TIDMGMF
GARTMORE FLEDGLING TRUST PLC
Final Results for the 14-month period to 31 August 2010
The following comprises extracts from the Company's Annual Report & Accounts
for the 14-month period to 31 August 2010. The full Annual Report and Accounts
is available to be viewed or downloaded from the Company's website at http://
www.gartmorefledglingtrust.co.uk . Copies will be mailed to shareholders
shortly.
Annual Report Page 3
Overview of the 14-month period to 31 August 2010
* Net Asset Value total return of 24.3%* over the 14-month period to 31 August
2010, compared with a total return of 19.1% from the FTSE Fledgling (ex.
Investment Companies) Index. The performance of the active investment portfolio
more than offset considerable portfolio rebalancing costs during the period.
* Over the ten-year period to 31 August 2010, the Company's net assets have
delivered a compound annual return of 9.0%, compared with a compound annual
return of 1.6% from the FTSE All-Share Index.
* The Company's performance ranked 1st in The Association of Investment
Companies UK Smaller Companies universe over the ten-year period to 31 August
2010.
* The Board is recommending an increased final dividend of 4.0 pence per
Ordinary share which, when added to the interim dividend of 3.5 pence, makes a
total of 7.5 pence, unchanged from the total dividend for the previous year,
excluding last year's one-off special dividend of 2.6 pence.
* Fledgling companies remain more attractive than their larger counterparts.
Key attractions include:
* Lower valuation ratios of price-to-sales (Fledgling companies are, on
average, valued at less than one third of their FTSE All-Share
counterparts) and price-to-book value which is approximately one half;
- Stronger balance sheets (the debt-to-equity ratio for Fledgling companies
averages 25%, compared with 47% for their FTSE All-Share counterparts);
- Directors demonstrating confidence in their own businesses (director share
purchases were nine times greater than share sales during the period);
- Long history of being acquired at good premiums to market prices.
* On a mid-market capital basis to give the fairest comparison
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Annual Report Page 6
Chairman's Statement
As previously reported, following FTSE Group's decision to move the primary
rebalancing date of its indices from December to June, the Company changed its
accounting reference date to 31 August, from 30 June, to ensure that the
portfolio of investments at the Company's year-end reflects the effects of
changes to the Fledgling Index and is free from distortion by transactions
related to the annual rebalancing.
I am pleased to present the Annual Report and Accounts of Gartmore Fledgling
Trust plc covering the 14-month period to 31 August 2010.
Performance
Over the 14-month period, the Company's assets delivered a net asset value
total return of 24.3%, compared with a total return of 19.1% from the Fledgling
Index and 29.2% from the FTSE All-Share Index. Over the same period, the price
of the Company's Ordinary shares rose by 20.6%. The Company's net asset value
performance relative to its benchmark is very pleasing, particularly given the
significant larger than usual dealing costs associated with the index
rebalancing in December 2009 and June 2010, and is attributable to strong
returns from the Company's active investment portfolio.
Historically, we have reported the Company's net asset value performance on a
capital only basis. However, our recent meetings with major shareholders have
highlighted that they consider net asset value total return performance as a
more appropriate measure of the Company's performance. Therefore, in this and
future reports, we will be reporting the Company's net asset value performance
on a total return basis.
Most of the Fledgling Index return over the reporting period occurred in the
final six months of 2009, with returns flat since the beginning of 2010,
causing the Fledgling Index to underperform against other major UK equity
indices. However, if the two-year period to 31 August 2010 is considered, then
the Fledgling Index delivered a total return of 37.2%, which is significantly
better than the other UK equity indices.
Over the ten years to 31 August 2010, the performance of the Fledgling Index
remains ahead of the FTSE All-Share Index, having delivered a total return of
155.0%, representing a compound annual return of 9.8%, compared with a total
return of 17.1% and compound annual return of 1.6% from the FTSE All-Share
Index. The Company was formed to capture the long-term outperformance of the
Fledgling asset class and in this it remains successful.
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Annual Report Page 7
Discount and Share Buybacks
The discount at which the Company's Ordinary shares trade relative to their
bid-priced Net Asset Value (including current year revenue) widened marginally,
from 16.1% at 30 June 2009, to 16.6% at 31 August 2010. This compares with the
average discount for the UK Smaller Companies sector which, over the same
period, widened from 13.8% to 15.8%.
