ABERFORTH SMALLER COMPANIES TRUST PLC
Aberforth Smaller Companies Trust plc
Audited Annual Results for the year to 31 December 2016
The following is an extract from the Company's Annual Report and Financial
Statements for the year to 31 December 2016. The Annual Report is expected to
be posted to shareholders on or before 1 February 2017. Members of the public
may obtain copies from Aberforth Partners LLP, 14 Melville Street, Edinburgh
EH3 7NS or from its website: www.aberforth.co.uk. A copy will also shortly be
available for inspection at the National Storage Mechanism at:
www.morningstar.co.uk/uk/NSM.
FINANCIAL HIGHLIGHTS
Net Asset Value Total +5.8%
Return
Numis Smaller Companies Index (Excl. Investment Companies) Total +11.1%
Return
Ordinary Share Price Total -4.2%
Return
Total Dividends increased to 30.10p per Ordinary Share
(including a Special Dividend of 2.75p per Ordinary Share)
The investment objective of Aberforth Smaller Companies Trust plc (ASCoT) is to
achieve a net asset value total return (with dividends reinvested) greater than
that of the Numis Smaller Companies Index (excluding Investment Companies)
(NSCI(XIC) or benchmark) over the long term. ASCoT is managed by Aberforth
Partners LLP.
CHAIRMAN'S STATEMENT TO SHAREHOLDERS
Review of 2016 performance
Last year proved difficult for small UK quoted companies when compared with the
returns of larger companies. The FTSE 100 Index gave a total return of 19.1%,
while the return of the FTSE All-Share Index, which is heavily weighted towards
large companies, was 16.8%. By comparison, the Numis Smaller Companies Index
excluding Investment Companies (NSCI (XIC)), the Company's benchmark, generated
a return of 11.1%. The Company's net asset value total return was 5.8%, while
the widening of the discount from 4.9% to 14.2% led to a share price total
return of -4.2%. The UK smaller company investment trust sector was negatively
affected by the EU referendum as discounts widened to reflect the economic
uncertainty stemming from the result.
The Managers' Report expands in more detail on 2016's performance and puts it
into the longer term context of the three year continuation vote period.
Dividends
The positive dividend environment within the small UK quoted companies sector
continues. In this context, the Board is pleased to propose a final ordinary
dividend of 18.75p. This results in total ordinary dividends for the year of
27.35p, which represents an increase of 5.2% on 2015.
In 2016, the income account benefited from the receipt of five special
dividends paid by investee companies. As was the case last year, the Board is
proposing the payment of a special dividend of 2.75p per share (2015: 2.75p) in
addition to the final ordinary dividend, thus ensuring the all-important
retention test is passed to allow the Company to continue to operate as an
investment trust in the eyes of HMRC.
The Board remains committed to a progressive dividend policy. The Company's
revenue reserves, after adjusting for payment of both the final ordinary and
special dividends, amount to 52.3p per share (up from 45.1p as at 31 December
2015) and provide a degree of flexibility for the future. As in my statement
last year, I would note that the base level for the Company's progressive
dividend policy in 2016 is 27.35p, i.e. excluding the special dividend.
Both dividends are subject to Shareholder approval at the 2017 Annual General
Meeting and will be paid on 3 March 2017 to Shareholders on the register at the
close of business on 10 February 2017. Their ex dividend date is 9 February
2017.
Continuation vote
It is the Company's policy to hold a continuation vote every three years. The
Annual General Meeting on 1 March 2017 will see the eighth such vote in its
history and the first since I assumed the chair. The Board views the vote as a
key shareholder right and we would encourage all Shareholders to exercise this
right. The 2017 vote occurs against a backdrop where the returns from the
Company have been below those of the NSCI (XIC) since the last vote. It is the
role of the Board, in representing shareholders, to understand fully the
factors that have affected performance over any given period. The current Board
benefits to the extent that third party information has become more readily
available, particularly when it comes to analysing the size and style
influences that are at work in the UK smaller quoted sector. For the three year
period to 31 December 2016, and indeed for much of the last decade, the value
investing style has experienced consistent, and at times, severe headwinds,
which have hampered the relative performance of the Company. The Board, in
recommending a vote in favour for the continuation of the Company, is
acknowledging the impact of the value investing style on the three year numbers
but also its positive role in the creation of the excellent long term record.
Given the longer term evidence, the Board continues to be encouraged by the
Managers' adherence to their value discipline, particularly over the past
decade, which has been so hostile to this investment style. The Board, in
monitoring performance, continues to believe that long term results give a much
stronger indication of skill than short term figures.
Alongside the investment style analysis, which supports the Board's
recommendation to vote in favour, is the Board's confidence in the Managers.
This reflects their single asset focus, their commitment to restrict the
business in terms of assets managed, the experience of the team and their
significant stake in the Company. These factors, while by no means guaranteeing
future outperformance, do, in the view of the Board, "tilt the scales" in the
Company's favour while avoiding at least some of the pitfalls that have
hampered the broader fund industry.
