BLACKROCK SMALLER COMPANIES TRUST
PLC
(Legal Entity Identifier: 549300MS535KC2WH4082)
Information
disclosed in accordance with Article 5 Transparency Directive and
DTR 4.1
Annual results
announcement for the year ended 29 February
2020
PERFORMANCE RECORD
|
29
February 2020 |
28
February 2019 |
Change % |
Performance |
|
|
|
Net asset value per share (debt at
par value)1,4 |
1,572.55p |
1,407.88p |
+11.7 |
Net asset value per share (debt at
par value, capital only)1,4 |
1,548.57p |
1,386.21p |
+11.7 |
Net asset value per share (debt at
fair value)1,2,4 |
1,556.41p |
1,400.57p |
+11.1 |
Numis Smaller Companies plus AIM
(excluding Investment Companies) Index1 |
5,159.73 |
5,231.98 |
-1.4 |
Ordinary share price |
1,484.00p |
1,330.00p |
+11.6 |
|
Year ended
29 February 2020 |
Year ended
28 February 2019 |
Change
% |
Revenue and dividends |
|
|
|
Revenue return per share |
37.13p |
33.67p |
+10.3 |
First interim / Interim dividend per
share |
12.80p |
12.00p |
+6.7 |
Second interim / Final dividend per
share |
19.70p |
19.20p |
+2.6 |
|
--------------- |
--------------- |
--------------- |
Total dividends paid and
payable |
32.50p |
31.20p |
+4.2 |
|
======== |
======== |
======== |
Assets |
|
|
|
Total assets less current
liabilities (£’000) |
847,423 |
716,287 |
+18.3 |
Equity shareholders’ funds
(£’000) |
767,873 |
674,089 |
+13.9 |
Ongoing charges
ratio3,4 |
0.7% |
0.7% |
– |
Dividend yield4 |
2.2% |
2.3% |
|
Gearing4 |
5.7% |
4.9% |
|
1 Without income reinvested.
2 The basis of calculation for the fair
value of the debt is disclosed in note 13 of the financial
statements and in the Glossary (both contained within the Company’s
Annual Report for the year ended 29 February
2020).
3 Ongoing charges ratio calculated as a
percentage of average shareholders’ funds and using operating
expenses, finance costs, transaction costs and taxation, in
accordance with AIC guidelines.
4 Alternative performance measures, see
Glossary contained within the Annual Report and Financial
Statements.
Sources: BlackRock and Datastream.
CHAIRMAN'S STATEMENT
No Chairman would take satisfaction in writing their first
letter to Shareholders under the circumstances that we all face
today as the world fights a pandemic. Since our 29 February year
end, we have moved into a period of unprecedented global economic
and social upheaval caused by COVID-19. As this crisis has
escalated, your Board and the Manager have concentrated on
protecting shareholder interests and maintaining operational
resilience. It is good to report that these robust efforts have
helped ensure smooth operations despite the sharp market volatility
that has plagued investors in markets around the world. Our key
areas of focus are noted below.
OPERATIONAL SECURITY AND WELL BEING
The Board has been working closely with BlackRock and the Company’s
key suppliers to minimise the risk the virus poses to the health
and wellbeing of all those working on the management and
administration of the Company. We have received regular updates to
ensure that the Company’s operations are not affected and that
established business continuity plans are effective.
GEARING
The Board has reviewed our current range of borrowings and debt
facilities (details of which are set out in the paragraph headed
‘gearing and sources of finance’ below) and note that despite
recent market falls, the Company has remained compliant with all
financial covenants and still maintains ample headroom above the
relevant thresholds. The Company’s borrowings are well within the
range of gearing limits set by the Company’s investment guidelines.
More detail is provided below.
INVESTMENT PORTFOLIO CONSTRUCTION
Board members have maintained a regular dialogue with our portfolio
manager to monitor the resilience of the portfolio in these
extraordinary times and the actions that have been taken since the
outbreak of the pandemic. A detailed update by the portfolio
manager is provided in the Investment Manager’s report below.
FOCUS ON WELL GOVERNED COMPANIES
Your Company’s investment team is very experienced and has
available a wide range of resources dedicated to the UK smaller
companies universe. Their history of investing in this sector has
shown that one of the best strategies to deal with adverse economic
and market conditions is to populate the portfolio with well
capitalised companies that have strong balance sheets and
experienced, effective management teams. The Company’s portfolio is
well diversified by sector and geography, with around half of the
revenues from portfolio companies being generated from
overseas.
THE YEAR UNDER REVIEW
While it is understandable that we should be focused on recent
market events, it is also important to look back over the year just
passed. Your Company’s remarkable record continued last year as it
outperformed the benchmark for over fifteen years. Over that
period, the net asset value (NAV) per share has increased by over
600%, greatly outdistancing the benchmark increase of just over
145% (all calculations with income reinvested). The Company has
also increased its dividends every year for over fifteen years; the
compound annual increase in dividends paid over the last fifteen
years has been 14% per annum.
PERFORMANCE
In the year under review the Company’s Net Asset Value per share
increased by 11.7%1,2,3, outperforming its benchmark,
the Numis Smaller Companies plus AIM (excluding Investment
Companies) Index, which decreased by 1.4%1. Over the
same period your Company’s share price increased by
11.6%1 to 1,484.00p per share compared with the FTSE AIM
All Share Index which fell by 5.8%1, the FTSE 250 Index
which rose by 0.8%1 and the FTSE 100 Index which fell by
7.0%1.
The first half of the Company’s financial year was challenging
for UK equity markets, which underperformed many other equity
markets as the uncertainties surrounding Brexit, together with
global concerns over elevated levels of geopolitical risk made
investors cautious. The UK market later experienced a resurgence
through to the end of 2019 however, responding positively to signs
of progress on US/China trade
discussions and the outcome of the UK General Election. Sterling
strengthened on the back of the election result and UK small &
mid-cap companies outperformed. This improving picture was abruptly
curtailed as measures to contain the fast-spreading COVID-19 virus
started to hit markets globally.
The table below demonstrates your Company’s consistent
outperformance over its benchmark during the last fifteen
years.
In addition to capital returns, the Company has also provided
impressive income growth.
The chart on page 7 of the Annual Report and Financial
Statements (which can be found on the Company’s website at
www.blackrock.com/uk/brsc) illustrates how long-term investors have
had an opportunity to build up an attractive annual income from an
investment in the Company. Even if the initial dividend yield at
the point of purchase has been unremarkable, the strong underlying
growth in dividends over the years has resulted in a competitive
yield on cost when compared with equity income funds in
general.
Specifically, this chart shows that £1,000 invested in the
Company on 31 March 2006 would have
increased in value by 418% in NAV terms to 29 February 2020, whereas £1,000 invested in the
median open-ended UK Income Fund would have increased by just 102%.
The chart also demonstrates that while the yield on the Company’s
shares was much lower at the beginning of the period, over time the
Company’s dividend has grown at a much faster rate than open-ended
UK income fund competitors. As a result, the yield on the purchase
cost of an investment in the Company would now be more than that on
the median UK Income Fund.
Performance to 29 February 2020 |
1
Year
change
% |
3
Years
change
% |
5
Years
change
% |
10
Years
change
% |
15
Years
change
% |
NAV per share1, 2,3 |
11.7 |
26.1 |
66.1 |
317.7 |
458.4 |
Benchmark1 |
-1.4 |
-2.0 |
12.8 |
79.0 |
67.5 |
Share price1 |
11.6 |
40.0 |
82.8 |
405.2 |
548.0 |
NAV per share2,3 (with
income reinvested) |
14.1 |
33.3 |
81.4 |
389.7 |
605.1 |
Benchmark (with income
reinvested) |
1.4 |
6.2 |
29.1 |
131.4 |
145.2 |
Share price3 (with income
reinvested) |
14.0 |
48.6 |
101.6 |
504.5 |
748.3 |
1. Percentages in Sterling terms without
income reinvested.
2. Debt at par.
3. Alternative Performance Measures – See
Glossary contained within the Annual Report and Financial
Statements.
RETURNS AND DIVIDENDS
The Company’s revenue return per share for the year ended
29 February 2020 increased by 10.3%
to 37.13p per share compared with 33.67p per share for the previous
year.
Regular dividends from portfolio companies rose by 11.0%, while
special dividends received were 4.2% higher than in the previous
year.
In November 2019 the Board
declared an interim dividend of 12.80p per share (November 2018: 12.00p per share). In normal
operating circumstances, the Board would declare a final dividend
in respect of the year ended 29 February 2020. However as
announced in the Company’s trading update published on 3 June 2020, the Company’s annual results
(normally released in May) were delayed due to a historic technical
issue that was identified in respect of the Company’s Articles of
Association (the 'Articles') (see note 12 below for more details).
Given the later release date for the Company’s annual results and
the consequent delay to the Company’s AGM which will now be held on
28 July 2020, the Board decided to
declare a second interim dividend in lieu of a final dividend. This
was to ensure that the payment timetable anticipated by
shareholders could be met despite the later AGM date. Accordingly,
on 3 June 2020, the Directors
announced the payment of a second interim dividend of 19.70p per
share (2019: 19.20p per share), making a total for the year of
32.50p per share, an increase of 4.2% over the total dividends of
31.20p per share paid in the previous year. In determining the
level of dividend, the Board was mindful of ensuring that the
Company retains a buffer of revenue reserves for future years.
Your Company has now increased its annual dividends every year
since 2003.
GEARING AND SOURCES OF FINANCE
The Company has traditionally maintained a range of borrowings and
facilities to provide balance between longer-term and short-term
maturities and between fixed and floating rates of interest. On
3 December 2019, this range was
expanded when the Company issued £20 million in senior unsecured
fixed rate private placement notes at a coupon of 2.41% maturing in
2044. The net proceeds from the issuance, as well as being in place
to provide refinancing for the £15 million debenture which is due
to expire in 2022, will also be used for additional investment in
the market within the Company’s existing gearing limits and will
give the Investment Manager more scope to take advantage of
suitable investment opportunities. The Board considers that
obtaining such Sterling denominated financing on an unsecured basis
at this price level and at a 25-year term to be highly
attractive.
The Company now has in place fixed rate funding consisting of
the Company’s existing £15 million debenture, £25 million senior
unsecured fixed rate private placement notes issued in May 2017 at a coupon of 2.74% maturing in 2037
and the new notes maturing in 2044 as described above. Shorter-term
variable rate funding consists of a £35 million three-year
revolving loan facility with Sumitomo Mitsui Banking Corporation
Europe Limited and an uncommitted overdraft facility of £10 million
with Bank Of New York Mellon (International) Limited.
It continues to be the Board’s intention that net gearing will
not exceed 15% of the net assets of the Company at the time of the
drawdown of the relevant borrowings. Under normal operating
conditions it is envisaged that gearing will be within a range of
0%-15% of net assets. The Company’s net gearing stands at 7.6% of
net assets as at 22 June 2020. At the
year end, the Company’s net gearing was 5.7% of net assets (2019:
4.9%).
DISCOUNT
The Board monitors the Company’s share rating closely, and
recognises the importance to shareholders that the price of the
Company’s shares in the stock market does not trade at either a
significant premium or discount to the underlying NAV. During
the year the Company’s discount narrowed steadily, moving to trade
at a premium for significant periods of time, and trading at an
average discount of 2.9% to NAV (with debt at fair value) over the
full year (compared to an average discount of 7.9% for the year to
28 February 2019). As markets
descended into turmoil following the outbreak of COVID-19, the
Company’s shares again moved to trade at a discount which was 3.7%
as at 22 June 2020.
SHARE ISSUANCE
During the financial year ended 29 February
2020, the Company issued 950,000 ordinary shares at an
average price of 1,686.84p per share for a total consideration of
£16 million. The shares were issued at a premium to NAV with the
objective of maintaining the Company’s share rating within a
sensible range, and providing ongoing market liquidity in a manner
that was accretive to shareholders. More details are set out on
page 111 of the Annual Report and Financial Statements. Since
29 February 2020, and up to the close
of business on 22 June 2020 no
additional shares have been issued.
At the forthcoming Annual General Meeting (AGM) the Company will
be seeking the authority to allot new ordinary shares or sell from
treasury ordinary shares representing up to 10% of the Company’s
issued ordinary share capital.
BOARD COMPOSITION AND POLICY ON TENURE
Mr Robertson, who has served on the Board for more than twelve
years, has informed the Board of his intention to retire in the
forthcoming year, subject to a suitable replacement being
recruited. The Board has commenced the recruitment process and a
further announcement will be made in due course. The Board wishes
to thank Mr Robertson for his wise counsel and invaluable
contribution to the Company over his tenure as a Director and since
June 2016 as Senior Independent
Director. Mr Robertson will step down from his role as the
Company’s Senior Independent Director at the Company’s next Annual
General Meeting. Ms Platts-Martin will become the Senior
Independent Director of the Company with effect from this date.
Mindful of the desirability of a combination of continuity and
renewal, the Board has decided to combine this, over time, with a
policy of limiting directors’ tenure to nine years. Subject to the
constraints of effective succession planning, it is the Board’s aim
that no Director will serve on the Board for more than nine years,
or twelve years in the case of the Chairman. The longer time limit
for the Chairman’s tenure is to allow for continuity of leadership
in circumstances where a Chairman is appointed from the ranks of
existing Board members after having already served on the Board for
a period of time.
In setting this policy, the Board is mindful that several Board
members have exceeded or are close to exceeding the proposed nine
year limit. To ensure an orderly Board refreshment process, the
implementation of the new policy on tenure will be phased in over a
period of time. As well as Mr Robertson, the tenure of both Mr
Peacock and Mrs Burton will exceed nine years by July 2021, and it is envisaged that they will
retire in due course as the new policy is implemented.
ANNUAL GENERAL MEETING
In light of the current situation with COVID-19, the Board
considers the well-being of shareholders and attendees as its top
priority. On 26 March 2020, the Stay
at Home Measures were passed into law in England and Wales, with immediate effect, in statutory
instruments (2020/350 in England
and 2020/353 in Wales) made
pursuant to the Public Health (Control of Disease) Act 1984. Under
these restrictions, public gatherings of more than two people are
not permitted. Accordingly, it may not be possible for shareholders
to attend Annual General Meetings in person and they are therefore
advised to submit their votes by proxy. The AGM of the Company will
be held at the offices of BlackRock at 12 Throgmorton Avenue,
London EC2N 2DL on 28 July 2020 at 2:30pm. If the current restrictions remain in
force, the only attendees who will be permitted entry to the
meeting will be those who will need to be present to form the
quorum to allow the business to be conducted. Further
information will be provided in due course by way of a regulatory
news announcement and through the Company’s website at
www.blackrock.com/uk/brsc.
CHANGES TO ARTICLES
Hybrid general meetings
The COVID-19 pandemic has resulted in unprecedented social and
economic damage. One consequence (as noted above) is that
shareholders are unable to attend physical general meetings under
current legislation. The current crisis has highlighted the need
for companies to be flexible in their approach to general meetings
and to take advantage of available technology to maximise
shareholders’ ability to participate in such meetings. The Board is
therefore proposing to make amendments to the Company’s Articles to
enable the Company to hold hybrid general meetings such that
shareholders may attend by electronic means as well as in person
and to give additional powers in respect of postponing or
adjourning meetings in appropriate circumstances. Whilst these
changes may come too late to be of any benefit to shareholders in
respect of the Company’s 2020 AGM, the Board’s aim in introducing
them is to make it easier for shareholders to participate in
general meetings in future through the introduction of electronic
access where appropriate, and also to ensure relevant security
measures are in place for the protection and wellbeing of
shareholders.
Distribution of capital reserves
The Company’s Articles do not currently permit the distribution of
capital reserves. This restriction dates back to earlier
times when legislation prohibited the distribution of realised
capital profits by way of dividends or share buy backs.
Changes introduced by the Companies Act in 1999 made it
permissible for investment companies to make distributions by way
of share buy backs from realised capital profits, and the Company
amended its Articles in May 2000 to
add a provision to permit this type of distribution from the
Company’s capital reserves. However when the Company’s
Articles were updated in June 2008 to
reflect changes to the rules on distributions applicable to
investment companies under the Companies Act 2006, this provision
was inadvertently deleted. The Board is now proposing to
reinstate it such that the Company will be permitted to distribute
realised capital profits by way of share buy backs.
Revised investment trust company tax rules introduced in 2012
made it possible for companies to distribute realised capital
profits by way of dividends. The Board is also proposing to remove
restrictions on the use of the Company’s capital reserves to allow
realised capital profits to be distributed by way of
dividends. While the Board has no present intention of making
dividend distributions from capital, and the Company has a
comfortable surplus of revenue reserves, the Board believes that as
a matter of good housekeeping it is prudent to provide the Company
with this additional flexibility in respect of how the capital
reserve may be distributed should this ever be required in the
future.