During the period to 31 August 2010, the Company repurchased 321,500 Ordinary
shares, at an average price of 363.6 pence per share and a weighted average
discount of 16.4%. Over the 14-month period to 31 August 2010, the Ordinary
shares have traded at a discount ranging between 10.0% and 22.2%, compared with
a range of 13.1% and 18.7% for the UK Small Companies sector.
Since the end of the financial year, the Company has bought back a further
653,000 Ordinary shares at an average price of 385.8 pence per share and a
weighted average discount of 16.5%. The share price discount currently stands
at around 11%.
The Board continues to monitor the level of the Company's discount with that of
its peer group and will continue to use the Company's share buyback powers when
appropriate.
Revenue and Dividends
The revenue return for the period to 31 August 2010 was 7.02 pence per Ordinary
share, compared with 6.91 pence for the previous year. The comparative figure
excludes the non-recurring repayment of VAT on past management fees (and
related interest) of 4.63 pence.
Your Board is pleased to recommend a final dividend of 4.0 pence per share
which, subject to approval by shareholders, will be paid on 8 December 2010 to
shareholders on the register at the close of business on 12 November 2010.
Taken together with the interim dividend of 3.5 pence per share paid in March,
the total dividend will amount to 7.5 pence per share, unchanged from the
previous year, excluding last year's one-off special dividend of 2.6 pence.
The Manager
I welcome Adam McConkey, who joins Harmesh Suniara as co-manager of the
Company's portfolio. Adam is the newly-appointed head of Gartmore's UK smaller
companies team and has over eleven years' investment industry experience. He
joined Gartmore in 2000 from the Co-operative Insurance Society where he worked
as a European analyst on Life and Pension funds, and on the construction of the
CIS European Growth Unit Trust. This appointment follows Gervais Williams'
decision to leave Gartmore at the end of September. We thank Gervais for his
valuable contribution to the performance of the Company over the last nine
years.
Board Changes
During the year we continued the process of refreshing the Board. I am
delighted to welcome Robert Jeens, who joined the Board on 1 September 2010.
Robert has a wealth of investment experience and knowledge which will
complement the balance of the Board.
Having served as a Director of your Company since its formation in December
1994, and as Chairman of the Audit Committee since 2004, James Kerr-Muir will
step down from the Board at the conclusion of the forthcoming Annual General
Meeting. I would like to thank him for his loyal service and contribution to
the Company's success over the past 16 years.
Robert Jeens will succeed James as Chairman of the Audit Committee.
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Annual Report Page 8
Annual General Meeting (AGM)
The Notice of Annual General Meeting can be found on pages 59 to 62. The
Directors recommend that shareholders vote in favour of all of the proposed
resolutions, as they intend to do in respect of their own beneficial holdings.
Following the formal business of the meeting, Harmesh Suniara will give a short
presentation on the fund and its prospects for the forthcoming year. The
meeting will be followed by a buffet lunch, providing shareholders with an
opportunity to meet the Board and management team.
Details of all resolutions are contained in the Report of the Directors on
pages 27 to 29. Among the items of special business are the following:
Continuation Vote
Pursuant to the Company's Articles of Association, an ordinary resolution will
once again be proposed at the AGM to the effect that the Company should
continue in operation as an investment trust company. This continuation vote is
important to shareholders as it allows them to decide whether or not the
Company should continue in existence.
Your Board believes that the Company's investment approach will continue to
deliver the excellent long-term relative returns experienced in the past. It
also considers that the Company provides a unique vehicle for investors to take
advantage of the long-term outperformance of the Fledgling area of the stock
market.
Articles of Association
The Board proposes to adopt new articles of association primarily to reflect
the implementation of the Shareholder Rights Directive in the UK in August 2009
and the remaining provisions of the Companies Act 2006 in October 2009. An
explanation of the main changes between the proposed and the new articles of
association is set out in the Appendix to the Notice of Annual General Meeting
on pages 63 and 64.
Outlook
The Company's investment approach continues to provide investors with a unique
opportunity to access a portfolio of companies offering compelling value and
potential upside. Despite its strong performance in 2009 following the sharp
fall in valuations during the credit crisis, the relative attractions of the
Fledgling sector remain undiminished. In particular, the price-to-book value
measure of the Fledgling sector is, on average, some 40% lower than that of the
FTSE All-Share, while Fledgling companies, on average, have about half the
level of debt-to-equity as their FTSE All-Share counterparts. The dividend
yield on the Fledgling Index is also higher than the FTSE All-Share and the
Company will be increasing its focus on improving its dividend payout.
