LEI number:
213800U7G1ROCTJYRR70
Herald Investment Trust plc
Annual
Financial Report
For the
year ended 31 December 2023
Results and dividend
The net asset value ('NAV') of the
Company as at 31 December 2023 was 2,219.2p per ordinary share
(2022 - 2,099.1p). This represented an increase of 5.7% during the
year, compared to an increase in the comparative total return
indices of 3.2% Numis Smaller Companies plus AIM (ex. investment
companies) Index and an increase of 21.0% Russell 2000® Technology
Index (small cap) (in sterling terms). The discount at year end was
13.4% (2022 - 15.1%).
The directors do not recommend a
dividend for the year ended 31 December 2023 (2022 - nil) as the
revenue reserve is in deficit.
STATISTICS
AND PERFORMANCE - YEAR'S SUMMARY
|
31 December
2023
|
31
December 2022
|
%
change
|
Total net assets
|
£1,245.8m
|
£1,305.0m
|
|
Shareholders' funds
|
£1,245.8m
|
£1,305.0m
|
|
Net asset value per ordinary
shareA
|
2,219.2p
|
2,099.1p
|
+5.7
|
Share priceA
|
1,922.0
|
1,782.0p
|
+7.9
|
Numis Smaller Companies plus AIM
(ex. investment companies) Index (capital only)
|
5,404.7
|
5,406.8
|
0.0
|
Russell 2000® Technology Index
(small cap) (in sterling terms) (capital
only)B
|
4,605.3
|
3,814.1
|
+20.7
|
Dividend per ordinary
share
|
-
|
-
|
|
Profit per ordinary share
(revenue)
|
6.79p
|
0.21p
|
|
Ongoing
chargesA
|
1.07%
|
1.05%
|
|
Discount to
NAVA
|
13.4%
|
15.1%
|
|
Year to 31 December
|
2023
|
2023
|
2022
|
2022
|
Year's high and low
|
High
|
Low
|
High
|
Low
|
Share price
|
1,950.0p
|
1,596.0p
|
2,570.0p
|
1,560.0p
|
Net asset valueA per
ordinary share
|
2,283.5p
|
1,911.4p
|
2,719.0p
|
1,978.7p
|
DiscountA
|
17.3%
|
11.4%
|
25.2%
|
4.1%
|
At
31 December
|
2023
|
|
2022
|
Profit/(loss) per ordinary share
|
|
|
|
Revenue
|
6.79p
|
|
0.21p
|
Capital
|
74.35p
|
|
(641.23p)
|
Total
|
81.14p
|
|
(641.02p)
|
A Alternative Performance
Measure
B Investments and
indices valued at USD/GBP exchange rate of 1.275 at 31 December
2023 (1.209 31 December 2022).
® Russell Investment
Group.
CAPITAL RETURN SINCE INCEPTION
|
|
Inception
|
|
|
31 December
|
16
February
|
|
|
2023
|
1994
|
% change
|
Net asset value per ordinary share
(including
|
|
|
|
current year
revenue)A
|
2,219.23p
|
98.70p
|
2,148.46
|
Net asset value per ordinary share
(excluding
|
|
|
|
current year
revenue)A
|
2,212.06p
|
98.70p
|
2,141.20
|
Share price
|
1,922.00p
|
90.90p
|
2,014.41
|
Numis Smaller Companies plus AIM
(ex. investment
|
|
|
|
companies) Index
|
5,404.69
|
1,750.00
|
208.84
|
Russell 2000® Technology Index
(small cap)
|
|
|
|
(in sterling
terms)†
|
4,605.25
|
688.70*
|
568.69
|
A Alternative
Performance Measure (APM). See Glossary of Terms and Alternative
Performance Measures in the financial report for details of the
explanation and reconciliations of APMs.
* At 9 April 1996
being the date funds were first available for international
investment.
† The Russell
2000® Technology
Index (small cap) was rebased during 2009 following some minor
adjustments to its constituents. The rebased index is used from 31
December 2008 onwards.
Chairman's
Statement AND REVIEW OF 2023
This is my first annual statement
since assuming the chairmanship of the Company in April 2023. I
would like to thank my predecessor Tom Black and my board
colleagues for entrusting me with the role and making my job much
easier through their constructive and collegiate
approach.
The Herald Investment Trust has a
remarkable long-term record. Had you bought shares at inception in
1994, you would have made 22 times your money, a compound annual
return comfortably into double figures. Since 1996 the Company has
not issued any new shares and has bought back more than £340m worth
of its own shares. The successive boards of the Company, and the
Manager, have exercised commendable capital discipline, recognising
that the size of the Company should not outgrow the strategy of
investing only in smaller technology and communication companies
worldwide. In the year to 31 December 2023 alone the Company bought
back £107.4m of shares, representing some 9.7% of the outstanding
shares at the start of the year.
Stepping back, the purpose of an
investment trust remains the same as it was when the vehicle was
invented in the 19th century: to allow savers, whether
directly or indirectly through, for example, pension funds, to gain
exposure to a portfolio of shares, expertly managed, which
they would almost certainly be unable to do on their own. The
Herald Investment Trust represents a classic use of the vehicle. In
the Company's case, its investment strategy inevitably involves
investing in stocks which are comparatively illiquid by virtue of
their small capitalisations. Part of the reason for the Company's
success is that it can take a long-term view of growth and value,
and not be looking over its shoulder for short-term liquidity.
A closed-end vehicle is well adapted to that role, with
selling of the Company's own shares representing the way for
shareholders to realise cash if needed, as opposed to redemptions
of units, which would require the Company to sell the underlying
shares to effect the redemptions. The Company's strategy cannot be
successfully executed through an open-ended fund, which would
compel the Company either to sell illiquid shares at a forced
seller's price to finance redemptions, and/or change its successful
strategy and invest only in the larger, more liquid, segment of the
target market, which would run counter to the long-term interests
of the Company and its shareholders.
There will be times when the focus
of the Company on smaller stocks leads to underperformance against
the wider stock market. 2023 was one such year. Growth in the
Company's NAV per share was 5.7% against stronger returns from the
global stock markets. As detailed in the Manager's Report, the main
cause of the Company's sluggish relative performance is illustrated
by the divergence between the performance of the Company's larger
stocks and smaller ones, which was extreme in 2023. The 39
investments with a market cap of greater than $3bn delivered
returns of 72.1% in the year against -9.2% for the 283 companies
capitalised at less than $3bn. This reflects a similar, if less
exaggerated, divergence within the wider stock markets of the
world. This in turn reflects in part a stage in the interest rate
cycle: after many years of very low rates, with the cost of capital
similarly very low, rates have returned to 'reality' leading to the
current reversal of popularity between small cap stocks and larger
companies, whose current valuations are less dependent than smaller
cap companies on a terminal value many years out which is then
discounted at the prevailing cost of capital. Savers were also for
the first time for many years able to earn a material return on
cash deposits. The divergence was enhanced by the fact that 40% or
so of the Company's holdings by value are in the UK. With 2023
seeing an underperformance in wider markets for the UK against the
rest of the world, the Company's portfolio suffered from
a 'double whammy' of focus on smaller stocks and the UK.
Again, the Manager's Report sets out the relative underperformance
of the UK, driven not by poor performance overall of the stock
picks, but by a contraction in price to earnings ('p/e') multiples
applied to the earnings, against a material expansion in p/e
multiples in all other regions.
As is typical of cycles, the
underperformance of both small cap and the UK will turn: eventually
their relative good value will be hard to ignore. In the meantime
patience is needed. The factors at work are the subject of frequent
dialogue between the Company's board and the Manager: it is right
to question the fundamental tenets of the investment strategy when
there is underperformance. Part of this underperformance may result
from a structural shift as an increased share of investment dollars
is taken by index tracker funds, which do not invest in small and
micro stocks. However, the board remains confident that the Company
is operating in a sector of the capital markets, namely small cap
technology and communications (in which there are more than 5,000
public companies globally) which is going to continue to prosper in
the long run by comparison with many other sectors. The typical
investor has few options to gain exposure to the sector on a global
basis - for example there is no way to invest in that sector
through an ETF - and the Company fulfils that requirement, with the
added benefit of the Manager's proven investment process and stock
picking skills. Similarly the Company plays a vital role in
providing primary capital to companies especially in the UK.
Because Herald is 'one of a kind', it is in a position to pick and
choose the companies it will support, and as deal flow picks up, it
will be the destination of choice for relevant companies wishing to
raise equity capital.
The Company's performance in the
various geographies is discussed in the Manager's Report. Although
there was underperformance by some measures against the market in
smaller companies in the UK, albeit not versus the AIM Technology
sector, there was a strong outperformance in the US. Needless to
say, over the longer term the Company compares very well on every
measure.
On the income account, the Company
itself benefitted from higher rates of interest receivable on its
cash and near cash. However, with a deficit in revenue reserves, no
dividend is payable.
The Manager details in its report
that selling pressure in the Company's own shares has been the
greatest in its history. Again this reflects a wider market
phenomenon, driven largely by the changed interest rate background,
with selling of investment company shares and redemptions from
open-ended funds, both pretty universal and at an elevated level.
In the case of UK investment companies, the position is not helped
by certain regulatory challenges, most notably a perverse
requirement to aggregate investment companies' charges (already
discounted in share prices) with the wealth or fund manager's own
costs. The practical effect has been to drive away what should be
natural sources of demand for the Company's shares and deny the
ultimate retail investor the opportunity to invest in a sector
otherwise tailor-made for them. Hopefully 2024 will see sense
prevail amongst the authorities.
The Company has entered 2024 with
over £100m cash and near cash, representing some 8.5% of net asset
value. Having avoided over-priced opportunities in recent years,
this cash will allow the Company to take advantage of placings and
perhaps IPOs at the more sensible valuation levels now prevailing.
In that same time, as detailed in the Manager's Report, the Company
has taken advantage of many takeover bids for its holdings, not
unusually at 100% or more of the undisturbed price, and these have
been the primary source of the Company's current
liquidity.
The board is confident that
long-term shareholders, who form the significant majority, will
continue to be well served by the Company, and their investment
aspirations of long-term growth will be fulfilled.
In December we welcomed Priya Guha
MBE to the board. As detailed in the annual report, Ms Guha
brings wide experience in the technology sector and a history of
working across the UK private and public sectors. The latter is
relevant for the Company, given the need for improvement at the
regulatory level on a number of fronts to ensure a healthy market
in smaller tech companies in the UK.
Karl Sternberg will not be standing
for re-election at the forthcoming AGM, having served a nine year
term. The board wish to record its appreciation for his many and
varied valuable contributions since he joined the board in 2015,
a period during which there have been many changes to the
markets in which the Company operates, and which has seen the
Company grow to become a constituent of the
FTSE 250.
ANDREW JOY
Chairman
21 February 2024
Investment
Manager's Report
It is a relief to report growth in
the Company's net asset value per share of 5.7% thanks to a rally
in the last two months of the year. In the technology sector the
excitement has focused on artificial intelligence, which has fed
through to strong demand, and even stronger share price
performance, for a handful of stocks in this portfolio which have
been significant enough to deliver a creditable performance for the
Company in 2023. AI enthusiasm has been much more significant in
the global large capitalisation technology indices.