Retirement and re-election of Directors
The Company’s Articles currently provide that one third of
Directors retire by rotation each year; however, the UK Code of
Corporate Governance requires all Directors to stand for
re-election annually. Consequently, the Board is proposing a change
to the Articles to introduce the requirement for annual re-election
of Directors.
Other
Some additional minor amendments are being made to bring the
Articles in line with changes to legislation and for administrative
purposes.
The changes proposed to be introduced in the Articles, and their
effect, are set out in more detail in the Directors’ report
contained within the Annual Report and Financial Statements.
OUTLOOK
Since the financial year end the Company’s NAV (as at 22 June 2020) has decreased by 10.7%1,
against a decrease in the benchmark of 7.7%1, and the
share price has fallen by 10.1%1.
The COVID-19 outbreak and its rapid spread beyond China has caused mounting concerns over the
impact on global growth, leading to significant volatility in stock
markets around the world. The market falls in March and April as
the crisis developed were savage and indiscriminate, only to be
followed by a dramatic rally. This extreme volatility is
likely to continue for some time and has created dislocations in
market valuations that are not consistent with the long-term
fundamentals of the stocks in which we invest; our portfolio
management team remain attuned to the investment opportunities that
may be presented by these dislocations in pricing.
These are unprecedented times. The impact of COVID-19 is
unpredictable and it is impossible at this stage to estimate its
scale and duration. However, things will improve in time.
The Investment Manager’s focus on financially strong businesses
with robust balance sheets provides us with confidence that the
Company’s portfolio is well placed to weather the storm. The
Company’s investment strategy remains focused on quality growth
investment opportunities in smaller companies, a style that has
demonstrably worked for the long-term, and historically periods of
sudden underperformance, such as this, have proven to be excellent
investment opportunities.
If shareholders would like to contact me, please write to
BlackRock Smaller Companies Trust plc, Exchange Place One, 1 Semple
Street, Edinburgh EH3 8BL marked
for the attention of the Chairman.
RONALD GOULD
Chairman
24 June 2020
1Percentages in Sterling terms without income
reinvested.
INVESTMENT MANAGER'S REPORT
MARKET REVIEW AND OVERALL INVESTMENT PERFORMANCE
The Company’s strong NAV performance masked a significant increase
in market volatility during the year under review, with multiple
factors at play. Equity markets rallied through the first half of
the financial year, as the headwinds created by global trade
uncertainties were offset by central bank easing in both the US and
Europe. The shifting sands of the
UK political outlook proved a never ending source of drama
throughout the year, with the developments around Brexit (which now
seems like a distant memory) a key driver of investor sentiment and
Sterling weakness. However with Boris
Johnson leading the Conservative Party to a convincing
majority in the December General Election there was an immediate
and dramatic change in sentiment towards the UK economy, boosting
small and mid-cap companies. The final day of January marked the
UK’s last day as a member of the EU, but there continue to be many
hurdles to overcome as the UK seeks to renegotiate trading
relationships.
2020 started on an optimistic tone; however this was
overshadowed by the outbreak of COVID-19, which sparked one of the
most rapid contractions in equity markets ever witnessed, as
investors became concerned over the potential impact of the virus
on the global economy. Country by country steps have been taken to
contain the virus, which has subsequently developed into a global
pandemic, but these necessary steps come with extreme economic
consequences which we will cover in the outlook.
PERFORMANCE REVIEW
The Company’s NAV per share (debt at par) rose by 11.7% during the
year, outperforming our benchmark which fell by 1.4%, and the FTSE
100 Index which fell by 7.0% (all percentages stated without income
reinvested).
This has been a challenging period for UK smaller companies
given the ongoing headwinds discussed above. However our focus on
bottom-up fundamental analysis has resulted in the Company
delivering another strong year of outperformance over our
benchmark. In particular our focus on differentiated
well-capitalised quality growth companies, that have been able to
generate strong sustainable earnings growth and cashflow has been
key to the Company’s performance. Key contributors this year have
been Avon Rubber, Liontrust Asset Management,
Team17, 4imprint Group and YouGov.
Shares in Avon Rubber rallied after the company acquired
the ballistic-protection business from US conglomerate 3M. The division manufactures bulletproof vests
and helmets for the US army, and the acquisition should increase
the pace of the company’s expansion into global military and law
enforcement markets. The company continued to report strong trading
at the beginning of 2020, while increasing global tensions provide
a further fillip to the defence sector. Liontrust Asset
Management has continued to see positive fund flows,
particularly in the retail market. The acquisition of Neptune
Investment Management provided further diversification to the
business and added £2.7 billion in assets under management, while
the sustainable products have been in demand as investors’ appetite
for ESG related investment continues to build momentum. Shares in
Team17 rallied throughout the period, as the video game
developer reported multiple upgrades to profit guidance. In fact,
the company provided five upgrades to forecasts in the last 12
months, and the future continues to look promising, with a number
of new titles scheduled to be launched in the coming year, further
adding to the group’s growing portfolio. 4imprint Group, a
long-term core holding which we have mentioned in many previous
reports, remained a top contributor for the full year as the
business continued to deliver organic top-line growth with upgrades
to forward guidance. Another repeat contributor to performance is
YouGov, which continued to trade well during the second half
of the year. Many people still think of YouGov as a UK
political polling business, but if investors take the time to look
beneath the bonnet, they will find a company that has been
repositioning itself, pushing the valuable consumer data they have
generated through their internal analysis system (the ‘Cube’) to
produce actionable insights for their clients in the marketing
industry.
Unsurprisingly given the strong performance during the period,
detractors were limited. The largest was Zotefoams, the
global manufacturer of specialty foams. Whilst still seeing demand
for high performance products like those supplied to Nike, the
challenging economic environment has resulted in a slowdown in
sales in its more competitive industrial division. Eco Animal
Health Group fell after the company issued a profit warning in
November in response to a sharp slowdown in sales in China where demand has fallen further on the
back of the African Swine Fever epidemic than we had anticipated.
The company’s decision to maintain the cost base in order to
benefit from the recovery once the outbreak is contained meant the
reduction in revenues had a disproportionate impact on
profitability. We have subsequently reduced the position but
maintain a holding as we see its long-term competitive position
unchanged and expect demand to improve as the Chinese pig herd
recovers.
ACTIVITY
The portfolio currently holds 127 positions, reflecting both the
number of opportunities we see within our universe, and the high
levels of uncertainty that we are currently facing. We took part in
the IPO of Watches of Switzerland and continued to add to the
luxury watch retailer throughout the year. The company has built a
strong position in both the UK and US markets, in an industry where
there is little competition from online. Strong relationships with
key brands allows the business to offer an unrivalled product
range, which has ensured they have historically been able to grow
sales despite the structural headwinds facing many other retailers.
We purchased a new holding in Serco Group, a business we
have carefully monitored over recent years as the management has
unpicked a raft of legacy loss-making contracts. It had identified
the US Navy as an attractive client to grow given future spending
patterns, so we were not surprised to see the announcement of a
deal to acquire NSBU, a leading supplier of ship design and
engineering services to that sector. We took part in the IPO of
The Pebble Group, a global designer and manufacturer of
bespoke branded promotional goods, an attractive and growing market
where they have a broad and loyal global client base. These repeat
customers bring a large proportion of recurring revenues, while
their subscription-based offering provides a high level of earnings
visibility. Following the result of the general election, we also
took steps to add to our UK exposure by purchasing new holdings in
Pets at Home, and adding to Breedon, Joules,
IntegraFin and Ibstock. Each of these holdings were added to
the portfolio for stock specific reasons and the secular drivers
they face, with the pessimism towards the UK during the year
providing attractive entry points in our opinion.
PORTFOLIO POSITIONING
Portfolio positioning is very much a result of stock selection and
therefore, reflecting the conviction we have in our core holdings,
sector exposure remains broadly unchanged from previous reports.
Relative to our benchmark we are overweight media companies,
financial services companies, and the support services sector. Our
media companies include 4imprint Group, YouGov and
Team17. 4imprint Group operates in a highly
fragmented industry where despite having less than a 4% share, they
are the undisputed market leader, and will benefit from any
recovery in US corporate spending. YouGov, as discussed
above, is adapting its business to changing customer demands
opening up future channels for growth. Team17 operates in
the fast-growing video games market, benefitting from the
lengthening product cycle of the industry which has been driven by
the rise of downloadable content. Within the financial services
sector our holdings have more of a focus on equities, alternatives,
sustainable investing or outsourcing services. Holdings include
IntegraFin, Impax Asset Management, Liontrust
Asset Management, AJ Bell and Polar Capital
Holdings. Support services is an extremely diverse sector. Our
largest holdings include recruiter Robert Walters and
workwear and linen rental business Johnson Service Group.
Robert Walters is well
diversified globally, generating more than three quarters of its
profits from outside of the UK. We remain underweight travel &
leisure companies, food producers and general retailers; all
sectors where we have structural concerns. We are also underweight
software and computer services as ongoing uncertainty could
continue to impact business investment decisions and IT spending.
Where we do have exposure in these areas, it is through specific
investment cases such as our holdings in Fuller Smith
& Turner and GB Group.
Our investment universe remains well diversified by sector and
geography, allowing us to build a portfolio of market leading
globally exposed businesses. We have maintained a high exposure to
international companies, with over half of the revenues of our
portfolio originating from overseas. Our UK exposure is very
deliberate, either exposed to more defensive businesses or to those
benefiting from positive structural or cyclical trends such as
Big Yellow, Workspace Group and Johnson Service
Group.
OUTLOOK
As shareholders will be aware, the recent COVID-19 outbreak and its
spread beyond China has caused
mounting concerns over the impact on global growth, resulting in a
dramatic and significant market sell-off, which has been
immediately followed by an equally dramatic rally. These are
unprecedented times. Never have we faced such an unknown
quantity, and never have we seen these levels of government support
or central bank stimulus. Given the uncertainty regarding the
scope, scale, effect or implications of the virus at this stage, we
have not materially changed positioning. Our unwavering focus on
financially strong businesses gives us confidence in the holdings
in our portfolio. The impact of COVID-19 is unpredictable,
unavoidable and unprecedented, but it will get better. Our
immediate outlook is for volatility to remain high as COVID-19
continues to dominate global events, but we must not allow the
focus on the virus to let us overlook some of the other issues that
can and will drive volatility. Brexit, US/China relations, and the US election will all
take center stage at some point in the months to come, fighting a
battle for market dominance with central bank policy, fiscal
stimulus, and asset flows. The Company’s investment strategy
remains focused on the identification of quality growth
opportunities in smaller companies, a style that has demonstrably
worked.
ROLAND ARNOLD
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
24 June 2020
TEN LARGEST INVESTMENTS as at
29 February 2020
1 IntegraFin
Financial Services
Portfolio
value
£20,838,000
Percentage of
portfolio
2.6%
Provider of a leading investment platform, called Transact, to
UK financial advisers and their clients. The platform runs off
proprietary technology, facilitating the smooth operation of client
portfolios.
2 YouGov
Data analytics
Portfolio
value
£19,835,000
Percentage of portfolio
2.4%
An international provider of specialist data analytics and
marketing information. The company was recently named one of the
world’s top 25 research companies.
3 4imprint Group
Marketing
Portfolio
value
£17,838,000
Percentage of portfolio
2.2%
A leading supplier of promotional products operating almost
wholly in the US market. It sells an extensive range of products to
businesses and organisations of all sizes, typically personalised
with the customers’ brand or logo. The leader in a highly
fragmented market, its growth is underpinned by data-driven
traditional and online marketing initiatives.
4 Avon Rubber
Aerospace and defence
Portfolio
value
£17,598,000
Percentage of portfolio
2.2%
An innovative technology group which designs and produces
specialist Chemical, Biological, Radiological and Nuclear (‘CBRN’)
respiratory protection systems. The company has two businesses:
Avon Protection (the recognised global leader in CBRN respiratory
protection systems for the world’s Military, Law Enforcement and
Fire markets) and Milkrite, a global leader providing complete
milking point solutions to dairy farmers across the world.
5 IG Design Group
Consumer goods
Portfolio
value
£15,897,000
Percentage of portfolio
2.0%
A leading manufacturer and supplier of gift packaging, greetings
cards, stationery and creative play products serving the
requirements of some of the largest global retailers.
6 Johnson Service Group
General industrials
Portfolio
value
£14,177,000
Percentage of portfolio
1.7%
A business providing textile rental high volume linen services
and premium linen services for the hotel, catering and hospitality
market throughout the UK and the leading supplier of work wear and
protective wear in the UK.
7 Watches of Switzerland
Personal goods
Portfolio
value
£13,556,000
Percentage of portfolio
1.7%
The UK’s leading luxury watch specialist with a growing US
presence. The group is comprised of four prestigious retail brands;
Watches of Switzerland, Mappin
& Webb, Goldsmiths and Mayors and has been transformed over the
last 5 years into a modern, technologically advanced, multi-channel
retailer. The group has an invested showroom network including
flagships in London, two flagship
showrooms in New York, and
increasing presence of mono-brand boutiques along with an industry
leading E-commerce platform.
8 Breedon
Construction and materials
Portfolio
value
£13,327,000
Percentage of portfolio
1.6%
A leading construction materials group in Great Britain and Ireland producing cement, aggregates, asphalt,
ready-mixed concrete, specialist concrete and clay products.
9 Team17
Leisure goods
Portfolio
value
£12,187,000
Percentage of portfolio
1.5%
An independent developer and games label. The company
collaborates with fellow developers around the globe sharing
expertise from creation to launch across PC, console and mobile
devices.
10 Impax Asset Management
Financial Services
Portfolio
value
£11,725,000
Percentage of portfolio
1.4%
A niche asset management company offering a range of listed
equity, fixed income, smart beta and real asset strategies with a
focus on environmental investing, a niche that is rapidly becoming
more popular in today’s market place.
FIFTY LARGEST INVESTMENTS as at
29 February 2020
Company |
Business activity |
Market value
£’000 |
%
of Total
portfolio |
|
|
|
|
IntegraFin |
Investment platform for financial
advisers |
20,838 |
2.6 |
YouGov |
Survey data and specialist data
analytics |
19,835 |
2.4 |
4imprint Group |
Promotional merchandise in the
US |
17,838 |
2.2 |
Avon Rubber |
Safety masks and dairy related
products |
17,598 |
2.2 |
IG Design Group |
Design and supply of greetings
products |
15,897 |
2.0 |
Johnson Service Group |
Textile rental and related
services |
14,177 |
1.7 |
Watches of Switzerland |
Retailer of luxury watches |
13,556 |
1.7 |
Breedon |
Construction materials |
13,327 |
1.6 |
Team17 |
Video game developer and
publisher |
12,187 |
1.5 |
Impax Asset Management |
Asset management services |
11,725 |
1.4 |
Workspace Group |
Flexible workspace to businesses in
London |
11,459 |
1.4 |
Robert Walters |
Recruitment services |
11,198 |
1.4 |
Morgan Sindall |
Office fit out, construction and
urban regeneration services |
10,983 |
1.4 |
Games Workshop |
Developer, publisher and
manufacturer of miniature war games |
10,745 |
1.3 |
DiscoverIE |
Specialist components for
electronics applications |
10,455 |
1.3 |
The Pebble Group |
Design and manufacturing of
promotional goods |
10,319 |
1.3 |
Stock Spirits Group |
Branded spirits mainly in Eastern
Europe |
10,198 |
1.3 |
Central Asia Metals |
Mining operations in Kazakhstan and
North Macedonia |
10,151 |
1.3 |
Ibstock |
Manufacture of clay bricks and
concrete products |
10,120 |
1.2 |
Alliance Pharma |
Pharmaceutical and healthcare
products |
9,853 |
1.2 |
Treatt |
Development and manufacture of
ingredients for the flavour and fragrance industry |
9,829 |
1.2 |
Liontrust Asset Management |
Asset management |
9,720 |
1.2 |
Learning Technologies |
E-learning services |
9,498 |
1.2 |
Fuller Smith & Turner -A
Shares |
Pubs in the London area and South
East England |
9,468 |
1.2 |
Oxford Instruments |
Design and manufacture of tools and
systems for industry and research |
9,409 |
1.2 |
Pets at Home |
Pet supplies retailer |
9,032 |
1.1 |
GB Group |
Identity verification software and
solutions |
8,868 |
1.1 |
St. Modwen Properties |
Investment in, and development of
property |
8,848 |
1.1 |
Sirius Real Estate |
Owner and operator of business
parks, offices and industrial complexes in Germany |
8,697 |
1.1 |
Grafton |
Builders merchants in the UK,
Ireland and Netherlands |
8,564 |
1.0 |
Next Fifteen Communications |
Digital communication products and
services |
8,511 |
1.0 |
Renew |
Engineering services group
supporting UK infrastructure |
8,314 |
1.0 |
CVS Group |
Operator of veterinary
surgeries |
8,206 |
1.0 |
Polar Capital Holdings |
Asset management |
7,910 |
1.0 |
Mattioli Woods |
Wealth management services |
7,865 |
1.0 |
James Fisher and Sons |
Innovative marine solutions and
specialised engineering services |
7,858 |
1.0 |
Qinetiq Group |
British multi-national defence
technology company |
7,854 |
1.0 |
Chemring Group |
Advanced technology products and
services for the aerospace, defence and security markets |
7,792 |
1.0 |
IMImobile |
Cloud communications software
provider |
7,655 |
0.9 |
Quartix |
Vehicle telematics services for the
fleet and insurance sectors |
7,633 |
0.9 |
Volution Group |
Ventilation products for the
residential and commercial construction markets |
7,594 |
0.9 |
OneSavings Bank |
Financial services |
7,591 |
0.9 |
Serco Group |
Public services across health,
transport, immigration, defence, justice and citizen services. |
7,572 |
0.9 |
Calisen |
Leading owner and manager of
essential energy infrastructure assets |
7,487 |
0.9 |
Sumo Group |
Creative and development services to
the video games and entertainment industries |
7,435 |
0.9 |
RM |
Educational software company |
7,150 |
0.9 |
Vistry Group |
UK housebuilder |
7,139 |
0.9 |
Hyve Group |
International exhibitions
company |
7,026 |
0.9 |
Clarkson |
Shipping services |
6,820 |
0.8 |
Tatton Asset Management |
On-platform discretionary fund
manager and IFA support service business |
6,794 |
0.8 |
|
|
------------ |
------------ |
50 largest investments |
|
506,598 |
62.4 |
|
|
------------ |
------------ |
Remaining investments |
|
305,418 |
37.6 |
|
|
------------ |
------------ |
Total |
|
812,016 |
100.0 |
|
|
======= |
======= |
Details of the full portfolio are available on the Company’s
website at blackrock.com/uk/brsc.
