SVM Svm Uk Emerging Fund Plc

SVM UK EMERGING FUND PLC

(the “Fund”)

ANNUAL FINANCIAL RESULTS

FOR THE YEAR ENDED 31 MARCH 2021

The Board is pleased to announce the Annual Financial Results for the year ended 31 March 2021.  The full Annual Report and Financial Statements, Notice of Annual General Meeting and Form of Proxy will be posted to shareholders and be available shortly on the Manager's website at www.svmonline.co.uk

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

HIGHLIGHTS

• Over the 12 months to 31 March 2021, net asset value gained 52.7% to 125.00p compared to a return of 37.8% in the chosen comparator, the IA UK Companies Sector Average Index.

• Over the five years to 31 March 2021, net asset value has gained 53.5% and the share price 59.2%, against the comparator index return of 39.3%.

• Portfolio emphasises exposure to scalable businesses with a competitive edge that can protect margins and deliver growth.

• Growth businesses performed well in the first six month, but more recently the better portfolio performances have been in economically sensitive sectors.

• At 30 June 2021, net asset value per share had risen to 136.02p

*For a definition of terms see Glossary of Terms and Alternative Performance Measures in the AFS

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

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

INVESTMENT OBJECTIVE

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

           
CHAIRMAN’S STATEMENT

Over the 12 months to 31 March 2021, the Company’s net asset value gained 52.7% to 125.00p per share, compared to a rise of 37.8% in the chosen comparator index, the IA UK All Companies Sector Average Index. Over the 12 months, the share price gained 42.1%. Over the five years to 31 March 2021, net asset value has gained 53.5% and the share price 59.2%, against the IA UK All Companies Sector Average return of 39.3%. The Company’s net asset value progressed in the three months since the year end to 136.02p at 30 June 2021. (total return, Lipper data, IA UK All Companies Sector Average for comparison purposes). 

Review of the year

Medium sized and smaller companies rebounded strongly from their low points of March 2020. These are areas where the Manager, SVM Asset Management Limited, finds more opportunity for the Fund. During the 12 months under review, there were positive contributions to performance from Ceres Power, Alpha FX, JD Sports, Draper Esprit and Codemasters Group. Beneficiaries in the first half of the 12 months under review tended to be in growth areas and those providing online services and support for working from home.  However, this was followed by a period in which investor focus was on recovery, and the best performances then came from the sectors that had lagged but which were expected to benefit from the easing of lockdowns. The portfolio overall has more emphasis on growth.

Disappointments in the period included Workspace, Manolete Partners, Jet2, Beazley and Learning Technologies.

New or additional investment was made in Games Workshop, Alpha FX, Aveva, Impax Asset Management, Restaurant Group and Seeing Machines.  To fund the purchases, sales were made of K3 Capital, Hotel Chocolat, Spirent, AJ Bell and Manolete Partners.

Portfolio changes emphasised increasing exposure to inflation beneficiaries and taking some profits in growth businesses.  Applegreen and Arrow Global were taken over, highlighting the attractiveness of UK small and medium sized companies to private equity buyers.  Cheap money is readily available to listed companies and private equity, which could drive more takeovers.  UK listeds with global exposure could be a target.

Significant global stimulus should boost company profits over the next two years. Inventory and capital spend hit lows in the second half of 2020, a position that often leads industrial recovery. The economic changes of resilience, productivity, capital investment and sustainability are likely to result in opportunities for growth businesses. But signs of overheating may emerge, linked to supply disruption in a range of sectors. The Fund focuses on businesses with pricing power which we believe will be able to absorb these and raise wages.

The shift towards electric vehicles and renewables is likely to bring major change in energy use. The Fund has investments in clean energy, including Ceres Power and ITM Power. We expect long term opportunity for companies supporting resilience, sustainability and reduction in fossil fuels.

Annual General Meeting

The Annual General Meeting will be held on Friday 10 September 2021 at SVM’s offices in Edinburgh. At the last General Meeting, shareholders approved powers for the Company to issue shares and to buy back for cancellation, or to hold in treasury. Your Board has directed the Manager to repeat this arrangement, operating within Board guidelines and approvals. The aim is to improve liquidity in our shares, and your Board does not expect this to be dilutive to shareholders.

