Aberforth Smaller Companies

Aberforth Smaller Companies Trust Plc - Final Results

Aberforth Smaller Companies Trust plc
Audited Annual Results for the year to 31 December 2020

The following is an extract from the Company's Annual Report and Financial Statements for the year to 31 December 2020. The Annual Report is expected to be posted to shareholders by 9 February 2021.  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: https://data.fca.org.uk/#/nsm/nationalstoragemechanism.


FINANCIAL HIGHLIGHTS

Net Asset Value per Ordinary Share Total Return                                                             -15.4%
Numis Smaller Companies Index (excluding Investment Companies) Total Return             -4.3%
Ordinary Share Price Total Return                                                       -16.5%

Total ordinary dividends of 33.3p per share for 2020 represent a 4.1% increment when compared with 2019's 32.0p (excluding special dividend).  

INVESTMENT OBJECTIVE

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.

CHAIRMAN’S STATEMENT TO SHAREHOLDERS

Review of performance

The year was ushered in with cautious optimism by UK investors following the December 2019 election, but would end up being defined by the Covid-19 pandemic.  The direct and indirect cost to human life serves as a stark reminder of the role infectious disease has played in history.  But human ingenuity, as in the past, has responded.  In the world of populist politics and fragmented media, it has sometimes been difficult to appreciate the progress made by the scientific community.  The vaccine development is astonishing, while treatments have also developed to mitigate the impact of the virus.

Economically, the impact is hard to contextualise, as it is necessary to go back to the 18th century to witness a comparable decline in the UK’s gross domestic product.  Policy stimulus, both monetary and fiscal, has been exceptional and global in nature.

It was a disappointing year for the Company.  The FTSE 100 Index’s total return was -11.5% and that of the FTSE All-Share Index, which is heavily weighted towards large companies, was -9.8%.  The Numis Smaller Companies Index (excluding Investment Companies) (“NSCI (XIC)”) is the Company’s benchmark.  Its total return was -4.3%.  The Company’s net asset value total return was -15.4%.  This reflects the Income Statement’s return attributable to equity Shareholders of -245.50p per share (2019: 332.22p), which comprises the capital return together with the effect of dividends received and re-invested.  The share price generated a total return of -16.5%.  Despite the year's volatile events, the year-end share price discount of 3.4% was broadly similar to the level that prevailed at the start of the year.

The Managers’ Report, which perhaps unsurprisingly is slightly longer than in previous years, reviews 2020 performance and more importantly the prospects for the future.

With all that has happened in 2020, it is easy to forget that ASCoT reached its 30th anniversary in December.  Those three decades have witnessed many tumultuous events, including three recessions, the TMT bubble, the global financial crisis, swings in interest rates from 15% to almost zero, referendums and, of course, a pandemic.  Though not unscathed by these events, ASCoT’s 30-year record of growth in total returns and dividends has so far stood the test of time.

Dividends

In last year’s Chairman’s Statement, I laid out the Board’s commitment to a progressive dividend policy.  I tempted fate by suggesting that the acid test of our policy would be the ability to deliver dividend growth through the next downturn. That downturn quickly came to pass and it includes what is unquestionably the most severe dividend recession since the Company’s formation in 1990 or indeed since 1955 when the data series for the NSCI (XIC) begins.  For small companies, aggregate dividends more than halved in 2020.

Nevertheless, the Board remains committed to a progressive dividend policy and is able to keep to that commitment by virtue of the revenue reserves that the Company prudently built up in the good times.  In this context, the Board is pleased to propose a final dividend of 22.9p per Ordinary Share.  Total ordinary dividends of 33.3p per share for 2020 represent a 4.1% increment when compared with 2019's 32.0p, which was itself up by 5.8% year-on-year.  To deliver the full year dividend, the Company will use 19.4p of its revenue reserves.  This will leave 56.7p of reserves, which is circa 1.7x the ordinary dividend.

In reaching its decision on the dividend, the Board has taken confidence from the revenue reserves and from tentative signs through the latter part of the year that investee companies are resuming the payment of dividends.  The process of dividend recovery will not be linear and 2020’s deficit will take more than one year to fill.  Nevertheless, as the Managers’ Report explores in more detail, growth in small company dividends looks likely in 2021 and medium-term prospects still appear consistent with the Board’s progressive dividend policy.             

Gearing

It has been the Company’s policy to use gearing in a tactical manner throughout its 30-year history.  The £130m facility with The Royal Bank of Scotland International has a term that runs to June 2023.  As has been the case in the past, the facility term dovetails with the three-yearly continuation vote cycle.  The facility continues to provide the Company with access to liquidity for investment purposes and to fund share buy-backs as and when appropriate.  In what is at times a volatile and less liquid asset class, having access to immediate funds through a credit facility provides the Managers with enhanced flexibility. 

In response to the year’s severe share price declines and consistent with its tactical approach to gearing, the Company utilised its debt facility during 2020.  This is only the fourth occasion in ASCoT’s 30-year history that it has deployed gearing and highlights the opportunity that emerged in 2020.  During the year, the level of gearing ranged from nil to 7.0%, with an average of 3.1%.  As my comments on the outlook below, along with the Managers’ Report, make clear, the Company’s portfolio valuations in the early stages of the new year are consistent with keeping the gearing in place: at the year-end gearing stood at 6.1% of Total Shareholders’ Funds.

Share buy-back

At the Annual General Meeting in March 2020, the authority to buy back up to 14.99% of the Company’s Ordinary Shares was approved.  During the year, 710,000 Ordinary Shares (0.8% of the issued share capital) were bought in at a total cost of £6.1m and at an average discount of 13.8%.  Consistent with the Board’s stated policy, those Ordinary Shares have been cancelled rather than held in Treasury.  The Board continues to believe that, at the margin, buy-backs provide an increase in liquidity for those Shareholders wishing to crystallise their investment and, at the same time, deliver an economic uplift for those Shareholders wishing to remain invested with the Company.  Once again, the Board will be seeking to renew the buy-back authority at the Annual General Meeting on 2 March 2021.

Board changes

The Board regularly reviews its composition and structure in line with corporate governance requirements.  Richard Rae, who has been a Director for nine years, will not stand for re-election at the forthcoming Annual General Meeting. Richard has made a significant contribution to the Board’s deliberations and we wish him well for the future.  As I indicated in my Interim Report, the Board appointed Victoria Stewart as a Director of the Company with effect from 1 September 2020 and we are already benefiting from her investment management experience of more than 22 years.