The annual and quarterly rebalancing process refreshes the constituents within
the portfolio, providing attractive investment opportunities whilst allowing
the Company to exit those holdings that have delivered strong returns. More
recently there has been increased institutional buying interest in mid-sized
Fledgling companies, a factor which has been absent in recent years. This
confirms the Company's confidence in its policy to buy-back shares and should
help the shares to trade at a narrower discount to net asset value. Although,
by historic standards, the number of takeovers was low during the reporting
period, we expect takeover activity to be a significant feature. We would also
expect the valuation discrepancy between Fledgling companies and their FTSE
All-Share counterparts to narrow, while corporate actions at very attractive
discounts provide further growth opportunities. The percentage of Fledgling
company overseas sales has also risen to 40%, from 21%, which we consider a
positive development, as it provides the sector with greater exposure to higher
growth economies.
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Annual Report Page 9
The Fledgling Index has outperformed the FTSE All-Share Index over both long
and short-term horizons such that the Company has been handsomely rewarded for
holding a portfolio of companies with much smaller market capitalisations, even
though this has been perceived as higher risk. Furthermore, the active overlay
has been successful in more than offsetting the rebalancing costs and providing
additional returns ahead of the benchmark.
Jimmy West
Chairman
28 October 2010
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Annual Report Page 11
Manager's Review
Investment Policy
The Company is managed using a hybrid investment style. For the most part, a
policy of broad indexation of the Fledgling Index is adopted. An active overlay
is then applied to up to a maximum of 35% of the portfolio. However, the
Directors intend that no more than 30% of the Company's assets would normally
be allocated to the active overlay. This overlay takes the form of
overweighting and/or underweighting holdings in:
* Fledgling Index companies; and/or
* AIM-traded companies which were formerly admitted to trading on the Official
List and which meet the Fledgling Index market capitalisation criteria (as at
the time of investment)
that are strongly favoured and/or less favoured by Gartmore's investment
process, and/or where directors have recently purchased or sold their own
shares. The Company will not invest more than 20% of the Company's assets (as
at the time of investment) in AIM-traded stocks which were formerly admitted to
trading on the Official List. However, it is the Directors' intention that no
more than 15% of the Company's assets (as at the time of investment) would
normally be invested in such stocks.
Companies which meet the investment criteria above but which are considered
unlikely to remain solvent on a one-year view will be excluded from the
portfolio.
Performance
The following tables show the performance of the Company's portfolio relative
to its benchmark over various periods, based upon mid-market priced portfolio
valuations to give the fairest comparison. Over the 14-month period to 31
August 2010, the portfolio outperformed the Fledgling Index by 6.2% on a
capital basis and by 4.3% on a total return basis.
(a) Capital Return
Period Gartmore Fledgling Benchmark Relative
Trust: Net Assets
Capital Performance*
per share
Return %
Capital Return
%
%
Year to 30 June 2006 +6.1 +5.4 +0.7
Year to 30 June 2007 +29.2 +31.9 -2.0
Year to 30 June 2008 -35.4 -35.8 +0.6
Year to 30 June 2009 +8.5 +8.4 +0.1
Fourteen months to 31 August +22.8 +15.7 +6.2
2010
Six months to 31 December 2009 +21.7 +15.7 +5.2
Eight months to 31 August 2010 +0.9 - +0.9
Five years to 31 August 2010 # +3.7 p.a. +2.9 p.a. +0.7 p.a.
Ten years to 31 August 2010 # +8.4 p.a. +7.9 p.a. +0.5 p.a.
Sources: Gartmore, Thomson Datastream.
* Relative performances are calculated as compound relatives and are based on
more decimal places than shown.
# Annualised.
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Annual Report Page 12
(b) Total Return
Period Gartmore Fledgling Benchmark Relative
Trust: Net Assets
Total Performance*
per share
Return %
Total Return
%
%
Year to 30 June 2006 +7.0 +7.4 -0.4
Year to 30 June 2007 +30.2 +34.3 -3.0
Year to 30 June 2008 -34.0 -33.8 -0.3
Year to 30 June 2009 +11.2 +12.3 -1.0
Fourteen months to 31 August +24.3 +19.1 +4.3
2010
Six months to 31 December 2009 +22.2 +17.1 +4.4
Eight months to 31 August 2010 +1.7 +1.8 -0.1
Five years to 31 August 2010 # +3.6 p.a. +4.1 p.a. -0.5 p.a.
Ten years to 31 August 2010 # +9.0 p.a. +9.8 p.a. -0.7 p.a.