Gearing
It has been the Company's policy to use gearing in a tactical manner throughout
its 26 year history. The existing £125m facility with The Royal Bank of
Scotland has a term expiring in June 2017. As has been the case in the past,
the facility term dovetails with the three yearly continuation vote cycle.
After the Annual General Meeting, and providing the continuation vote is duly
passed, the Board and the Managers will seek to put in place a new facility
which would continue to provide the Company with access to liquidity for
investment purposes and to fund share buy-ins as and when appropriate. In an
illiquid, and at times volatile, asset class such as small UK quoted companies,
having access to immediate funds through a credit facility provides the
Managers with enhanced flexibility. At the year end, gearing stood at 2.7% of
Shareholders' funds. During the year, the level of gearing ranged from 0.3% to
4.2% with an average of 2.7%.
Share buy-in
At the Annual General Meeting in March 2016, the authority to buy in up to
14.99% of the Company's Ordinary Shares was approved. During the year, 620,500
Ordinary Shares (0.7% of the issued share capital) were bought in at a total
cost of £6.28m million. Consistent with the Board's stated policy; those
Ordinary Shares have been cancelled rather than held in Treasury. Once again,
the Board will be seeking to renew the buy-in authority at the Annual General
Meeting on 1 March 2017.
Outlook
2016 was a remarkable year as the UK voted to leave the EU and the United
States embraced "populism" by electing Donald Trump. Undoubtedly, Brexit has
introduced an additional level of uncertainty for British business, which I
suspect will continue to be a feature for some time. Ironically, amidst all
this apprehension, financial markets have started to move in a manner that
should be more helpful for the Company. As the year drew to a close, value
investing, as a style, performed strongly around the globe, though less
pronounced in the UK small quoted arena where Brexit uncertainty looms large.
Nevertheless, the Company's stronger second half, with a net asset value total
return of 19.2% compared to the 17.7% return generated by the NSCI (XIC),
benefited from a slight style tailwind.
The interdependency of politics and economics currently appears elevated. 2017
will serve up further challenges and opportunities. By this time next year we
may indeed have a little more clarity on Brexit, perhaps greater clarity on
what President Trump's America looks like and a series of elections will
provide feedback on where European populism lies. In financial markets, the
struggle between inflation and deflation and to what extent fiscal stimulus
returns to the economic stage are likely to be important factors. The so called
"reflation trade" could easily herald better times for the value investor, but
stagflation against a backdrop of growing protectionism would undoubtedly be
more challenging for equities in general.
However, with small UK quoted companies on their lowest rating since 2000 when
compared with large companies and after a decade long bear market for the value
style, it seems plausible that some of the headwinds of recent years could
shift to become tailwinds for the Company over the coming years.
Finally, the Board welcomes the views of Shareholders and we are always
available to talk to Shareholders directly. I have very much enjoyed and
gained huge benefit from the conversations I have had with those Shareholders
who have been in touch. My email address is noted below.
Paul Trickett
Chairman
27 January 2017
paul.trickett@aberforth.co.uk
MANAGERS' REPORT
Introduction
ASCoT's total return in the twelve months to 31 December 2016 was 5.8%. This
was below the benchmark's return, with the NSCI (XIC) up by 11.1%. Both ASCoT
and small companies in general were some way behind large companies: the FTSE
All-Share's total return was 16.8%.
The year under review also marks the end of a continuation vote cycle. Over
the three years, ASCoT's total return was 15.8%, which may be compared with
20.6% for the NSCI (XIC) and with 19.3% for the FTSE All-Share. This
represents a disappointing relative performance. The following paragraphs
describe the general influences on ASCoT's returns over the three years,
summarise specific issues on an annual basis and look in greater depth at
performance in 2016.
Performance review
Over the three year period, politics started to exercise greater influence on
financial markets than has been the case for some time. From the Scottish
independence referendum in 2014, through Brexit and the election of Donald
Trump, political risk rose and remains elevated. The themes of populism,
inequality and a challenge to the "liberal elite" are cited to link unexpected
electoral developments around the world. Hand in hand with this come the
threat of protectionism and challenges to the central bank orthodoxy of
quantitative easing and ultra low interest rates. Over the course of the
continuation vote cycle, the underlying problems facing the UK and global
economies were unchanged - namely sluggish real growth, high indebtedness and
deflation - but the means of addressing them might be on the point of
transformation.
Inspired by Brexit and encouraged by both US presidential candidates promising
greater fiscal stimulus, the financial markets were starting to toy with the
possibility of a more inflationary turn of events in the middle of the year.
It was, however, Trump's victory that prompted a decisive re-evaluation of the
outlook. Resources companies, whose share prices had begun a rebound in
February following five years of extreme weakness, were given renewed impetus
on the expectation of infrastructure investment. Meanwhile, the inflationary
implications of populist policies drove bond yields sharply higher to challenge
the consensus deflationary positioning that has held sway for much of the time
since the financial crisis.