Annual General Meeting (“AGM”)

The AGM will be held at 14 Melville Street, Edinburgh EH3 7NS at 2.30 pm on 2 March 2021.  Details of the resolutions to be considered by Shareholders are set out in the Notice of the Meeting on page 57.  Owing to the Covid-19 restrictions on attendance at public gatherings, along with the Government advice to stay at home as much as possible and limit contact with other people, Shareholders will not be permitted to attend the AGM in person and it will be held as a closed meeting.  The only attendees permitted will be those who are required to form a quorum and allow the business of the meeting to be conducted.  Accordingly, the Board advises Shareholders to submit their vote by proxy in accordance with the Notice of the AGM.  Despite the prevailing restrictions, the Board welcomes questions from Shareholders and invites any questions to be submitted by email to enquiries@aberforth.co.uk before 11.00 am on 26 February 2021.  Questions will be considered by the Board and responses provided. In light of these circumstances a brief update on performance and the portfolio will be available on the Managers' website following the closed meeting. In accordance with normal practice, the results of the AGM will be issued in a regulatory news announcement and also posted on the website.

Outlook

After such a challenging year, it is worth all of us, as investors, remembering that the stockmarket always looks forward. Through that lens, and acknowledging the world is a very different place from last January, the cautious optimism I expressed in last year’s statement towards prospects for the Company, for small UK quoted companies and for the value investment style remains relevant.

As was the case in 2019, the year drew to a close with a strong performance from the value investment style.  Perhaps this episode merely offers some respite from the pain of the earlier part of the year, but the final quarter of 2020 brought a magnitude of style rotation that had not been seen since the turn of the millennium at the time of the TMT bubble. The three catalysts of the vaccines, the Brexit trade deal and anticipation of the so-called blue wave following the US election contributed to a quarter of exceptional returns for the Company – its strongest ever month came in November and strongest ever quarter in the final three months of 2020.  The shift in favour towards value investing may prove short lived in much the same way as other such periods have since the financial crisis.  Alternatively, the impact of change brought by the virus, the scale of fiscal stimulus and the extreme valuation stretches within stockmarkets may combine to make the recent moves more enduring.

While the short-term outlook is likely to be influenced by the tug of war between the vaccine roll out and disease progression, current valuations offer a more promising outlook for the Company on a medium-term time horizon.  The historical price earnings ratio of 10.8x for the benchmark is circa 22% below the average of the past 30 years, while the portfolio’s historical 7.3x multiple stands just over 40% below its 30-year average.  Stockmarkets are well versed in dealing with such anomalies and, as they do so, the Board is reassured that the Company should benefit.  The concluding months of 2020 demonstrate the relevance of the Managers’ value investment style and the scope for exceptional returns for the Company when the stockmarket’s investment horizons broaden from their very narrow focus of recent years.

As the Company moves into its fourth decade, I am chastened by tempting fate twelve months ago, but, together with the rest of the Board, I once again look forward with cautious optimism based on the portfolio’s valuation and the Managers’ consistency of offering. 

Finally, the Board very much welcomes the views of Shareholders and is available to talk to you directly.  My email address is noted below.

Richard Davidson

Chairman

29 January 2021

richard.davidson@aberforth.co.uk

MANAGERS’ REPORT

Introduction

The experience of 2020 will live long in the memory for the lives lost directly and indirectly to Covid-19.  Through the measures taken to control its spread, the virus will also have lasting effects on how we live and on economic activity.  A global pandemic was often cited as a plausible “left field” risk to modern globalised societies, but the reaction of financial markets to Covid-19 shows how unprepared the world was. 

In 2020, the total return from UK equities was -9.8%, as gauged by the FTSE All-Share, which is dominated by larger companies.   The NSCI (XIC), the index of smaller companies that is ASCoT’s benchmark, recorded a return of -4.3%. ASCoT’s net asset value total return was -15.4%.  This poor year of absolute and relative performance combined aspects of the global financial crisis, as economies lurched into recession, and of the TMT bubble around the Millennium, as many highly rated technology companies benefited from lockdown conditions.

The overall performance numbers belie a year of extraordinary volatility.  The damage to ASCoT’s performance came in the first quarter of the year as the impact of Covid-19 and lockdown was felt.  In this period, ASCoT’s net asset value declined by 43.8%, which compares with a fall of 35.6% for the NSCI (XIC).  This was, by some distance, the worst calendar quarter for ASCoT in its 30 year history.  The fortunes of the portfolio’s cyclical companies turned viciously as the optimism around last year’s decisive election result evaporated.  Notwithstanding the substantial assistance from government and the Bank of England, lockdown crushed economic activity and squeezed liquidity within the corporate sector – doubt about the viability of many businesses was extreme.

However, even though uncertainty about the virus and the path out of lockdown was still intense, most share prices reached their low points in late March.  In the nine months from 31 March to 31 December, ASCoT’s asset value rose by 50.6% in total return terms, against the NSCI (XIC) up by 48.7%.  With the series of vaccine announcements breathing life into the equity of the portfolio’s holdings, performance improved as the year progressed: November was ASCoT’s strongest ever month and the final three months of 2020 were its strongest ever calendar quarter.

The subsequent sections of this report describe in some detail how the events of the year affected ASCoT.  The Conclusion & Outlook provides a summary of the main points as well as an assessment of the Company’s prospects.

2020 – a review of a difficult year

Despite Brexit and a US presidential election, Covid-19 dominated 2020.  From the portfolio’s perspective, the virus itself was less significant than the measures taken to tackle it.  Lockdown constrained consumer behaviours and precipitated the UK’s sharpest recession in over three hundred years.  Many companies, particularly those serving the domestic economy, saw their revenues dwindle to zero in the months after the imposition of the first lockdown and were confronted by the prospect of rapidly diminishing cash resources.  This was not a scenario with which anyone, let alone those responsible for companies’ viability statements, had previously had to contend. 

This liquidity squeeze precipitated the deepest dividend cuts since records began and would have proved fatal for many businesses – the so-called “Covid victims” – without external assistance.  That assistance came in three forms.  First, the government and Bank of England deployed huge support programmes in the form of the Coronavirus Job Retention Scheme (furlough), the Covid Corporate Financing Facility (CCFF) and others.  Second, lenders to companies relaxed the terms of existing debt facilities.  Third, the equity market played its part, with pre-emption rules temporarily eased and large sums raised by several companies through the issue of new shares. 

The second quarter was extraordinarily busy in terms of engagement with the boards of investee companies.  The companies attempted to gauge the equity markets’ appetite to be part of the solution, while the Managers sought to quantify the extent of the liquidity problem and, with a longer term perspective, to discuss appropriate dividend policies. Additionally, the Managers engaged with the Bank of England both to improve knowledge of their support schemes and to relay relevant information gathered from companies.  The swapping of intelligence through this period and the preparedness on occasion to become temporary insiders were crucial, since there was a dearth of information with company guidance generally withdrawn.  Through it all, the Managers’ objective was unchanged: to discern where ASCoT’s capital could be most profitably deployed and thus to enhance the potential upside from the portfolio. Consistent with this, ASCoT did not support every equity issue undertaken by investee companies.  Indeed, in certain cases the Managers advised against the issuance of shares while uncertainty was at its greatest and dilution would be more significant.