Otherwise, sentiment has been
dominated by the end of quantitative easing, and the normalisation
of interest rates, and there has been an extraordinary divergence
between the performance of larger companies and small ones. It is
difficult to determine how much the small company underperformance
has reflected expectations that smaller companies would be more
challenged in the economic environment of higher interest rates and
slower growth, and how much it reflects redemptions in smaller
company funds which are the most significant investors on many
small companies' share registers.
The table below shows the regional
returns and highlights how badly the UK has done. However, the
greater divergence is market capitalisation, where the returns for
stocks below $3bn market capitalisation are much more comparable,
and poor in all regions. The median market capitalisation in the UK
is much smaller than North America and Asia. Most of the
investments operate globally and are exposed to global demand, yet
valuations and stock market dynamics are more regional.
At the start of the year, there were
22 holdings with a market capitalisation in excess of $3 billion,
being an aggregate value of £226m, by the year-end, market
movements took this to 39 companies with an aggregate value of
£309m. The returns of these groups are as follows:
|
|
Return
-
|
Return
-
|
Return
-
|
Return
-
|
|
|
investments
|
investments
|
investments
|
investments
|
|
|
with
market
|
with
market
|
with
market
|
with
market
|
|
|
cap
>$3bn
|
cap
<$3bn
|
cap
>$3bn
|
cap
<$3bn
|
Regional
|
Return -
all
|
at 31
Dec
|
at
31 Dec
|
at 31
Dec
|
at 31
Dec
|
Returns*
|
investments
|
2023
|
2023
|
2022
|
2022
|
United Kingdom
|
-8.7%
|
28.5%
|
-10.5%
|
25.6%
|
-10.1%
|
North America
|
31.1%
|
84.8%
|
-9.8%
|
96.1%
|
4.4%
|
EMEA
|
4.5%
|
146.2%
|
-11.7%
|
43.8%
|
-8.1%
|
Asia
|
14.8%
|
38.5%
|
3.5%
|
19.6%
|
13.7%
|
Total return
|
5.7%
|
72.1%
|
-9.2%
|
63.3%
|
-4.3%
|
Number of companies
|
322
|
39
|
283
|
22
|
300
|
Market value
|
£1,139.9m
|
£308.7m
|
£831.2m
|
£226.2m
|
£913.7m
|
|
|
|
|
|
| |
*IRR for year to 31 December
2023.
It appears to be more than just a
cyclical divergence, but a structural change. There have been
positive cash flows into index tracking funds, which do not invest
in smaller companies, and when companies grow into the radar screen
they benefit from a rerating. To a degree this has always been the
case, but this effect seems more extreme now. Of greater concern is
the withdrawal of investors from the smaller company public
markets. In the US, this is reflected in companies scaling to a
greater extent funded by venture capitalists, who in recent years
have used an initial public offering as an exit rather than as a
final round of development capital. In consequence, valuations have
generally not attracted us. In the UK and Europe, IPOs are still
used to raise development capital, because venture pockets are less
deep, but in the last year the withdrawal of capital has meant the
public markets have been virtually closed for primary capital
raises apart from necessary secondary offerings, often at
distressed valuations.
There have been noticeable areas of
demand weakness in parts of our targeted sectors. In particular,
there has been reduced demand for IT services, which seems to
reflect a slowdown in capital expenditure associated with the
higher cost of capital and a weaker advertising market. In
addition, the high order backlogs associated with covid related
supply issues have evaporated. A few investments have had their own
particular challenges, but, in general, trading conditions have
been benign. A greater effect on returns has been p/e multiple
expansion and contraction.
Regional Price to Earnings
|
2022
|
2023
|
|
|
Year-end
P/E
|
Year-end
P/E
|
% change
|
UK
|
16.7
|
16.0
|
-4.2
|
North America
|
17.9
|
22.3
|
24.6
|
EMEA
|
24.1
|
30.4
|
26.1
|
Asia
|
16.9
|
21.5
|
27.2
|
Source: Bloomberg. Analyst earnings
estimates, where available, are aggregated using the Bloomberg
weighted harmonic average calculation. This excludes loss-making
companies from the P/E calculation. A weighted harmonic average
will normally be lower than a geometric or arithmetic
average.
On Bloomberg estimates, the forecast
p/e has expanded materially in all regions except the UK. This
implies that there have been material reductions in profit
expectations in Asia and EMEA where multiple expansion far exceeds
share price returns. In North America, the share price performance
exceeds the multiple expansion implying rising profit expectations,
whereas on average UK profit expectations have marginally slipped
and valuations are a little lower. There is also of course the mid
cap rerating which has had a greater effect in Asia and North
America.
There have been fourteen takeovers
announced during the year. There was a quiet patch reflecting
economic uncertainty in the first half, and it is noticeable that
twelve of these were announced in the second half. In contrast, we
have not participated in any IPOs. This is the inevitable result of
more sellers than buyers, largely due to redemptions from small
company funds and professional managers moving up the size chain
where there is more liquidity.
We have been quite surprised by the
scale of net selling in Herald Investment Trust's own shares, which
has resulted in a record level of buybacks (£107m) and a
discount player accumulating a stake not dissimilar in size. Since
launching the Company nearly thirty years ago, the scale of selling
this year has been without parallel. Some of this will reflect
investors switching into fixed income, some will be investors
cautious about the global economy and UK smaller companies in
particular, but we are also aware of some wealth managers removing
all investment trusts from their recommended lists because of the
cost disclosure requirements. At the IPO in 1994 our own investors
were mainly pension funds and insurance companies. There was
a rotation on the register from 2000-08 when these investors
exited, reflecting regulatory and tax changes, and they were
largely replaced by wealth managers. More recently, retail
investors through platforms have appeared, and now represent over
15% of the register.
We fervently believe in the target
mandate long-term and believe that specialist active management is
required to provide capital intelligently for growing businesses.
Having invested over £600m in primary capital, in spite of only
ever raising £95m of outside capital ourselves and having delivered
a total return of over 22x per share, we are well placed to
continue this. However, a challenging 2024 seems likely as the bond
markets are hungry for cash and fiscal deficits in the major
economies must be reduced. It seems a discount to net assets is an
appropriate compromise for short-term challenges and long-term
opportunities. I observe that the investment trust sector as a
whole has seen widening discounts and selling pressure, but
open-ended funds have similarly seen outflows.
REGIONAL ALLOCATION CHANGES (STERLING
THOUSANDS)
|
Valuation
at
|
Net
|
|
|
Valuation
at
|
|
31 December
|
acquisitions/
|
|
Appreciation/
|
31 December
|
|
2022
|
(disposals)
|
Amortisation
|
(depreciation)
|
2023
|
Equities*
|
|
|
|
|
|
UK
|
575,522
|
(12,533)
|
-
|
(59,055)
|
503,934
|
North America
|
284,450
|
(27,630)
|
-
|
84,751
|
341,571
|
EMEA
|
141,424
|
4,230
|
-
|
4,695
|
150,349
|
Asia Pacific
|
145,477
|
(19,051)
|
-
|
17,594
|
144,020
|
Total equities
|
1,146,873
|
(54,984)
|
-
|
47,985
|
1,139,874
|
Government bonds
|
77,640
|
(15,825)
|
1,516
|
(2,566)
|
60,765
|
Total investments
|
1,224,513
|
(70,809)
|
1,516
|
45,419
|
1,200,639
|
Net liquid assets
|
80,535
|
(34,101)
|
-
|
(1,316)
|
45,118
|
Total assets+
|
1,305,048
|
(104,910)
|
1,516
|
44,103
|
1,245,757
|
* Equities includes
convertibles and warrants.
+ The total assets
figure comprises assets less current liabilities.
UK
The UK remains the largest region,
accounting for 40.5% of net assets in spite of our withdrawing over
£200m in recent years. The return of -8.04% (Time Weighted Return -
TWR) is disappointing relative to the Numis Smaller Companies plus
AIM (ex. investment companies) Index total return returning 3.2%,
but the return for the AIM Technology index has been considerably
worse. In contrast, over 5 years the UK IRR is 45.3% versus
the Numis index returning 24.0%, with technology companies having
strongly outperformed the more general small-cap index during the
coronavirus pandemic, but this trend partially reversing during the
most recent year. There have been a small number of companies that
have performed badly - notably Zoo Digital, Cirata,
S4 Capital, IQE and Spirent. In aggregate they delivered
a negative return of £35.2m during the year. However,
collectively over the entire period of ownership they have yielded
a positive return of £29.4m, reflecting significant profits that
have already been realised. Only S4 Capital has delivered a
cumulative negative return of £1.1m. Zoo Digital suffered from
strikes in Hollywood, Cirata from the unwinding of fake orders,
although fortunately sufficient profits had been taken for £1.9m
profits to have been realised overall. IQE suffered from mobile
phone destocking and share losses, while Spirent suffered from
reduced telecom company capital expenditure, particularly in China.
However, 84 other UK holdings also yielded a negative return
despite underlying trading generally being adequate or
better.
On a brighter note, in percentage
terms the best performing stocks included a number of takeover
approaches including SmartSpace, OnTheMarket, Sopheon and Smoove.
Of note is that the premiums to the trading period prior to a bid
were frequently in the region of 100%, demonstrating the value that
lies in these small companies. Volex has been a marginal
beneficiary of the AI boom. Trustpilot has been the only material
addition to the portfolio and has contributed usefully.
There is no doubt that the UK public
market is in a more fragile state than during any previous downturn
in living memory. The question is whether this is cyclical or
whether the damage is more structural. The UK public market is
currently a fairly difficult environment for entrepreneurs to raise
capital and I am saddened by how much management teams have
been diluted by fund raisings at distressed levels. I believe that
value in our portfolio will be realised through takeovers but that
the costs incurred by listed companies in the UK, with the recent
added burden of ESG and auditing requirements, has become too high
to attract new companies. Similarly, the costs for managing small
investments have increased considerably, with additional ESG and
regulatory costs. Unfortunately, active investment management does
not scale, and it is conspicuous that larger players have withdrawn
and funds have shrunk. There are now too few players in the UK to
have an efficient market, and too few co-investors. It is a pity
because public markets have provided long-term risk capital for the
benefit of the wider economy, but the skillset is disappearing
rapidly. It seems the UK will inevitably shrink as a percentage of
the Company's assets.
We are proud that cumulatively UK
listed and AIM companies have delivered gains for the Company of
£965.4m from total capital raised of £95m (£65m in 1994 and £30m in
1996), and that capital of £525.9m has been invested through IPOs
and follow-on fund raisings, to directly finance small
companies.
North America
The North American performance has
excelled this year with a return of 31.06% (TWR). This compares to
a sterling return of 21.0% for the Russell 2000® Technology Index.
The star contributor was Super Micro Computer which returned 226.8%
in 2023 and has now appreciated 1,935.2% over five years.
Furthermore, the £55.5m return this year, and cumulative return of
£74.8m, makes it the most profitable stock for the Company
throughout history. It builds custom computers sourcing processors
for Nvidia, AMD, Intel and others, and has benefitted from booming
demand for artificial intelligence. Fabrinet, which is the leading
contractor for fibre optic manufacturing has also benefitted from
Nvidia demand, and Celestica has also been a strong performer
rising 146.8%. Arlo Technologies has returned 156.0% and QuickLogic
154.5%, but they are smaller positions. It is worth noting that
there are now 21 North American holdings which have grown to have
market values in excess of $3bn, albeit we continue to limit buying
to below that threshold. These 21 holdings returned £100.9m during
the year, which exceeds the return of the whole North American
portfolio. In other words the 75 holdings with a market
capitalisation below $3bn delivered an IRR of -9.8%. These figures
are of course distorted by the success bias. Nevertheless, the
divergence is remarkable.