Against the background sketched in the preceding paragraphs, ASCoT's investment
returns varied widely year to year. The following summaries of individual
years describe the principal influences on performance, starting with 2013,
which, though not in the most recent continuation vote period, provides useful
context.
2013 ASCoT +52.4% NSCI (XIC) +36.9%
FTSE All-Share +20.8%
This was the year in which the financial markets last attempted to embrace the
"great rotation": still buoyed by Mario Draghi's bravado in 2012, investors
contemplated an acceleration in economic growth that would favour equities over
bonds. Government bond yields thus rose sharply, which favoured the value
investment style. ASCoT benefited accordingly.
2014 ASCoT -0.7% NSCI (XIC) -1.9%
FTSE All-Share +1.2%
The optimism about economic progress of 2013 petered out, which was reflected
in a relapse in government bond yields. This represented a complication for
the performance of the value investment style. A good level of M&A activity
protected ASCoT from the worst of a poor year for the asset class.
2015 ASCoT +10.2% NSCI (XIC) +10.6%
FTSE All-Share +1.0%
This turned out to be a difficult twelve months for the value investor; indeed,
within the context of the NSCI (XIC) it was the fourth worst year for the broad
value style in sixty years. ASCoT managed to keep pace with the benchmark
thanks to a further improvement in the incidence of M&A activity and to a
relatively low exposure to resources companies, which continued to struggle in
the face of high debt levels and falling commodity prices.
2016 ASCoT +5.8% NSCI (XIC) +11.1%
FTSE All-Share +16.8%
As can be seen from the annual performance numbers above, ASCoT's relative
performance over the three year continuation vote period is down to what
happened in 2016. An important influence on relative returns was the bounce in
the resources sectors, which started in the middle of February and without
which the NSCI (XIC) would have been up by 5% in 2016. This resources rebound
played to the relative strengths of the FTSE All-Share against the NSCI (XIC),
with large companies possessing a much greater exposure than small to resources
companies. Similarly, ASCoT's low exposure compared with the NSCI (XIC)
hampered returns through 2016. That low exposure came through the miners
rather than the oil companies. Indeed, the portfolio's weighting in the latter
was higher than that of the index and thus ASCoT benefited as the oil price's
recovery gathered pace. In total, the miners accounted for 316 of the 528
basis points under-performance in 2016 shown in the following table.
For the 12 months ended 31 December 2016 Basis
points
Stock selection (505)
Sector selection 6
-----
Attributable to the portfolio of investments, based on mid (499)
prices
(after transaction costs of 16 basis points)
Movement in mid to bid price spread 21
Cash/gearing 17
Purchase of Ordinary Shares 9
Management fee (70)
Other expenses (6)
-----
Total attribution based on bid prices (528)
-----
Note: 100 basis points = 1%. Total Attribution is the difference between the
total return of the NAV and the
Benchmark Index (i.e. NAV = 5.80%; Benchmark Index = 11.08%; difference is
-5.28% being -528 basis points).
For the avoidance of doubt, the Managers do not ignore the mining sectors: they
are analysed in the same detail and depth as other parts of the stockmarket.
However, the subset of miners available within the NSCI (XIC) has certain
characteristics that complicate investment from the Managers' perspective.
First, the subset is highly indebted: a majority of the mining companies
included in the NSCI (XIC) on its 1 January 2016 rebalancing had stretched
balance sheets that threatened their survival and certainly prevented dividend
payments. A second important factor is that many of the small miners remain
controlled by oligarchs or family interests. This introduces an additional
level of risk for minority shareholders and makes it difficult for the Managers
to engage with the chairman in a useful fashion. In the rare cases where the
Managers see these characteristics discounted by stockmarket valuations, they
are willing to invest. Indeed, two of ASCoT's biggest winners last year were
miners.
Beyond resources, large companies also benefited relative to small from the
effects of June's EU referendum. The "out" vote was seen to be to the
disadvantage of businesses addressing the domestic economy. The NSCI (XIC) has
a greater exposure to such companies: roughly 59% of the accumulated historical
sales of the index's constituents were generated in the UK, which compares with
approximately 25% for large companies. The portfolio's exposure is around
53%. From this perspective, ASCoT was less affected than the benchmark by
Brexit. However, the share prices of many domestic companies - notably
retailers, property companies and housebuilders - were down over the year as a
whole and therefore the referendum did affect ASCoT's absolute returns.
A more significant influence on ASCoT's relative performance was the Managers'
value investment style. Thanks to the powerful rebound of the resources
sectors, the value style, as defined by the London Business School and Style
Research, pulled ahead of the growth style in 2016. However, this was due to
the out-performance of the resources companies. This underlying style
performance was consistent with the downward pressure on bond yields over the
twelve months. Since the financial crisis, the correlation between falling
bond yields and weaker returns for the value investor has been high. One of
the reasons for this is that lower yields tend to be associated with a poorer
outlook for economic growth. This is to the disadvantage of value since in
today's market the typical value stock is cyclical, whereas bond-like equities,
producing low but steady growth, have been re-rated to very high valuations
that are more in keeping with those of traditional growth stocks. This state
of affairs is unusual and, as described in the Conclusion of this report, gives
the Managers cause for optimism: a move towards the inevitable normalisation of
monetary conditions, such as was experienced in 2013 and has been seen since
the US elections, would be to the benefit of the value investment style and by
extension to ASCoT's returns.