Sources: Gartmore, Thomson Datastream.
* Relative performances are calculated as compound relatives and are based on
more decimal places than shown.
# Annualised.
Over the very long term, the Fledgling segment of the market has significantly
outperformed the FTSE All-Share Index. The 54-year period from 1 January 1955
to 31 August 2010 saw the market's smallest capitalised stocks, as represented
by the MicroCap and Fledgling indices, deliver an annualised rate of return of
19.2%, compared with an annualised return of 11.9% from the FTSE All-Share
Index. Retail price inflation was 5.6% per annum over the same period, implying
a real return of more than 13% per annum for the Fledgling sector.
Performance versus Competitor Companies
As a result of stronger performances from the FTSE SmallCap Index, FTSE 250
Index and the FTSE AIM All-Share Index over the 14-month period to 31 August
2010, the Company's shorter term performance has suffered within its competitor
universe. However, over the longer term, the Company remains a strong
performer. Over the ten-year period to 31 August 2010, the Company was ranked
first in its universe, outperforming the sector average by 7.6% per annum.
Periods to 31 August Gartmore Fledgling AIC UK Smaller Ranking
2010 Trust NAV Total
Return Companies Sector in Sector
% Size Weighted
Average Return
%
One year +9.2 +14.0 10/13
Three years -3.0 -15.1 5/13
Five years +20.5 +16.6 9/13
Ten years +141.2 +16.4 1/13
Source: Fundamental Data Limited on behalf of the Association of Investment
Companies.
All returns shown on unannualised bid-to-bid NAV total return (including
income) basis.
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Annual Report Page 13
Rebalancing
The nature of the Fledgling Index is that its constituent companies are smaller
than those of the FTSE All-Share Index, with no gap between, or overlap in, the
two indices' constituents. The FTSE Actuaries Equity Indices Committee
undertakes a full annual review in June (previously December), when a
`threshold' market capitalisation is set to divide the two indices. This was
set at approximately GBP53 million in June 2010, compared with GBP35 million in
December 2008.
The annual rebalance in June 2010 was more evenly matched than expected and
resulted in a turnover of approximately 17.6% by value of the Fledgling Index
for new entrants and a similar amount for exits. Post the annual rebalance the
Company's portfolio requires further rebalancing, given the objective is to
broadly match the make-up of the Index, albeit with a somewhat greater degree
of active flexibility. Such a large proportion of turnover leads inevitably to
the dealing costs that the active overlay policy is designed to mitigate.
Portfolio Construction
(a) Summary Risk Statistics
The number of individual investments held in the portfolio decreased over the
14-month period, from 120 as at 30 June 2009 to 104 as at 31 August 2010. Over
the same period, the number of companies in the Fledgling Index fell from 122
to 103. The portfolio remains widely diversified over the Fledgling area of the
market, with an overlap between the investment portfolio and the index of 96
companies.
The following table summarises the risk characteristics of the portfolio. The
key summary statistics are the tracking error of 3.1% against the Fledgling
Index and the information ratio of 2.0x. The tracking error estimates the
typical range in performance around the index that might be expected in two out
of three years. This number is marginally higher than the 2.8% recorded at 30
June 2009, but we consider it remains at a reasonable level, particularly given
the greater active component of the portfolio and the relative illiquidity of
the Fledgling market. The information ratio is a measure of the return achieved
relative to the risk taken. Over the 14-month period to 31 August 2010, the
information ratio was 2.0x. The higher ratio reflects the portfolio's
significant outperformance of the benchmark over the 14-month period, which was
achieved without increasing significantly the level of risk. Further
explanation of these terms can be found in the Glossary of Terms on the inside
back cover of this Report.
Gartmore FTSE Fledgling
Fledgling (ex. Investment Portfolio &
Trust Companies) Index Index Overlap
Number of Companies 104 (120) 103 (122) 96 (110)
Tracking Error 3.1% (2.8%)
Information Ratio 2.0x (0.0x)
Beta 1.00 (1.00) 1.00 (1.00)
Source: Barra
Comparative statistics as at 30 June 2009 are shown in brackets.
(b) Sector Weightings
The portfolio's sector positions are broadly similar to those of the benchmark
as befits a predominantly index tracking approach. The table on page 19 shows
the portfolio's weightings against the benchmark index as at 31 August 2010.