Portfolio holdings in excess of 3% of
issued share capital
At 29 February 2020, the Company
did not hold any equity investments comprising more than 3% of any
Company’s share capital other than as disclosed in the table
below:
Security |
% of shares
held |
|
|
Longboat Energy |
4.90 |
Filta Group Holdings |
4.64 |
Angling Direct |
4.64 |
Capital Drilling |
4.56 |
Tatton Asset Management |
4.50 |
Tekmar Group |
4.32 |
WLL London |
4.32 |
Everyman Media Group |
4.31 |
Quartix Holdings |
4.30 |
City of London Investment Group |
4.23 |
Cello Health |
4.09 |
The Pebble Group |
4.08 |
RBG Holdings |
4.04 |
Ten Entertainment Group |
3.69 |
Treatt |
3.68 |
Anpario |
3.61 |
Mattioli Woods |
3.46 |
Fuller Smith and Turner |
3.45 |
Maxcyte |
3.35 |
Ergomed |
3.34 |
RM |
3.30 |
Duke Royalty |
3.19 |
Curtis Banks Group |
3.18 |
Lok’n Store Group |
3.16 |
Bloomsbury Publishing |
3.15 |
Joules Group |
3.14 |
Central Asia Metals |
3.13 |
Mind Gym |
3.10 |
|
===== |
Distribution of investments as at
29 February 2020
Sector |
% of portfolio |
|
|
Oil & Gas Producers |
0.8 |
Alternative Energy |
0.5 |
|
-------- |
Oil & Gas |
1.3 |
|
-------- |
Chemicals |
1.4 |
Mining |
2.0 |
|
-------- |
Basic Materials |
3.4 |
|
-------- |
Construction & Materials |
7.8 |
Aerospace & Defence |
4.1 |
Electronic & Electrical
Equipment |
3.8 |
General Industrials |
1.6 |
Industrial Engineering |
1.8 |
Industrial Transportation |
1.8 |
Support Services |
11.4 |
|
-------- |
Industrials |
32.3 |
|
-------- |
Beverages |
1.3 |
Household Goods & Home
Construction |
4.1 |
Personal Goods |
2.0 |
Leisure Goods |
3.7 |
|
-------- |
Consumer Goods |
11.1 |
|
-------- |
Health Care Equipment &
Services |
2.2 |
Pharmaceuticals &
Biotechnology |
3.6 |
|
-------- |
Health Care |
5.8 |
|
-------- |
Food & Drug Retailers |
0.7 |
General Retailers |
2.8 |
Media |
9.6 |
Travel & Leisure |
4.8 |
|
-------- |
Consumer Services |
17.9 |
|
-------- |
Mobile Telecommunications |
0.7 |
|
-------- |
Telecommunications |
0.7 |
|
-------- |
Financial Services |
15.8 |
Real Estate Investment &
Services |
3.6 |
Real Estate Investment Trusts |
2.2 |
|
-------- |
Financials |
21.6 |
|
-------- |
Software & Computer
Services |
5.9 |
Technology |
5.9 |
|
-------- |
Total |
100.0 |
|
===== |
PORTFOLIO ANALYSIS as at 29 February 2020
INVESTMENT SIZE AS AT 29 FEBRUARY
2020
|
Number of
investments |
Market value of
investments as % of portfolio |
£0m to £1m |
4 |
0.3 |
£1m to £2m |
6 |
1.2 |
£2m to £3m |
13 |
4.2 |
£3m to £4m |
12 |
5.3 |
£4m to £5m |
12 |
6.7 |
£5m to £6m |
18 |
12.2 |
£6m to £7m |
12 |
9.5 |
£7m to £8m |
15 |
14.0 |
£8m to £9m |
7 |
7.4 |
£9m to £10m |
7 |
8.2 |
£10m to £11m |
7 |
9.0 |
£11m to £12m |
3 |
4.2 |
£12m to £13m |
1 |
1.4 |
£13m to £14m |
2 |
3.3 |
£14m to £15m |
1 |
1.7 |
£15m to £16m |
1 |
2.0 |
£17m to £18m |
2 |
4.4 |
£19m to £20m |
1 |
2.4 |
£20m to £21m |
1 |
2.6 |
Source: BlackRock.
MARKET CAPITALISATION OF OUR PORTFOLIO COMPANIES AS AT
29 FEBRUARY 2020
|
% of portfolio |
£0m to £200m |
15.4 |
£200m to £600m |
30.4 |
£600m to £1500m |
41.7 |
£1500m+ |
12.5 |
Source: BlackRock.
ANALYSIS OF PORTFOLIO VALUE BY SECTOR
|
Company
% |
Benchmark
(Numis Smaller Companies, plus AIM
(ex Investment Companies) Index)
% |
Oil & Gas |
1.3 |
6.2 |
Basic Materials |
3.4 |
5.9 |
Industrials |
32.3 |
22.6 |
Consumer Goods |
11.1 |
10.2 |
Health Care |
5.8 |
5.3 |
Consumer Services |
17.9 |
17.1 |
Telecommunications |
0.7 |
2.5 |
Financials |
21.6 |
20.4 |
Technology |
5.9 |
8.6 |
Utilities |
0.0 |
1.2 |
Source: BlackRock and Datastream.
STRATEGIC REPORT
The Directors present the Strategic Report of the Company for
the year ended 29 February 2020. The
aim of the Strategic Report is to provide shareholders with the
information to assess how the Directors have performed their duty
to promote the success of the Company for the collective benefit of
shareholders.
The Chairman’s Statement together with the Investment Manager’s
Report and the Directors’ Statement setting out how they promote
the success of the Company form part of the Strategic Report. The
Strategic Report was approved by the Board at its meeting on
24 June 2020.
PRINCIPAL ACTIVITY
The Company is a public company limited by shares and carries on
business as an investment trust and its principal activity is
portfolio investment. Investment trusts, like unit trusts and
OEICs, are pooled investment vehicles which allow exposure to a
diversified range of assets through a single investment, thus
spreading, although not eliminating investment risk.
OBJECTIVE
The Company’s prime objective is to achieve long-term capital
growth for shareholders through investment mainly in smaller UK
quoted companies.
No material change will be made to the Company’s investment
objective without shareholder approval.
STRATEGY, BUSINESS MODEL AND INVESTMENT POLICY
To achieve its investment objective the Company invests
predominantly in UK Smaller Companies which are listed on the
London Stock Exchange or on the Alternative Investment Market
(AIM), with a limit on the level of AIM investments that may be
held within the portfolio of 50% of the portfolio by value. The
Company may also invest in securities which are listed overseas but
have a secondary UK quotation. Although investments are primarily
in companies listed on recognised stock exchanges, the Investment
Manager may also invest in less liquid unquoted securities with the
prior approval of the Board. At 29 February
2020 the Company did not hold any illiquid unquoted
investments in its portfolio.
BUSINESS MODEL
The Company’s business model follows that of an externally managed
investment trust. Therefore, the Company does not have any
employees and outsources its activities to third party service
providers including the Manager, who is the principal service
provider. The management of the investment portfolio and the
administration of the Company have been contractually delegated to
the Manager who in turn (with the permission of the Company) has
delegated certain investment management and other ancillary
services to the Investment Manager. The Manager, operating under
guidelines determined by the Board, has direct responsibility for
the decisions relating to the day-to-day running of the Company and
is accountable to the Board for the investment, financial and
operating performance of the Company.
The Company delegates fund accounting services to BlackRock
Investment Management (UK) Limited (“BIM (UK)”), which in turn
sub-delegates these services to The Bank of New York Mellon
(International) Limited (“BNYM”). Other service providers include
the Depositary (also BNYM) and the Registrar, Computershare
Investor Services PLC. The Depositary has sub-delegated the
provision of custody services to the Asset Servicing division of
BNYM. Details of the contractual terms with the Manager and the
Depositary and more details of the sub-delegation arrangements in
place governing custody services are set out in the Directors’
Report.
INVESTMENT POLICY
The Manager has adopted a consistent investment process, focusing
on good quality growth companies that are trading well; stock
selection is the primary focus but consideration is also given to
sector weightings and underlying themes. Whilst there are no set
limits on individual sector exposures against the Company’s
benchmark, a schedule of sector weightings is presented at each
Board meeting for review. In applying the investment objective, the
Investment Manager expects the Company to be fully invested and to
borrow as and when appropriate. The Company seeks to achieve an
appropriate spread of investment risk by investing in a number of
holdings across a range of sectors.
The Company may not hold more than 6% of the share capital of
any company in which it has an investment. In addition, while the
Company may hold shares in other listed investment companies
(including investment trusts) the Board has agreed that the Company
will not invest more than 15% of its total assets in other UK
listed investment companies. The Investment Manager will not deal
in derivatives without the prior approval of the Board and
derivative instruments, such as options and futures contracts, have
not been used during the year.
Performance is measured against an appropriate benchmark, the
Numis Smaller Companies plus AIM (excluding Investment Companies)
Index.
INVESTMENT PHILOSOPHY
The Investment Manager seeks to identify companies which it
believes have superior long-term growth prospects and the
management in place to take advantage of these prospects. This is
done through monitoring market newsflow carefully, looking for
signs of outperformance, and by working closely with BlackRock’s
network of brokers. Initially, if the Investment Manager is
sufficiently impressed with a company’s prospects, it will look to
take a small position, usually 0.25% to 0.50% of the Company’s net
assets, in a new holding. These holdings will be closely monitored,
and members of the portfolio management team will meet with
management on a regular basis. If these companies continue to
prosper and make the most of opportunities, the Investment Manager
will gradually add to the portfolio holding. Where initial
expectations are disappointed, the holding will be sold. The
anticipation is that each holding will develop into a core holding
over time; one that meets the Investment Manager’s criteria for
high quality growth companies.
Valuation is a key consideration; it is important not to overpay
for new holdings. However, investment fundamentals are also
important and the Investment Manager may be prepared to pay what
seems like a high price if it believes that long-term growth
prospects are very strong. Generally, a company will be held within
the portfolio if it meets the criteria for core holdings; in
respect of recent investments, the Investment Manager will consider
whether they have the potential to meet these criteria. Holdings
will be sold if there are concerns that the investment case has
changed in a negative way. Holdings will be reduced where the
position size becomes too large and raises concerns about risk and
diversification. The general aim is for portfolio holdings not to
exceed 3% of the Company’s net assets (excluding cash fund
investments held for cash management purposes). As the investments
within the portfolio become larger over time, the Portfolio Manager
will continue to assess growth prospects in comparison to smaller
businesses operating within similar markets. New holdings must have
a market cap beneath £2 billion, however holdings that move above
that level will be maintained providing the investment adheres to
the original thesis, and remains the most attractive opportunity
that can be found amongst a comparable peer group. In accordance
with the guidelines, the Portfolio Manager will sell any stock that
enters the FTSE 100 within thirty days of entry.
The Investment Manager believes that consistent outperformance
can be achieved by employing a combination of bottom-up and
top-down analysis, based upon strong fundamental research.
In building a robust portfolio the Investment Manager will also
consider the macro-economic background, working with strategists,
economists and other teams internally and externally to understand
this better. It also works closely with BlackRock’s risk team to
assess the risks in the structure of the portfolio. Any necessary
adjustments will be made to the portfolio to ensure that it is
structured in an appropriate way from a macro and risk point of
view.
GEARING POLICY
Details of the Company’s gearing policy and borrowing arrangements
are set out in detail in the Chairman’s statement above.
PORTFOLIO ANALYSIS
A detailed analysis of the portfolio has been provided above.
PERFORMANCE
Details of the Company’s performance including the dividend are set
out in the Chairman’s Statement. The Chairman’s Statement and the
Investment Manager’s Report form part of this Strategic Report and
include a review of the main developments during the year, together
with information on investment activity within the Company’s
portfolio.
RESULTS AND DIVIDENDS
The results for the Company are set out in the Income Statement
below. The total net profit for the year, after taxation, was
£93,080,000 (2019: loss of £33,946,000) of which the revenue return
amounted to £17,837,000 (2019: profit of £16,123,000), and the
capital profit amounted to £75,243,000 (2019: loss of
£50,069,000).
The Company’s revenue return amounted to 37.13p per share (2019:
33.67p). The Directors have declared a second interim
dividend of 19.70p per share as set out in the Chairman’s
Statement.
FUTURE PROSPECTS
The Board’s main focus is to achieve long-term capital growth. The
future performance of the Company is dependent upon the success of
the investment strategy and, to a large extent, on the performance
of financial markets. The outlook for the Company in the next
twelve months is discussed in the Chairman’s Statement and the
Investment Manager’s Report above.
SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES
As an investment trust, the Company has no direct social or
community responsibilities. However, the Directors believe that it
is in shareholders’ interests to consider human rights issues,
environmental, social and governance matters when selecting and
retaining investments. Details of the Company’s policy on socially
responsible investment are set out on pages 44 and 45 of the Annual
Report and Financial Statements.
MODERN SLAVERY ACT
As an investment vehicle the Company does not provide goods or
services in the normal course of business, and does not have
customers. Accordingly, the Directors consider that the Company is
not required to make any slavery or human trafficking statement
under the Modern Slavery Act 2015. In any event, the Board
considers the Company’s supply chain, dealing predominantly with
professional advisers and service providers in the financial
services industry, to be low risk in relation to this matter.
DIRECTORS, GENDER REPRESENTATION AND EMPLOYEES
The Directors of the Company on 29 February
2020 are set out in the Directors’ biographies contained
within the Annual Report and Financial Statements. With effect from
4 June 2019, the Board consists of
three male Directors and two female Directors. The Company’s policy
on diversity is set out on page 60 of the Annual Report and
Financial Statements. The Company does not have any executive
employees.
KEY PERFORMANCE INDICATORS
At each Board meeting, the Directors consider a number of
performance measures to assess the Company’s success in achieving
its objectives. The key performance indicators (KPIs) used to
measure the progress and performance of the Company over time and
which are comparable to those reported by other investment trusts
are set out below. As indicated in footnote 3 to the table, some of
these KPIs fall within the definition of ‘Alternative Performance
Measures’ (APMs) under guidance issued by the European Securities
and Markets Authority (ESMA) and additional information explaining
how these are calculated is set out in the Glossary in the Annual
Report and Financial Statements.
Additionally, the Board regularly reviews many indices and
ratios to understand the impact on the Company’s relative
performance of the various components such as asset allocation and
stock selection. The Board also reviews the performance and ongoing
charges of the Company against a peer group of UK smaller companies
trusts and open-ended funds.