The portfolio
Though meaningful, top-down influences on performance are somewhat removed from
the Managers' day-to-day focus on stock selection. This is not to gloss over
the impact of weak share performances that resulted from company specific
issues: as is the case in any twelve month period, the portfolio contained
several companies that did not perform as expected, both negatively and
positively. However, the Managers' preference not to focus in any one year on
the attribution to ASCoT's performance of individual companies reflects an
important aspect of their investment approach.
The Managers attempt to divorce the name of a stock, with all its baggage and
history, from the valuation accorded to it at any point in time by a capricious
stockmarket. The failure of an underlying business to meet expectations is
reflected in some measure by its share price almost instantaneously: what the
Managers have to do is work out whether the disappointment is indicative of
on-going pressures on the business that will result in a permanent loss of
value or whether the stockmarket has over-reacted and is thus presenting an
incremental investment opportunity. In the Managers' experience the latter is
often the case, particularly in the financial conditions of recent years when
the "certainty" of returns from those bond-like equities have been so highly
prized. Additionally, some of the best contributors to ASCoT's performance
over its history have been stocks where the Managers' initial purchases proved
poor but where the discipline has been exercised to reassess after a
disappointment and then judiciously to invest incremental capital often over a
period of years.
For ASCoT to generate superior returns for its shareholders, getting more
investment decisions right than wrong on average year after year probably does
the job. Following the reasoning of the previous paragraph, this aspiration,
which may come across as deceptively unambitious, is not about identifying more
high quality businesses than low quality businesses and owning them forever -
that is an approach followed by the growth investor. Rather, the aspiration is
about retesting the value of companies both within and outwith the portfolio in
relation to the share prices accorded to them by a volatile stockmarket, and,
from this, it is about encouraging the circulation of ASCoT's capital over time
from those stocks with low upsides to those with high upsides.
In 2016, the opportunities to put this process into practice were fewer than
usual. This is reflected in an unusually low level of portfolio turnover.
With situations, such as M&A, in which ASCoT is effectively a forced seller
excluded, the underlying rate of turnover was just 12%, half the long term
average. This reflected the mood of the stockmarket: general interest in the
sort of stocks owned by ASCoT was low, which meant that they were not revalued
and that there was little reason to exit existing positions. A similar
phenomenon was witnessed in 2012: in the annual report for that year the
Managers expressed a desire for "turnover to return to more normal levels".
Given the unexpectedly sharp rebound in the following year, a re-run of 2013
would be welcome.
The Managers' investment decisions resulted in a portfolio at 31 December 2016
with an active share of 76% assessed against the NSCI (XIC). Active share is a
gauge of how different a portfolio is from an index. The higher the ratio, the
higher the likelihood that the performance of the portfolio will differ, for
better or worse, from that of the index. The Managers target a ratio of at
least 70%, though would tolerate a temporarily depressed number. This target
is assessed without the benefit of holdings that are not constituents of the
index, since such holdings would flatter the ratio. The Managers believe that,
with an active share of 76%, the portfolio is well placed to exploit a turn in
the stockmarket back in favour of the value investment style.
In contrast to its lacklustre capital performance, the portfolio generated a
good rate of income growth in 2016: 3.8% in headline terms. This number was
affected by the receipt of several special dividends in 2016 and by an even
larger contribution from special dividends in 2015. In underlying terms, with
those lumpy special dividends excluded, the rate of increase rises to 12.5%.
Adjusted for inflation this is far ahead of the 2.5% long term real dividend
growth from small companies. These numbers highlight what was another good
year for dividends from small companies in general. Encouraging boards to
increase dividends are strong balance sheets: for illustration, companies with
net cash on their balance sheets represent 29% of ASCoT's portfolio. Another
factor is relatively high dividend cover, which for the portfolio is 3x, well
above the long term average of 2.6x. Additionally, trading conditions through
2016, while not buoyant, were sufficiently benign to allow small companies to
move their profits ahead, notwithstanding the uncertainties engendered by the
EU referendum and other big picture issues. Nevertheless, the above average
pace of small company dividend growth enjoyed in recent years has to decline
close to that long term average. The Valuations section below gives
consideration to the risk of a downturn in the domestic economy, brought on by
the uncertainties stemming from the EU referendum.