Outlook

This year may bring an interest rate rise by the Bank of England, ahead of the US Federal Reserve. In what might represent the first stage in an eventual tightening of monetary policy, the Bank has announced it will slow the pace of its asset purchase program. Brexit has triggered more bottlenecks in the UK economy and its successful vaccination programme has spurred a sharper bounce in the economy than in much of Europe. The key to whether inflation is transient or not will now be found in wage inflation. If the Bank acts, the Pound would likely strengthen – cooling the economy a little but favouring domestic businesses over international earnings. 

There is potential for much change in the global economy, but possibly in a different direction than that which occurred in the exceptional circumstances of the pandemic. The portfolio emphasises exposure to scalable businesses with a competitive edge and potential for self-help that can deliver. It also includes investments with recovery potential.  Your Fund remains fully invested with some additional gearing.

Peter Dicks

Chairman

14 July 2021

MANAGER’S REVIEW

Summary

The period under review began near the low point for the stockmarket, which reflected the height of investor fear about the pandemic. The bounce in many growth shares was sharp, as it was clear that many companies could quickly adapt their business model to benefit from the change in consumer behaviour. Goods and services that could be purchased online saw increased demand, with a greater interest in sustainability, resilience and the home evident.  The portfolio benefited from an emphasis on businesses with a strong competitive edge, or servicing the digital economy.  As the year progressed, investors began to look to the benefits from an easing of lockdowns, and there was a recovery in economically-sensitive sectors.  These are a smaller component of the portfolio, which remains focused on growth, but the opportunity was taken to take profits in some growth shares and re-invest in recovery. Contracts for difference (“CFDs”) continued to be used within the Fund to assist efficient portfolio management and also allow some gearing.

Portfolio review and investment strategy

The investment approach of the Company favours disruptors and emerging winners, where they have already proven that they can build market share. The aim is to identify structural growth opportunities that can perform at different stages of the economic cycle. The Manager believes that their research is best focused on medium sized and smaller growing businesses, particularly where the business opportunity is not fully recognised but a company is starting to attract more investor interest. There is no standard business model, and the investment process involves meetings with management as well as analysing accounts.

New business models are emerging that disrupt established businesses, often winning their customers through new services or innovative technology.  But because many young businesses fail it is important to be rigorous in selection and invest only when their business model is proven.  Although it is innovation that drives these businesses, they can appear in very traditional sectors: food, legal services and speciality chemicals.  They can also be in established businesses that pivot to change the way they do things, perhaps going from selling product as a one-time sale with some after-market support, on to a recurring annual software as a service model. What that achieves in quality and visibility of income streams can create dramatic growth in long term value.

Keystone Law is an example of a disruptor with a changed business model driven to an extent by regulation.  It has emerged as an attractive alternative to legal partnerships for high calibre lawyers. It shows that a long-standing traditional business approach can be ripe for a revolution in business model. Keystone is an innovative platform utilising technology to reduce costs and increase profitability. The Manager sees Keystone as a scalable business model that can grow market share.

The Manager looks for resilience in businesses, and good stewardship and culture. Companies that get it right are usually candid and straightforward in their accounting and reporting, and generally transparent in strategy. They have a good sense of their key value drivers and will share that in one-to-one meetings. Resilience in a business often comes from its strength within a niche - how important its product or service is to customers and how well it manages risks.  Good profit margins and cashflow can help to protect against challenges.  Key to the opportunity that the Manager sees in investment is an ability to generate returns greater than cost of capital and to ensure that stewardship of assets is focused on this.

As a portfolio example, Games Workshop is the global leader for tabletop miniature gaming, now a fast-growing part of the games market. Since 2020 the appetite for hobbies has accelerated and the Manager sees this as a structural growth theme. The company has an opportunity to leverage the franchise -increasing royalties to reflect the greater appetite for computer games in graphic novels and TV series.

Companies providing technology and solutions are proving significantly disruptive. The Manager favours businesses that have been domestic UK and then, sometimes through an acquisition, internationalise their business. A number of medium sized businesses have successfully moved beyond the UK into underpenetrated markets. New winners are emerging - for example fuel cell businesses and some other innovative but robust technologies. These developments span quite a wide range of sectors – digital data, cloud technology and mobile delivery can transform and disrupt many traditional sectors. Some of the transformation will be in older industries.

Manufacturing, for example is moving to a business model where control can now mean remotely operated processes helped by many more sensors and intelligence in the system. Remotely they can know when a motor is going to break down or need service so they can schedule maintenance to minimise outages.  Technology offers two avenues; cutting costs for efficiency but also offering real time feedback from manufacturing operations or consumer markets.  Ideally companies should have a two-pronged approach; an opportunity to grow their market and, also, to achieve efficiency savings as they grow.