In a normal stock market cycle,
returns should feed through to smaller companies. However, there is
a structural change with so much cash flow feeding into index
tracking funds leading to demand whatever the valuation. It
reinforces our belief that we should focus on stocks below the
index tracking momentum size, and benefit from the companies that
grow into the radar screen and have the associated revaluation. The
other factor is that venture capitalists have been floating
companies at a later stage, with much of the growth already
achieved, at valuations that seem uninteresting. Many of the IPOs
in the 2020-2021 bull market are trading below and often materially
below the IPO price and offer more appeal. Now that interest rates
have normalised, there may be less capital available privately, and
in order to get exits, companies may come to market at more
realistic valuations. Furthermore, the later stage private equity
houses will have less ability to use creative leveraged structures
with tax advantages versus public companies. In 2023, the market
has been closed to new issues, which is anomalous when the large
technology indices have had a staggeringly good year (58.2%
sterling total return on the Russell 1000® Technology Index). The
market was knocked by the failure of Silicon Valley Bank, but
gradually recovered confidence as the US economy has proved more
resilient than many economists feared in the face of rising
interest rates.
Europe Middle East and Africa
The overall return of 4.64% (TWR) is
respectable in a difficult market for companies. However, the
performance has been lifted by an outstanding return from the
largest holding, BE Semiconductor, of 144.1%. It accounts for 21.6%
of the EMEA portfolio at the year end. BE is a manufacturer of
semiconductor packaging equipment. Smaller geometries and faster
processing speeds have required innovative semiconductor packaging,
which BE is continuing to develop. The rest of the portfolio has
delivered a return of -11.7%. However, EQS, a listed German
company, has risen over 50% following the announcement of an agreed
takeover by Thoma Bravo, the US based private equity house.
Somewhat surprisingly this takeover will be the fifteenth takeover
of one of the Company's holdings by Thoma Bravo. The market value
of EQS at the period end was c€400m, with the Company's stake being
2.6% of the outstanding shares. EQS struggled to raise the
necessary capital in the public markets, with the Company being one
of the few participants in the last funding round, and it has c€40m
debt. In consequence management actively sought a buyer. This
demonstrates that lack of capital is a feature across Europe,
not just the UK.
Asia
Although the Asian return is 14.72%
(TWR), markedly better than the UK and Europe, it is a little more
disappointing in relative terms. The South Korean return for the
year of 36.7% has been good and the Taiwanese return of 47.7% has
been even better. However, these sparkling numbers have been offset
by poor returns in Australia (-1.5%) and Japan (+1.5%). The latter
is also the heaviest weighting, and the weakness of the Japanese
Yen has not helped. By sector, technology hardware stocks
(Bloomberg defined sector) which account for 36.8% of the Asian
portfolio returned 46.8%. In contrast, software and technology
services stocks, which account for a similar percentage weighting,
returned -3.4%. Media only has an 8.3% weighting and returned
-9.5%.
Sector Analysis
|
31-Dec-22
|
31-Dec-23
|
31-Dec-22
|
31-Dec-23
|
2023
|
|
£m
|
£m
|
% of equity
|
% of equity
|
Return*
|
Sector Weighting and Performance
|
|
|
investments
|
investments
|
|
Software & Technology
Services
|
500.8
|
463.9
|
43.7%
|
40.7%
|
-2.7%
|
Technology Hardware
|
|
|
|
|
|
& Semiconductors
|
312.6
|
336.5
|
27.2%
|
29.5%
|
23.7%
|
Media
|
157.3
|
154.3
|
13.7%
|
13.5%
|
0.2%
|
Other
|
176.2
|
185.2
|
15.4%
|
16.3%
|
|
Total equities
|
1,146.9
|
1,139.9
|
|
|
|
Cash & liquid assets
|
158.1
|
105.8
|
|
|
|
Total net assets
|
1,305.0
|
1,245.8
|
|
|
|
*IRR to 31 December 2023.
There has been a conspicuous
divergence in performance between sectors. Technology hardware and
semiconductors have done well, except in the small exposure in the
UK. This sector has benefitted from expectations of an inventory
restocking cyclical recovery and the artificial intelligence boom.
It is not just hype. There is a conspicuous upturn in demand, and
revenue and profits have exceeded expectations and forecasts have
been raised in a number of companies in the hardware supply chain.
Artificial intelligence in the long run is not about hardware. That
is only the enabling technology. The effects of applications are so
far less evident. Some investee companies have expressed optimism
about efficiencies, particularly related to software development,
while others have expressed initial concern about higher costs. For
example, Microsoft's Office 365 Copilot AI product has been priced
at £28/seat/month. The short-term winner is Microsoft and in due
course there may be efficiency benefits. Many companies have
already been using AI in software products that hardware
improvements offer scope to improve further. Many new applications
and markets will inevitably be developed which will be a driver for
the sector in years to come.
In contrast, software and technology
services have had a dull year returning -2.7%. In part, this
reflects optimistic valuations, in part greater cost control in
terms of licenses, and in part slower decision making on new
investments. Unfortunately, this sector has the largest weighting
and accounts for 40.7% of the total investment value. It delivered
negative returns in every region except North America where the
return was 11.6% versus 53.5% from technology hardware and
semiconductors.
Media is the third segment, but only
accounts for 13.5% of investments. Overall, it had a flat year.
There is also a heavy UK bias. Poor performances by S4 Capital and
Next15 were largely offset by gains on YouGov and Trustpilot late
in the year when people realised the economy was not as adverse as
feared.
Economic Background
Maintaining wealth, let alone
creating wealth, will be a challenge in a world with so much
government debt and in which fiscal deficits will have to be both
funded and reduced. Money will be sucked into bond markets and
consumers and businesses will be squeezed by higher tax. It seems
obvious that good returns may only be achieved through growing
markets, and that technology continues to evolve, and that
innovation creates new markets offering more potential than other
sectors. Entrepreneurial management can exploit these opportunities
but need access to capital to do this. Equally growth will occur
where people work for $2/hour and there is evident migration of
labour-intensive manufacturing to countries like Indonesia and
Vietnam. The outlook for Europe including the UK seems challenging
because labour is too expensive for low-cost manufacturing and
there is limited availability of capital.
The UK does have an innovative,
creative entrepreneurial spirit and had already lost energy
intensive industries prior to the Russia/Ukraine disruption of the
energy markets, so does not have the headwind faced in other
economies. The headwind of rising corporation tax and ESG costs in
the UK will now be reflected in profit expectations, and other
countries will probably follow with higher taxes. The trouble is
that the UK stock market also seems broken, and unlikely to provide
capital to emerging businesses, and therefore unlikely to provide
the investment opportunities that it has in the past. Nevertheless,
having capital in a capital constrained world will present
opportunities. There is still world leadership in the media sector
and the creative industries, but the semiconductor sector, which
was so important in the development of the smartphone, has
diminished. Key UK-developed technologies included the processor
(Arm), the graphics processor (Imagination), audio (Wolfson) and
Bluetooth (CSR). Arm has now gone public again on NASDAQ and
Imagination seems to be considering a US IPO in 2024, but the
US/China semiconductor politics complicates both the valuations and
the prospects. New companies will emerge using artificial
intelligence. Necessity may lead to Government policy that is more
sympathetic to the wealth generating element of the economy. It
seems to have been hostile or at least careless for this century to
date.
China has driven growth through
infrastructure investment and property. There are now too many
empty dwellings and too much debt for this to provide growth in
future. Wages are now too high for low-cost manufacturing, which is
another headwind. The bright spot is that China is emerging as the
leading electric vehicle manufacturer. This will be particularly
challenging for the German automotive industry, which is not just
losing an important export market, but facing a new competitor. The
important German chemical industry is endangered by higher energy
costs, and East German labour costs are no longer cheap. It seems
possible that Germany will face the deindustrialisation that the UK
experienced in the 1970s and 1980s.
North America has been the engine of
growth in 2023, but this has been driven by extraordinary fiscal
and trade deficits, and anomalously low fixed rate domestic
mortgages. The technology sector has brilliantly scaled businesses
and has had cheap capital to do this. The trouble is that salaries
are too high for smaller emerging companies, and in the quoted
world the reporting of adjusted earnings per share which excludes
share based payments is quite deceitful, and unsustainable in
valuation terms. San Francisco is troubled economically and
socially, and the elevated pay there seems anomalous in a world of
remote working. However, the US is leading the way in artificial
intelligence, albeit with an Asian supply chain.
Developed Asia including Taiwan,
South Korea and Japan has the most vibrant stock markets, and an
enviable work ethic. It has to be the area of greater focus for
this Company. The overhanging cloud is President Xi's ambitions
towards Taiwan.
At the time of writing, the markets
have taken the negative effect of conflicts in the Ukraine and
Israel lightly. There could be an upside surprise from peace in
these regions, but continued and even increased tensions seem more
likely. This will drive increased defence spending, and investment
in technology led defence solutions, not least in
cybersecurity.
UK investors are acutely aware of
the challenges faced by the UK economy following the explosion of
Government spending and the high debt levels. It seems they are
less aware that these challenges are faced in almost all developed
counties. I fear they may move money to North America where
valuations are high and the widespread use of adjusted earnings per
share excluding share-based payments which is effectively
understating both the costs of running a company and the
price/earnings ratio. In the technology sector in particular
share-based payments can be material. We are privileged to meet
management teams around the world on a daily basis, and aware of
the widespread challenges. The greatest concern is that the bond
markets will force fiscal discipline, particularly in the United
States, which will make global growth challenging. The key is to
find strong management teams addressing growth markets to offset
these headwinds.
Outlook
I suspect there will be more
takeovers in the UK in particular. The US IPO market may open up if
there is not an upset like the failure of Silicon Valley Bank in
2023. There are headwinds from corporate debt costs rising, trade
tensions with China and elections with difficult choices in several
countries. Although the macro environment is uncertain, we retain
our belief in the growth prospects for the technology and
communications sectors and that we will continue to discover
entrepreneurial management teams that merit backing with the
Company's capital.
Sector Performance
(Sterling Millions)
|
Market
value
|
% of
|
Total
return
|
Total
return
|
|
equity
portfolio
|
equity
portfolio
|
equity
portfolio
|
equity
portfolio
|
|
31 Dec 2023
|
31 Dec 2023
|
31 Dec 2023
|
31 Dec 2022
|
Software
|
367.5
|
32.2
|
-6.8
|
-144.2
|
Technology Hardware
|
207.2
|
18.2
|
56.5
|
-39.2
|
Semiconductors
|
129.3
|
11.3
|
13.0
|
-36.7
|
Technology Services
|
96.4
|
8.5
|
-6.7
|
-17.8
|
Advertising &
Marketing
|
66.5
|
5.8
|
-6.7
|
-42.7
|
Internet Media &
Services
|
54.9
|
4.8
|
8.8
|
-28.8
|
Electrical Equipment
|
34.5
|
3.0
|
4.6
|
-12.4
|
Telecommunications
|
31.2
|
2.8
|
3.7
|
-3.7
|
Publishing &
Broadcasting
|
23.4
|
2.1
|
0.8
|
-15.0
|
Commercial Support
Services
|
23.2
|
2.0
|
1.7
|
0.3
|
Other
|
105.8
|
9.3
|
-7.8
|
-58.8
|
Total
|
1,139.9
|
100.0
|
61.1
|
-399.0
|
Source: BICS (Bloomberg Industry
Classification Standard).