After the initial period of confusion, reflected in the precipitous drop in share prices, the summer months brought some stability and clarity.  While the full economic impact of lockdown – the longer term “scarring” – has been deferred by the official support measures, it became clear that the virus could be controlled.  This allowed some tentative recalibration of forecasts both by companies and investors.  Meanwhile, the immediate and most pressing corporate liquidity issues were quantified and addressed.  At the same time, the easing of lockdown brought a recovery in companies’ revenues and suggested a willingness on the part of consumers to revert, more or less, to previous habits.  It was through this middle part of the year that the boards of small companies proved that they could meet the challenges posed by Covid-19 and proved the resilience of their businesses, as they did in the global financial crisis and in the wake of the EU referendum.  Trading updates through the Autumn were generally better than expected and several companies were able to resume dividend payments.

Against this background, which was encouraging despite the advent of the second lockdown, the vaccine announcements arrived in November.  These proved the catalyst for a broad reappraisal by the financial markets of the prospects for economic activity and for cyclical companies.  Investment horizons elongated as confidence rose that a return to a normal way of life was achievable and that a recovery in profits could commence.  The stockmarket re-engaged with businesses that it had previously priced to be without a future of more than a few years.  These companies were aggressively re-valued, to ASCoT’s benefit.  This was another damning episode for market efficiency, with the equity market again struggling to calibrate value in a period of stress.  Echoing the experience of the Nifty Fifty and the TMT bubble, the market focused narrowly on those businesses immune to or benefiting from the effects of Covid-19.  It therefore lost sight of the beneficiaries of the ingenuity that it otherwise prized so highly.

The inspiration from the remarkably rapid vaccine development would have been a good way to have ended a bad year. However, Brexit politics threatened to complicate the immediate outlook for the UK economy.  In the event, a trade deal with the EU was secured.  The detail of its implementation is not yet fully clear, but the near term prospects for the UK economy are undoubtedly better with an agreement in place.  From the perspective of the portfolio, it reduces uncertainty and removes an excuse for overseas investors to ignore UK assets, which have been global pariahs for several years.  Nevertheless, beyond Brexit, any upside from the UK’s regained sovereignty may be complicated by the political fallout from Covid-19 and questions about the Union itself.

In considering the operating performance of the portfolio’s holdings and of small companies more generally in 2020, an important lesson is the resilience of the underlying businesses.  Most companies are sensitive to the economic cycle, with their profits waxing and waning in step with broad economic activity.  It is certainly the case that, since the global financial crisis, cyclicality around the world has been shunned by most investors – stockmarket valuations of such businesses had fallen to the extent that they have attracted value investors, such as the Managers.  With the onset of Covid-19 and lockdown, cyclical companies have suffered disproportionately in terms of profits and share prices. However, cyclicality does not equate to low quality.  The businesses within the portfolio, while predominantly cyclical, are resilient.  They can cover their cost of capital and can grow from cycle to cycle.  They are well managed and balance the interests of their shareholders with responsibilities to other stakeholders.  These characteristics are often overlooked, seldom to such a degree as in 2020, but give confidence that future challenges can be met.

Investment Performance

To recap, ASCoT’s net asset value total return in 2020 was -15.4%.  In comparison, the NSCI (XIC)’s return was -4.3%.  The following table and paragraphs describe the main influences on ASCoT’s absolute and relative performance.

Performance for the twelve months ended 31 December 2020 Basis points
Attributable to the portfolio of investments, based on mid prices
 (after transaction costs of 21 basis points)
(1,229)
  Movement in mid to bid price spread -
  Cash/gearing 172
  Purchase of ordinary shares 7
  Management fee (52)
  Other expenses (6)
----
Total attribution based on bid prices (1,108)
Note: 100 basis points = 1%.  Total Attribution is the difference between the total return of the NAV and the Benchmark Index (i.e. NAV = -15.37%; Benchmark Index = -4.29%; difference is -11.08% being -1,108 basis points).

Size

For the purposes of this analysis, the size effect concerns the relative performance within the NSCI (XIC) of its “larger small” companies, which are defined as the overlap between the FTSE 250 and the NSCI (XIC), and its “smaller small” companies, which are the index’s other constituents.  This is relevant because the portfolio has a high exposure to the index’s “smaller smalls”, a position that reflects the considerably lower valuations for these companies.  A useful gauge of the relative performance of the two groups is the performance of the FTSE 250 against that of the FTSE SmallCap.  In 2020, the FTSE SmallCap out-performed the FTSE 250 by 10%, thanks principally to a much stronger rebound in November.  The strength of the “smaller smalls” means that, all else being equal, size would have benefited ASCoT’s performance in 2020.  However, other factors – notably style as described below – proved more influential.

Style

Notwithstanding a rebound in the fourth quarter inspired by the vaccine news, the value investment style struggled in 2020.  The London Business School (LBS) maintains the NSCI (XIC) and conducts style analysis on its constituents. Defining value stocks as those with the lowest price to book ratios, it calculated that value lagged growth by 14% in 2020. Though the Managers determine value in a broader fashion and use a variety of valuation metrics, the LBS analysis is indicative of strong headwinds for value managers.  Style was therefore an important contributor to ASCoT’s under-performance in 2020.

The past decade has been challenging for value investors, with subdued economic growth, disinflation and ever lower government bond yields.  These conditions have favoured the valuations of companies offering secular growth potential and have elongated investment horizons to the benefit of businesses that might not generate meaningful cash flows for some years.  The generational issues at work over the past decade remain relevant, but the specific reason for the value style’s particular struggles in 2020 was the recession that ensued from lockdown.  As explained above, coming into the Covid-19 period, value stocks – both in the UK small cap world and more broadly – were generally sensitive to the economic cycle.  Their profits and valuations were therefore vulnerable to lockdown, which was to the detriment of ASCoT’s performance.  A corollary of this is that the portfolio is likely to fare better once confidence in economic recovery builds – this was the case in the final quarter of the year as the vaccine news allowed markets to look beyond the second lockdown.

Profits

The table below shows the Managers’ estimates for the aggregate EBITA (earnings before interest, tax and amortisation) of the portfolio and of the tracked universe.  The tracked universe is those companies in the NSCI (XIC) that the Managers follow closely and represents 95% by value of the NSCI (XIC).  Oil and gas production companies are excluded since their profits are volatile and distort the underlying message of the majority of companies.