Valuations
The years since the financial crisis have seen valuation relationships develop
within and between financial markets to levels that are unusual in a long term
historical context. Most fundamentally, quantitative easing and zero interest
rate policy resulted in the re-establishment of the "yield gap": for the first
sustained period of time since the 1950s, equities yield more than government
bonds. Lower bond yields have been a handicap to the returns of the value
investor, on the whole. The qualification is necessary since it is likely that
ASCoT has enjoyed some mitigation by virtue of the above average yields of its
typical holdings. Those yields became more sought after as bond yields
declined and starved the investment world of income. This dynamic aside, the
evolution of today's valuation relationships has been a headwind to the
Managers' value investment style. More positively, a normalisation of the
valuation stretches, which are illustrated below, will be of benefit to ASCoT's
future returns.
Characteristics 31 December 2016 31 December 2015
ASCoT NSCI (XIC) ASCoT NSCI (XIC)
Number of companies 87 349 86 349
Weighted average market £617m £800m £567m £750m
capitalisation
Price earnings ratio (historic) 11.3x 12.5x 12.5x 14.6x
Dividend yield (historic) 3.0% 2.8% 3.1% 2.7%
Dividend cover 3.0x 2.9x 2.6x 2.5x
Small against large
The table shows the historical price earnings ratios of the portfolio and of
small companies as a whole; consistent with the Managers' value investment
style, ASCoT's PE is lower. Over the course of 2016, the PE of small companies
has dropped from 14.6x to 12.5x. In contrast, the PE of the FTSE All-Share has
risen from 16.6x to 18.6x. This leaves small companies on their widest PE
discount to large since 2000. The re-rating of large companies reflects the
substantial exposure of the FTSE All-Share to the resources sectors, which
rebounded strongly in 2016, and to other international companies, which
benefited from sterling weakness following the EU referendum.
"Small small" against "large small"
Market cap. range Below £100m £100m - £ £250m - £ Above £750m
250m 750m
ASCoT exposure 4% 17% 45% 34%
Tracked universe 1% 7% 34% 58%
exposure
Tracked universe EV/ 9.4x 9.6x 11.6x 12.2x
EBITA
The table shows that the UK stockmarket is presently characterised by a
continuous size effect: the smaller the company, the lower the valuation within
the tracked universe (representing 96% by value of the NSCI (XIC)). This is
unusual in a longer term context: smaller companies have traditionally
justified a higher valuation owing to their scope for superior, if more
volatile, growth. Today's state of affairs would appear to reflect elevated
concern about illiquidity, which has been in evidence since the financial
crisis. ASCoT, as a closed-end fund, is able to take a longer term view and to
exploit the opportunity to own companies with better growth prospects on lower
valuations.
Value against growth
EV/EBITA Growth Other Tracked ASCoT
Number of stocks 40 244 284 87
2017 on prevailing 16.4x 11.0x 11.7x 10.1x
estimates
2017 with a downturn 18.6x 13.0x 13.7x 11.9x
The ratio of enterprise value to earnings before interest, tax and amortisation
(EV/EBITA) is the Managers' preferred valuation metric. The table shows the
2017 ratios for ASCoT, for the tracked universe and for two subdivisions of the
tracked universe, i.e. 40 growth stocks and the 244 other companies. Two
scenarios are set out for 2017. The first is based on prevailing estimates and
reveals a wide gap between the valuation of the growth stocks and ASCoT's
portfolio, with the former on a 62% premium to the latter.
The second basis acknowledges the risks of a slowdown in the UK economy, as
Brexit takes its toll on spending decisions and weak sterling affects
purchasing power. For the sake of simplicity, the downturn is assumed to start
on 1 January 2017. A second main assumption is that the downturn reduces the
EBITA of companies reliant on the domestic economy by 25%, which is roughly in
line with the experience in 2009. Under this scenario, and as should be
expected, the profits of ASCoT's portfolio companies decline by more than those
of the growth stocks, the effect of which is to reduce the EV/EBITA premium of
the growth stocks over the portfolio to 56%. While a recession in 2017 is by
no means certain, the scenario analysis highlights an important facet of the UK
stockmarket's valuation at the current time. The out-performance and re-rating
of growth stocks since the financial crisis have been justified by concern
about the vulnerability of cyclical value stocks to another recession.
However, growth stocks emerge from a recession model still on a large valuation
premium. For the Managers - biased value investors that they are - this
suggests that some of the risk of a downturn may already be captured by today's
share prices.
Conclusion
It is disappointing to have to report on a year of poor performance, which has
also undermined returns over the three years of the continuation vote period.
It is particularly frustrating that this comes against a background in 2016
that is ostensibly more favourable to the value investor. However, value's
nascent fightback was concentrated in the highly indebted mining companies, at
least in the early stages of the year. Intriguingly, the year ended with a
welcome broadening of the stockmarket's appetite for value stocks. The
catalyst would appear to have been Donald Trump's victory in the US election.
His rhetoric and, presumably, his policies may mark a turn from austerity
towards a reflationary strategy. The promise of tax cuts, fiscal stimulus and
protectionism have challenged the positioning of financial markets, which
reflected an expectation of low rates, deflationary pressure and subdued
growth. Government bond yields have responded: ten year yields in the US ended
the year at 2.4%, up from a mid year trough of below 1.4%, while ten year gilt
yields up from 0.5% in August to 1.2% at the year end. As talk builds again of
the "great rotation", small value stocks in the UK have been caught up in the
repricing of a reflationary outcome and ASCoT duly benefited as 2016 drew to a
close.