Key Performance Indicators |
Year
ended
29 February
2020 |
Year
ended
28 February
2019 |
NAV per share (debt at par
value)1,2 |
11.7% |
-6.6% |
NAV per share (debt at fair
value)1,2 |
11.1% |
-6.6% |
NAV per share (debt at par value,
capital only)1,2 |
11.7% |
-6.8% |
NAV per share total return
performance (debt at fair value)2 |
13.5% |
-4.9% |
Share price1,2 |
11.6% |
0.4% |
Benchmark return1 |
-1.4% |
-8.2% |
Average discount to NAV with debt at
fair value2 |
2.9% |
7.9% |
Revenue return per share |
37.13p |
33.67p |
Ongoing charges
ratio2,3 |
0.7% |
0.7% |
Retail ownership |
64.9% |
62.3% |
|
====== |
====== |
1 Without income reinvested.
2 Alternative performance measures, see
Glossary in the Annual Report and Financial Statements.
3 Calculated as a percentage of average
shareholders’ funds and using operating expenses, finance costs,
transaction costs and taxation in accordance with AIC
guidelines.
Sources: BlackRock and Datastream.
PRINCIPAL RISKS
The Company is exposed to a variety of risks and uncertainties. As
required by the UK Code, the Board has in place a robust ongoing
process to identify, assess and monitor the principle risks and
emerging risks facing the Company, including those that would
threaten its business model, future performance, solvency or
liquidity. A core element of this process is the Company’s risk
register which identifies the risks facing the Company and assesses
the likelihood and potential impact of each risk and the quality of
the controls operating to mitigate it. A residual risk rating is
then calculated for each risk based on the outcome of the
assessment.
The risk register, its method of preparation and the operation
of key controls in BlackRock’s and third-party service providers’
systems of internal control are reviewed on a regular basis by the
Audit Committee. In order to gain a more comprehensive
understanding of BlackRock’s and other third-party service
providers’ risk management processes and how these apply to the
Company’s business, BlackRock’s internal audit department provides
an annual presentation to the Audit Committee Chairman setting out
the results of testing performed in relation to BlackRock’s
internal control processes. The Audit Committee also periodically
receives presentations from BlackRock’s Risk & Quantitative
Analysis team and reviews Service Organisation Control (SOC 1)
reports from the Company’s service providers. The current risk
register categorises the Company’s main areas of risk as
follows:
- Investment performance risk;
- Market risk;
- Income/dividend risk;
- Legal & compliance risk;
- Operational risk;
- Financial risk; and
- Marketing risk.
The Board has undertaken a robust assessment of both the
principal and emerging risks facing the Company, including those
that would threaten its business model, future performance,
solvency or liquidity. Since the year end, the COVID-19 pandemic
has given rise to unprecedented challenges for businesses across
the globe and the Board has taken into consideration the risks
posed to the Company by the crisis and incorporated these into the
Company’s risk register. The risks identified by the Board have
been described in the table that follows, together with an
explanation of how they are managed and mitigated. Emerging risks
are considered by the Board as they come into view and are
incorporated into the existing review of the Company’s risk
register. They were also considered as part of the annual
evaluation process.
Additionally, the Manager considers emerging risks in numerous
forums and the Risk and Quantitative Analysis team produces an
annual risk survey. Any material risks of relevance to the Company
identified through the annual risk survey will be communicated to
the Board.
The Board will continue to assess these risks on an ongoing
basis. In relation to the UK Code, the Board is confident that the
procedures that the Company has put in place are sufficient to
ensure that the necessary monitoring of risks and controls has been
carried out throughout the reporting period.
Principal risk |
Mitigation/Control |
Investment
performance
Returns achieved are reliant primarily upon the performance of the
portfolio.
The Board is responsible for:
- deciding the investment strategy to fulfil the Company’s
objective; and
- monitoring the performance of the Investment Manager and the
implementation of the investment strategy.
An inappropriate investment strategy may lead to:
- poor performance compared to the Benchmark Index and the
Company’s peer group;
- a loss of capital; and
- dissatisfied shareholders.
|
To manage this risk the
Board:
- regularly reviews the Company’s investment mandate and
long-term strategy;
- has set investment restrictions and guidelines which the
Investment Manager monitors and regularly reports on;
- receives from the Investment Manager a regular explanation of
stock selection decisions, portfolio exposure, gearing and any
changes in gearing and the rationale for the composition of the
investment portfolio;
- monitors the maintenance of an adequate spread of investments
in order to minimise the risks associated with factors specific to
particular sectors, based on the diversification requirements
inherent in the investment policy; and
- receives reports showing the Company’s performance against the
benchmark.
|
Market risk
Market risk arises from volatility in the prices of the Company’s
investments influenced by currency, interest rate or other price
movements. It represents the potential loss the Company might
suffer through holding market positions in financial instruments in
the face of market movements.
Market risk includes the potential impact of events which are
outside the Company’s control, such as the COVID-19 pandemic. |
The Board considers
asset allocation, stock selection and levels of gearing on a
regular basis and has set investment restrictions and guidelines
which are monitored and reported on by the Investment Manager.
The Board monitors the implementation and results of the investment
process with the Investment Manager.
The Board also recognises the benefits of a closed end fund
structure in extremely volatile markets such as those
experienced as the COVID-19 pandemic escalates. Unlike
open-ended counterparts, closed end funds are not obliged to sell
down portfolio holdings at low valuations to meet liquidity
requirements for redemptions. During times of elevated volatility
and market stress, the ability of a closed end fund structure to
remain invested for the long-term enables the portfolio manager to
adhere to disciplined fundamental analysis from a bottom-up
perspective and be ready to respond to dislocations in the market
as opportunities present themselves. |
Income/dividend risk
The amount of dividends and future dividend growth will depend on
the performance of the Company’s underlying portfolio. In addition,
any change in the tax treatment of the dividends or interest
received by the Company may reduce the level of dividends received
by shareholders. |
The Board monitors this
risk through the receipt of detailed income forecasts and considers
the level of income at each Board meeting.
The Company has substantial revenue reserves which can be
utilised. |
Legal &
Compliance risk
The Company has been approved by HM Revenue & Customs as an
investment trust, subject to continuing to meet the relevant
eligibility conditions and operates as an investment trust in
accordance with Chapter 4 of Part 24 of the Corporation Tax Act
2010. As such, the Company is exempt from capital gains tax on the
profits realised from the sale of its investments.
Any breach of the relevant eligibility conditions could lead to the
Company losing investment trust status and being subject to
corporation tax on capital gains realised within the Company’s
portfolio. In such event the investment returns of the Company may
be adversely affected.
Any serious breach could result in the Company and/or the Directors
being fined or the subject of criminal proceedings or the
suspension of the Company’s shares which would in turn lead to a
breach of the Corporation Tax Act 2010.
Amongst other relevant laws and regulations, the Company is
required to comply with the provisions of the Companies Act 2006,
the Alternative Investment Fund Managers’ Directive, the UK Listing
Rules and Disclosure Guidance and Transparency Rules and the Market
Abuse Regulation. |
The Investment Manager
monitors investment movements and the amount of proposed dividends
to ensure that the provisions of Chapter 4 of Part 24 of the
Corporation Tax Act 2010 are not breached. The results are reported
to the Board at each meeting.
Compliance with the accounting rules affecting investment trusts is
also carefully and regularly monitored.
The Company Secretary and the Company’s professional advisers
provide regular reports to the Board in respect of compliance with
all applicable rules and regulations. |
Operational
risk
In common with most other investment trust companies, the Company
has no employees. The Company therefore relies on the services
provided by third parties. Accordingly, it is dependent on the
control systems of the Manager, the Depositary and the Fund
Accountant who maintain the Company’s assets, dealing procedures
and accounting records.
The security of the Company’s assets, dealing procedures,
accounting records and adherence to regulatory and legal
requirements and the prevention of fraud depend on the effective
operation of the systems of these other third party service
providers. There is a risk that a major disaster, such as floods,
fire, a global pandemic, or terrorist activity, renders the
Company’s service providers unable to conduct business at normal
operating capacity and effectiveness.
Failure by any service provider to carry out its obligations to the
Company could have a material adverse effect on the Company’s
performance. Disruption to the accounting, payment systems or
custody records could prevent the accurate reporting and monitoring
of the Company’s financial position. |
Due diligence is
undertaken before contracts are entered into with third party
service providers. Thereafter, the performance of the provider is
subject to regular review and reported to the Board.
The Board reviews on a regular basis an assessment of the fraud
risks that the Company could potentially be exposed to, and also a
summary of the controls put in place by the Manager, the
Depositary, the Custodian, the Fund Accountant and the Registrar
designed specifically to mitigate these risks.
Most third-party service providers produce Service Organisation
Control (SOC 1) reports to provide assurance regarding the
effective operation of internal controls as reported on by their
reporting accountants. These reports are provided to the Audit
Committee. The Company’s assets are subject to a strict liability
regime and in the event of a loss of financial assets held in
custody, the Depositary must return assets of an identical type or
the corresponding amount, unless able to demonstrate the loss was a
result of an event beyond its reasonable control.
The Board reviews the overall performance of the Manager,
Investment Manager and all other third-party service providers and
compliance with the Investment Management Agreement on a regular
basis. The Board also considers the business continuity
arrangements of the Company’s key service providers on an ongoing
basis and reviews these as part of their review of the Company’s
risk register. In respect of the unprecedented and emerging risks
posed by the COVID-19 pandemic in terms of the ability of service
providers to function effectively, the Board have received reports
from key service providers (the Manager, the Depositary, the
Custodian, the Fund Administrator, the Broker, the Registrar and
the printers) setting out the measures that they have put in place
to address the crisis in addition to their existing business
continuity framework. Having considered these arrangements and
reviewed service levels since the crisis has evolved, the Board are
confident that a good level of service will be maintained. |
Financial risk
The Company’s investment activities expose it to a variety of
financial risks that include interest rate, credit and liquidity
risk. |
Details of these risks are disclosed
in note 17 to the Annual Report and Financial Statements, together
with a summary of the policies for managing these risks. |
Marketing risk
Marketing efforts are inadequate, do not comply with relevant
regulatory requirements, and fail to communicate adequately with
shareholders or reach out to potential new shareholders resulting
in reduced demand for the Company’s shares and a widening
discount. |
The Board focuses significant time
on communications with shareholders and reviewing marketing
strategy and initiatives. All investment trust marketing documents
are subject to appropriate review and authorisation. |
VIABILITY STATEMENT
In accordance with provision 31 of the 2018 UK Corporate Governance
Code, the Directors have assessed the prospects of the Company over
a longer period than the 12 months referred to by the ‘Going
Concern’ guidelines.
The Board is cognisant of the uncertainty surrounding the
potential duration of the COVID-19 pandemic, its impact on the
global economy and the prospects for many of the Company’s
portfolio holdings. Notwithstanding this crisis, and given the
factors stated below, the Board expects the Company to continue for
the foreseeable future and has therefore conducted this review for
the period up to the AGM in 2025 being a five-year period from the
date that this Annual Report will be approved by shareholders. This
assessment term has been chosen as it represents a medium-term
performance period over which investors in the smaller companies
sector generally refer to when making investment decisions.
In making this assessment the Board has considered the following
factors:
- The Company’s principal risks as set out above;
- The impact of a significant fall in UK equity markets on the
value of the Company’s investment portfolio, factoring in the
impact of recent market volatility related to the COVID-19
pandemic;
- The ongoing relevance of the Company’s investment objective in
the current environment; and
- The level of demand for the Company’s ordinary shares.
The Board has also considered a number of financial metrics and
other factors, including:
- The Board has reviewed portfolio liquidity as at 31 May 2020 in light of the impact of the
COVID-19 pandemic on global market liquidity. As at 31 May 2020, 62% of the portfolio was estimated
as being capable of being liquidated within 30 days.
- The Board has reviewed the Company’s revenue and expense
forecasts in light of the COVID-19 pandemic and its anticipated
impact on dividend income and market valuations. The Board is
confident that the Company’s business model remains viable and that
the Company has sufficient resources to meet all liabilities as
they fall due for the period under review;
- The Board has reviewed the Company’s borrowing and debt
facilities and considers that despite recent market falls the
Company continues to meet its financial covenants in respect of
these facilities and has a wide margin before any relevant
thresholds are reached;
- The Board keeps the Company’s principal risks and uncertainties
as set out above under review, and is confident that the Company
has appropriate controls and processes in place to manage these and
to maintain its operating model, even given the challenges posed by
COVID-19;
- The operational resilience of the Company and its key service
providers (the Manager, Depositary, Custodian, Fund Administrator,
Registrar and Broker) and their ability to continue to provide a
good level of service for the foreseeable future;
- The effectiveness of business continuity plans in place for the
Company and key service providers in particular in respect to
COVID-19;
- The level of current and historic ongoing charges incurred by
the Company;
- The discount to NAV;
- The level of income generated by the Company; and
- Future income forecasts.
The Company is an investment company with a relatively liquid
portfolio. As at 29 February 2020,
the Company held no illiquid unquoted investments and 67% of the
Company’s portfolio investments were readily realisable and listed
on the London Stock Exchange. The remaining 33% that were listed on
the Alternative Investment Market are also considered to be readily
realisable. The Company has largely fixed overheads which comprise
a very small percentage of net assets. Therefore, the Board has
concluded that, even in exceptionally stressed operating
conditions, including the challenges presented by the COVID-19
pandemic, the Company would comfortably be able to meet its ongoing
operating costs as they fall due.
Based on the results of their analysis, the Directors have a
reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the period
of their assessment.
SECTION 172 STATEMENT: PROMOTING THE SUCCESS OF THE
COMPANY
New regulations (The Companies (Miscellaneous Reporting)
Regulations 2018) require directors to explain in greater detail
how they have discharged their duties under section 172(1) of the
Companies Act 2006 in promoting the success of their companies for
the benefit of members as a whole. This enhanced disclosure is
required under the Companies Act 2006 and the AIC Code of Corporate
Governance and covers how the Board has engaged with and
understands the views of stakeholders and how stakeholders’ needs
have been taken into account, the outcome of this engagement and
the impact that it has had on the Board’s decisions.
As the Company is an externally managed investment company and
does not have any employees or customers, the Board consider the
main stakeholders in the Company to be the shareholders, key
service providers (being the Manager and Investment Manager, the
Custodian, Depositary, Registrar and Broker) and investee
companies. The reasons for this determination, and the Board’s
overarching approach to engagement, are set out in the table
below.
Stakeholders |
Shareholders |
Manager and Investment Manager |
Other key service providers |
Investee companies |
Continued shareholder support and
engagement are critical to the continued existence of the Company
and the successful delivery of its long-term strategy. The Board is
focused on fostering good working relationships with shareholders
and on understanding the views of shareholders in order to
incorporate them into the Board’s strategy and objectives in
delivering long- term growth and income. |
The Board’s main working
relationship is with the Manager, who is responsible for the
Company’s portfolio management (including asset allocation, stock
and sector selection) and risk management, as well as ancillary
functions such as administration, secretarial, accounting and
marketing services. The Manager has sub-delegated portfolio
management to the Investment Manager. Successful management of
shareholders’ assets by the Investment Manager is critical for the
Company to successfully deliver its investment strategy and meet
its objective. The Company is also reliant on the Manager as AIFM
to provide support in meeting relevant regulatory obligations under
the AIFMD and other relevant legislation. |
In order for the Company to function
as an investment trust with a listing on the premium segment of the
official list of the FCA and trade on the London Stock Exchange’s
(LSE) main market for listed securities, the Board relies on a
diverse range of advisors for support in meeting relevant
obligations and safeguarding the Company’s assets. For this reason
the Board consider the Company’s Custodian, Depositary, Registrar
and Broker to be stakeholders. The Board maintains regular contact
with its key external service providers and receives regular
reporting from them through the Board and committee meetings, as
well as outside of the regular meeting cycle. |
Portfolio holdings are ultimately
shareholders’ assets, and the Board recognise the importance of
good stewardship and communication with investee companies in
meeting the Company’s investment objective and strategy. The Board
monitors the Manager’s stewardship arrangements and receives
regular feedback from the Manager in respect of meetings with the
management of portfolio companies. |
A summary of the key areas of engagement undertaken by the Board
with its key stakeholders in the year under review and how
Directors have acted upon this to promote the long-term success of
the Company are set out in the table below.
Area of Engagement |
Issue |
Engagement |
Impact |
Management of share rating |
The
Board recognises that it is in the long-term interests of
shareholders that shares do not trade at a significant discount or
premium to their prevailing net asset value. |
The
Board monitors the Company’s share rating on an ongoing basis and
receives regular updates from the Company’s brokers and Manager
regarding the level of discount and the drivers behind this. The
Manager provides regular performance updates and detailed
performance attribution.