Katie Potts
21 February 2024
Classification of investments
|
|
|
North
|
Japan &
Asia
|
2023
|
2022
|
|
UK
|
EMEA
|
America
|
Pacific
|
Total
|
Total
|
Classification*
|
%
|
%
|
%
|
%
|
%
|
%
|
COMMUNICATIONS
|
10.7
|
1.1
|
1.8
|
1.3
|
14.9
|
14.0
|
Advertising &
Marketing
|
5.0
|
0.2
|
0.2
|
-
|
5.4
|
5.5
|
Entertainment Content
|
0.8
|
-
|
-
|
-
|
0.8
|
1.0
|
Internet, Media &
Services
|
2.1
|
0.8
|
0.5
|
0.9
|
4.3
|
3.7
|
Publishing &
Broadcasting
|
1.7
|
-
|
0.2
|
-
|
1.9
|
1.9
|
Telecommunications
|
1.1
|
0.1
|
0.9
|
0.4
|
2.5
|
1.9
|
CONSUMER DISCRETIONARY
|
0.3
|
-
|
0.1
|
0.2
|
0.6
|
0.4
|
Automotive
|
-
|
-
|
-
|
-
|
-
|
0.1
|
E-Commerce Discretionary
|
-
|
-
|
-
|
0.2
|
0.2
|
0.2
|
Leisure Facilities &
Services
|
0.1
|
-
|
-
|
-
|
0.1
|
-
|
Retail - Discretionary
|
0.1
|
-
|
-
|
-
|
0.1
|
-
|
Wholesale - Discretionary
|
0.1
|
-
|
0.1
|
-
|
0.2
|
0.1
|
ENERGY
|
0.5
|
-
|
0.2
|
-
|
0.7
|
0.6
|
Oil & Gas Services &
Equipment
|
-
|
-
|
0.2
|
-
|
0.2
|
-
|
Renewable Energy
|
0.5
|
-
|
-
|
-
|
0.5
|
0.6
|
FINANCIALS
|
0.9
|
-
|
-
|
0.6
|
1.5
|
1.7
|
Asset Management
|
0.6
|
-
|
-
|
-
|
0.6
|
0.2
|
Equity Investment
Instruments
|
0.2
|
-
|
-
|
-
|
0.2
|
0.7
|
Speciality Finance
|
0.1
|
-
|
-
|
0.6
|
0.7
|
0.8
|
HEALTH CARE
|
0.7
|
0.4
|
-
|
0.1
|
1.2
|
1.2
|
Biotechnology &
Pharmaceutical
|
-
|
-
|
-
|
-
|
-
|
0.1
|
Health Care Facilities &
Services
|
0.2
|
-
|
-
|
-
|
0.2
|
0.2
|
Medical Equipment &
Devices
|
0.5
|
0.4
|
-
|
0.1
|
1.0
|
0.9
|
INDUSTRIALS
|
5.1
|
0.3
|
0.9
|
0.5
|
6.8
|
5.7
|
Aerospace & Defence
|
-
|
-
|
0.4
|
-
|
0.4
|
0.3
|
Commercial Support
Services
|
1.4
|
-
|
0.4
|
0.1
|
1.9
|
1.2
|
Electrical Equipment
|
2.0
|
0.3
|
0.1
|
0.3
|
2.7
|
2.0
|
Industrial Intermediate
Production
|
1.7
|
-
|
-
|
0.1
|
1.8
|
2.2
|
MATERIALS
|
0.1
|
-
|
-
|
0.2
|
0.3
|
0.4
|
Chemicals
|
-
|
-
|
-
|
0.2
|
0.2
|
0.3
|
Forestry, Paper & Wood
Products
|
0.1
|
-
|
-
|
-
|
0.1
|
0.1
|
TECHNOLOGY
|
20.9
|
10.3
|
24.4
|
8.6
|
64.2
|
62.2
|
Semiconductors
|
1.0
|
3.9
|
3.3
|
2.2
|
10.4
|
9.2
|
Software
|
11.9
|
4.2
|
10.6
|
2.7
|
29.4
|
29.8
|
Technology Hardware
|
3.7
|
0.9
|
9.9
|
2.1
|
16.6
|
14.7
|
Technology Services
|
4.3
|
1.3
|
0.6
|
1.6
|
7.8
|
8.5
|
UTILITIES
|
1.3
|
-
|
-
|
-
|
1.3
|
1.7
|
Electricity & Gas Marketing
& Trading
|
1.1
|
-
|
-
|
-
|
1.1
|
1.4
|
Gas & Water Utilities
|
0.2
|
-
|
-
|
-
|
0.2
|
0.3
|
TOTAL EQUITIES (including
convertibles and warrants)
|
40.5
|
12.1
|
27.4
|
11.5
|
91.5
|
-
|
Total equities - 2022 (including
convertibles and warrants)
|
44.1
|
10.8
|
21.8
|
11.2
|
-
|
87.9
|
BONDS
|
-
|
-
|
4.9
|
-
|
4.9
|
5.9
|
NET
LIQUID ASSETS**
|
1.3
|
0.2
|
0.9
|
1.2
|
3.6
|
6.2
|
TOTAL NET ASSETS
|
41.8
|
12.3
|
33.2
|
12.7
|
100.0
|
-
|
Total net assets - 2022
|
49.8
|
11.3
|
26.5
|
12.4
|
-
|
100.0
|
SHAREHOLDERS' FUNDS
|
41.8
|
12.3
|
33.2
|
12.7
|
100.0
|
-
|
Shareholders' Funds -
2022
|
49.8
|
11.3
|
26.5
|
12.4
|
-
|
100.0
|
Number of equity investments
(including convertibles and warrants)
|
125
|
35
|
79
|
83
|
322
|
345
|
* Source: Bloomberg
Industry Classification Standard.
** Cash, current assets and
liabilities.
Top 20
Equity Holdings
AS AT 31
DECEMBER 2023
A brief description of the twenty
largest equity holdings in companies is as follows:
Super
Micro
|
|
|
Super Micro Computer ('Supermicro') is a
leading provider of application-optimised, high-performance server
and storage solutions that address a broad range of
computational-intensive workloads. With over 20 years of hardware
design experience, Supermicro's server Building Block Solutions,
coupled with extensive in-house design and manufacturing, enables
the Company to rapidly develop, build, and test server and storage
systems, subsystems, and accessories with unique configurations.
This capability gives customers an unparalleled breadth of choice
in dynamic markets, including Edge/5G, data centers, public/private
cloud, and artificial intelligence; plus, Supermicro offers
world-class software and service.
|
|
£45.7M
VALUATION
3.7%
OF TOTAL ASSETS
0.4%
OF ISSUED SHARE
CAPITAL HELD
£4.0M
BOOK COST
|
BE Semiconductor
Industries
|
|
|
BE Semiconductor Industries (Besi) is a
leading supplier of semiconductor assembly equipment for the global
semiconductor and electronics industries offering high levels of
accuracy, productivity and reliability at a low cost of ownership.
Besi develops leading edge assembly processes and equipment for
leadframe, substrate and wafer level packaging applications in a
wide range of end-user markets including electronics, mobile
internet, computer, automotive, industrial, LED and solar energy.
Customers are primarily leading semiconductor manufacturers,
assembly subcontractors and electronics and industrial
companies.
|
|
£32.5M
VALUATION
2.6%
OF TOTAL ASSETS
0.3%
OF ISSUED SHARE
CAPITAL HELD
£0.7M
BOOK COST
|
Fabrinet
|
|
|
Fabrinet is a leading provider of advanced
optical packaging and precision optical, electro-mechanical, and
electronic manufacturing services to original equipment
manufacturers of complex products, such as optical communication
components, modules and subsystems, industrial lasers and sensors.
Fabrinet offers a broad range of advanced optical and
electro-mechanical capabilities across the entire manufacturing
process, including process design and engineering, supply chain
management, manufacturing, advanced packaging, integration, final
assembly and test. Fabrinet focuses on production of high
complexity products in any mix and volume. Fabrinet maintains
engineering and manufacturing resources and facilities in Thailand,
the United States, and the People's Republic of
China.
|
|
£24.8m
Valuation
2.0%
of total assets
0.5%
of issued share
capital held
£2.1m
Book Cost
|
Next15
|
|
|
Next15 is a group of businesses designed to
help companies grow. Next 15 perceive themselves as more than
marketing consultants and as growth consultants. They help their
clients in four different ways. Firstly, they use data to generate
the insights that help businesses understand the opportunities and
challenges they face and arm them with the knowledge they need to
make the best decisions. Secondly, they help their customers
optimise their brand reputation and build the mission-critical
digital assets businesses need to engage with their audiences.
Thirdly, they use creativity, data, and analytics to create
connections with customers to drive sales and other forms of
customer interaction. Finally, Next 15 help customers redesign
their business model or create new ventures to maximise the value
of their organisation.
|
|
£24.2m
Valuation
1.9%
of total assets
3.0%
of issued share
capital held
£2.4m
Book Cost
|
YouGov
|
|
|
YouGov is an international online research
data and analytics technology group. Their mission is to supply a
continuous stream of accurate data and insight into what the world
thinks, so that companies, governments and institutions can make
informed decisions. YouGov's innovative solutions help the world's
most recognised brands, media owners and agencies to plan, activate
and track their marketing activities better. At the core of the
platform is an ever-growing source of consumer data that has been
amassed over twenty years of operation. All products and services
draw upon this detailed understanding of 26 million registered
panel members to deliver accurate, actionable consumer insights.
With operations in the UK, the Americas, Europe, the Middle East,
India and Asia Pacific, YouGov has one of the world's largest
research networks.
|
|
£23.9m
Valuation
1.9%
of total assets
1.8%
of issued share
capital held
£2.9m
Book Cost
|
Diploma
|
|
|
Diploma is an international value-add
distribution Group, organised across three sectors: Controls, Seals
and Life Sciences. Value-add services are delivered alongside
products, which include: wire & cable, connectors, fasteners
and adhesives; seals, gaskets, hose and fluid power sealing
products; surgical and diagnostic equipment, consumables and
instrumentation. An entrepreneurial culture and decentralised
management structure ensures that decisions are made close to the
customer and that the businesses are agile and responsive to
changes in the market and the competitive environment. Diploma
operates in core geographies of North America, Continental Europe,
UK and Australia.
|
|
£21.5m
Valuation
1.7%
of total assets
0.4%
of issued share
capital held
£0.4m
Book Cost
|
Idox
|
|
|
Idox is focused on developing specialist
software and information management solutions for government,
health, engineering, transport and property, across the UK and
internationally. The public and asset intensive industries in which
Idox operates are characterised by the dual challenge of improving
productivity and service standards whilst addressing continued
pressure on expenditure. The requirement to drive greater
efficiency through digital transformation is therefore driving
continuing investment in software in these markets.
|
|
£18.7m
Valuation
1.5%
of total assets
6.0%
of issued share
capital held
£4.5
Book Cost
|
Volex
|
|
|
Volex is a leading specialist integrated
manufacturer of critical power and data transmission products. The
company serves a diverse range of markets and customers, with
particular expertise in cable assemblies, higher-level assemblies,
data centre power and connectivity, electric vehicles and consumer
electricals power products. The critical products and services that
Volex offers are integral to an increasingly complex digital world,
providing power and connectivity from the most common household
items to the most complex medical equipment. Volex are
headquartered in the UK and operate from 19 manufacturing locations
with a global workforce of over 8,000 employees across
22 countries.
|
|
£18.6M
VALUATION
1.5%
OF TOTAL ASSETS
3.2%
OF ISSUED SHARE
CAPITAL HELD
£7.5M
BOOK COST
|
Silicon Motion
Technology
|
|
|
Silicon Motion Technology is the global
leader in supplying NAND flash memory controllers for solid state
storage devices. They supply more SSD controllers than any other
company in the world for servers, PCs and other client devices and
are the leading merchant supplier of eMMC and UFS embedded storage
controllers used in smartphones, IoT devices and other
applications. Silicon Motion also supplies customised
high-performance hyperscale data centres and specialised industrial
and automotive SSD solutions. Customers include most of the NAND
flash vendors, storage device module makers and leading
OEMs.
|
|
£17.2m
Valuation
1.4%
of total assets
1.1%
of issued share
capital held
£1.7m
Book Cost
|
Descartes
Systems
|
|
|
Descartes Systems ('Descartes') offers
networks, applications, global trade content, and collaborative
multi-modal logistics communities to improve the productivity,
performance. safety and security of logistics and supply chain
operations. Customers use Descartes' modular, cloud-based and data
content solutions to route, schedule, track, train and measure
delivery resources; plan, allocate and execute shipments; rate,
audit and pay transportation invoices; access and analyse global
trade data; research and perform trade tariff and duty
calculations; file customs and security documents for imports and
exports; comply with trade regulations, and complete numerous other
logistics processes. Customers can purchase Descartes' solutions
either on a subscription, transactional or perpetual license basis.