The power of the rotation so far probably says more about how extreme some of
the valuation stretches within financial markets had become. For the rotation
to continue the new president has to deliver on his promises, while other
familiar macro economic issues, not least Brexit, need to be negotiated.
However, the valuations of ASCoT's holdings already reflect much of the
top-down risk and the underlying characteristics of these companies offer
encouragement. Though cyclical, they are well managed, robustly funded and
resilient enough businesses to have weathered the financial crisis and severe
recession eight years ago. Stockmarket investors in general may still be
reluctant to embrace these qualities, but it was notable that the year ended
with an upsurge in takeover activity: once again bigger companies are
exploiting the valuation anomalies on offer among the lower reaches of the UK
stockmarket, with overseas predators given additional encouragement by the
weakness of sterling.
For the Managers, the weight of history together with the underlying progress
of the businesses in the portfolio give confidence that today's valuations are
anomalies and that over time these will be addressed to the benefit of ASCoT
and the value style more generally. Given how powerfully turns in financial
markets can play out, the Managers believe that ASCoT's contrarian positioning
remains as compelling and as relevant as at any point in the trust's twenty six
year history.
Aberforth Partners LLP Managers
27 January 2017
DIRECTORS' RESPONSIBILITY STATEMENT
Each of the Directors confirms to the best of their knowledge that:
(a) the financial statements, which have been 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;
(b) the Annual Report 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; and
(c) the Annual Report, taken as a whole, is fair, balanced and understandable
and provides information necessary for Shareholders to assess the Company's
performance, business model and strategy.
On behalf of the Board
Paul Trickett
Chairman
27 January 2017
PRINCIPAL RISKS AND RISK MANAGEMENT
The Board carefully considers risks faced by the Company and seeks to manage
these risks through continual review, evaluation, mitigating controls and
taking action as necessary.
Investment in small companies is generally perceived to carry more risk than
investment in large companies. While this is reasonable when comparing
individual companies, it is much less so when comparing the volatility of
returns from diversified portfolios of small and large companies. In addition,
the Company has a simple capital structure and outsources all the main
operational activities to recognised, well-established firms.
The principal risks faced by the Company, together with the approach taken by
the Board towards them, have been summarised below. Further information
regarding the review process can be found in the Corporate Governance and Audit
Committee Reports.
(i) Investment policy/performance risk - the Company's portfolio is exposed to
share price movements due to the nature of its investment policy and strategy.
The performance of the investment portfolio will typically differ from the
performance of the benchmark and will be influenced by market related risks
including market price and liquidity . The Board's aim is to achieve the
investment objective over the long term by ensuring the investment portfolio is
managed appropriately. The Board has outsourced portfolio management to
experienced managers with a clearly defined investment philosophy and
investment process. The Board receives regular and detailed reports on
investment performance including detailed portfolio analysis, risk profile and
attribution analysis. Senior representatives of Aberforth Partners attend each
Board meeting. Peer group performance is also regularly monitored by the Board.
(ii) Share price discount - investment trust shares tend to trade at discounts
to their underlying net asset values. The Board and the Managers monitor the
discount on a daily basis. The Board intends to continue to use the share buy-
in facility to seek to sustain as low a discount as seems possible.
(iii) Gearing risk - in rising markets, gearing will enhance returns; however,
in falling markets the gearing effect will adversely affect returns to
Shareholders. The Board and the Managers consider the gearing strategy and
associated risk on a regular basis.
(iv) Reputational risk - the Board and the Managers monitor external factors
outwith the Company's control affecting the reputation of the Company and/or
the key service providers and take action if appropriate.
(v) Regulatory risk - failure to comply with applicable legal and regulatory
requirements could lead to suspension of the Company's share price listing,
financial penalties or a qualified audit report. A breach of Section 1158 of
the Corporation Tax Act 2010 could lead to the Company losing investment trust
status and, as a consequence, any capital gains would then be subject to
capital gains tax. The Board receives quarterly compliance reports from the
Secretaries to evidence compliance with rules and regulations, together with
information on future developments. The Board also closely monitors political
developments and, in particular, is mindful of the uncertainty following the UK
referendum result to leave the EU.