The Board believes that the best way of maintaining the share
rating at an optimal level over the long-term is to create demand
for the shares in the secondary market. To this end the Investment
Manager is devoting considerable effort to broadening the awareness
of the Company, particularly to wealth managers and to the wider
retail shareholder market. The Company contributes to a focused
investment trust sales and marketing initiative operated by
BlackRock on behalf of the investment trusts under its
management.
The Company’s contribution to the consortium element of the
initiative, which enables the trusts to achieve efficiencies by
combining certain sales and marketing activities was a fixed amount
of £66,000 and this contribution is matched by the Investment
Manager for the year ended 31 December 2019. In addition, a budget
of £42,000 was allocated for Company specific sales and marketing
activity also for the year to 31 December 2019. The purpose of the
programme overall is to ensure effective communication with
existing shareholders and to attract new shareholders to the
Company to improve liquidity in the Company’s shares and to sustain
the stock market rating of the Company. |
Over the
last four years, the Company’s discount has narrowed steadily, from
an average discount of 15.4% for the year to 28 February 2017 to
2.9% for the year ended 29 February 2020; in the year under review
the Company’s shares moved to trade at a premium for significant
periods of time. Market demand for the Company’s shares has been
strong and between December 2019 and the date of this report the
Company has issued 950,000 shares for proceeds of £16 million,
improving the Company’s liquidity and resulting in a lower
operating charges ratio.
Over the last nine years, the number of shares held by retail
shareholders has increased from 29.5% (as at 28 February 2011) to
64.9% at 29 February 2020. |
Investment mandate
and objective |
The Board has the
responsibility to shareholders to ensure that the Company’s
portfolio of assets is invested in line with the stated investment
objective and in a way that ensures an appropriate balance between
spread of risk and portfolio returns. |
The Board works
closely with the Investment Manager throughout the year in further
developing our investment strategy and underlying policies, not
simply for the purpose of achieving the Company’s investment
objective but in the interests of shareholders and future
investors. |
The portfolio
activities undertaken by the Investment Manager can be found in the
Investment Manager’s Report. Details regarding the Company’s NAV
and share price performance can be found in the Chairman’s
Statement and in the Strategic Report above. |
Responsible investing |
More
than ever, good governance and consideration of sustainable
investment is a key factor in making investment decisions. Climate
change is becoming a defining factor in companies’ long-term
prospects across the investment spectrum, with significant and
lasting implications for economic growth and prosperity. |
The
Board believes that responsible investment and sustainability are
integral to the longer-term delivery of the Company’s success. The
Board works closely with the Investment Manager to regularly review
the Company’s performance, investment strategy and underlying
policies to ensure that the Company’s investment objective
continues to be met in an effective, responsible and sustainable
way in the interests of shareholders and future investors.
The Investment Manager’s approach to the consideration of
Environmental, Social and Governance (‘ESG’) factors in respect of
the Company’s portfolio, as well as the Investment Manager’s
engagement with investee companies to encourage the adoption of
sustainable business practices which support long-term value
creation are kept under review by the Board.
The Investment Manager reports to the Board in respect of its ESG
policies and how these are integrated into the investment process;
a summary of BlackRock’s approach to ESG and sustainability is set
out on page 44 the Company’s Annual Report and Financial
Statements. The Investment Manager’s engagement and voting policy
is detailed on pages 44 to 45 and page 48 of the Company’s Annual
Report and Financial Statements and on the BlackRock website. |
The
Board and the Investment Manager believe there is a positive
correlation between strong ESG practices and investment
performance. Details of the Company’s performance in the year are
given in the Chairman’s Statement and the Performance Record
above. |
Gearing
and sources of finance |
The Board
believes that it is important for the Company to have an
appropriate range of borrowings and facilities in place to provide
a balance between longer-term and short-term maturities and between
fixed and floating rates of interest. |
Gearing
levels and sources of funding are reviewed regularly by the Board
with a view to ensuring that the Company has a suitable mix of
financing at competitive market rates.
The Board moved the Company’s existing £35 million Revolving Credit
Facility (RCF) from Scotiabank (Ireland) Limited to Sumitomo Bank
Limited in November 2019 in order to benefit from lower finance
costs.
Mindful of the fact that the Company’s £15 million debenture will
need refinancing in 2022, the Board decided in November 2019 to
borrow an additional £20 million at a rate of 2.41% per annum
through issuing additional unsecured, fixed rate, private placement
notes. The notes have a 25 year maturity, and will be repaid in
November 2044.
As at 29 February 2020, the Company had the following borrowing
facilities in place: long-term fixed rate funding in the form of a
£15 million debenture with a coupon of 7.75% maturing in 2022, £25
million senior unsecured fixed rate private placement notes issued
in May 2017 at a coupon of 2.74% with a 20 year maturity and £20
million senior unsecured fixed rate private placement notes issued
in December 2019 at a coupon of 2.41% with a 25 year maturity.
Shorter term variable rate funding consisted of a £35 million
three-year revolving loan facility with Sumitomo Bank Limited with
interest charge at Libor plus 75 basis points and an uncommitted
overdraft facility of £10 million with Bank of New York (Europe)
Limited with interest charged at Libor plus 100 basis points.
It is the Board’s intention that gearing will not exceed 15% of the
net assets of the Company at the time of the drawdown of the
relevant borrowings. Under normal operating conditions it is
envisaged that gearing will be within a range of 0%-15% of net
assets. |
The
transfer of the RCF from Scotiabank to Sumitomo will result in
significant savings for the Company by way of reduced finance
charges. By way of example, if the RCF were fully utilised, the
reduction in interest over the three year RCF term equates to
£210,000.
The Board believes that the issue of the £20 million private
placement notes in December 2019 locks in fixed rate, long dated,
Sterling denominated financing at a highly competitive pricing
level.
The net proceeds of the additional debt issue, as well as being in
place to provide refinancing for the £15 million debenture when it
expires in 2022, will also be used for additional investment in the
market within the Company’s existing gearing limits and will give
the Investment Manager significantly more scope to take advantage
of suitable investment opportunities. The Board is optimistic that
the Investment Manager will be able to find investments in the
future which will provide returns comfortably in excess of the
interest rate on the additional tranche of debt.
At the year end, the Company’s gearing was 5.7% of net assets. |
Service levels of third party providers |
The
Board acknowledges the importance of ensuring that the Company’s
principal suppliers are providing a suitable level of service:
including the Manager in respect of investment performance and
delivering on the Company’s investment mandate; the Custodian and
Depositary in respect of their duties towards safeguarding the
Company’s assets; the Registrar in its maintenance of the Company’s
share register and dealing with investor queries and the Company’s
Brokers in respect of the provision of advice and acting as a
market maker for the Company’s shares. |
The
Manager reports to the Board on the Company’s performance on a
regular basis. The Board carries out a robust annual evaluation of
the Manager’s performance, their commitment and available
resources.
The Board performs an annual review of the service levels of all
third party service providers and concludes on their suitability to
continue in their role.
The Board receives regular updates from the AIFM, Depositary,
Registrar and Brokers on an ongoing basis. Since the year end, in
light of the challenges presented by the COVID-19 pandemic to the
operation of business across the globe, the Board has worked
closely with the Manager to gain comfort that relevant business
continuity plans are operating effectively for all of the Company’s
service providers. |
All
performance evaluations were performed on a timely basis and the
Board concluded that all third party service providers, including
the Manager were operating effectively and providing a good level
of service.
The Board has received updates in respect of business continuity
planning from the Company’s Manager, Custodian, Depositary, Fund
Administrator, Brokers, Registrar and printers, and is confident
that arrangements are in place to ensure that a good level of
service will continue to be provided despite the impact of the
COVID-19 pandemic. |
Board
composition |
The
Board is committed to ensuring that its own composition brings an
appropriate balance of knowledge, experience and skills, and that
it is compliant with best corporate governance practice under the
new UK Code, including guidance on tenure and the composition of
the Board’s committees. |
During
the 2019 financial year Mr Nick Fry advised of his desire to retire
at the 2019 AGM, creating the need to select a new director and
chairman.
The Nomination Committee agreed the selection criteria and the
method of selection, recruitment and appointment. Board diversity,
including gender, was taken into account when establishing the
criteria. The services of an external search consultant, were used
to identify potential candidates.
All Directors are subject to a formal evaluation process on an
annual basis (more details and the conclusions in respect of
the 2020 evaluation process are given in the Annual Report and
Financial Statements). All Directors stand for re-election by
shareholders annually.
Notwithstanding the issues posed by the COVID-19 pandemic, in
normal operating conditions, shareholders may attend the AGM and
raise any queries in respect of Board composition or individual
Directors in person, or may contact the Company Secretary or the
Chairman using the details provided in the Annual Report and
Financial Statements with any issues. |
As a
result of the recruitment process, Mr Ronald Gould was appointed as
a Director of the Company with effect from 1 April 2019. Mr Nick
Fry retired as a Director and Chairman of the Company on 4 June
2019, with Mr Gould taking on the role of Chairman with effect from
this date.
One Director, Mr Robertson, has served for more than nine years. He
has given notice of his intention to retire as soon as a
replacement is found. The recruitment process is underway.
Details of each Directors’ contribution to the success and
promotion of the Company are set out in the Directors’ report in
the Annual Report and Financial Statements and details of
Directors’ biographies can be found in the Annual Report and
Financial Statements. The Directors are not aware of any issues
that have been raised directly by shareholders in respect of Board
composition in the year under review. Details for the proxy voting
results in favour and against individual Directors' re-election at
the 2019 AGM are given on the Company’s website at www.
blackrock.com/uk/brsc. |
Shareholders |
Continued shareholder
support and engagement are critical to the continued existence of
the Company and the successful delivery of its long-term
strategy. |
The Board is committed
to maintaining open channels of communication and to engage with
shareholders. Under normal operating circumstances, the Board
welcomes and encourages attendance and participation from
shareholders at its Annual General Meetings. Given the COVID-19
crisis and restrictions on public meetings, this may not be
possible for the 2020 AGM, however the Board look forward to
offering opportunities for shareholders to meet the portfolio
manager and the Board at some safer stage in the future. If
shareholders wish to raise issues or concerns with the Board
outside of the AGM, they are welcome to do so at any time. The
Chairman is available to meet directly with shareholders
periodically to understand their views on governance and the
Company’s performance where they wish to do so. He may be contacted
via the Company Secretary whose details are given on page 109 of
the Company’s Annual Report and Financial Statements.
The Annual Report and Half Yearly Financial Report are available on
the Company's website and are also circulated to shareholders
either in printed copy or via electronic communications. In
addition, regular updates on performance, monthly factsheets, the
daily NAV and other information are also published on the website
at blackrock.com/uk/brsc.
The Board also works closely with the Manager to develop the
Company’s marketing strategy, with the aim of ensuring effective
communication with shareholders in respect of the investment
mandate and objective. Unlike trading companies, one-to-one
shareholder meetings usually take the form of a meeting with the
portfolio manager as opposed to members of the Board. As well as
attending regular investor meetings the portfolio managers hold
regular discussions with wealth management desks and offices to
build on the case for, and understanding of, long-term investment
opportunities in the UK smaller companies sector.
The Manager also coordinates public relations activity, including
meetings between the portfolio managers and relevant industry
publications to set out their vision for the portfolio strategy and
outlook for the region. The Manager releases monthly portfolio
updates to the market to ensure that investors are kept up to date
in respect of performance and other portfolio developments, and
maintains a website on behalf of the Company that contains relevant
information in respect of the Company’s investment mandate and
objective. |
The Board values any
feedback and questions from shareholders ahead of and during Annual
General Meetings in order to gain an understanding of their views
and will take action when and as appropriate. Feedback and
questions will also help the Company evolve its reporting, aiming
to make reports more transparent and understandable.
Feedback from all substantive meetings between the Investment
Manager and shareholders will be shared with the Board. The
Directors will also receive updates from the Company’s broker on
any feedback from shareholders, as well as share trading activity,
share price performance and an update from the Investment
Manager.
The portfolio management team attended a number of professional
investor meetings, and held discussions with many different wealth
management desks and offices in respect of the Company during the
year under review.
Investors gave positive feedback in respect of the portfolio
manager and how well the handover process had been executed
following the retirement of Mr Prentis as manager in June 2019 and
succession of Mr Arnold. Investors also commented that they liked
the investment process, the positioning of the portfolio and its
track record, the level of diversity in the portfolio and the
approach to risk management, as well as the impressive dividend
growth.
Investors expressed concerns over the impact of Brexit on the UK
Smaller Companies sector. |
SUSTAINABILITY AND OUR ESG POLICIES
The Board’s approach
Environmental, social and governance (ESG) issues can present both
opportunities and threats to long-term investment performance.
These ethical and sustainability issues cannot be ignored, and your
Board is committed to ensuring that we have appointed a manager
that applies the highest standards of ESG practice. The Board
believes effective engagement with management is, in most cases,
the most effective way of driving meaningful change in the
behaviour of investee company management. This is particularly true
for the Manager given the extent of BlackRock’s shareholder
engagement (BlackRock held 2,050 engagements with 1,458 companies
based in 42 markets for the year to 30 June
2019). As well as the influence afforded by its sheer scale,
the Board believes that BlackRock is well placed as Manager to
fulfil these requirements due to the integration of ESG into its
investment processes, the emphasis it places on sustainability, its
collaborative approach in its investment stewardship activities and
its position in the industry as one of the largest suppliers of
sustainable investment products in the global market. More
information on BlackRock’s approach to sustainability is set out
below.
Responsible ownership – BlackRock’s approach
As a fiduciary to its clients, BlackRock has built its business to
protect and grow the value of clients’ assets. From BlackRock’s
perspective, business-relevant sustainability issues can contribute
to a company’s long-term financial performance, and thus further
incorporating these considerations into the investment research,
portfolio construction, and stewardship process can enhance
long-term risk adjusted returns. By expanding access to data,
insights and learning on material ESG risks and opportunities in
investment processes across BlackRock’s diverse platform, BlackRock
believes that the investment process is greatly enhanced. The
Company’s portfolio managers work closely with BlackRock’s
Investment Stewardship team to assess the governance quality of
companies and investigate any potential issues, risks or
opportunities. The portfolio managers use ESG information when
conducting research and due diligence on new investments and again
when monitoring investments in the portfolio.
BlackRock’s approach to sustainable investing
Considerations about sustainability have been at the center of
BlackRock’s investment approach for many years and the firm offers
more than 100 sustainable products and solutions. BlackRock
believes that climate change is now a defining factor in companies’
long-term prospects, and that it will have a significant and
lasting impact on economic growth and prosperity. BlackRock
believes that climate risk now equates to investment risk, and this
will drive a profound reassessment of risk and asset values as
investors seek to react to the impact of climate policy changes.
This in turn is likely to drive a significant reallocation of
capital away from traditional carbon intensive industries over the
next decade. In January 2020, with
this transition in mind, BlackRock announced that it would
accelerate its sustainable investing efforts and make a number of
enhancements to its investment management and risk processes,
including the following:
- Heightening scrutiny on sectors and issuers with a high ESG
risk, such as thermal coal producers, due to the investment risk
they present to client portfolios;
- Putting ESG analysis at the heart of Aladdin (BlackRock’s
proprietary trading platform) and using proprietary tools to help
analyse ESG risk; and
- Placing oversight of ESG risk with BlackRock’s Risk and
Quantitative Analysis group (RQA), to ensure that ESG risk is given
increased weighting as a risk factor and is analysed with the same
weight given to traditional measures such as credit or liquidity
risk.
Investment Stewardship
BlackRock also places a strong emphasis on sustainability in its
stewardship activities. BlackRock have engaged with companies on
sustainability-related questions for a number of years, urging
management teams to make progress while also deliberately giving
companies time to enhance disclosure consistent with the
Sustainability Accounting Standards Board (SASB) and the Task Force
on Climate related Financial Disclosures (TCFD). This includes each
company’s plan for operating under a scenario where the Paris
Agreement’s goal of limiting global warming to less than two
degrees is fully realised, as expressed by the TCFD guidelines. To
this end, BlackRock is now a member of Climate Action 100+, a group
of investors that engages with companies to improve climate
disclosure and align business strategy with the goals of the Paris
Agreement. BlackRock will be aligning its engagement and
stewardship priorities to UN Sustainable Development Goals
(including Gender Equality and Affordable and Clean Energy).
BlackRock is committed to voting against management to the extent
that they have not demonstrated sufficient progress on
sustainability issues.
BlackRock is committed to transparency in terms of disclosure on
its engagement with companies and voting rationales. Last year
BlackRock voted against or withheld votes from 4,800 directors at
2,700 different companies. More details about BlackRock’s
investment stewardship process can be found on BlackRock’s website
at
https://www.blackrock.com/uk/individual/about-us/investment-stewardship.