The company serves transportation providers (air, ocean and truck
modes), logistics service providers (including third-party
logistics providers, freight forwarders, freight brokers, and
customs brokers) and manufacturers, retailers, distributors, and
business service providers. Descartes' headquarters are in
Waterloo, Ontario, Canada and they have offices and partners around
the world.
|
|
£16.8m
Valuation
1.4%
of total assets
0.3%
of issued share
capital held
£0.5m
Book Cost
|
Trustpilot
|
|
|
Founded in Denmark in 2007, Trustpilot has
since grown to become one of the world's leading consumer review
platforms. Trustpilot offers a public platform where consumers can
leave reviews for businesses and businesses can respond to honest
feedback. The platform is open to all businesses and consumers -
yet independent of both - every interaction on Trustpilot is
transparent for all to see. Trustpilot business model is to charge
recurring software fees to its corporate customers for the use of
the platform.
|
|
£15.9m
Valuation
1.3%
of total assets
2.5%
of issued share
capital held
£11.3m
Book Cost
|
Varonis
Systems
|
|
|
Varonis Systems ('Varonis') is a
pioneer in data security and analytics, fighting a different battle
than conventional cybersecurity companies. Varonis addresses the
challenge that an enterprise's capacity to create and share data
far exceeds its capacity to protect it. Since the company's
founding, the focus has been on using innovation to address the
cyber-implications of securing data, creating software that
provides new ways to track, alert and protect data wherever it is
stored. Varonis software enables enterprises of all sizes and
industries to protect data stored on premises and in the cloud
including: sensitive files and emails; confidential personal data
belonging to customers, patients and employees; financial records;
source code, strategic and product plans; and other intellectual
property. Varonis has customers in over 90 countries, including
leading firms in the financial services, public, healthcare,
industrial, insurance, technology, consumer and retail, energy and
utilities, construction and engineering and education sectors, with
hundreds of thousands of employees and petabytes of
data.
|
|
£15.3m
Valuation
1.2%
of total assets
0.4%
of issued share
capital held
£4.5m
Book Cost
|
bango
|
|
|
The world's largest online merchants,
including Amazon, Google, and Microsoft, use Bango technology to
acquire more paying users. Bango has developed unique purchase
behavior technology that enables millions more users to buy the
products and services they want, using innovative payment methods,
including carrier billing, digital wallets, and subscription
bundling. Bango harnesses this purchase activity into valuable
marketing segments called Bango Audiences. Merchants use these
audiences to target their marketing at paying customers based on
their purchase behavior. Better targeting increases spend through
the Bango payments business, in turn generating more data insights,
creating a powerful virtuous circle that drives
growth.
|
|
£15.1m
Valuation
1.2%
of total assets
9.8%
of issued share
capital held
£6.4m
Book Cost
|
Esker
|
|
|
Esker was founded as a software company in
1985 with a direct and simple vision in mind - to help businesses
deliver their paper documents electronically. Today, Esker's
strategy is focused on developing and selling a cloud-based
software platform for the automation of enterprise back-office
processes. These solutions cover both the order-to-cash (from the
customer order to invoice collection) and source-to-pay processes
(from the selection of suppliers to the payment of invoices). The
Company is focused on accelerating organic growth largely through a
direct sales force and via partners. Esker has grown into a leading
document processing automation solution provider, with more than
1,000 employees in 15 subsidiaries worldwide.
|
|
£13.8m
Valuation
1.1%
of total assets
1.7%
of issued share
capital held
£4.4m
Book Cost
|
GB
Group
|
|
|
GB Group ('GBG'), was founded in 1989,
originally pioneering new ways of delivering address management
services. Since then, the offering has grown to cover three core
areas of Location, Identity & Fraud, which together create
confidence online. The location business ensures addresses and
locations can be easily captured, verified and managed. GBG's
digital identity verification tools ensure that companies are
trading with good customers and can identify the bad actors. Fraud
prevention solutions reduce financial risk and ensure compliance
with regulations. GBG's future goal is to facilitate online
environments where everyone can transact with the complete and
unconditional confidence they expect.
|
|
£13.7m
Valuation
1.1%
of total assets
2.0%
of issued share
capital held
£5.4m
Book Cost
|
Nordic
Semiconductor
|
|
|
Nordic Semiconductor is a Norwegian fabless
semiconductor company specialising in wireless communication
technology that powers the Internet of Things (IoT). Nordic was
established in 1983 and has more than 1500 employees across the
globe. Nordic's Bluetooth Low Energy solutions pioneered ultra-low
power wireless, making them the global market leader. The
technology range was later supplemented by ANT+, Thread and Zigbee,
and in 2018 they launched low power, compact LTE-M/NB-IoT cellular
IoT solutions to extend the penetration of the IoT. The Nordic
portfolio was further complemented by Wi-Fi technology in 2021.
Nordic's Bluetooth LE solutions are used by the world's leading
brands in a variety of products, including wireless PC peripherals,
gaming, sports and fitness, mobile phone accessories, consumer
electronics, toys, healthcare and automation.
|
|
£13.6m
Valuation
1.1%
of total assets
0.7%
of issued share
capital held
£4.6m
Book Cost
|
Telecom
Plus
|
|
|
Telecom Plus, which owns and operates the
Utility Warehouse brand, is the UK's only fully integrated provider
of a wide range of competitively priced utility services spanning
the energy, broadband, mobile and insurance markets. Utility
Warehouse (UW) and currently have 950,000 customers nationwide, the
medium-term ambition is to welcome an additional 1 million
customers to UW. Customers benefit from the convenience of a single
monthly bill, consistently good value across all their utilities
and good levels of service. The business relies on word-of-mouth
recommendation by existing satisfied customers and partners in
order to grow its market share.
|
|
£13.1m
Valuation
1.1%
of total assets
1.0%
of issued share
capital held
£3.1M
Book Cost
|
Pega
|
|
|
Founded in 1983, Pega provides a platform
that empowers the world's leading organisations to unlock
business-transforming outcomes with real-time optimisation
software. Clients use Pega's enterprise AI decisioning and workflow
automation to solve pressing business challenges - from
personalising engagement to automating service to streamlining
operations. Pega has built a scalable and flexible architecture to
help enterprises meet customer demands while continuously
transforming for tomorrow.
|
|
£11.5m
Valuation
0.9%
of total assets
0.4%
of issued share
capital held
£1.5M
Book Cost
|
Qualys
|
|
|
Qualys is a leading provider of disruptive
cloud-based security, compliance and IT solutions with more than
10,000 subscription customers worldwide, including a majority of
the Forbes Global 100 and Fortune 100. Qualys helps organizations
streamline and automate their security and compliance solutions
onto a single platform for greater agility, better business
outcomes, and substantial cost savings. The Qualys Cloud Platform
leverages a single agent to continuously deliver critical security
intelligence while enabling enterprises to automate the full
spectrum of vulnerability detection, compliance, and protection for
IT systems, workloads and web applications across on premises,
endpoints, servers, public and private clouds, containers, and
mobile devices. Founded in 1999, Qualys has strategic partnerships
and seamlessly integrates its vulnerability management capabilities
into security offerings from cloud service providers, including
Amazon Web Services, the Google Cloud Platform and Microsoft Azure,
along with a number of leading managed service providers and global
consulting organisations.
|
|
£11.4m
Valuation
0.9%
of total assets
0.2%
of issued share
capital held
£1.9M
Book Cost
|
discoverIE
|
|
|
discoverIE is an international group of
businesses that designs and manufactures customised electronic
components for industrial applications. With a focus on key markets
driven by structural growth and increasing electronic content,
namely renewable energy, medical, transportation and industrial
& connectivity, the group aims to achieve organic growth ahead
of GDP and to supplement that with targeted complementary
acquisitions. discoverIE comprises of over 20 businesses, with
4,600 employees in 20 countries, who help customers around the
world create customised and ever better technical
solutions.
|
|
£11.3m
Valuation
0.9%
of total assets
1.5%
of issued share
capital held
£3.2m
Book Cost
|
STATEMENT OF COMPREHENSIVE
INCOME
For the
year ended 31 December 2023
|
2023
|
2023
|
2023
|
2022
|
2022
|
2022
|
|
Revenue
|
Capital
|
Total
|
Revenue
|
Capital
|
Total
|
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
Gains/(losses) on
investments
|
-
|
45,419
|
45,419
|
-
|
(409,797)
|
(409,797)
|
(Losses)/gains on foreign
exchange
|
-
|
(1,316)
|
(1,316)
|
-
|
4,144
|
4,144
|
Income
|
17,926
|
-
|
17,926
|
15,326
|
-
|
15,326
|
Investment management fee
|
(12,375)
|
-
|
(12,375)
|
(13,653)
|
-
|
(13,653)
|
Other administrative
expenses
|
(966)
|
(8)
|
(974)
|
(996)
|
(9)
|
(1,005)
|
Profit/(loss) before taxation
|
4,585
|
44,095
|
48,680
|
677
|
(405,662)
|
(404,985)
|
Taxation
|
(559)
|
-
|
(559)
|
(542)
|
-
|
(542)
|
Profit/(loss) after taxation
|
4,026
|
44,095
|
48,121
|
135
|
(405,662)
|
(405,527)
|
Profit/(loss) per ordinary share (basic and
diluted)
|
6.79p
|
74.35p
|
81.14p
|
0.21p
|
(641.23)p
|
(641.02)p
|
There is no final dividend proposed
(2022 - nil). More information on dividend distributions can be
found in note 7.
The total column of this statement
is the profit and loss account of the Company, prepared in
accordance with UK Accounting Standards.
The profit/(loss) after taxation is
the total comprehensive income and therefore no additional
statement of comprehensive income is presented. The supplementary
revenue and capital columns are presented for information purposes
in accordance with the Statement of Recommended Practice issued by
the Association of Investment Companies. All items in the above
statement derive from continuing operations of the Company. No
operations were acquired or discontinued in the year.