The Income Statement, Balance Sheet, Reconciliation of Movements in
Shareholders' Funds and summary Cash Flow Statement are set out below:-
INCOME STATEMENT
For the year ended 31 December 2016
(audited)
For the year ended For the year ended
31 December 2016 31 December 2015
Revenue Capital Total Revenue Capital Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Net gains on investments - 29,674 29,674 - 87,132 87,132
Investment income 39,027 5,229 44,256 37,652 1,462 39,114
Other income 46 - 46 - - -
Investment management fee (3,111) (5,185) (8,296) (3,283) (5,472) (8,755)
Transaction costs - (1,925) (1,925) - (3,890) (3,890)
Other expenses (689) - (689) (778) - (778)
-------- -------- -------- -------- -------- --------
Net return before finance 35,273 27,793 63,066 33,591 79,232 112,823
costs
and tax
Finance costs (254) (424) (678) (242) (403) (645)
-------- -------- -------- -------- -------- --------
Return on ordinary 35,019 27,369 62,388 33,349 78,829 112,178
activities
before tax
Tax on ordinary activities (36) - (36) - - -
-------- -------- -------- -------- -------- --------
Return attributable to
equity shareholders 34,983 27,369 62,352 33,349 78,829 112,178
====== ======= ======= ====== ======= =======
Returns per Ordinary Share 36.93p 28.89p 65.82p 35.03p 82.80p 117.83p
The Board declared on 27 January 2017 a final dividend of 18.75p per Ordinary
Share and a special dividend of 2.75p per Ordinary Share. The Board also
declared on 27 July 2016 an interim dividend of 8.60p per Ordinary Share.
The total column of this statement is the profit and loss account of the
Company. All revenue and capital items in the above statement derive from
continuing operations. No operations were acquired or discontinued in the year.
A Statement of Comprehensive Income is not required as all gains and losses of
the Company have been reflected in the above statement.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
For the year ended 31 December 2016
(audited)
Capital
Share redemption Special Capital Revenue
Capital reserve reserve reserve reserve Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Balance as at 31 December 2015 950 38 172,625 955,881 62,385 1,191,879
Return on ordinary activities - - - 27,369 34,983 62,352
after taxation
Equity dividends paid - - - - (27,721) (27,721)
Purchase of Ordinary Shares (6) 6 (6,282) - - (6,282)
-------- -------- -------- -------- -------- --------
Balance as at 31 December 2016 944 44 166,343 983,250 69,647 1,220,228
====== ====== ====== ====== ====== ======
For the year ended 31 December 2015
(audited)
Capital
Share redemption Special Capital Revenue
Capital reserve reserve reserve reserve Total
£ 000 £ 000 £ 000 £ 000 £ 000 £ 000
Balance as at 31 December 2014 953 35 176,300 877,052 53,000 1,107,340
Return on ordinary activities - - - 78,829 33,349 112,178
after taxation
Equity dividends paid - - - - (23,964) (23,964)
Purchase of Ordinary Shares (3) 3 (3,675) - - (3,675)
-------- -------- -------- -------- -------- --------
Balance as at 31 December 2015 950 38 172,625 955,881 62,385 1,191,879
====== ====== ====== ====== ====== ======
BALANCE SHEET
As at 31 December 2016
(audited)
31 December 31 December
2016 2015
£ 000 £ 000
Fixed assets
Investments at fair value through profit or 1,253,247 1,195,581
loss
---------- ----------
Current assets
Debtors 2,881 2,725
Cash at bank 241 1,025
---------- ----------
3,122 3,750
Creditors (amounts falling due within one (36,141) (510)
year)
---------- ----------
Net current assets (33,019) 3,240
---------- ----------
Total Assets less Current Liabilities 1,220,228 1,198,821
Creditors (amounts falling due after more - (6,942)
than one year)
---------- ----------
Total Net Assets 1,220,228 1,191,879
======= =======
Capital and reserves: equity interests
Called up share capital 944 950
Capital redemption reserve 44 38
Special reserve 166,343 172,625
Capital reserve 983,250 955,881
Revenue reserve 69,647 62,385
---------- ----------
Total Shareholders' Funds 1,220,228 1,191,879
======= =======
Net Asset Value per Ordinary Share 1,292.57p 1,254.30p
CASH FLOW STATEMENT
For the year ended 31 December 2016
(audited)
31 December 2016 31 December 2015
£ 000 £ 000
Operating activities
Net revenue before finance costs and 35,273 33,591
tax
Tax withheld from income - (59)
Tax recovered 23 -
Receipt of special dividends taken to 5,229 1,462
capital
Investment management fee charged to (5,185) (5,472)
capital
Increase in debtors (215) (432)
(Decrease)/increase in other creditors (40) 47
-------- --------
Net cash inflow from operating 35,085 29,137
activities
===== =====
Investment activities
Purchases of investments (231,112) (452,925)
Sales of investments 201,136 480,102
-------- --------
Cash (outflow)/inflow from investment (29,976) 27,177
activities
===== =====
Financing activities
Purchase of Ordinary Shares (6,282) (3,675)
Equity dividends paid (27,721) (23,964)
Interest and fees paid (640) (638)
Net drawdown/(repayment) of bank debt 28,750 (27,250)
facilities
(before any costs)
-------- --------
Cash outflow from financing activities (5,893) (55,527)
===== =====
Change in cash during the period (784) 787
===== =====
Cash at the start of the period 1,025 238
Cash at the end of the period 241 1,025
====== ======
SUMMARY NOTES TO THE FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The Company has presented its financial statements under Financial Reporting
Standard 102 (FRS 102) issued by the Financial Reporting Council and under the
AIC's Statement of Recommended Practice "Financial Statements of Investment
Trust Companies and Venture Capital Trusts (SORP) issued in 2014. The
principal accounting policies have been consistently applied throughout the
year and the preceding year. The financial statements have been prepared on a
going concern basis under the historical cost convention, modified to include
the revaluation of the Company's investments as permitted by FRS 102. The
functional and presentation currency is pounds sterling, which is the currency
of the environment in which the Company operates.