BY ORDER OF THE BOARD
SARAH BEYNSBERGER
FOR AND ON BEHALF OF
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED
Company Secretary
24 June 2020
RELATED PARTY TRANSACTIONS: TRANSACTIONS WITH THE MANAGER AND
INVESTMENT MANAGER
The Manager was appointed as the Company’s Alternative Investment
Fund Manager (AIFM) with effect from 2 July
2014. The Manager has (with the Company’s consent) delegated
certain portfolio and risk management services, and other ancillary
services, to the Investment Manager. Details of the fees payable to
the Manager are set out in note 4.
The Manager provides management and administration services to
the Company under a contract which is terminable on six months’
notice. The Manager has (with the Company’s consent) delegated
certain portfolio and risk management services, and other ancillary
services, to BIM (UK). Further
details of the investment management contract are disclosed in the
Directors’ Report contained within the Annual Report and Financial
Statements.
The investment management fee payable for the year ended
29 February 2020 amounted to
£4,681,000 (2019: £4,590,000) as disclosed in note 4 to the
Financial Statements. At the year end, £2,383,000 was outstanding
in respect of the management fee (2019: £2,099,000).
In addition to the above services, BlackRock provided the
Company with marketing services. The total fees paid or payable for
these services for the year ended 29
February 2020 amounted to £153,000 including VAT (2019:
£113,000). Marketing fees of £151,000 (2019: £152,000) were
outstanding at the year end.
As of 29 February 2020, an amount
of £190,000 (2019: £137,000) was payable to the Manager in respect
of Directors’ fees.
The ultimate holding company of the Manager and the Investment
Manager is BlackRock, Inc. a company incorporated in Delaware USA. During the period, PNC Financial
Services Group, Inc. (“PNC”) was a substantial shareholder in
BlackRock, Inc. PNC did not provide any services to the Company
during the financial years ended 29 February
2020 and 28 February 2019.
RELATED PARTY DISCLOSURE: DIRECTORS'
EMOLUMENTS
The Board consists of five non-executive Directors, all of whom
are considered to be independent by the Board. None of the
Directors has a service contract with the Company. For the year
ended 29 February 2020, the Chairman
received an annual fee of £42,500, the Chairman of the Audit
Committee received an annual fee of £32,500 and each other Director
received an annual fee of £28,500. The Directors’ fees for
the year ended 28 February 2021 will
remain unchanged.
As at 24 June 2020, with the
exception of Ronald Gould, all
members of the Board held shares in the Company. Michael Peacock held 1,000 ordinary shares,
Robbie Robertson held 91,062
ordinary shares, Caroline Burton
held 5,500 ordinary shares and Susan
Platts-Martin held 2,800 ordinary shares.
STATEMENT OF DIRECTORS'
RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL
STATEMENTS
The Directors are responsible for preparing the Annual Report
and Financial Statements in accordance with applicable law and
regulations. Company law requires the Directors to prepare
financial statements for each financial year. Under that law they
have elected to prepare the financial statements in accordance with
applicable law and United Kingdom Accounting Standards (United
Kingdom Generally Accepted Accounting Practice).
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Company as at the end of each
financial year and of the profit or loss of the Company for that
year.
In preparing those financial statements, the Directors are
required to:
- present fairly the financial position, financial performance
and cash flows of the Company;
- select suitable accounting policies and then apply them
consistently;
- present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information;
- make judgements and estimates that are reasonable and
prudent;
- state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and that enable them to ensure
that the Financial Statements and the Directors’ Remuneration
Report comply with the Companies Act 2006. They are also
responsible for safeguarding the assets of the Company and hence
for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
The Directors are also responsible for preparing the Strategic
Report, Directors’ Report, the Directors’ Remuneration Report, the
Corporate Governance Statement and the Report of the Audit
Committee in accordance with the Companies Act 2006 and applicable
regulations, including the requirements of the Listing Rules and
the Disclosure Guidance and Transparency Rules. The Directors have
delegated responsibility to the Manager for the maintenance and
integrity of the Company’s corporate and financial information
included on BlackRock’s website. Legislation in the United Kingdom governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
Each of the Directors, whose names are listed in the Company’s
Annual Report and Financial Statements, confirms that, to the best
of their knowledge:
- the Financial Statements, prepared in accordance with
applicable accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company; and
- the Strategic Report contained in the Annual Report and
Financial Statements includes a fair review of the development and
performance of the business and the position of the Company,
together with a description of the principal risks and
uncertainties that it faces.
The UK Code also requires Directors to ensure that the Annual
Report and Financial Statements are fair, balanced and
understandable. In order to reach a conclusion on this matter, the
Board has requested that the Audit Committee advise on whether it
considers that the Annual Report and Financial Statements fulfil
these requirements. The process by which the Committee has reached
these conclusions is set out in the Audit Committee’s report in the
Annual Report and Financial Statements. As a result, the Board has
concluded that the Annual Report and Financial Statements for the
year ended 29 February 2020, taken as
a whole, are fair, balanced and understandable and provide the
information necessary for shareholders to assess the Company’s
position, performance, business model and strategy.
FOR AND ON BEHALF OF THE BOARD
RONALD GOULD
Chairman
24 June 2020
INCOME STATEMENT FOR THE YEAR ENDED 29 FEBRUARY 2020
|
Notes |
2020
Revenue
£’000 |
2020
Capital
£’000 |
2020
Total
£’000 |
2019
Revenue
£’000 |
2019
Capital
£’000 |
2019
Total
£’000 |
Gains/(losses) on investments held
at fair value through profit or loss |
|
– |
80,423 |
80,423 |
– |
(44,856) |
(44,856) |
(Losses)/gains on foreign
exchange |
|
– |
(1) |
(1) |
– |
16 |
16 |
Income from investments held at fair
value through profit or loss |
3 |
20,294 |
– |
20,294 |
18,434 |
– |
18,434 |
Other income |
3 |
157 |
– |
157 |
135 |
– |
135 |
|
|
------------ |
------------ |
------------ |
------------ |
------------ |
------------ |
Total income/(expenses) |
|
20,451 |
80,422 |
100,873 |
18,569 |
(44,840) |
(26,271) |
|
|
======= |
======= |
======= |
======= |
======= |
======= |
Expenses |
|
|
|
|
|
|
|
Investment management and
performance fees |
4 |
(1,170) |
(3,511) |
(4,681) |
(1,147) |
(3,443) |
(4,590) |
Operating expenses |
5 |
(839) |
(28) |
(867) |
(650) |
(29) |
(679) |
|
|
------------ |
------------ |
------------ |
------------ |
------------ |
------------ |
Total operating expenses |
|
(2,009) |
(3,539) |
(5,548) |
(1,797) |
(3,472) |
(5,269) |
|
|
======= |
======= |
======= |
======= |
======= |
======= |
Net profit/(loss) on ordinary
activities before finance costs and taxation |
|
18,442 |
76,883 |
95,325 |
16,772 |
(48,312) |
(31,540) |
Finance costs |
|
(547) |
(1,640) |
(2,187) |
(586) |
(1,757) |
(2,343) |
|
|
------------ |
------------ |
------------ |
------------ |
------------ |
------------ |
Net profit/(loss) on ordinary
activities before taxation |
|
17,895 |
75,243 |
93,138 |
16,186 |
(50,069) |
(33,883) |
|
|
======= |
======= |
======= |
======= |
======= |
======= |
Taxation |
|
(58) |
– |
(58) |
(63) |
– |
(63) |
|
|
------------ |
------------ |
------------ |
------------ |
------------ |
------------ |
Net profit/(loss) on ordinary
activities after taxation |
|
17,837 |
75,243 |
93,080 |
16,123 |
(50,069) |
(33,946) |
|
|
======= |
======= |
======= |
======= |
======= |
======= |
Revenue return/(loss) per
ordinary share (pence) |
7 |
37.13 |
156.62 |
193.75 |
33.67 |
(104.57) |
(70.90) |
|
|
======= |
======= |
======= |
======= |
======= |
======= |
The total column of this statement represents the Company’s
profit and loss account. The supplementary revenue and capital
columns are both prepared under guidance published by the
Association of Investment Companies (AIC). All items in the above
statement derive from continuing operations. No operations were
acquired or discontinued during the year. All income is
attributable to the equity holders of the Company.
The net profit/(loss) for the year disclosed above represents
the Company’s total comprehensive income/(loss).
STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED
29 FEBRUARY 2020
|
Notes |
Called
up share
capital
£’000 |
Share
Premium
account
£’000 |
Capital
redemption
reserve
£’000 |
Capital
reserves
£’000 |
Revenue
reserve
£’000 |
Total
£’000 |
For the year ended 29 February
2020 (restated)1 |
|
|
|
|
|
|
|
At 28 February 2019 |
|
12,498 |
38,952 |
1,982 |
598,272 |
22,385 |
674,089 |
Total comprehensive income: |
|
|
|
|
|
|
|
Net profit for the year |
|
– |
– |
– |
75,243 |
17,837 |
93,080 |
Transactions with owners, recorded
directly to equity: |
|
|
|
|
|
|
|
Share issues |
11 |
– |
13,028 |
– |
3,029 |
– |
16,057 |
Share issue costs |
11 |
– |
– |
– |
(32) |
– |
(32) |
Dividends paid2 |
6 |
– |
– |
– |
– |
(15,321) |
(15,321) |
|
|
------------ |
------------ |
------------ |
------------ |
------------ |
------------ |
At 29 February 2020 |
|
12,498 |
51,980 |
1,982 |
676,512 |
24,901 |
767,873 |
|
|
======= |
======= |
======= |
======= |
======= |
======= |
For the year ended 28 February
2019 |
|
|
|
|
|
|
|
At 28 February 2018 (as previously
presented) |
|
12,498 |
38,952 |
1,982 |
646,791 |
21,219 |
721,442 |
Restatement due to prior period
error1 |
|
- |
- |
- |
1,550 |
(1,550) |
- |
Restated reserves as at 28
February 2018 |
|
12,498 |
38,952 |
1,982 |
648,341 |
19,669 |
721,442 |
Total comprehensive
(expenses)/income: |
|
|
|
|
|
|
|
Net (loss)/profit for the year |
|
– |
– |
– |
(50,069) |
16,123 |
(33,946) |
Transactions with owners, recorded
directly to equity: |
|
|
|
|
|
|
|
Dividends paid3 |
6 |
– |
– |
– |
– |
(13,407) |
(13,407) |
|
|
------------ |
------------ |
------------ |
------------ |
------------ |
------------ |
At 28 February 2019
(restated)1 |
|
12,498 |
38,952 |
1,982 |
598,272 |
22,385 |
674,089 |
|
|
======= |
======= |
======= |
======= |
======= |
======= |
1
The prior year comparatives for the capital reserves balance and
the revenue reserve balance have been restated to correct a prior
period error by reallocating the cost of share buy backs undertaken
in prior years (amounting to £1,549,811) from the capital reserves
to the revenue reserve. More information is given in note 12
below.
2
Interim dividend paid in respect of the year ended 29 February 2020 of 12.80p was declared on
5 November 2019 and paid on
3 December 2019. Final dividend paid
in respect of the year ended 28 February
2019 of 19.20p was declared on 5 May
2019 and paid on 12 June
2019.
3 Interim
dividend paid in respect of the year ended 28 February 2019 of 12.00p was declared on
29 October 2018 and paid on
26 November 2018. Final dividend paid
in respect of the year ended 28 February
2018 of 16.00p was declared on 27
April 2018 and paid on 15 June
2018.
BALANCE SHEET AS AT 29 FEBRUARY
2020
|
Notes |
2020
£’000 |
2019
£’000 |
Fixed assets |
|
|
|
Investments held at fair value
through profit or loss |
|
812,016 |
707,150 |
Current assets |
|
|
|
Debtors |
8 |
3,825 |
2,379 |
Cash and cash equivalents |
|
39,250 |
11,719 |
|
|
------------ |
------------ |
|
|
43,075 |
14,098 |
|
|
------------ |
------------ |
Creditors – amounts falling due
within one year |
9 |
(7,668) |
(4,961) |
Net current assets |
|
35,407 |
9,137 |
|
|
======= |
======= |
Total assets less current
liabilities |
|
847,423 |
716,287 |
|
|
======= |
======= |
Creditors – amounts falling due
after more than one year |
10 |
(79,550) |
(42,198) |
|
|
======= |
======= |
Net assets |
|
767,873 |
674,089 |
|
|
======= |
======= |
Capital and reserves |
|
|
|
Called up share capital |
11 |
12,498 |
12,498 |
Share premium account |
|
51,980 |
38,952 |
Capital redemption reserve |
|
1,982 |
1,982 |
Capital reserves |
|
676,512 |
598,272* |
Revenue reserve |
|
24,901 |
22,385* |
|
|
------------ |
------------ |
Total shareholders’
funds |
|
767,873 |
674,089 |
|
|
======= |
======= |
Net asset value per ordinary
share (debt at par value) (pence) |
7 |
1,572.55 |
1,407.88 |
|
|
======= |
======= |
Net asset value per ordinary
share (debt at fair value) (pence) |
7 |
1,556.41 |
1,400.57 |
|
|
======= |
======= |
*The prior year comparatives for the capital reserves balance and
the revenue reserve balance have been restated to correct a prior
period error by reallocating the cost of share buy backs undertaken
in prior years (amounting to £1,549,811) from the capital reserves
to the revenue reserve. More information is given in note 12
below. |
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED
29 FEBRUARY 2020
|
2020
£’000 |
2019
£’000 |
Operating activities |
|
|
Net profit/(loss) before
taxation |
93,138 |
(33,883) |
Add back finance costs |
2,187 |
2,343 |
(Gains)/losses on investments held
at fair value through profit or loss |
(80,423) |
44,856 |
Net movement in foreign
exchange |
1 |
(16) |
Sales of investments held at fair
value through profit or loss |
307,040 |
330,276 |
Purchases of investments held at
fair value through profit or loss |
(330,558) |
(295,132) |
Increase in debtors |
(166) |
(584) |
Increase/(decrease) in
creditors |
375 |
(1,624) |
Taxation on investment income |
(58) |
(63) |
|
------------ |
------------ |
Net cash (used in)/generated from
operating activities |
(8,464) |
46,173 |
|
======= |
======= |
Financing activities |
|
|
Proceeds from 2.41% loan note
issue |
20,000 |
– |
Issue costs of loan note |
(179) |
– |
Drawdown of Sumitomo Mitsui Banking
Corporation revolving credit facility |
20,000 |
– |
Net repayment of Scotia Bank
revolving credit facility |
(2,500) |
(32,500) |
Interest paid |
(2,029) |
(2,355) |
Cash proceeds from ordinary shares
reissued from treasury |
16,025 |
– |
Dividends paid |
(15,321) |
(13,407) |
|
------------ |
------------ |
Net cash generated from/(used in)
financing activities |
35,996 |
(48,262) |
|
======= |
======= |
Increase/(decrease) in cash and
cash equivalents |
27,532 |
(2,089) |
Cash and cash equivalents at
beginning of the year |
11,719 |
13,792 |
Effect of foreign exchange rate
changes |
(1) |
16 |
|
------------ |
------------ |
Cash and cash equivalents at end
of year |
39,250 |
11,719 |
|
======= |
======= |
Comprised of: |
|
|
Cash at bank |
12,584 |
1,535 |
Cash Funds* |
26,666 |
10,184 |
|
------------ |
------------ |
|
39,250 |
11,719 |
|
======= |
======= |
* Cash Funds represent funds held on
deposit with the BlackRock Institutional Cash Series plc – Sterling
Liquid Environmentally Aware Fund (2019: BlackRock Institutional
Cash Series plc – Sterling Liquidity Fund).
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED
29 FEBRUARY 2020
1. PRINCIPAL ACTIVITY
The principal activity of the Company is that of an investment
trust company within the meaning of section 1158 of the Corporation
Tax Act 2010.
2. ACCOUNTING POLICIES
The principal accounting policies adopted by the Company are set
out below.
(a) Basis of preparation
The Company presents its results and positions under FRS 102, ’The
Financial Reporting Standard applicable in the UK and Republic of
Ireland’ (FRS 102), which forms part of the revised Generally
Accepted Accounting Practice (New UK GAAP) issued by the Financial
Reporting Council (FRC) in 2013.
The financial statements have been prepared on a going concern
basis in accordance with FRS 102 and the revised Statement of
Recommended Practice – ’Financial Statements of Investment Trust
Companies and Venture Capital Trusts’ (SORP) issued by the
Association of Investment Companies (AIC) in November 2014 and updated in October 2019 and the provisions of the Companies
Act 2006.