Estimated change in aggregate EBITA 2020 2021 2022 2023 4 years
Portfolio ex oil & gas producers -45% +52% +26% +12% +18%
NSCI (XIC) -37% +41% +21% +4% +11%

The table demonstrates the cyclicality of the portfolio, for worse on the way down in 2020 and for better in the subsequent years.  The recovery profile reflects considerations of the second wave of the virus, lockdowns, lasting economic effects, changing societal behaviours and the vaccines.  Certain individual forecasts will no doubt prove inaccurate, but the Managers believe the framework to be useful.

The impact on profits shown in the table misses another factor.  In the absence of Covid-19 and recession for any other reason, profits would have grown each year.  By 2023, profits would have been around 25% higher than they are now expected to be, which is a quantification of the opportunity cost of the pandemic.  However, the important point for equity valuations is that the recovery does take place: the resilience and nimbleness of small companies has allowed them to stay in the game to benefit from economic recovery and normalisation.  For much of 2020, the stockmarket appeared to doubt the viability of many businesses and was valuing them as if they would not make it through to the recovery.

Sector

Since 2016’s EU referendum, sterling has weakened against other currencies, which has fostered the development of a strong sectoral theme within UK equities in general and within the portfolio.  The share price performances of overseas facing companies have been much stronger than those of companies oriented towards the domestic economy.  Covid-19 accentuated that trend: the Managers calculate that domestics lagged by 10% in 2020 to take their under-performance since the referendum to 27%.  As a global pandemic, the coronavirus affected both overseas and domestic businesses, but the former experienced a less harsh downturn as economic activity recovered strongly in China. In contrast, the domestic facing sectors have been characterised as the so-called “Covid victims”.

The portfolio’s geographical profile at the start of 2020 was inappropriate for what was to come.  The Managers estimate that, of the underlying sales of the holdings at 31 December 2019, 63% were generated in the UK, compared with 54% for the NSCI (XIC).  This tilt towards the domestic economy had arisen since the EU referendum as the valuations of the domestic businesses had fallen sharply relative to the overseas earners.  The positioning proved helpful in 2019 as political clarity promised an economic benefit, but that proved short-lived.  Domestic exposure accounted for a substantial majority of ASCoT’s under-performance against the NSCI (XIC) in 2020.

The Travel & Leisure sector is a useful illustration.  The portfolio’s exposure here coming into 2020 was principally through bus and rail companies, a pub group, a restaurant business and a gaming operator.  Covid-19 brought three impacts on relative performance.

  • First, the recessionary conditions saw the profits of the holdings in the pub, restaurant and casino companies collapse.  The specifics of lockdown worsened the experience, but the falls in profits and share prices were broadly what might be expected of cyclical businesses.
  • Second, the bus and rail operators also saw their profits vanish.  In the context of the analysis of these businesses before the advent of Covid-19, this was more surprising.  One of the attractions of bus franchises over the years has been the relative stability of their revenues.  However, that stability was overwhelmed by the pandemic and lockdown – the bus operators went from being one of the more resilient components of the portfolio to one of its most vulnerable.
  • Third, the portfolio had no exposure to the highly valued companies operating on-line betting platforms within the Travel & Leisure sector.  As capital light “Covid beneficiaries”, these performed strongly through 2020 and therefore were a drag on ASCoT’s relative performance.

The stockmarket’s judgement of the prospects for these groups of businesses was swift and severe.  What were already wide valuation gaps within the sector expanded, which led to opportunities for further investment.  To date, the Managers have seen better value among the holdings in the first group of companies, in some cases taking advantage of equity issues to do so.  The outlook is less clear for the bus and rail operators.  These have relied heavily on official support and it is unclear how the relationship with government will develop once the pandemic is brought under control.

Balance sheets

The table below sets out the development of the portfolio’s exposure to four categories of holding.  The categories are determined by the balance sheet position of each company.  The estimates underlying the future years are the Managers’.

Portfolio weight Net cash Net debt/EBITDA <2x Net debt/EBITDA >2x Other*
2019 24% 49% 22% 4%
2020 20% 34% 31% 15%
2021 28% 40% 28% 4%
2022 32% 45% 22% 1%

*Includes loss-makers, IPOs and lenders

The portfolio came into 2020 with balance sheets in a good position.  The decisive general election results at the end of 2019 promised to reduce political uncertainty and to release economic activity.  That optimism was overtaken by the onset of Covid-19.  Balance sheets that were secure in normal conditions were suddenly challenged in a manner that few had anticipated.  That challenge is evident in the much higher proportion of the portfolio exposed to companies with leverage above 2x in 2020 compared with 2019.  Existing lenders have eased their terms and government facilities have helped, but the pressure on liquidity and balance sheets has seen numerous equity issues through 2020.

ASCoT supported ten equity issues by its investee companies in the year, with an aggregate sum of £30m committed. The Managers did not back every issue offered, but sought to prioritise those companies that they calculated needed the funds most and where, therefore, the pricing of the deal offered most upside.  Compared with their expectations at the time of the interim report, there were few equity issues in the second half of the year.  This in part reflects the efforts undertaken by companies to address liquidity issues in other ways and the fact that the year did not develop in quite so bad a fashion as might have been feared amid the first lockdown.  Nevertheless, it is likely that 2021 will see further equity issues as companies seek to rebuild working capital as their revenues start the recovery.

In supporting the equity issues and taking advantage of distressed prices, ASCoT benefited from its £130m three year debt facility from Royal Bank of Scotland International.  ASCoT came into the Covid-19 period ungeared, which was consistent with its historical practice of gearing in a tactical manner, in response to episodes of economic and financial market stress.  Gearing was deployed for only the fourth time in the Company’s 30 year history in April.  It offered flexibility to add to existing holdings, to participate in equity issues and to buy back shares without having to disturb the underlying portfolio.  At the year end, the gearing ratio was 6%.

Returning to the table above, it can be seen that the portfolio’s exposure to high leverage reduces in 2021 and 2022. This reflects the underlying generation of free cash flow by the investee companies – no further equity issues are assumed.  The ability of the portfolio’s holdings to pay down debt in this fashion underscores their viability and relevance.  While cyclical, these companies are well run and resilient – they are not zombies.

Income

Dividends paid by UK companies – large and small – suffered their worst year in the post war era in 2020: the London Business School calculates that aggregate dividends from NSCI (XIC) constituents fell by 52% in real terms.  In 2009, which was previously the worst year, the decline was “just” 22%.  ASCoT’s Revenue Investment Income, again adjusted for special dividends, fell in line with the NSCI (XIC).  The table below gives a different perspective on the portfolio’s dividend experience, categorising the holdings by their most recent dividend action.