The notes form part of these
financial statements.
STATEMENT OF FINANCIAL
POSITION
At 31
December 2023
|
2023
|
2022
|
|
£'000
|
£'000
|
Fixed assets
|
|
|
Investments held at fair value
through profit or loss
|
1,200,639
|
1,224,513
|
Current assets
|
|
|
Cash and cash equivalents
|
42,285
|
80,442
|
Other receivables
|
4,022
|
1,308
|
|
46,307
|
81,750
|
Current liabilities
|
|
|
Other payables
|
(1,189)
|
(1,215)
|
|
(1,189)
|
(1,215)
|
Net
current assets
|
45,118
|
80,535
|
TOTAL NET ASSETS
|
1,245,757
|
1,305,048
|
Capital and reserves
|
|
|
Called up share capital
|
14,034
|
15,543
|
Share premium
|
73,738
|
73,738
|
Capital redemption
reserve
|
7,918
|
6,409
|
Capital reserve
|
1,154,062
|
1,217,387
|
Revenue reserve
|
(3,995)
|
(8,029)
|
TOTAL SHAREHOLDERS' FUNDS
|
1,245,757
|
1,305,048
|
NET
ASSET VALUE PER ORDINARY SHARE (including current year
income)
|
2,219.23p
|
2,099.05p
|
NET
ASSET VALUE PER ORDINARY SHARE (excluding current year
income)
|
2,212.06p
|
2,098.83p
|
The financial statements of Herald
Investment Trust plc (company registration number 02879728) were
approved by the board of directors and authorised for issue on 21
February 2024 and signed on its behalf by
ANDREW JOY
CHAIRMAN
The notes form part of these
financial statements.
STATEMENT OF CHANGES IN
EQUITY
For the
year ended 31 December 2023
|
Called up
|
|
Capital
|
|
|
Total
|
|
Share
|
Share
|
Redemption
|
Capital
|
Revenue
|
Shareholders'
|
|
Capital
|
Premium
|
Reserve
|
Reserve
|
Reserve
|
funds
|
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
Shareholders' funds at
1 January 2023
|
15,543
|
73,738
|
6,409
|
1,217,387
|
(8,029)
|
1,305,048
|
Profit after taxation
|
-
|
-
|
-
|
44,095
|
4,026
|
48,121
|
Unclaimed dividends
|
-
|
-
|
-
|
-
|
8
|
8
|
Shares purchased for
cancellation
|
(1,509)
|
-
|
1,509
|
(107,420)
|
-
|
(107,420)
|
Shareholders' funds at
31 December 2023
|
14,034
|
73,738
|
7,918
|
1,154,062
|
(3,995)
|
1,245,757
|
For the year ended 31 December
2021
|
Called
up
|
|
Capital
|
|
|
Total
|
|
Share
|
Share
|
Redemption
|
Capital
|
Revenue
|
Shareholders'
|
|
Capital
|
Premium
|
Reserve
|
Reserve
|
Reserve
|
funds
|
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
£'000
|
Shareholders' funds at
1 January 2022
|
16,189
|
73,738
|
5,763
|
1,673,351
|
(8,164)
|
1,760,877
|
(Loss)/profit after
taxation
|
-
|
-
|
-
|
(405,662)
|
135
|
(405,527)
|
Shares purchased for
cancellation
|
(646)
|
-
|
646
|
(50,302)
|
-
|
(50,302)
|
Shareholders' funds at
31 December 2022
|
15,543
|
73,738
|
6,409
|
1,217,387
|
(8,029)
|
1,305,048
|
The notes form part of these
financial statements.
STATEMENT OF CASH
FLOWS
For the
year ended 31 December 2023
|
2023
|
2023
|
2022
|
2022
|
|
£'000
|
£'000
|
£'000
|
£'000
|
Cash flow from operating activities
|
|
|
|
|
Profit/(loss) before finance costs
and taxation
|
48,680
|
|
(404,985)
|
|
Adjustments for (gains)/losses on
investments
|
(45,419)
|
|
409,797
|
|
Purchase of investments
|
(169,090)
|
|
(191,478)
|
|
Sale of investments
|
237,981
|
|
244,408
|
|
Increase in receivables
|
(817)
|
|
(144)
|
|
Decrease in payables
|
(26)
|
|
(315)
|
|
Amortisation of fixed income book
cost
|
(1,516)
|
|
(507)
|
|
Effect of foreign exchange rate
changes
|
1,316
|
|
(4,144)
|
|
Overseas tax on overseas
income
|
(538)
|
|
(583)
|
|
Net
cash inflow from operating activities
|
|
70,571
|
|
52,049
|
Cash flow from financing activities
|
|
|
|
|
Shares purchased for
cancellation
|
(107,420)
|
|
(50,302)
|
|
Unclaimed dividends
|
8
|
|
-
|
|
Net
cash outflow from financing activities
|
|
(107,412)
|
|
(50,302)
|
Net
(decrease)/increase in cash and cash equivalents
|
|
(36,841)
|
|
1,747
|
Cash and cash equivalents at start
of the year
|
|
80,442
|
|
74,551
|
Effect of foreign exchange rate
changes
|
|
(1,316)
|
|
4,144
|
Cash and cash equivalents at the end of the
year
|
|
42,285
|
|
80,442
|
Comprised of:
|
|
|
|
|
Cash and cash equivalents
|
|
42,285
|
|
80,442
|
Cash flow from operating activities
includes interest received of £2,663,000 (2022 - £1,078,000) and
dividends received of £12,235,000 (2022 - £12,924,000).
As the Company did not have any long
term debt at both the current and prior year ends, no
reconciliation of the net debt position is presented.
The notes form part of these
financial statements.
INCOME
|
2023
|
2022
|
|
£'000
|
£'000
|
Dividend income from investments
|
|
|
UK dividends from listed
investments
|
4,184
|
3,499
|
UK dividends from unlisted
investments (inc AIM)
|
3,273
|
4,173
|
Overseas dividends from UK-listed
and AIM companies
|
394
|
384
|
Overseas dividend income
|
5,179
|
5,375
|
|
13,030
|
13,431
|
Interest income from equity investments
|
|
|
Income from unlisted (inc AIM) UK
convertible bonds
|
535
|
363
|
Income from unlisted US convertible
bonds
|
85
|
49
|
|
620
|
412
|
Fixed interest
|
|
|
UK interest from government
securities
|
312
|
391
|
Overseas interest from government
securities
|
2,368
|
648
|
|
2,680
|
1,039
|
Other income
|
|
|
Deposit interest
|
1,596
|
444
|
|
1,596
|
444
|
Total income
|
17,926
|
15,326
|
Included within dividend income are
special dividends of £964,000 (2022 - £655,000).
Included within deposit interest is
interest received of £1,598,000 (2022 - £449,000), and interest
paid of £2,000 (2022 - £5,000).
STATUS
The Company is an investment company
within the meaning of s833 of the Companies Act 2006 and operates
as an investment trust in accordance with s1158 of the Corporation
Tax Act 2010 as amended ('s1158'). The Company is subject to the
Listing Rules of the Financial Conduct Authority and governed by
its articles of association, amendments to which must be approved
by shareholders by way of a special resolution. The Company
obtained approval from HM Revenue and Customs of its status as an
investment trust under s1158 and the directors are of the opinion
that the Company has and continues to conduct its affairs in
compliance with s1158 since this approval was granted.
BUSINESS MODEL
The Company has appointed Herald
Investment Management Limited ('HIML') as the Alternative
Investment Fund Manager to provide all portfolio management and
risk management services. HIML is authorised and regulated by the
Financial Conduct Authority both for investment management and as
an Alternative Investment Fund Manager.
Administration of the Company and
its investments has been delegated by HIML to the Bank of New York
Mellon (International) Limited ('BNYMIL') and company secretarial
duties have been delegated to Apex Listed Companies Services (UK)
Limited ('Apex').
BNYMIL is the depositary under a
tripartite agreement between HIML, the Company and BNYMIL. The
depositary is also responsible for custody activities.
OBJECTIVE
The Company's objective is to
achieve capital appreciation through investments in smaller quoted
companies in the areas of telecommunications, multimedia and
technology.
INVESTMENT POLICY - STRATEGY
While the
policy is global investment in smaller quoted companies in TMT, the
approach is to construct a diversified portfolio through the
identification of individual companies which offer long-term growth
potential, typically over a five-year horizon or more. The
portfolio is actively managed and does not seek to track any
comparative index. With a remit to invest in smaller companies
with market capitalisation generally below $3bn at the point of
purchase, there tends to be a correlation with the performance of
smaller companies, as well as that of the technology sector. A
degree of volatility relative to the overall market should be
expected.
The risk associated with the
illiquidity of smaller companies is reduced by generally
restricting the stake in any one company to less than 10% of the
shares in issue.
A number of investments are in
early-stage companies, which have a higher stock specific risk but
the potential for above average growth. Stock specific risk is
reduced by having a diversified portfolio.
In addition, to contain the risk of
any one holding, the Manager generally takes profits when a holding
reaches more than 5% of the portfolio. The Manager actively manages
the exposure within the constraint that illiquid positions cannot
be traded for short-term movements.
The Company has a policy not to
invest more than 15% of gross assets in other UK-listed investment
companies.
From time to time, fixed interest
holdings, non-equity or unlisted investments may be held on an
opportunistic basis.
The Company recognises the long-term
advantages of gearing and has a maximum gearing limit of 50% of net
assets. Borrowings are invested primarily in equity markets but the
Manager is permitted to invest in other securities in the companies
in the target areas when it is considered that the investment
grounds merit the Company taking a geared position. The board's
intention is to gear the portfolio when appropriate. Gearing levels
are monitored closely by the Manager and reviewed by directors at
each board meeting.
The Company may use derivatives
which will be principally, but not exclusively, for the purpose of
efficient portfolio management (i.e. for the purpose of reducing,
transferring or eliminating investment risk in its investments,
including protection against currency risk).
PRINCIPAL RISKS AND UNCERTAINTIES
The audit committee, on behalf of
the board, regularly undertakes a robust assessment of the
principal, including emerging, risks facing the Company. These
include those that would threaten its business model, future
performance, solvency or liquidity . Principal risks are also
considered as part of the board's annual strategy meeting. The
principal risks that follow are those identified by the board after
taking account of mitigating factors.
All risks are documented on
a risk register and are grouped into six main categories:
strategic risk; market, economic and geopolitical risk; investment
management risk; operational risk; emerging/external risk; and
regulatory risk. Risks are rated by impact and likelihood of
occurrence, with the ratings charted on two risk matrices: a
pre-mitigation and a post-mitigation one. Mitigation takes into
account processes, procedures and internal controls, and the
post-mitigation matrix is used to identify the Company's principal
risks. The risk register is reviewed on an ongoing basis, in an
attempt to capture all risks and ensure appropriate mitigation is
in place, and to enable directors to concentrate on principal risks
whilst ensuring all risks are considered.
As part of the risk review, the
board considered the challenging global economic and geopolitical
environment including: the continuing effects of the Russia/Ukraine
war, the Gaza/Israel conflict and the tensions between China/Taiwan
and China/USA, with attendant global supply chain issues; and the
risks from climate change. Inflation and interest rates were also
discussed.
A.