The revised SORP issued in October
2019 is applicable for accounting periods beginning on or
after 1 January 2019. As a result,
the gain arising from disposals of investments of £48,411,000
(2019: £73,210,000) and gain on revaluation of investments of
£32,012,000 (2019: loss of £118,066,000) have now been combined, as
shown in note 10 to the financial statements. The result of this
change has no impact on the net asset value or total return for
both the current year and prior year. No other accounting policies
or disclosures have changed as a result of the revised SORP.
The principal accounting policies adopted by the Company are set
out below. Unless specified otherwise, the policies have been
applied consistently throughout the year and are consistent with
those applied in the preceding year. All of the Company’s
operations are of a continuing nature. The Company’s financial
statements are presented in Sterling, which is the currency of the
primary economic environment in which the Company operates. All
values are rounded to the nearest thousand pounds (£’000) except
where otherwise stated.
(b) Presentation of Income Statement
In order to better reflect the activities of an investment trust
company and in accordance with guidance issued by the AIC,
supplementary information which analyses the Income Statement
between items of a revenue and a capital nature has been presented
on the face of the Income Statement.
(c) Segmental reporting
The Directors are of the opinion that the Company is engaged in a
single segment of business being investment business.
(d) Income
Dividends receivable on equity shares are treated as revenue for
the year on an ex-dividend basis. Where no ex-dividend date is
available, dividends receivable on or before the year end are
treated as revenue for the year. Provisions are made for dividends
not expected to be received. The return on a debt security is
recognised on a time apportionment basis.
Special dividends are recognised on an ex-dividend basis and are
treated as capital or revenue depending on the facts or
circumstances of each dividend.
Dividends are accounted for in accordance with Section 29 of FRS
102 on the basis of income actually receivable. Dividends from
overseas companies continue to be shown gross of withholding
tax.
Deposit interest receivable is accounted for on an accruals
basis.
Where the Company has elected to receive its dividends in the
form of additional shares rather than in cash, the cash equivalent
of the dividend foregone is recognised in the revenue column of the
Income Statement. Any excess in the value of the shares over the
amount of the cash dividend is recognised in capital reserves.
(e) Expenses
All expenses, including finance costs, are accounted for on an
accruals basis. Expenses have been charged wholly to the revenue
column of the Income Statement, except as follows:
- expenses which are incidental to the acquisition or disposal of
an investment are treated as capital. Details of transaction costs
on the purchases and sales of investments are shown in Note 10 of
the Annual Report and Financial Statements;
- expenses are treated as capital where a connection with the
maintenance of enhancement of the value of the investments can be
demonstrated;
- the investment management fee and finance costs have been
allocated 75% to the capital column and 25% to the revenue column
of the Income Statement in line with the Board’s expected long-term
split of returns, in the form of capital gains and income
respectively, from the investment portfolio.
(f) Taxation
The tax expense represents the sum of the tax currently payable and
deferred tax. The tax currently payable is based on the taxable
profit for the year. Taxable profit differs from net profit as
reported in the Income Statement because it excludes items of
income or expenses that are taxable or deductible in other years
and it further excludes items that are never taxable or deductible.
The Company’s liability for current tax is calculated using tax
rates that were applicable at the balance sheet date.
Deferred taxation is recognised in respect of all timing
differences at the financial reporting date, where transactions or
events that result in an obligation to pay more taxation in the
future or right to less taxation in the future have occurred at the
balance sheet date. Deferred tax is measured on a non-discounted
basis, at the average tax rates that are expected to apply in the
periods in which the timing differences are expected to reverse
based on tax rates and laws that have been enacted or substantively
enacted by the balance sheet date. This is subject to deferred
taxation 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 timing differences can be deducted.
(g) Investments held at fair value through profit or
loss
The Company’s investments are classified as held at fair value
through profit or loss in accordance with Section 11 and 12 of FRS
102 and are managed and evaluated on a fair value basis in
accordance with its investment strategy.
All investments are designated upon initial recognition as held
at fair value through profit or loss. Purchases of investments are
recognised on a trade date basis. Sales of assets are recognised at
the trade date of the disposal. Proceeds will be measured at fair
value, which will be regarded as the proceeds of the sale less any
transaction costs.
The fair value of the financial investments is based on their
quoted bid price at the balance sheet date on the exchange on which
the investment is quoted, without deduction for the estimated
future selling costs.
Unquoted investments are valued by the Directors at fair value
using International Private Equity and Venture Capital Valuation
Guidelines. This policy applies to all current and non current
asset investments of the Company.
Changes in the value of investments held at fair value through
profit or loss and gains and losses on disposal are recognised in
the Income Statement as ’Gains or losses on investments held at
fair value through profit or loss’. Also included within this
heading are transaction costs in relation to the purchase or sale
of investments.
The fair value hierarchy consists of the following three
levels:
Level 1 – Quoted market price for identical instruments in
active markets
Level 2 – Valuation techniques using observable inputs
Level 3 – Valuation techniques using significant unobservable
inputs
(h) Dividends payable
Under Section 32 of FRS 102 final dividends should not be accrued
in the financial statements unless they have been approved by
shareholders before the balance sheet date. Dividends payable to
equity shareholders are recognised in the Statement of Changes in
Equity when they have been approved by shareholders and have become
a liability of the Company. Interim dividends are recognised in the
financial statements in the period in which they are paid.
(i) Foreign currency translation
In accordance with Section 30 of FRS 102, the Company is required
to nominate a functional currency, being the currency in which the
Company predominately operates. The functional and reporting
currency is Sterling, reflecting the primary economic environment
in which the Company operates. Transactions in foreign currencies
are translated into Sterling at the rates of exchange ruling on the
date of the transaction. Foreign currency monetary assets and
liabilities are translated into Sterling at the rates of exchange
ruling at the Balance Sheet date. Profits and losses thereon are
recognised in the capital column of the Income Statement and taken
to the capital reserve.
(j) Share repurchases and re-issues
Shares repurchased and subsequently cancelled – share capital is
reduced by the nominal value of the shares repurchased, and the
capital redemption reserve is correspondingly increased in
accordance with section 733 of the Companies Act 2006. The full
cost of the repurchase is charged to an appropriate reserve.
Shares repurchased and held in treasury – the full cost of the
repurchase is charged to an appropriate reserve.
Where treasury shares are subsequently reissued:
- amounts received to the extent of the repurchase price are
credited to an appropriate reserve; and
- any surplus received in excess of the repurchase price is taken
to the share premium account.
(k) Debtors
Debtors include sales for future settlement, other debtors and
pre-payments and accrued income in the ordinary course of business.
If collection is expected in one year or less, they are classified
as current assets. If not, they are presented as non-current
assets.
(l) Creditors
Creditors include purchases for future settlement, interest
payable, share buyback costs and accruals in the ordinary course of
business. Creditors, loans and debentures are classified as
creditors – amounts due within one year if payment is due within
one year or less (or in the normal operating cycle of the business
if longer). If not, they are presented as creditors – amounts
falling due after more than one year.
(m) Cash and cash equivalents
Cash comprises cash in hand and on demand deposits and bank
overdrafts repayable on demand. Cash equivalents include
short-term, highly liquid investments, that are readily convertible
to known amounts of cash and that are subject to an insignificant
risk of changes in value.
(n) Critical accounting estimates and judgements
The Company makes estimates and assumptions concerning the future.
The resulting accounting estimates and assumptions will, by
definition, seldom equal the related actual results. Estimates and
judgements are regularly evaluated and are based on historical
experience and other factors, including expectations of future
events and that are believed to be reasonable under the
circumstances. The Directors do not believe that any accounting
judgements or estimates have a significant risk of causing material
adjustment to the carrying amount of assets and liabilities within
the next financial year.
3. INCOME
|
2020
£’000 |
2019
£’000 |
Investment income: |
|
|
UK listed dividends |
16,012 |
14,020 |
UK listed scrip dividends |
– |
54 |
UK listed special dividends |
1,210 |
1,372 |
Property income dividends |
809 |
777 |
Overseas listed dividends |
1,878 |
2,053 |
Overseas listed scrip dividends |
– |
– |
Overseas listed special
dividends |
385 |
158 |
|
------------ |
------------ |
|
20,294 |
18,434 |
|
======= |
======= |
Other income: |
|
|
Bank interest |
10 |
14 |
Interest from Cash Funds |
147 |
121 |
|
------------ |
------------ |
|
157 |
135 |
|
------------ |
------------ |
Total |
20,451 |
18,569 |
|
======= |
======= |
No special dividends have been recognised in capital during the
year (2019: £nil).
Dividends and interest received in cash in the period amounted
to £20,020,000 and £153,000 (2019: £17,762,000 and £128,000).
4. INVESTMENT MANAGEMENT AND
PERFORMANCE FEES
|
2020 |
2019 |
Revenue
£’000 |
Capital
£’000 |
Total
£’000 |
Revenue
£’000 |
Capital
£’000 |
Total
£’000 |
Investment management fee |
1,170 |
3,511 |
4,681 |
1,147 |
3,443 |
4,590 |
|
------------ |
------------ |
------------ |
------------ |
------------ |
------------ |
Total |
1,170 |
3,511 |
4,681 |
1,147 |
3,443 |
4,590 |
|
======= |
======= |
======= |
======= |
======= |
======= |
The investment management fee is based on a rate of 0.6% of the
first £750 million of total assets (excluding current year income)
less the current liabilities of the Company (the "Fee Asset
Amount"), reducing to 0.5% above this level. The fee is calculated
at the rate of one quarter of 0.6% of the Fee Asset Amount up to
the initial threshold of £750 million, and one quarter of 0.5% of
the Fee Asset Amount in excess thereof, at the end of each quarter.
The investment management fee is allocated 75% to the capital
column and 25% to the revenue column of the Income Statement.
5. OPERATING EXPENSES
|
2020
£’000 |
2019
£’000 |
Allocated to revenue: |
|
|
Custody fees |
7 |
6 |
Depositary fees |
84 |
98 |
Auditors’ remuneration: |
|
|
– audit services |
27 |
27 |
– non-audit
services1 |
3 |
6 |
Registrar’s fee |
43 |
41 |
Directors’
emoluments2 |
172 |
155 |
Director search fees |
24 |
6 |
Marketing fees |
153 |
113 |
AIC fees |
26 |
23 |
Bank Charges |
87 |
18 |
Broker fees |
46 |
36 |
Stock exchange listings |
22 |
21 |
Printing and Postage |
37 |
24 |
Other administrative costs |
108 |
76 |
|
------------ |
------------ |
|
839 |
650 |
|
======= |
======= |
Allocated to capital: |
|
|
Transaction charges |
28 |
29 |
|
------------ |
------------ |
|
867 |
679 |
|
======= |
======= |
|
2020 |
2019 |
The Company’s ongoing
charges3, calculated as a percentage of average net
assets and using recurring expenses excluding finance costs, direct
transaction costs, custody transaction charges and taxation
were: |
0.7% |
0.7% |
|
======= |
======= |
1
Fees for non audit services relate to the debenture compliance work
carried out by the Auditors (2019: Debenture compliance work and a
review by the Auditors in respect of the impact of the new
management fee arrangements (as set out in note 4)).
2
Further information on Directors’ emoluments can be found in the
Directors’ Remuneration Report in the Annual Report and Financial
Statements.
3
Alternative performance measure, see Glossary in the Annual Report
and Financial Statements.
6. DIVIDENDS
Dividends paid on equity shares:
|
Record
date |
Payment
date |
2020
£’000 |
2019
£’000 |
|
|
|
|
|
2018 Final of 16.00p |
18 May 2018 |
15 June
2018 |
– |
7,661 |
2019 Interim of 12.00p |
09 November
2018 |
26 November
2018 |
– |
5,746 |
2019 Final of 19.20p |
17 May 2019 |
12 June
2019 |
9,193 |
– |
2020 First interim of 12.80p |
15 November
2019 |
03 December
2019 |
6,128 |
– |
|
|
|
------------ |
------------ |
|
|
|
15,321 |
13,407 |
|
|
|
======= |
======= |
The Directors have proposed a second interim dividend of 19.70p
per share in respect of the year ended 29
February 2020. The second interim dividend will be paid on
29 June 2020 to shareholders on the
Company’s register on 12 June 2020.
The second interim dividend has not been included as a liability in
these financial statements, as such dividends are only recognised
in the financial statements when they have been paid.
The total dividends payable in respect of the year which form
the basis of determining retained income for the purposes of
section 1158 of the Corporation Tax Act 2010 and section 833 of the
Companies Act 2006, and the amount proposed for the year ended
29 February 2020 meet the relevant
requirements as set out in this legislation.
Dividends paid or proposed on equity
shares:
|
2020
£’000 |
2019
£’000 |
|
|
|
Interim dividend paid 12.80p (2019:
12.00p) |
6,128 |
5,746 |
Second interim dividend payable of
19.70p per share* (final dividend proposed 2019: 19.20p) |
9,619 |
9,193 |
|
------------ |
------------ |
|
15,747 |
14,939 |
|
======= |
======= |
* Based upon 48,829,792 ordinary shares
(excluding treasury shares) in issue on 12
June 2020.
All dividends paid or payable are distributed from the Company’s
distributable reserves.
7. RETURNS AND NET ASSET VALUE PER SHARE
Revenue and capital earnings/(loss) per share are shown below and
have been calculated using the following:
|
Year
ended
29 February 2020 |
Year
ended
28 February 2019 |
|
|
|
Revenue return attributable to
ordinary shareholders (£’000) |
17,837 |
16,123 |
Capital return/(loss) attributable
to ordinary shareholders (£’000) |
75,243 |
(50,069) |
|
----------------- |
----------------- |
Total profit/(loss) attributable
to ordinary shareholders (£’000) |
93,080 |
(33,946) |
|
========== |
========== |
Equity shareholders’ funds
(£’000) |
767,873 |
674,089 |
The weighted average number of
ordinary shares in issue during the year on which the return per
ordinary share was calculated was: |
48,040,516 |
47,879,792 |
The actual number of ordinary shares
in issue at the end of each year on which the undiluted net asset
value was calculated was: |
48,829,792 |
47,879,792 |
Earnings per share |
|
|
Revenue return per share
(pence) |
37.13 |
33.67 |
Capital return/(loss) per share
(pence) |
156.62 |
(104.57) |
|
----------------- |
----------------- |
Total return/(loss) per share
(pence) |
193.75 |
(70.90) |
|
========== |
========== |
|
As
at
29 February 2020 |
As
at
28 February 2019 |
|
|
|
Net asset value per ordinary share
(debt at par value) (pence) |
1,572.55 |
1,407.88 |
Net asset value per ordinary share
(debt at fair value) (pence) |
1,556.41 |
1,400.57 |
Net asset value per ordinary share
(with debt at par value, capital only) (pence) |
1,548.57 |
1,386.21 |
Ordinary share price (pence) |
1,484.00 |
1,330.00 |
|
========== |
========== |
8. DEBTORS
|
2020
£’000 |
2019
£’000 |
|
|
|
Sales for future settlement |
2,602 |
1,322 |
Prepayments and accrued income |
1,132 |
982 |
Taxation recoverable |
91 |
75 |
|
----------------- |
----------------- |
|
3,825 |
2,379 |
|
========== |
========== |
9. CREDITORS – AMOUNTS FALLING DUE
WITHIN ONE YEAR
|
2020
£’000 |
2019
£’000 |
|
|
|
Purchases for future settlement |
4,392 |
2,187 |
Interest payable |
396 |
269 |
Accrued expenditure |
2,880 |
2,505 |
|
----------------- |
----------------- |
|
7,668 |
4,961 |
|
========== |
========== |
10. CREDITORS – AMOUNTS FALLING DUE
AFTER MORE THAN ONE YEAR
|
2020
£’000 |
2019
£’000 |
|
|
|
7.75% debenture stock 2022 |
15,000 |
15,000 |
Unamortised debenture stock issue
expenses |
(34) |
(50) |
|
----------------- |
----------------- |
|
14,966 |
14,950 |
|
========== |
========== |
2.74% loan note 2037 |
25,000 |
25,000 |
Unamortised loan note issue
expenses |
(238) |
(252) |
|
----------------- |
----------------- |
|
24,762 |
24,748 |
|
========== |
========== |
2.41% loan note 2044 |
20,000 |
– |
Unamortised loan note issue
expenses |
(178) |
– |
|
----------------- |
----------------- |
|
19,822 |
– |
|
========== |
========== |
Revolving loan facility – Scotia
Bank |
– |
2,500 |
Revolving loan facility – Sumitomo
Mitsui Banking Corporation |
20,000 |
– |
|
----------------- |
----------------- |
Total |
79,550 |
42,198 |
|
========== |
========== |
The fair value of the 7.75% debenture stock using the last
available quoted offer price from the London Stock Exchange as at
29 February 2020 was 121p per
debenture (2019: 125p), a total of £18,150,000 (2019: £18,750,000).