Cut to zero Other cuts Unchanged payer Higher Nil payer
34 20 3 8 15

The lesson of 2009 was that the dividend cuts were quickly forgotten as growth recommenced in 2010.  Given how much further dividends fell in 2020, growth in 2021 is likely but the trajectory of the recovery is important.  The early signs are positive and support the decision by ASCoT’s Board to raise its final dividend.  The latter part of 2020 saw several companies return to the dividend register after having cut to zero amid the deep uncertainty of March and the second quarter.  Within the portfolio, three holdings reinstated dividends in the form of a bonus issue of shares and another six reinstated cash dividends.  The bonus issues, while dilutive, maintain discipline and provide a bridge to reinstated cash returns to shareholders.  The Managers believe that dividends are a crucial component of equity returns and continue their engagement with the boards of investee companies.  However, it is important to emphasise that the Managers would not jeopardise a company’s viability or ability to undertake profitable investments for the sake of a dividend – ASCoT’s portfolio continues to be managed in line with its total return objective.

Corporate activity

It was a tremendously busy year for corporate activity – given the pressure on companies’ liquidity it had to be and the portfolio’s participation in equity issues has already been quantified above.  As the year progressed, M&A picked up strongly.  Takeovers of 17 companies within NSCI (XIC) were completed, up from 12 in each of the two previous years. ASCoT held seven of the 17.  On top of this, bids for another eight companies were outstanding at the year end.  The buyers were a mix of domestic and overseas, with both private equity and other corporates featuring.  Deal structures also varied: alongside the full takeover, private equity proved willing to take stakes in companies that retained their public market listing.  At one level, this upsurge in interest in small UK quoted companies is surprising – stockmarket valuations would seem to indicate that prospects for these businesses are poor.  That, though, is the point: other companies and private equity are keen to take advantage of these extremely low valuations.  For the Managers, this opportunism is entirely rational.  The real issue is that a standard 30% control premium on prevailing share prices does not represent good value for most companies in the portfolio.  It may prove necessary to forgo a one day boost to performance and to push back on approaches for investee companies if the valuations are unrealistic.

Turnover

Portfolio turnover – as defined in the glossary – was 30% in 2020.  This is slightly lower than the 33% long term average, but higher than the 24% and 26% rates in the previous two years.  In any year, an element of portfolio turnover is unavoidable because of M&A and the annual rebalancing of the NSCI (XIC).  This rebalancing sees companies that have grown too large for the index ejected, to be replaced by companies whose share prices have fallen enough to merit inclusion.  This process effectively refreshes the value characteristics of the index and ensures there are numerous opportunities for investment.  It also creates an element of forced turnover, since, in accordance with the Investment Policy, there are limited circumstances in which ASCoT can hold companies that are not in the NSCI (XIC).

There were two important influences on the rise in turnover during the year.  First, Covid-19 and the reaction to it have undoubtedly changed the prospects for some businesses, notwithstanding the overall resilience of the UK’s small companies.  Where these changes are not fully reflected in share prices, the Managers make sales and look to reinvest in companies with strong upsides.  Second, the vaccine news saw the stockmarket rediscover its enthusiasm for some of the cyclical businesses.  Some were drastically re-rated close to target valuations, encouraging a rotation of capital to companies with greater upside – the “value roll” – and resulting in a pick-up in turnover from low levels of activity in the second quarter.

Active share

At the end of December, ASCoT’s active share in relation to the NSCI (XIC) was 78%, well above the Managers’ target of at least 70%.  Active share is a measure of how different a portfolio is from an index.  It is calculated as half of the sum of the absolute differences between each stock’s weighting in an index and its weighting in the portfolio.  A higher active share would indicate that a portfolio has a higher chance of performing differently from the index, for better or worse.

A portfolio analysis

Amid the depths of the year’s uncertainty, the Managers categorised the portfolio in order to quantify where the impact on performance had been greatest but, more importantly, to understand where the sources of greatest upside might lie. To be clear, this analysis did not change the underlying investment process.  As described in more detail in the 2019 Managers’ Report, the process is based on understanding the businesses, determining appropriate target valuations and circulating the portfolio’s capital from those companies with low upsides to those with high upsides, the “value” roll. Rather, the analysis focused attention on the most controversial holdings within the portfolio and to challenge the investment cases.

Category Number Weight 2020 return Upside to target 2022 EV/EBITA
Demand beneficiaries 19 26% +3% 43% 8.4x
Demand cyclicals 25 29% -15% 46% 7.6x
Supply side beneficiaries 12 13% -29% 58% 8.0x
Strategic accelerators 10 16% +0% 84% 7.4x
Structural victims? 13 16% -39% 75% 8.4x
  • Demand beneficiaries are companies that either have benefited or are likely to benefit from the pandemic, lockdown conditions and official support measures.  These suffered less in share price terms, but this is reflected in higher valuations and lower upsides.  Examples include holdings involved in logistics, healthcare businesses, digital platforms and likely beneficiaries of higher infrastructure and housing investment.  Given the lower upside, this category is a more likely source of capital.
  • Demand cyclicals comprises companies whose fortunes are driven by the ebbs and flows of economic activity.  This category contains overseas earners, as well as many domestic businesses, such as retailers and leisure companies, whose sales and profits suffered from lockdown conditions.  The profitability and share prices of these companies are expected to recover with the economy at large over the next three years.
  • Supply side beneficiaries are also economically sensitive and have suffered accordingly, but their recovery prospects are likely to be enhanced by an improving competitive position as capital is withdrawn from their industries and as competitors fail.  The upside from this category is therefore higher.  Within it are some retailers, oil producers and housebuilders.
  • Strategic accelerators is a somewhat clumsy term for companies that are not letting the crisis go to waste – they are seeking to achieve in one year what might otherwise have taken three.  Examples include the accelerated deployment of an online strategy, deep cost restructuring and acquisition integration.  In some cases, companies here required additional equity funding, but the upsides from successful execution promise to be substantial. Significant investment has been made in this category through 2020.
  • Structural victims? is the most controversial category, which includes companies that the stockmarket has determined to be the most fundamentally affected by Covid-19.  The category’s constituents in aggregate suffered most in 2020 and have received greater scrutiny from the Managers.  The business models here have been severely challenged by lockdown, such as the bus companies, doorstep lenders and travel related businesses.  Valuations are low and upsides are potentially very attractive, which has led to further investment in the category.  However, not all constituents have received incremental capital, since in some cases the future role of government is a significant uncertainty – official support has been important, but the degree of future government involvement and regulation are not yet clear.  The question mark in the name of the category acknowledges the controversy but, in view of the valuations, also hints at the potential here should the stockmarket’s blunt judgement prove extreme.