MARKET RISK
(i) Other price risk,
being the risk that the value of investment holdings will fluctuate
as a result of changes in market prices caused by factors other
than interest rate or currency rate movement;
(ii)
Interest rate risk, being the risk that the fair value or future
cash flows of a financial instrument will fluctuate because of
changes in market interest rates; and
(iii)
Foreign currency risk, being the risk that the fair value or future
cash flows of a financial instrument will fluctuate because of
changes in foreign exchange rates.
B.
CREDIT RISK
Being the risk that one party to a
financial instrument will cause a financial loss for the other
party by failing to discharge an obligation.
The Company is exposed to
counterparty credit risk from the parties with which it trades and
will bear the risk of settlement default. Counterparty credit risk
to the Company arises from transactions to purchase or sell
investments held within the portfolio.
There were no past due nor impaired
assets as of 31 December 2023 (2022 - nil).
The counterparties engaged with the
Company are regulated entities and of high credit
quality.
C.
LIQUIDITY RISK
Being the
risk that an entity will encounter difficulty in meeting
obligations associated with financial liabilities.
These risks and the policies for
managing them have been applied throughout the year and are
summarised below. Further detail is contained in the strategic
report in the annual report.
A.
MARKET RISK
(i)
Other Price Risk
The
Company's investment portfolio is exposed to market price
fluctuations which are monitored by the manager in pursuance of the
corporate objective. Listed securities held by the Company are
valued at bid prices, whereas material unlisted investments are
valued by the directors on the basis of the latest information in
line with the relevant principles of the International Private
Equity and Venture Capital Valuation Guidelines (Accounting Policy
1(c)). These valuations represent the fair value of the
investments.
Other Price Risk Sensitivity
13.1% of the Company's total equity
investments at 31 December 2023 (2022 - 14.9%) were listed on the
main list of the London Stock Exchange and a further 30.0% (2022 -
34.1%) on AIM. The NASDAQ Stock Exchange accounts for 24.4% (2022 -
21.5%), New York Stock Exchange for 5.4% (2022 - 3.6%) and other
stock exchanges or unlisted 27.1% (2022 - 25.9%). A 10% increase in
equity investment prices at 31 December 2023 would have increased
total net assets and profit & loss after taxation by
£113,987,000 (2022 - £114,687,000). A decrease of 10% would have
the exact opposite effect. The portfolio does not target any
exchange as a comparative index, and the performance of the
portfolio has a low correlation to generally used
indices.
The shares of Herald Investment
Trust plc have an underlying NAV per share. The NAV per share of
Herald Investment Trust plc fluctuates on a daily basis. In
addition, there is volatility in the discount/premium the share
price has to NAV.
(ii) Interest Rate Risk
The majority of the Company's assets
are equity shares and other investments which neither pay interest
nor have a maturity date. However, the Company does hold
convertible bonds and Government bonds, the interest rate and
maturity dates of which are detailed below. Interest is accrued on
cash balances at a rate linked to the UK base rate.
The interest rate risk profile of
the financial assets and financial liabilities at 31 December
was:
FINANCIAL ASSETS
|
|
|
2023
|
|
|
2022
|
|
|
2023
|
Weighted
|
|
2022
|
Weighted
|
|
|
Weighted
|
average
|
|
Weighted
|
average
|
|
|
average
|
period
|
|
average
|
period
|
|
|
interest
|
until
|
|
interest
|
until
|
|
2022
|
rate/
|
maturity/
|
2021
|
rate/
|
maturity/
|
|
Fair value
|
interest
|
maturity
|
Fair
value
|
interest
|
maturity
|
|
£'000
|
rate
|
date
|
£'000
|
rate
|
date
|
Fixed rate:
|
|
|
|
|
|
|
US bonds
|
60,765
|
2.7%
|
0.3 years
|
32,831
|
1.3%
|
0.3
Years
|
UK bonds
|
-
|
-
|
-
|
44,809
|
0.8%
|
0.3
Years
|
Overseas convertible
bonds
|
549
|
18.0%
|
1.1 years
|
827
|
5.7%
|
1.2
Years
|
UK convertible bonds
|
2,336
|
9.1%
|
0.9 years
|
2,000
|
9.0%
|
1.1
Years
|
Floating rate cash:
|
|
|
|
|
|
|
Non-sterling
|
27,877
|
3.7%
|
|
49,675
|
0.5%
|
|
Sterling
|
14,408
|
3.4%
|
|
30,767
|
0.6%
|
|
|
42,285
|
|
|
80,442
|
|
|
The benchmark rates which determine
the interest payments received on cash balances are the Bank of
England base rate, the European Central Bank rate and the United
States Federal Reserve rate.
Interest rate risk sensitivity
(a)
Cash
An increase of 100 basis points in
interest rates as at 31 December 2023 would have a direct effect on
net assets. Based on the position at 31 December 2023, over a full
year, an increase of 100 basis points would have increased the
profit & loss after taxation by £423,000 (2022 - £804,000) and
would have increased the net asset value per share by 0.75p (2022 -
1.29p). The calculations are based on the cash balances as at the
respective balance sheet dates and are not representative of the
year as a whole.
(b)
Fixed rate bonds
An increase
of 100 basis points in bond yields as at 31 December 2023 would
have decreased total net assets and profit & loss after
taxation by £195,000 (2022 - £224,000) and would have decreased the
net asset value per share by 0.35p (2022 - 0.36p). A decrease in
bond yields would have had an equal and opposite effect. The loan
stocks having an element of equity risk are not included in this
analysis as given the nature of the businesses and the risk profile
of their balance sheets; they are considered to have more equity
like characteristics.
(iii) Foreign Currency Risk
The Company's reporting currency is
sterling, but investments are made in overseas markets as well as
the United Kingdom and the asset value can be affected by movements
in foreign currency exchange rates.
Furthermore many companies trade
internationally both through foreign subsidiaries, and through
exports. The greatest foreign currency risk occurs when companies
have a divergence in currencies for costs and revenues. A much less
risky exposure to currency is straight translation of sales and
profits. The list of investments Iin the annual report breaks down
the portfolio by geographic listing. However the location of the
stock market quote only has a limited correlation to the costs,
revenues and even activities of those companies, and so this note
should not be regarded as a reliable guide to the sensitivity of
the portfolio to currency movements. For example, the holdings in
the portfolio that have suffered most from US$ weakness are UK
companies with dollar revenues and sterling costs.
The Company does not hedge the
sterling value of investments that are priced in other currencies.
Overseas income is subject to currency fluctuations. The Company
does not hedge these currency fluctuations because it is impossible
to quantify the effect for the reasons stated above. However, from
time to time the manager takes a view by holding financial assets
or liabilities in overseas currencies.
Exposure to currency risk through
asset allocation by currency of listing is indicated
below:
At
31 December 2023
|
|
|
Other
|
|
|
|
|
receivables
|
|
|
|
Cash and
|
and
|
Net
|
|
Investments
|
deposits
|
payables
|
exposure
|
|
£'000
|
£'000
|
£'000
|
£'000
|
US dollar
|
403,795
|
10,942
|
787
|
415,524
|
Euro
|
112,813
|
2,777
|
76
|
115,666
|
Taiwan dollar
|
43,155
|
14,158
|
9
|
57,322
|
Japanese yen
|
47,257
|
-
|
34
|
47,291
|
Norwegian krone
|
22,988
|
-
|
-
|
22,988
|
Australian dollar
|
22,182
|
-
|
-
|
22,182
|
Korean won
|
18,388
|
-
|
119
|
18,507
|
Other overseas currencies
|
26,342
|
-
|
36
|
26,378
|
Exposure to currency risk on
translation of valuations of securities listed in overseas
currencies
|
696,920
|
27,877
|
1,061
|
725,858
|
Sterling
|
503,719
|
14,408
|
1,772
|
519,899
|
|
1,200,639
|
42,285
|
2,833
|
1,245,757
|
At
31 December 2022
|
|
|
Other
|
|
|
|
|
receivables
|
|
|
|
Cash
and
|
and
|
Net
|
|
Investments
|
deposits
|
payables
|
exposure
|
|
£'000
|
£'000
|
£'000
|
£'000
|
US dollar
|
321,822
|
27,885
|
118
|
349,825
|
Euro
|
98,470
|
6,106
|
93
|
104,669
|
Taiwan dollar
|
38,340
|
15,684
|
50
|
54,074
|
Japanese yen
|
50,047
|
-
|
55
|
50,102
|
Australian dollar
|
26,226
|
-
|
-
|
26,226
|
Norwegian krone
|
24,331
|
-
|
-
|
24,331
|
Korean won
|
16,156
|
-
|
133
|
16,289
|
Other overseas currencies
|
29,058
|
-
|
31
|
29,089
|
Exposure to currency risk on
translation of valuations of securities listed in overseas
currencies
|
604,450
|
49,675
|
480
|
654,605
|
Sterling
|
620,063
|
30,767
|
(387)
|
650,443
|
|
1,224,513
|
80,442
|
93
|
1,305,048
|
Foreign currency risk sensitivity
At 31 December 2023, had sterling
strengthened by 10% (2022 - 10%) in relation to all currencies,
with all other variables held constant, total net assets and profit
& loss after taxation would have decreased by the amounts shown
below based on the balances denominated in foreign currency. A 10%
(2022 - 10%) weakening of sterling against all currencies, with all
other variables held constant, would have had the exact opposite
effect on the financial statement amounts. However, companies whose
cost base diverges in currency terms from its sales will in the
longer term have a significantly greater effect on valuation than
simple translation. In the short term investee companies generally
cover their currency exposure to varying degrees. There is
insufficient publicly disclosed information to quantify this, but
in the long term this effect is expected to dwarf simple
translation of foreign listings in terms of both risk and reward,
because many investee companies trade globally. Furthermore, the
country of listing is not necessarily an indication of the
geography of some or even any operational activities for investee
companies. The Manager does not use financial instruments to
protect against currency movements. From time to time financial
leverage has been made using debt in overseas
currencies.
|
2023
|
2022
|
|
£'000
|
£'000
|
US dollar
|
41,552
|
34,983
|
Euro
|
11,567
|
10,467
|
Taiwan dollar
|
5,732
|
5,407
|
Japanese yen
|
4,729
|
5,010
|
Norwegian krone
|
2,299
|
2,433
|
Australian dollar
|
2,218
|
2,623
|
Korean won
|
1,851
|
1,629
|
Other overseas currencies
|
2,638
|
2,909
|
|
72,586
|
65,461
|
B.
Credit Risk
Credit risk is the risk that a
counterparty to a financial instrument will fail to discharge an
obligation or commitment which it has entered into with the
Company. The manager monitors counterparty risk on an ongoing
basis.
The Company has investments in
convertible loan stocks that have an element of equity. These
securities are viewed as having a risk profile similar to the
equity holdings. This is because the convertibles held are in
nascent technology companies that may be loss making and may have
weak balance sheets. For this reason these stocks are categorised
as equity holdings and for risk management purposes excluded from
the credit risk analysis.
Credit Risk Exposure
The exposure to credit risk at 31
December was:
|
2023
|
2022
|
|
£'000
|
£'000
|
Fixed interest
investments
|
60,765
|
77,640
|
Cash and cash equivalents
|
42,285
|
80,442
|
Sales for subsequent
settlement
|
1,918
|
-
|
|
104,968
|
158,082
|
During the year the maximum exposure
in fixed interest investments was £75,518,000 (2022 - £85,394,000)
and the minimum £38,735,000 (2022 - £27,013,000). The maximum
exposure in cash was £79,533,000 (2022 - £91,114,000) and the
minimum £23,504,000 (2022 - £50,164,000).