The fair value of the 2.74% loan note has been determined based on
a comparative yield for UK Gilts for similar duration maturity and
spreads, and as at 29 February 2020
equated to a valuation of 112.21p per note (2019: 97.78p), a total
of £28,053,000 (2019: £24,445,000). The fair value of the 2.41%
loan note has been determined based on a comparative yield for UK
Gilts for similar duration maturity and spreads, and as at
29 February 2020 equated to a
valuation of 106.14p per note (2019: nil), a total of £21,228,000
(2019: £nil).
The £15 million debenture stock was issued on 8 July 1997. Interest on the stock is payable in
equal half yearly instalments on 31 July and 31 January in each
year. The stock is secured by a first floating charge over the
whole of the assets of the Company and is redeemable at par on
31 July 2022.
The £25 million loan note was issued on 24 May 2017. Interest on the note is payable in
equal half yearly instalments on 24 May and 24 November in each
year. The loan note is unsecured and is redeemable at par on
24 May 2037.
The £20 million loan note was issued on 3
December 2019. Interest on the note is payable in equal half
yearly instalments on 3 December and 3 June in each year. The loan
note is unsecured and is redeemable at par on 3 December 2044.
The Company has in place a £35 million three year multi-currency
revolving loan facility with Sumitomo Mitsui Banking Corporation
Europe Limited. As at 29 February
2020, £20 million of the facility had been utilised. Under
the agreement the termination date of this facility is the third
anniversary of the effective date being November 2022. Interest on this facility is reset
every three months and is currently charged at the rate of
1.43%.
As at 28 February 2019, the
Company had in place a £35 million three year multi-currency
revolving loan facility with Scotiabank (Ireland) Limited, of which £2.5 million had
been utilised. Interest on this facility was reset every three
months and the interest rate charged as at 28 February 2019 was 1.68%.
The Company also has available an uncommitted overdraft facility
of £10 million with BNYM, of which £nil had been utilised at
29 February 2020 (2019: £nil).
11. CALLED UP SHARE CAPITAL
|
Ordinary
shares
in issue
number |
Treasury
shares
number |
Total
shares
number |
Nominal
Value
£’000 |
Allotted, called up and fully
paid share capital comprised: |
|
|
|
|
Ordinary shares of 25p
each |
|
|
|
|
At 28 February 2019 |
47,879,792 |
2,113,731 |
49,993,523 |
12,498 |
Ordinary shares issued from
Treasury |
950,000 |
(950,000) |
– |
– |
|
----------------- |
----------------- |
----------------- |
----------------- |
At 29 February 2020 |
48,829,792 |
1,163,731 |
49,993,523 |
12,498 |
|
========== |
========== |
========== |
========== |
During the year ended 29 February
2020, the Company issued 950,000 (2019: nil) shares from
treasury for a total consideration of £16,025,000 (2019: £nil)
including costs.
No shares have been issued since 29
February 2020 up to the date of this report.
The ordinary shares (excluding any shares held in treasury)
carry the right to receive any dividends and have one voting right
per ordinary share. There are no restrictions on the voting rights
of the ordinary shares or on the transfer of ordinary shares.
12. RESERVES
|
Share
premium
account
£’000 |
Capital
redemption
reserve
£’000 |
Capital
reserve
(arising on
investments
sold)
£’000 |
Capital
reserve
(arising on
revaluation
of
investments
held)
£’000 |
Revenue
reserve*
£’000 |
|
|
|
|
|
|
At 28 February 2019 (restated) |
38,952 |
1,982 |
452,869 |
145,403 |
22,385 |
Movement during the year: |
|
|
|
|
|
Share issues |
13,028 |
– |
3,029 |
– |
– |
Share issue costs |
– |
– |
(32) |
– |
– |
Gains on realisation of
investments |
– |
– |
48,411 |
– |
– |
Change in investment holding
gains |
– |
– |
– |
32,012 |
– |
Gains on foreign currency
transactions |
– |
– |
(4) |
3 |
– |
Finance costs and expenses charged
to capital |
– |
– |
(5,179) |
– |
– |
Net profit for the year |
– |
– |
– |
– |
17,837 |
Dividends paid during the year |
– |
– |
– |
– |
(15,321) |
|
----------------- |
----------------- |
----------------- |
----------------- |
----------------- |
At 29 February 2020 |
51,980 |
1,982 |
499,094 |
177,418 |
24,901 |
|
========== |
========== |
========== |
========== |
========== |
* Represents the Company’s distributable
reserves.
The share premium account and capital redemption reserve are not
distributable profits under the Companies Act 2006. In addition, in
accordance with the Company’s Articles, capital reserves may not be
distributed by way of payment of dividends and may not be regarded
or treated as profits of the Company available for distribution.
The revenue reserve is distributable and may be used to pay
dividends and for the repurchase of shares.
The prior year balances of the Company’s capital reserves and
revenue reserve have been restated to reflect an increase of
£1,549,811 to the capital reserves and a decrease of the same
amount to the revenue reserve. The background to this prior year
adjustment is set out below. With effect from 4 June 2008 when the Company’s Articles were
updated to reflect changes to the rules on distributions applicable
to investment companies under the Companies Act 2006, a provision
of the Articles which permitted the Company to make distributions
from realised capital profits by way of share buy backs was
inadvertently deleted. Between 4 June
2008 and 5 February 2010, the
Company bought back 629,916 shares at a total cost of £1,549,811 as
part of the Board’s discount management programme. At the time each
of the relevant buy backs was implemented, the Company had
sufficient distributable revenue reserves to cover the cost of the
transaction. However, the cost of the share buy backs was
misallocated in the Company’s 2009 and 2010 accounts as a debit
from the Company’s capital reserve. To correct this prior period
error, the prior year adjustment has been made to reallocate the
cost of these distributions by way of buy backs from the capital
reserve to the revenue reserve. The impact of this adjustment on
the relevant reserves is set out in the table below. There is no
impact on the Company’s financial position or net asset value as a
result of the reallocation.
|
Capital reserve
(arising on
investments sold)
£’000 |
Capital reserve
(arising on
revaluation of
investments held)
£’000 |
Capital reserve
(Total)
£’000 |
Revenue reserve
£’000 |
|
|
|
|
|
28 February 2018 (as previously
presented) |
383,322 |
263,469 |
646,791 |
21,219 |
Restatement |
1,550 |
- |
1,550 |
(1,550) |
28 February 2018 (as restated) |
384,872 |
263,469 |
648,341 |
19,669 |
|
|
|
|
|
28 February 2019 (as previously
presented) |
451,319 |
145,403 |
596,722 |
23,935 |
Restatement |
1,550 |
- |
1,550 |
(1,550) |
28 February 2019 (as
restated) |
452,869 |
145,403 |
598,272 |
22,385 |
13. VALUATION OF FINANCIAL
INSTRUMENTS
Financial assets and financial liabilities are either carried in
the Balance Sheet at their fair value (investments) or at an amount
which is a reasonable approximation of fair value (due from
brokers, dividends and interest receivable, due to brokers,
accruals, cash at bank and bank overdrafts). Section 11 of FRS 102
requires the Company to classify fair value measurements using a
fair value hierarchy that reflects the significance of inputs used
in making the measurements. The valuation techniques used by the
Company are explained in the accounting policies note 2 of the
Financial Statements.
Categorisation within the hierarchy has been determined on the
basis of the lowest level input that is significant to the fair
value measurement of the relevant asset.
The fair value hierarchy has the following levels:
Level 1 – Quoted market price for identical instruments in
active markets
A financial instrument is regarded as quoted in an active market if
quoted prices are readily and regularly available from an exchange,
dealer, broker, industry group, pricing service or regulatory
agency and those prices represent actual and regularly occurring
market transactions on an arm’s length basis. The Company does not
adjust the quoted price for these instruments.
Level 2 – Valuation techniques using observable
inputs
This category includes instruments valued using quoted prices for
similar instruments in markets that are considered less active; or
other valuation techniques where significant inputs are directly or
indirectly observable from market data.
Level 3 – Valuation techniques using significant unobservable
inputs
This category includes all instruments where the valuation
technique includes inputs not based on market data and these inputs
could have a significant impact on the instrument’s valuation.
This category also includes instruments that are valued based on
quoted prices for similar instruments where significant entity
determined adjustments or assumptions are required to reflect
differences between the instruments and instruments for which there
is no active market. The Investment Manager considers observable
data to be that market data that is readily available, regularly
distributed or updated, reliable and verifiable, not proprietary,
and provided by independent sources that are actively involved in
the relevant market.
The level in the fair value hierarchy within which the fair
value measurement is categorised in its entirety is determined on
the basis of the lowest level input that is significant to the fair
value measurement. For this purpose, the significance of an input
is assessed against the fair value measurement in its entirety. If
a fair value measurement uses observable inputs that require
significant adjustment based on unobservable inputs, that
measurement is a Level 3 measurement.
Assessing the significance of a particular input to the fair
value measurement in its entirety requires judgment, considering
factors specific to the asset or liability.
The table below sets out fair value measurements using FRS 102
fair value hierarchy.
Financial assets at fair value
through profit or loss
at 29 February 2020 |
Level 1
£’000 |
Level 2
£’000 |
Level 3
£’000 |
Total
£’000 |
Equity investments |
812,016 |
– |
– |
812,016 |
|
-------------- |
-------------- |
-------------- |
-------------- |
Total |
812,016 |
– |
– |
812,016 |
|
======== |
======== |
======== |
======== |
Financial assets at fair value
through profit or loss
at 28 February 2019 |
Level 1
£’000 |
Level 2
£’000 |
Level 3
£’000 |
Total
£’000 |
Equity investments |
707,150 |
– |
– |
707,150 |
|
-------------- |
-------------- |
-------------- |
-------------- |
Total |
707,150 |
– |
– |
707,150 |
|
======== |
======== |
======== |
======== |
There were no transfers between levels for financial assets
during the year recorded at fair value as at 29 February 2020 and 28
February 2019. The Company did not hold any Level 3
securities throughout the financial year or as at 29 February 2020 (2019: nil).
(e) Capital management policies and procedures
The Company’s capital management objectives are:
- to ensure it will be able to continue as a going concern;
and
- secure long-term capital growth primarily through investing in
smaller UK quoted companies.
This is to be achieved through an appropriate balance of equity
capital and gearing. It is the Board’s intention that gearing
should not exceed 15% of net assets. The Company’s objectives,
policies and processes for managing capital remain unchanged from
the preceding accounting period.
The Company’s total capital at 29
February 2020 was £847,423,000 (2019: £716,287,000)
comprising £20,000,000 (2019: £2,500,000) of revolving credit
facility, £14,966,000 (2019: £14,950,000) of debenture stock at par
value, £24,762,000 (2019: £24,748,000) of 2.74% unsecured loan
note, £19,822,000 (2019: £nil) of 2.41% unsecured loan note and
£767,873,000 (2019: £674,089,000) of equity share capital and other
reserves.
The Board with the assistance of the Investment Manager monitor
and review the broad structure of the Company’s capital on an
ongoing basis. This review includes:
- the planned level of gearing, which takes into account the
Investment Manager’s view on the market; and
- the need to buyback equity shares, either for cancellation or
to be held in treasury, which takes account of the difference
between the NAV per share and the share price (i.e. the level of
share price discount or premium).
The Company’s objectives, policies and processes for managing
capital remain unchanged from the preceding accounting period.
The Company is subject to externally imposed capital
requirements:
- as a public company, the Company has a minimum share capital of
£50,000; and
- in order to be able to pay dividends out of profits available
for distribution, the Company has to be able to meet one of the two
capital restrictions tests imposed on investment companies by
law.
During the year the Company complied with the externally imposed
capital requirements to which it was subject including those
imposed in respect of loan covenants.
14. TRANSACTIONS WITH THE MANAGER AND THE INVESTMENT
MANAGER
The Manager was appointed as the Company’s Alternative Investment
Fund Manager (AIFM) with effect from 2 July
2014. The Manager has (with the Company’s consent) delegated
certain portfolio and risk management services, and other ancillary
services, to the Investment Manager. Details of the fees payable to
the Manager are set out in note 4.
The Manager provides management and administration services to
the Company under a contract which is terminable on six months’
notice. The Manager has (with the Company’s consent) delegated
certain portfolio and risk management services, and other ancillary
services, to BIM (UK). Further
details of the investment management contract are disclosed in the
Directors’ Report.
The investment management fee payable for the year ended
29 February 2020 amounted to
£4,681,000 (2019: £4,590,000) as disclosed in note 4 to the
Financial Statements. At the year end, £2,383,000 was outstanding
in respect of the management fee (2019: £2,099,000).
In addition to the above services, BlackRock provided the
Company with marketing services. The total fees paid or payable for
these services for the year ended 29
February 2020 amounted to £153,000 including VAT (2019:
£113,000). Marketing fees of £151,000 (2019: £152,000) were
outstanding at the year end.
As of 29 February 2020, an amount
of £190,000 (2019: £137,000) was payable to the Manager in respect
of Directors’ fees.
The ultimate holding company of the Manager and the Investment
Manager is BlackRock, Inc. a company incorporated in Delaware USA. During the period, PNC Financial
Services Group, Inc. (“PNC”) was a substantial shareholder in
BlackRock, Inc. PNC did not provide any services to the Company
during the financial years ended 29 February
2020 and 28 February 2019.
15. RELATED PARTY DISCLOSURE: DIRECTORS’ EMOLUMENTS
Disclosures of the Directors’ interests in the ordinary shares of
the Company and fees and expenses payable to the Directors are set
out in the Directors’ Remuneration Report contained with the Annual
Report and Financial Statements. At 29
February 2020, an amount of £13,000 (2019: £13,000) was
outstanding in respect of Directors’ fees.
16. CONTINGENT LIABILITIES
There were no contingent liabilities at 29
February 2020 (2019: nil).
17. POST BALANCE SHEET EVENTS
Subsequent to the year end, the net asset value per share of the
Company (with debt at par) has decreased by 10.7% from 1,572.55p to
1,404.34p and the Company’s share price has decreased by 10.1% from
1,484.00p to 1,334.00p as at 22 June
2020. The Company’s benchmark has decreased by 7.7% from
5,159.73 to 4,760.41 (all calculations without income
reinvested).
As noted in the Chairman’s Statement and the Investment
Manager’s Report, since 29 February
2020, equity markets have fallen significantly due primarily
to concerns around the scale of the impact of COVID-19 on the
global economy. The Board and the Manager continue to monitor
investment performance in line with the Company’s investment
objectives.
On 11 May 2020, PNC announced its
intent to sell its investment in BlackRock, Inc. through a
registered offering and related buyback by BlackRock, Inc.
There were no other significant events affecting the Company
since the financial year end.
18. PUBLICATION OF NON-STATUTORY
ACCOUNTS
The financial information contained in this announcement does
not constitute statutory accounts as defined in section 435 of the
Companies Act 2006.
The figures set out above have been reported upon by the
auditors. The comparative figures are extracts from the audited
financial statements of BlackRock Smaller Companies Trust plc for
the year ended 28 February 2019,
which have been filed with the Registrar of Companies. The reports
of the auditors for the years ended 28
February 2019 and 29 February
2020 contain no qualification or statement under section
498(2) or (3) of the Companies Act 2006. The 2020 Annual Report and
Financial Statements will be filed with the Registrar of Companies
after the Annual General Meeting.
19. ANNUAL REPORT AND FINANCIAL
STATEMENTS
Copies of the Annual Report and Financial Statements will be
sent to members shortly and will be available from The Company
Secretary, BlackRock Smaller Companies Trust plc, 12 Throgmorton
Avenue, London EC2N 2DL.
20. ANNUAL GENERAL MEETING
The Annual General Meeting of the Company will be held at 12
Throgmorton Avenue, London EC2N
2DL on 28 July 2020 at 2:30 p.m.
ENDS
The Annual Report and Financial Statements will also be
available on the BlackRock Investment Management website at
http://www.blackrock.com/uk/brsc. Neither the contents of the
Manager's website nor the contents of any website accessible from
hyperlinks on the Manager's website (or any other website) is
incorporated into, or forms part of, this announcement.
For further information, please
contact:
Melissa Gallagher, Managing
Director, Closed End Funds, BlackRock Investment Management (UK)
Limited
Tel: 020 7743 3893
Roland Arnold, BlackRock
Investment Management (UK) Limited
Tel: 020 7743 5113
Press Enquiries:
Ed Hooper, Lansons Communications –
Tel: 020 7294 3620
E-mail: BlackRockInvestmentTrusts@lansons.com or
EdH@lansons.com
24 June 2020