Valuations

Consideration of valuations at the present time is complicated by the uncertainty of forecasts as the recession takes its effect on companies’ profits.  The use of historical profits can adjust for this.  At 31 December 2019, the portfolio’s historical price earnings ratio (PE) – the current share price divided by historical earnings per share – was 10.0x.  This compares with a 30 year average of 11.5x and so, even before the onset of Covid-19, the portfolio offered attractive valuation characteristics in relation to history.  During 2020, as pessimism intensified, the PE fell as low as 5.8x, before ending the year at 7.3x as share prices recovered in the fourth quarter.  At 5.8x, the PE was in line with its low points over the past 30 years, which coincided with the recessions in the early 1990s and during the financial crisis.

The portfolio’s PE of 7.3x at 31 December 2020 was 32% lower than the NSCI (XIC)’s 10.8x.  Though the discount has narrowed from over 50% at points through 2020, the year end figure of 32% is much wider than the 30 year average of 13%.  The portfolio thus remains much more attractively valued than usual relative to small companies as a whole.  The stockmarket would appear to be judging that many businesses simply will not make it to the other side of the recession. This gloomy view is hard to reconcile with the progress made by companies through the year and the measures taken to address liquidity pressures.  Indeed, some recognition of this came in November as share prices started to adjust to the vaccine news.

Even without a further rise in share prices, the portfolio’s historical PE will rise through 2021 as companies report results in respect of 2020.  These results will reflect the impact of lockdown and lower profits.  History suggests that share prices can look through the decline in profits to the recovery: the rise in ASCoT’s historical PE in the early 1990s from 7x to 19x was driven by a combination of lower historical profits and rising share prices as the stockmarket anticipated recovery. Indeed, low historical valuations have been a useful gauge of likely future returns – unsurprisingly, a lower starting PE today increases the chance of a higher return over five years.

The table below brings forecasts into the valuation analysis for the portfolio and for the tracked universe.  The ratio used here is EV/EBITA (enterprise value to earnings before interest, tax and amortisation), which is the Managers’ preferred valuation metric.  Also shown are the ratios for a subset of growth stocks within the NSCI (XIC), along with those of the rest, which highlights the valuation stretch at the present time.

EV/EBITA 2020 2021 2022 2023
ASCoT 12.9x 9.6x 7.8x 6.4x
Tracked universe (253 stocks) 15.2x 12.1x 10.0x 8.8x
  • 42 growth stocks
22.8x 19.4x 16.9x 14.8x
  • 211 other stocks
14.0x 11.1x 9.1x 8.0x

The profit forecasts underlying the ratios in the outer years are the Managers’ and are established from the bottom-up analysis of the portfolio’s holdings.  The forecasts will evolve and are influenced by the second lockdown, official support measures and the vaccine news.  They are also framed in the context of the likely longer term economic impact of Covid-19, as companies cut costs and as consumer behaviour adjusts to higher unemployment.  Consistent with the commentary above, the EV/EBITA ratios imply a robust recovery over the next few years, with aggregate EBITA in 2023 estimated to be back to 2019 levels.

The table below provides characteristics of the portfolio, including the historical PE ratios that were addressed above.  It also shows historical dividend yield and dividend cover data, which are higher for the portfolio than for the NSCI (XIC). The portfolio’s 2.2% yield reflects part of the deep dividend downturn: the full impact will come through as investee companies with December year ends report their full year results in the first quarter of 2021.

Portfolio characteristics 31 December 2020 31 December 2019
ASCoT NSCI (XIC) ASCoT NSCI (XIC)
Number of companies 80 334 80 346
Weighted average market capitalisation £587m £866m £672m £883m
Price earnings (PE) ratio (historic) 7.3x 10.8x 10.0x 14.9x
Dividend yield (historic) 2.2% 1.5% 3.4% 3.2%
Dividend cover 6.1x 6.2x 2.9x 2.1x

Conclusion & outlook

It is difficult to do justice to just how extraordinary 2020 was.  A normal year would have been defined by the recently decided presidential election, remarkable for the conduct of the incumbent, or, closer to home, by the on-going wrangling over a trade deal with the EU.  Both these issues have, of course, been overwhelmed by Covid-19.  The stockmarket’s verdict on the impact of the coronavirus was abrupt and decisive: the share prices of the strong but cyclical businesses favoured by ASCoT were crushed, while the share prices of the highly valued technology companies benefiting from lockdown conditions rose further.  ASCoT’s performance suffered accordingly.

The Managers do not disagree with the stockmarket’s differentiation between those two cohorts of companies in the context of the onset of the coronavirus or with the proposition that the prospects of some businesses have been fundamentally changed by the pandemic.  However, the degree of the differentiation was harder to understand, unless numerous inherently profitable businesses were going to fail.  As government and shareholders offered their support and as management teams took the necessary actions, it became clear that this would not happen.  Additionally, the stockmarket’s reasoning only went so far: it was fascinated with the ingenuity underlying the technology businesses that benefited from pandemic conditions, but did not appear to contemplate which companies might benefit from the astonishing human endeavour involved in developing the vaccines.  From this it was clear that much of the universe of small UK quoted companies, already more attractively valued than usual at the start of the year, was offering exceptional value.  This led to ASCoT deploying its debt facility for the fourth time in its 30 years.

The vaccine news went on to challenge the stockmarket’s prejudices and, alongside the Brexit trade deal, allowed the year to end in a more encouraging fashion.  The recovery is, though, in its early days and the portfolio’s valuations remain lower than their long term historical average.  This in part reflects lingering uncertainty about Covid-19: as the new year begins, the world is grappling with a new more highly transmissible variant of the virus, which is necessitating incremental lockdown measures in the UK and elsewhere.  Nevertheless, the vaccines continue to be rolled out and thus allow markets to contemplate prospects beyond the duration of the current lockdown.

Looking, therefore, to the medium term, an important component in the opportunity offered by ASCoT today is normalisation – of social behaviours, of economic activity, of profits and of share prices.  This is not to assert that there will be a full return to what was normal, since the coronavirus will effect permanent change on societies and economies, not least through the acceleration of pre-existing disruptive trends.  However, share prices have already adjusted to this new reality and not all that Covid-19 has wrought will necessarily prove lasting.  The markets’ on-going efforts to distinguish between the truly long term and ephemeral effects of the virus will provide further investment opportunities.