Outlook

The portfolio emphasises exposure to businesses with strong competitive positions and potential for organic growth. It also includes investments with recovery potential. 

Your Fund remains fully invested with some additional gearing.

INVESTMENT PORTFOLIO

as at 31 March 2021

*Includes CFDs.

Market exposure for equity investments held is the same as fair value and for CFDs held is the market value of the underlying shares to which the portfolio is exposed via the contract. The investment portfolio is grossed up to include CFDs and the net CFD position is then deducted in arriving at the net asset total. Further information is given in note 6 to the Financial Statements. A full portfolio listing as at 31 March 2021 is detailed on the website.

PRINCIPAL RISKS AND UNCERTAINTIES

The Directors carry out a robust assessment of the Company’s emerging and principal risks including reviewing the policies implemented for identifying and managing the principal risks faced by the Fund.

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

The principal risks facing the Fund relate to the investment in financial instruments and include market, liquidity, credit and interest rate risk. An explanation of these risks and how they are mitigated is explained in note 10 to the financial statements. Additional risks faced by the Fund are summarised below.

The Board considers the COVID-19 pandemic and Brexit to be factors which exacerbate existing risk, rather than new emerging risks.  Their impact is considered within the relevant risks.

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

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

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

Operational – The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. In common with most other Investment Trusts, the Fund has no employees and relies upon the services provided by third parties. The Manager has comprehensive internal controls and processes in place to mitigate operational risks. Risk controls are monitored by their assigned owner with oversight from the Manager’s risk and compliance function as part of the Manager’s risk & control framework, which is reviewed at least annually.

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

Financial – The Fund’s investment activities expose it to a variety of financial risks including market, credit and interest rate risk. These risks are explained in Note 10 to the financial statements. The Board seeks to mitigate and manage these risks through continuous review, policy setting and enforcement of contractual obligations. The Board receives both formal and informal reports from the Manager and third party service providers addressing these risks. The Board believes the Fund has a relatively low risk profile as it has a simple capital structure; invests principally in UK quoted companies; does not use derivatives other than CFDs and uses well established and creditworthy counterparties.

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

STATEMENT OF DIRECTORS’ RESPONSIBILITIES

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

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

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

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

By Order of the Board

Peter Dicks

Chairman

14 July 2021

Income statement

for the year to 31 March 2021

for the year to 31 March 2020

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

Balance sheet

as at 31 March 2021

Statement of Changes in Equity

for the year to 31 March 2021

for the year to 31 March 2020

Accounting policies

Basis of preparation

The Financial Statements have been prepared on a going concern basis in accordance with FRS 102, the “Financial Reporting Standard applicable in the UK and Republic of Ireland” and under the AIC’s Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts” (SORP) issued in April 2021. The Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for at least twelve months from the date of approval of these Financial Statements. In making their assessment the Directors have reviewed income and expenditure projections, reviewed the liquidity of the investment portfolio and considered the Company's ability to meet liabilities as they fall due. This conclusion also takes in to account the Directors' assessment of the continuing risks arising from COVID-19. The Company is exempt from presenting a Cash Flow Statement as a Statement of Changes in Equity is presented and substantially all of the Company’s investment are highly liquid and are carried at market value.

Significant judgements and estimates

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

Income

Income is included in the Income Statement on an ex-dividend basis and includes dividends on both direct equity investments and synthetic equity holdings via Contracts for Differences, special dividends and interest receivable on bank balances and CFDs.

Expenses and interest

Expenses and interest payable are dealt with on an accruals basis. All expenses other than investment management fees are charged to revenue.

Investment management fees

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

Taxation

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

Investments

The investments have been categorised as ‘‘fair value through profit or loss’’. All investments are held at fair value. For listed investments this is deemed to be at bid prices. A Contract for Difference (CFD) is a synthetic equity comprising of a future contract to either purchase or sell a specific asset at a specified future date for a specified price. The Company can hold long and short positions in CFDs which are held at fair value, based on the bid prices of the underlying securities in respect of long positions, and the offer prices of the underlying securities in respect of short positions. Profits and losses on CFDs are recognised in the Income Statement as capital gains or losses on investments at fair value.  Dividends and interest on CFDs are included in the revenue income. The year end fair value of CFD positions which are assets is included in fixed asset investments, whilst the year end fair value of CFD positions which are liabilities is included within current liabilities in Note 8.  Balances with brokers in respect of margin calls are included within debtors in Note 7.  Unlisted investments are valued at fair value based on the latest available information and with reference to International Private Equity and Venture Capital Valuation Guidelines.