2.
DIVIDENDS
Year to Year to
31 December 2016 31 December 2015
£000 £000
Amounts recognised as
distributions to
equity holders in the period:
Final dividend of 17.85p for the 16,962 16,209
year ended
31 December 2015 (2014: 17.00p)
Special dividend of 2.75p for the 2,613 -
year ended
31 December 2015 (2014: nil)
Interim dividend of 8.60p for the 8,146 7,755
year
ended 31 December 2016 (2015:
8.15p)
--------- --------
27,721 23,964
--------- --------
The 2.75p special and 18.75p final dividend for the year ended 31 December 2016
will be paid, subject to shareholder approval, on 3 March 2017. These dividends
have not been included as a liability in these financial statements.
3. RETURNS PER ORDINARY
SHARE
The returns per Ordinary Share are based on:
Year to Year to
31 December 2016 31 December 2015
Returns attributable to Ordinary £ 62,352,000 £112,178,000
Shareholders
Weighted average number of shares
in issue
during the year 94,730,414 95,200,792
Return per Ordinary Share 65.82p 117.83p
There are no dilutive or potentially dilutive shares in issue.
4. INVESTMENTS AT FAIR VALUE
In accordance with FRS 102 fair value measurements have been classified using
the fair value hierarchy:
Level 1 - using unadjusted quoted prices for identical instruments in an active
market;
Level 2 - using inputs, other than quoted prices included within Level 1, that
are directly or indirectly observable (based on market data); and
Level 3 - using inputs that are unobservable (for which market data is
unavailable).
Investments held as fair value through profit or loss
Level 1 Level 2 Level 3 Total
As at 31 December £'000 £'000 £'000 £'000
2016
Listed equities 1,253,247 - - 1,253,247
Unlisted equities - - - -
------------ ------------ ------------ ------------
Total financial asset 1,253,247 - - 1,253,247
investments
------------ ------------ ------------ ------------
As at 31 December Level 1 Level 2 Level 3 Total
2015 £'000 £'000 £'000 £'000
Listed equities 1,195,581 - - 1,195,581
Unlisted equities - - - -
------------ ------------ ------------ ------------
Total financial asset 1,195,581 - - 1,195,581
investments
------------ ------------ ------------ ------------
5. NET ASSET
VALUES
The net assets and the net asset value per share attributable to the Ordinary
Shares at each year end are calculated in accordance with their entitlements in
the Articles of Association and were as follows:
31 December 31 December
2016 2015
Net assets attributable £1,220,228,000 £1,191,879,000
Ordinary Shares in issue at the 94,403,292 95,023,792
end of the year
Net asset value attributable per 1,292.57p 1,254.30p
Ordinary Share
6. SHARE CAPITAL
During the year, the Company bought in and cancelled 620,500 shares (2015:
321,000) at a total cost of £6,282,000 (2015: £3,675,000). On 24 January 2017,
the Company bought in and subsequently cancelled 25,000 shares at a cost of £
279,000.
7. RELATED PARTY TRANSACTIONS
Directors' fees and their shareholdings are detailed in the Directors'
Remuneration Report contained in the Annual Report. There were no matters
requiring disclosure under s412 of the Companies Act 2006.
8. FURTHER INFORMATION
The foregoing do not constitute statutory accounts (as defined in section 434
(3) of the Companies Act 2006) of the Company. The statutory accounts for the
year ended 31 December 2015, which contained an unqualified Report of the
Auditors, have been lodged with the Registrar of Companies and did not contain
a statement required under section 498(2) or (3) of the Companies Act 2006.
Certain statements in this announcement are forward looking statements. By
their nature, forward looking statements involve a number of risks,
uncertainties or assumptions that could cause actual results or events to
differ materially from those expressed or implied by those statements. Forward
looking statements regarding past trends or activities should not be taken as
representation that such trends or activities will continue in the future.
Accordingly, undue reliance should not be placed on forward looking statements.
The Annual Report is expected to be posted to shareholders on 1 February 2017.
Members of the public may obtain copies from Aberforth Partners LLP, 14
Melville Street, Edinburgh EH3 7NS or from its website: www.aberforth.co.uk.
CONTACT: Alistair Whyte/Euan Macdonald, Aberforth Partners LLP, 0131 220
0733
Aberforth Partners LLP, Secretaries - 27 January 2017
ANNOUNCEMENT ENDS
ABERFORTH SMALLER TRUST : Final Results
January 27, 2017 at 04:52 pm IST
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