Further out, the impact of normalisation will inevitably fade, which is likely to bring the broader influences on investment style back to the fore.  The disinflationary trend of the past 40 years, accelerated by the extraordinary monetary policies imposed after the global financial crisis, has favoured the growth style.  It remains to be seen how the world reacts to the shock of the pandemic.  The initial collapse in demand is undoubtedly deflationary, but the supply side has also been affected.  On top of this, governments appear to be looking to move on from stimulus policies that have relied heavily on monetary actions.  Fiscal spending, sometimes under the banner of “modern monetary theory”, is being widely heralded as the solution to the coronavirus deficit, low growth and wealth disparity.  Even leaving aside the dubious recent record of politicians, fiscal stimulus and a larger role for government usually lead to inflationary pressure. 

Despite the complexity of the generational issues that affect the debate between inflation and deflation, the financial markets harbour little doubt.  The consensus view is that yesterday’s winners will be tomorrow’s winners and there is little questioning of taut valuation stretches between and within markets.  Government bonds are priced as “return free risks” and most listed companies, in the UK and more broadly, are very lowly valued by the stockmarket.

Accordingly, the upside today from a diversified portfolio of companies selected within a value investment philosophy is much greater than usual.  In making this assertion, the Managers are acutely conscious of what ASCoT has endured to get to this point – both in the coronavirus afflicted year of 2020 and over longer periods, exposure to the value investment style has incurred an opportunity cost.  However, the sanity check comes through considering the qualities of the underlying companies, which are well run, in command of their balance sheets and able to grow profitably from cycle to cycle.  These viable businesses benefit from innovation and provide us with essential products and services –they merit higher valuations from the stockmarket.  As 2019 and the final quarter of 2020 showed, the scope for strong total returns is considerable and ASCoT therefore remains geared as 2021 begins.  The Managers are optimistic about ASCoT’s prospects and have added meaningfully to their shareholdings through 2020.

Aberforth Partners

Managers

29 January 2021

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 Strategic 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 position and performance, business model and strategy.

On behalf of the Board

Richard Davidson

Chairman

29 January 2021

PRINCIPAL RISKS

The Board carefully considers risks, including emerging 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 risks inherent in 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 Board receives internal control reports from these firms to review the effectiveness of their control frameworks. Since the Covid-19 pandemic, these firms have deployed alternative operational practices, including staff working remotely, to ensure continued business service.

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. As described in the Chairman's Statement and Managers' Report, Covid-19 has caused a significant reduction in capital values and dividends from UK small companies.

(i) Investment policy/performance risk – the Company’s portfolio is exposed to share price movements owing to the nature of its investment policy and strategy. The performance of the investment portfolio typically differs from the performance of the benchmark and is influenced by stock selection and 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) Market risk - investment performance is impacted by a number of market risk factors, including uncertainty about future price movements of investments. The Managers regularly assess the exposure to market risk when making investment decisions and the Board monitors the results of the investment process with the Managers. The Board and Managers closely monitor economic and political developments and, in particular, are mindful of the continuing uncertainty following the departure of the UK from the EU, the ongoing impact of the Covid-19 pandemic and government responses, the potential effects of climate change and other geopolitical issues referred to in the Managers’ Report.

(iii) Share price discount – investment trust shares tend to trade at discounts to their underlying net asset values but a significant share price discount, or related volatility, could reduce shareholder returns and confidence. The Board and the Managers monitor the discount on a daily basis both in absolute terms and relative to ASCoT’s peers. In this context, the Board intends to continue to use the buy-back authority as described in the Directors’ Report.

(iv) Gearing risk – in rising markets, gearing enhances returns; however, in falling markets the gearing effect adversely affects returns to Shareholders. The Board and the Managers consider the gearing strategy and associated risk on a regular basis.

(v) Reputational risk – the reputation of the Company is important in maintaining the confidence of shareholders. 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.

(vi) 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.

Going Concern

The Audit Committee has undertaken and documented an assessment of whether the Company is a going concern. This assessment included the impact on the Company of Covid-19. The Committee reported the results of its assessment to the Board. The Company’s business activities, capital structure and borrowing facilities, together with the factors likely to affect its development and performance are set out in the Strategic Report. In addition, the Annual Report includes the Company’s objectives, policies and processes for managing its capital and financial risk, along with details of its financial instruments and its exposures to credit risk and liquidity risk. The Company’s assets comprise mainly readily realisable equity securities and funding flexibility can typically be achieved through the use of the borrowing facilities which are described in notes to the annual report The Company has adequate financial resources to enable it to meet its day-to-day working capital requirements. In summary and taking into consideration all available information, the Directors have concluded it is appropriate to continue to prepare the financial statements on a going concern basis.

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 2020

(audited)

For the year ended For the year ended
31 December 2020 31 December 2019
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Net (losses)/gains on investments - (223,279) (223,279) - 269,836 269,836
Investment income 15,656 - 15,656 42,478 295 42,773
Investment management fee (2,717) (4,529) (7,246) (3,326) (5,543) (8,869)
Portfolio transaction costs - (2,747) (2,747) - (2,595) (2,595)
Other expenses (731) - (731) (698) - (698)
-------- -------- -------- -------- -------- --------
Net return before finance costs 12,208 (230,555) (218,347) 38,454 261,993 300,447
  and tax
Finance costs (301) (502) (803) (351) (586) (937)
-------- -------- -------- -------- -------- --------
Return on ordinary activities 11,907 (231,057) (219,150) 38,103 261,407 299,510
  before tax
Tax on ordinary activities (48) - (48) - - -
-------- -------- -------- -------- -------- --------
Return attributable to
  equity shareholders 11,859 (231,057) (219,198) 38,103 261,407 299,510
====== ======= ======= ====== ======= =======
Returns per Ordinary Share (Note 4) 13.28p (258.78)p (245.50)p 42.26p 289.96p 332.22p

The Board declared on 29 January 2021 a final dividend of 22.90p per Ordinary Share. The Board declared on 28 July 2020 an interim dividend of 10.40p 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 2020

(audited)

Capital
Share redemption Special Capital Revenue
Capital reserve reserve reserve reserve Total
£’000 £’000 £’000 £’000 £’000 £’000
Balance as at 31 December 2019 895 93 102,753 1,210,620 91,439 1,405,800
Return on ordinary activities after taxation - - - (231,057) 11,859 (219,198)
Equity dividends paid (Note 3) - - - - (32,582) (32,582)
Purchase of Ordinary Shares (7) 7 (6,090) - - (6,090)
-------- -------- -------- -------- -------- --------
Balance as at 31 December 2020 888 100 96,663 979,563 70,716 1,147,930
====== ====== ====== ====== ====== ======

For the year ended 31 December 2019

(audited)