C.
Liquidity Risk
The Company's policy with regard to
liquidity is to provide a degree of flexibility so that the
portfolio can be repositioned when appropriate and that most of the
assets can be realised without an excessive discount to the market
price.
Equity Securities
The Company's unlisted investments
are not readily realisable, but these only amount to 1.2% of the
Company's total assets at 31 December 2023 (2022 -
1.1%).
In practice, liquidity in investee
companies is imperfect, particularly those with a market value of
less than £100 million. To reduce this liquidity risk it is the
policy to diversify the holdings and generally to restrict the
holding in any one company to less than 10% of the share capital of
that company. Furthermore the guideline is for no single investment
to account for more than 5% of the assets of the
Company.
The market valuation of each
underlying security gives an indication of value, but the price at
which an investment can be made or realised can diverge materially
from the bid or offer price depending on market conditions
generally and particularly to each investment. 15.1% (£169
million) (2022 - 13.9% (£158 million)) of the listed equities in
the portfolio are invested in stocks with a market capitalisation
below £100 million, where liquidity is expected to be more limited.
If these stocks had on average a realisable value 20% below the bid
price the value of the total fund would be adversely affected by
2.7% (2022 - 2.4%).
Liquidity Risk Exposure
Contractual maturities of the
financial liabilities at the year end, based on the earliest date
on which payment can be required are as follows:
|
2023
|
2022
|
|
One year
|
One
year
|
|
or less
|
or
less
|
|
£'000
|
£'000
|
Other payables
|
1,189
|
1,215
|
|
1,189
|
1,215
|
Fair Value of Financial Instruments
The company's investments, as
disclosed in the Company's balance sheet, are valued at fair
value.
Nearly all of the Company's
portfolio of investments are disclosed in the Level 1 category as
defined in FRS 102.
Categorisation is based on the
lowest level input that is significant to the fair value measure in
its entirety.
The three levels set out in FRS102
follow:
Level 1 - The unadjusted quoted
price in an active market for identical assets or liabilities that
the entity can access at the measurement date.
Level 2 - Inputs other than quoted
prices included within Level 1 that are observable (i.e. developed
using market data) for the asset or liability, either directly or
indirectly.
Level 3 - Inputs are unobservable
(i.e. for which market data is unavailable) for the asset or
liability.
The investment manager considers
observable data to be that market data that is readily available,
regularly distributed or updated, reliable and verifiable, not
proprietary, and provided by independent sources that are actively
involved in the relevant market.
The analysis of the valuation basis
for the financial instruments based on the hierarchy as at 31
December is as follows:
At
31 December 2023
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
£'000
|
£'000
|
£'000
|
£'000
|
Financial assets
|
|
|
|
|
Equity investments
|
1,124,789
|
-
|
9,813
|
1,134,602
|
Government debt
securities
|
60,765
|
-
|
-
|
60,765
|
Convertible loan stocks
|
-
|
-
|
5,272
|
5,272
|
Total investments
|
1,185,554
|
-
|
15,085
|
1,200,639
|
At
31 December 2022
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
£'000
|
£'000
|
£'000
|
£'000
|
Financial assets
|
|
|
|
|
Equity investments
|
1,133,136
|
-
|
8,522
|
1,141,658
|
Government debt
securities
|
77,640
|
-
|
-
|
77,640
|
Convertible loan stocks
|
-
|
-
|
5,215
|
5,215
|
Total investments
|
1,210,776
|
-
|
13,737
|
1,224,513
|
A reconciliation of fair value
measurements in Level 3 is set out below:
At
31 December 2023
|
£'000
|
Opening balance at 1 January 2023
|
13,737
|
Purchases
|
2,538
|
Sales
|
(400)
|
Total (losses)
|
|
- on assets held at 31 December
2023
|
(2,366)
|
Assets transferred during the
year
|
1,576
|
Closing balance at 31 December 2023
|
15,085
|
VIABILITY STATEMENT
The directors' view of the Company's
viability has not changed since last year. The Company, as an
investment trust, is a collective investment vehicle designed and
managed for the long term. The directors consider that
three years is an appropriate forward-looking time period.
This recognises the Company's current position, the investment
strategy, which includes investment in smaller companies, some of
which are early stage and for which a three-year horizon is a
meaningful period over which to judge prospects, the board's
assessment of the main risks that threaten the business model and
the relatively fast-moving nature of the sectors in which the
Company invests. Inevitably, investment in smaller and early-stage
companies carries higher risks, both in terms of stock liquidity
and longer-term business viability and this risk is accepted by the
board as necessary to seek to deliver high returns.
There are no current plans to amend
the investment strategy, which has delivered good investment
performance for shareholders over many years and, the directors
believe, should continue to do so. The investment strategy and its
associated risks are kept under constant review by the board. The
board undertook a robust assessment of the risks pertaining to the
Company, including risks to the Company's viability, and this is
set out in the principal risks and uncertainties section. This
included emerging risks such as ongoing global tensions - for
example the war in Ukraine, the conflict in Gaza and associated
tensions in the Middle East, and tensions over Taiwan- and
continuing negative growing effects of climate change. As part of
this, the board considered several severe but plausible scenarios,
including the impact of significant market movements.
Other items relevant in the
directors' assessment of the Company's viability were: income and
expenses projections and the expectation that the majority of the
Company's investments comprise readily realisable securities as
substantiated by liquidity analysis of the portfolio; any borrowing
facilities in place - noting there were none at the year end; and
the fact that as a closed ended investment company the Company
is not affected by the liquidity issues of open-ended companies
caused by large or unexpected redemptions. The board also takes
account of the triennial shareholder vote on whether the Company
should continue as an investment trust. At the AGM in April 2022,
99.99% of votes cast were in favour of continuation. The next
continuation vote will be at the AGM to be held in 2025.
The directors confirm that, based on
the above and on reviews conducted as part of the detailed internal
controls and risk management processes set out in the annual
report, they have a reasonable expectation that the Company will
continue to maintain its status as an investment trust, to
implement its investment strategy and to operate and be able to
meet its liabilities as they fall due for at least the next
three financial years.
On behalf of the board
ANDREW JOY
Chairman
21 February 2024
Statement of Directors' Responsibilities in respect of the
financial statements
The directors are responsible for
preparing the annual report and the financial statements in
accordance with applicable
law and regulations.
Company law requires the directors to prepare financial statements
for each financial year. Under that law the directors have elected
to prepare the financial statements in accordance with applicable
law and United Kingdom Accounting Standards (United Kingdom
Generally Accepted Accounting Practice), including FRS 102 "The
Financial Reporting Standard applicable in the UK and Republic of
Ireland". Under company law the directors must not approve the
financial statements unless they are satisfied that they give a
true and fair view of the state of affairs of the Company and of
the profit or loss of the Company for that period. In preparing
these financial statements, the directors are required
to:
· select
suitable accounting policies and then apply them
consistently;
· make
judgements and accounting estimates that are reasonable and
prudent;
· state
whether applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in the
financial statements; and
· prepare the financial statements on the going concern basis,
unless it is inappropriate to assume that the Company will continue
in business.
The directors are responsible for the keeping of adequate
accounting records that are sufficient to show and explain
the Company's transactions and disclose with reasonable accuracy at
any time the financial position of the Company
and enable them to ensure that the financial statements and the
Directors' Remuneration Report comply with the
Companies Act 2006. They are also responsible for safeguarding the
assets of the Company and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.
The directors have delegated responsibility to the Manager for the
maintenance and integrity of the Company's page of
the Manager's website. Legislation in the United Kingdom governing
the preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
The work carried out by the auditor does not involve any
consideration of these matters and, accordingly, the auditor
accepts no responsibility for any changes that may have occurred to
the financial statements since they were initially presented on the
website.
Each of the directors, whose names and functions are listed in
the annual report confirm that, to the best of their
knowledge:
· the
financial statements, which have been prepared in accordance with
applicable law and United Kingdom Accounting Standards (United
Kingdom Generally Accepted Accounting Practice), give a true and
fair view of the assets, liabilities, financial position and loss
of the Company;
· the
annual report and financial statements includes a fair review of
the development and performance of the business and the position of
the Company, together with a description of the principal risks and
uncertainties that it faces and the Directors' Report contains
those matters required to be disclosed by applicable law;
and
· they
consider that the annual report and financial statements, taken as
a whole, is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company's
position, performance, business model and strategy.
On behalf of the board
ANDREW JOY
Chairman
21 February 2024
Financial Information
This announcement does not constitute
the Company's statutory accounts. The financial information
for the year to 31 December 2023 is derived from the statutory
accounts for 2023, which will be delivered to the Registrar of
Companies. The auditor has reported on the 2023 accounts; their
report was unqualified and did not include a statement under
Section 498(2) or (3) of the Companies Act 2006.
The Annual Report for the year ended
31 December 2023 was approved on 21 February 2024. It will be made
available on the Company's website at www.heralduk.com.
The Annual Report will be submitted
to the National Storage Mechanism and will shortly be available for
inspection at:
https://data.fca.org.uk/#/nsm/nationalstoragemechanism
This announcement contains regulated
information under the Disclosure Guidance and Transparency Rules of
the FCA.
Annual General Meeting
The AGM will be held at 11.30am on 23
April 2024 at the Company's registered office, 10-11 Charterhouse
Square,
London, EC1M 6EE. The Investment Manager will provide an update on
the investments and take questions after the formal business of the
meeting. Members of the board will also be available to discuss the
Company.
About Herald Investment
Trust
Herald Investment Trust invests
globally in the excellent opportunities available in the smaller
quoted technology and communications sectors. The Company was
established in 1994 and raised £65 million on launch and a further
£30 million in 1996. No further capital has been
raised.
Since inception Herald has delivered
a 22x NAV total return - with the NAV per share, on a total return
basis, having compounded at an annualised rate of 11.0%. Herald has
grown to become a constituent of the FTSE 250 index with total
assets of approximately £1.1 billion. The Company is currently
ungeared and has also returned in excess of £300 million to
shareholders through share buy backs - a multiple of its original
capital.
The Board believes that this
outstanding performance is primarily attributable to the Company's
distinctive investment strategy which is focused entirely on
smaller quoted companies in the global technology and
communications sectors. This strategy requires specialist
expertise, an extensive network and sound investment judgement from
the Investment Manager. Target companies within the Company's
investible universe often receive very limited institutional
investor participation, creating opportunities for the Investment
Manager to find excellent companies at attractive valuations, and
to support them as they grow.
HIT occupies a unique position as
the only investment trust offering expert access to such a wide
range of small and micro technology and communications stocks to
both retail investors and institutions, and performs a vital (and
very successful) role in enabling the returns from such companies
to be shared by a wide range of investors.
Since inception, the Company has
invested approximately £660 million of primary capital, of
which over £500 million has been invested in UK listed and AIM
companies. In addition to providing outstanding returns to
shareholders, the Company's initial capital has been reinvested
multiple times providing much needed capital to a growth sector of
the UK economy, helping to build businesses, create skilled jobs
and enhance the UK's productivity. Of the total profits of
approximately £1.4 billion made by the Company since 1994, over
£900 million is attributable to UK listed investments and AIM
stocks.
For further information
contact:
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Hudson Sandler
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+44 (0) 20 7796 4133
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Michael Sandler
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