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

Financial instruments

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

Foreign currency translation

Transactions involving foreign currencies are converted at the rate ruling as at the date of the transaction. Sterling is the functional currency of the Fund and all foreign currency monetary assets and liabilities are retranslated into Sterling at the rate ruling on the financial reporting date.

Capital reserve

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

Special reserve

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

Notes to the financial statements

1. Income                  

2. Investment Management Fees

3. Other expenses

Revenue

4. Taxation

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

At 31 March 2021, the Fund had unutilised management expenses and non trade loan relationship (“NTLR”) deficits of £1,439,000 (2020 – £1,260,000).

A deferred tax asset of £275,000 (2020 - £239,000) has not been recognised on unutilised management expenses as it is unlikely that there would be suitable taxable profits from which the future reversal of the deferred tax asset could be deducted.

5. Returns per share

Returns per share are based on a weighted average of 5,995,000 (2020 – 5,999,836) ordinary shares in issue during the year.

Total return per share is based on the total gain for the year of £2,585,000 (2020 – loss of £1,692,000).

Capital return per share is based on the net capital gain for the year of £2,695,000 (2020 – loss of £1,685,000).

Revenue return per share is based on the revenue loss after taxation for the year of £110,000 (2020 – loss of £7,000).

The net asset value per share is based on the net assets of the Fund of £7,494,000 (2020 – £4,909,000) divided by the number of shares in issue at the year end as shown in note 9.

6. Investments at fair value through profit or loss

The transaction costs in acquiring investments during the year were £8,000 (2020: £10,000).  For disposals, transaction costs were £3,000 (2020: £3,000).

The company received £2,716,000 (2020 £2,910,000) from investments sold in the year.  The book cost of these investments when they were purchased was £2,244,000 (2020 £2,592,000). These investments have been revalued over time and, until they were sold, any unrealised gains/losses were included in the fair value of the investments.

*Net gains/losses on investments includes gains of £430,000 (2020: losses of £220,000) in relation to CFDs.

7. Debtors

8. Creditors: amounts falling due within one year

9. Share capital

As at the date of publication of this document, there was no change in the issued share capital and each ordinary share carries one vote, other than 10,000 shares held in treasury which carry no voting rights.

During the year no Ordinary Shares were brought back (2020: 10,000 Ordinary Shares with a nominal value of £500 and representing 0.17% of the issued share capital were bought back during the year and placed in treasury for an aggregate consideration of £8,650).  The 10,000 shares bought back during 2020 remain in treasury.

10. Financial instruments

Risk Management

The Fund’s investment policy is to hold investments, CFDs and cash balances with gearing being provided by the use of CFDs and a bank overdraft. Over 99.2% (2020: 94.8%) of the Fund's net asset value is held in investments that are denominated in Sterling and are carried at fair value. Where appropriate, gearing can be utilised in order to enhance net asset value. It does not invest in short dated fixed rate securities other than where it has substantial cash resources. Fixed rate securities held at 31 March 2021 were valued at £nil (2020 – £nil). Investments, which comprise principally equity investments, are valued as detailed in the accounting policies.

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

Market risk

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

Liquidity risk

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

Credit risk

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

Interest rate risk

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

11.   The financial information contained within this announcement does not constitute statutory accounts as defined in sections 434 and 435 of the Companies Act 2006.  The results for the years ended 31 March 2021 and 2020 are an abridged version of the statutory accounts for those years. The Auditor has reported on the 2021 and 2020 accounts, their reports for both years were unqualified and did not contain a statement under section 498 of the Companies Act 2006.  Statutory accounts for 2020 have been filed with the Registrar of Companies and those for 2021 will be delivered in due course.

12.       The Annual Report and Accounts for the year ended 31 March 2021 will be mailed to shareholders shortly and copies will be available from the Manager’s website www.svmonline.co.uk and the Fund’s registered office at 7 Castle Street, Edinburgh, EH2 3AH. 

            The Annual General Meeting of the Fund will be held at 12 noon on Friday 10 September 2021 at 7 Castle Street, Edinburgh, EH2 3AH.

For further information, please contact:

Colin McLean                         SVM Asset Management                    0131 226 6699

Roland Cross                           Four Broadgate                                   0207 726 6111

14 July 2021