Capital
Share redemption Special Capital Revenue
Capital reserve reserve reserve reserve Total
£’000 £’000 £’000 £’000 £’000 £’000
Balance as at 31 December 2018 906 82 115,375 949,213 88,160 1,153,736
Return on ordinary activities after taxation - - - 261,407 38,103 299,510
Equity dividends paid (Note 3) - - - - (34,824) (34,824)
Purchase of Ordinary Shares (11) 11 (12,622) - - (12,622)
-------- -------- -------- -------- -------- --------
Balance as at 31 December 2019 895 93 102,753 1,210,620 91,439 1,405,800
====== ====== ====== ====== ====== ======

BALANCE SHEET

As at 31 December 2020

(audited)

31 December 31 December
2020 2019
£‘000 £‘000
Fixed assets
Investments at fair value through profit or loss (Note 5) 1,218,073 1,416,678
---------- ----------
Current assets
Debtors 968 2,809
Cash at bank 2,963 187
---------- ----------
3,931 2,996
Creditors (amounts falling due within one year) (1,231) (13,874)
---------- ----------
Net current assets / (liabilities) 2,700 (10,878)
---------- ----------
Total Assets less Current Liabilities 1,220,773 1,405,800
Creditors (amounts falling due after more than one year) (72,843) -
---------- ----------
Total Net Assets 1,147,930 1,405,800
======= =======
Capital and reserves: equity interests
Called up share capital 888 895
Capital redemption reserve 100 93
Special reserve 96,663 102,753
Capital reserve 979,563 1,210,620
Revenue reserve 70,716 91,439
---------- ----------
Total Shareholders’ Funds 1,147,930 1,405,800
======= =======
Net Asset Value per Ordinary Share (Note 6) 1,292.38p 1,570.15p

CASH FLOW STATEMENT

For the year ended 31 December 2020

(audited)

31 December 2020 31 December 2019
£’000 £’000
Operating activities
Net revenue before finance costs and tax 12,208 38,454
Scrip dividends received               (904)               -
Taxation (48) -
Receipt of special dividends taken to capital - 295
Investment management fee charged to capital (4,529) (5,543)
Decrease in debtors 1,841 421
Decrease in other creditors - (13)
-------- --------
Net cash inflow from operating activities 8,568 33,614
===== =====
Investing activities
Purchases of investments (341,319) (300,568)
Sales of investments 315,913 319,296
-------- --------
Cash (outflow) / inflow from investment activities (25,406) 18,728
===== =====
Financing activities
Purchases of Ordinary Shares (6,090) (12,622)
Equity dividends paid (Note 3) (32,582) (34,824)
Interest and fees paid (964) (1,018)
Net drawdown / (repayment) of bank debt facilities  
(before any costs)
59,250 (3,750)
-------- --------
Cash inflow / (outflow) from financing activities 19,614 (52,214)
===== =====
Change in cash during the period 2,776 128
===== =====
Cash at the start of the period 187 59
Cash at the end of the period 2,963 187
====== ======

SUMMARY NOTES TO THE FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES                                                                                                                       

The financial statements have been presented under Financial Reporting Standard 102 (FRS 102) and under the AIC’s Statement of Recommended Practice “Financial Statements of Investment Trust Companies and Venture Capital Trusts” (SORP) issued in October 2019, applicable for accounting periods beginning on or after 1 January 2019. 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 described below. The functional and presentation currency is pounds sterling, which is the currency of the environment in which the Company operates. The Board confirms that no critical accounting judgements or significant sources of estimation uncertainty have been applied to the financial statements and therefore there is not a significant risk of a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

2. INVESTMENT MANAGEMENT FEE

The Managers, Aberforth Partners LLP, receive an annual management fee, payable quarterly in advance, equal to 0.75% of net assets up to £1 billion, and 0.65% thereafter. The investment management fee has been allocated 62.5% to capital reserve and 37.5% to revenue reserve, 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 of the Company.

3. DIVIDENDS                                                                                                                                      

Year to 31 December 2020
£’000
Year to 31 December 2019
£’000
Amounts recognised as distributions to equity holders in the period:
Final dividend for the year ended 31 December 2019 of 22.00p (2018: 20.75p) paid on 6 March 2020 19,697 18,795
Special dividend for the year ended 31 December 2019 of 4.00p (2018: 7.75p) paid on 6 March 2020 3,581 7,020
Interim dividend for the year ended 31 December 2020 of 10.40p (2019: 10.00p) paid on 28 August 2020 9,304 9,009
------------ ------------
32,582 34,824
------------ ------------

The 22.90p final dividend (2019: 22.00p final and 4.00p special) for the year ended 31 December 2020 will be paid, subject to shareholder approval, on 9 March 2021. These dividends have not been included as a liability in the financial statements for 2020 or 2019.

4. RETURNS PER ORDINARY SHARE                                                                                                                                                                                                                       

The returns per Ordinary Share are based on:

Year to 31 December 2020 Year to 31 December 2019
Returns attributable to Ordinary Shareholders         £(219,198,000)        £299,510,000       
Weighted average number of shares in issue
during the year
89,285,989                    90,154,625                   
Return per Ordinary Share                        (245.50)p                     332.22p                    

There are no dilutive or potentially dilutive shares in issue.

5. 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


As at 31 December 2020
Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Listed equities 1,214,140 - 3,933 1,218,073
Unlisted equities - - - -
------------ ------------ ------------ ------------
Total financial asset investments 1,214,140 - 3,933 1,218,073
------------ ------------ ------------ ------------

During the year, an investment was transferred from Level 1 to Level 3 as its listing in the market was suspended. The shares were relisted on 29 January 2021.


As at 31 December 2019
Level 1
£’000
Level 2
£’000
Level 3
£’000
Total
£’000
Listed equities 1,416,678 - - 1,416,678
Unlisted equities - - - -
------------ ------------ ------------ ------------
Total financial asset investments 1,416,678 - - 1,416,678
------------ ------------ ------------ ------------

6. NET ASSET VALUES                                                                                                                                        

The net asset value per share and the net assets attributable to the Ordinary Shares at the year end are calculated in accordance with their entitlements in the Articles of Association and were as follows.                                           

31 December 2020 31 December 2019
Net assets attributable £1,147,930,000      £1,405,800,000     
Ordinary Shares in issue at the end of the year 88,823,066 89,533,066
Net asset value per Ordinary Share 1,292.38p 1,570.15p

7. SHARE CAPITAL

During the year, the Company bought back and cancelled 710,000 shares (2019: 1,047,245) at a total cost of £6,090,000 (2019: £12,622,000). During the period 1 January to 29 January 2021, 100,000 shares have been bought back for cancellation.

8. 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.

9. 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 2019 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 by 9 February 2021.  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 – 29 January 2021

ANNOUNCEMENT ENDS