development partners to release capital. Listed companies in this sector include Unite.

A new sector has emerged to capture the interest of young consumers in videogames. There are still risks in this area, but the best titles are extremely valuable, and many smaller UK businesses have emerged to support this industry. It is a growing London-listed sector; including Codemasters.

Food and drink businesses may look dull, but many have innovative business models and are developing new products and services to meet changing tastes. Kerry Group, for example, is the world’s largest supplier of specialist ingredients and flavours. It is reformulating ingredients and re-engineering recipes. Consumer tastes are changing; health and wellness trends are driving a demand for a clean label, and organic and free-from characteristics in their food. Kerry has been particularly successful in winning long term contracts with smaller food businesses, where its innovation supports customers’ success. Fevertree Drinks continues to perform well, with potential now to replicate UK success in the US, and also to broaden its mixer range.

A number of portfolio companies are key to technological change in their sectors. Ocado Group provides logistics to support major supermarket groups. Over the past twelve months it has won a number of new contracts with major global supermarket chains, supporting online customer service. Although it has already grown substantially, taking it into the FTSE 100 Index, the Manager believes Ocado can win additional contracts and expand further. AB Dynamics designs and supplies advanced testing and measurement products to major European car manufacturers. It is building close relationships with these customers and should benefit as automated driving technology progresses.

Outlook

The UK economy has proved relatively resilient, with the resumption of real wage growth signalling a reversal of the consumer squeeze. Sentiment has driven domestically-focused UK shares and the Pound itself down to low levels. Foreign investors are likely to return when there is clarity on Brexit. UK equity allocations are at lows, and domestic stocks are already pricing in a lot of pessimism. Europe is slowing and the ECB will likely maintain easy monetary policy.

Meetings with company managements continue to be encouraging, and portfolio companies are making good progress. We see considerable investment opportunity and accordingly the Fund is fully invested, with flexible borrowing arrangements allowing a typical gearing of 120% of assets.

INVESTMENT PORTFOLIO

as at 31 March 2019

Market exposure for equity investments held is the same as fair value and for CFDs held is the market value of the underlying shares to which the portfolio is exposed via the contract. Further information is given in note 6 to the Financial Statements. A full portfolio listing as at 31 March 2019 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. 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 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 Board

Peter Dicks

Chairman

5 July 2019

Income statement

for the year to 31 March 2019

for the year to 31 March 2018

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 2019

Statement of Changes in Equity

for the year to 31 March 2019

for the year to 31 March 2017

Accounting policies

Basis of preparation

The Financial Statements have been prepared on a going concern basis in accordance with FRS 102, the “Financial Reporting Standards 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 2014. 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. 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. 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 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.

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

Transactions 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 re-designation of the Share Premium Account, at that date, as a fully distributable Special Reserve.

Notes to the financial statements

1. Income

Income from shares and securities

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 2019, the Fund had unutilised management expenses and non trade loan relationship (“NTLR”) deficits of £1,116,000 (2018 – £1,019,000).

A deferred tax asset of £190,000 (2018 - £173,000) 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.

5. Returns per share

Returns per share are based on a weighted average of 6,005,000 (2018 – 6,005,000) ordinary shares in issue during the year.

Total return per share is based on the total loss for the year of £120,000 (2018 – gain of £768,000).

Capital return per share is based on the net capital loss for the year of £130,000 (2018 – gain of £1,012,000).

Revenue return per share is based on the revenue gain after taxation for the year of £10,000 (2018 – gain of £57,000).

The net asset value per share is based on the net assets of the Fund of £6,609,000 (2018 – £6,729,000) 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 £2,000 (2018: £3,000). For disposals, transaction costs were £2,000 (2018: £4,000).

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.

10. 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 investments 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 2019 were valued at £nil (2018 – £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 2019 and 2018 are an abridged version of the statutory accounts for those years. The Auditor has reported on the 2019 and 2018 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 2018 have been filed with the Registrar of Companies and those for 2019 will be delivered in due course.

12. The Annual Report and Accounts for the year ended 31 March 2019 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 13 September 2019 at 7 Castle Street, Edinburgh, EH2 3AH.

For further information, please contact:

Colin McLean SVM Asset Management 0131 226 6699

Roland Cross Four Broadgate 0207 726 6111

5 July 2019