Characteristics of the FTSE Fledgling (ex. Investment Companies) Index
The Fledgling Index differs from larger company indices such as the FTSE
All-Share Index and the FTSE 100 Index. In particular, the Fledgling Index has
a significantly different industry distribution and different style biases.
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Annual Report Page 14
(a) Distribution by Market Capitalisation
The Fledgling Index represents the smallest listed companies on the London
Stock Exchange that are not included in the FTSE All-Share (ex. Investment
Companies) Index. The chart below shows the distribution of the constituents of
the Fledgling Index by market capitalisation as at 31 August 2010.
(b) Sector Distribution
The Fledgling Index has significantly different sector weightings, compared
with the FTSE All-Share Index. In particular, industrials (particularly support
services) and technology are strongly represented. Conversely, the Fledgling
Index currently has no exposure to telecommunications and is underweight oil &
gas and financials (notably banks).
(c) Valuation
The constituent companies of the Fledgling Index continue to be valued
significantly more cheaply than those of the FTSE All-Share Index using the
price-to-sales and price-to-book value measures. For example, Fledgling
companies, on average, are currently priced below their book value and are
valued at a 41% discount to FTSE All-Share Index companies using the
price-to-book value measure. In terms of the price/earnings ratio, the
Fledgling Index increased over the 14-month period and is now higher than the
FTSE All-Share Index, indicating better prospects for profits growth in the
Fledgling sector.
A combination of factors led to a significant fall in the dividend yield of the
Fledgling Index over the 14-month period. Although the drop was caused
primarily by higher-yielding stocks leaving the index at the annual and
quarterly rebalancings during the period, it has also been impacted by the
significant rise in the index, and in some cases Fledgling companies have cut
or cancelled their dividends.
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Annual Report Page 15
Valuation Measures FTSE Fledgling FTSE Relative
(ex.
at 31 August 2010 Investment All-Share
Companies) Index
Index
Price/Sales Ratio 0.4x (0.3x) 1.3x (1.1x) 0.28(0.30)
Price/Book Value Ratio 1.0x (0.5x) 1.7x (1.5x) 0.59(0.33)
Price/Earnings Ratio 14.0x (10.7x) 9.3x (11.1x) 1.51(0.96)
Historic Dividend Yield 4.1% (9.5%) 3.4% (4.6%) 1.22(2.07)
Dividend Cover 2.2x (2.2x) 2.6x (2.0x)
Notes: Price/Sales Ratio is calculated as Enterprise Value (market
capitalisation plus net debt) to Sales. (Source: UBS)
Price/Book Value Ratio excludes negative earners. (Source: UBS)
Price/Earnings Ratio shown is 2010 forecast and excludes negative earners.
(Source: UBS)
Dividend Yield is shown net. (Source: Thomson Datastream)
Dividend Cover is only in respect of companies actually paying a dividend.
(Source: UBS)
Comparative valuation measures as at 30 June 2009 are shown in brackets.
(d) Growth, Financing and Profitability
Growth
Currently, consensus forecasts for dividend growth of larger UK companies
exceed those for Fledgling companies. However, earnings growth among Fledgling
companies is anticipated to substantially exceed that of larger companies.
Financing
The average debt-to-equity ratio for both the Fledgling Index and the FTSE
All-Share Index has decreased over the 14-month period. However, Fledgling
companies continue to carry lower levels of debt than their larger
counterparts, a fact that has been true at all times since the autumn of 2001.
A number of Fledgling companies have strengthened their balance sheets since 30
June 2009 by raising new equity capital, which they have used either to reduce
expensive bank debt or to finance product development and future expansion,
leaving them in a stronger position to capitalise on growth opportunities.
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Annual Report Page 16
Characteristics Debt/Equity
at 31 August 2010 Ratio %
FTSE Fledgling (ex. Investment Companies) 25 (34)
FTSE All-Share 47 (56)
Source: UBS.
Comparatives as at 30 June 2009 are shown in brackets.
Profitability
As a result of rebalancing, the proportion of Fledgling company sales
originating from overseas markets increased from 21% to 40% over the 14-month
period to 31 August 2010. We view the rise in Fledgling company overseas sales
in recent years as a positive development, as increased sales to overseas
markets, particularly high growth emerging markets, will offset potentially
depressed domestic demand.
Average returns on equity remain significantly lower at the Fledgling end of
the market. This indicates substantial scope for profits recovery by Fledgling
companies.
Characteristics Overseas Sales as Average
at 31 August 2010 a Percentage of Return on
Total* Equity#
% %
FTSE Fledgling (ex. Investment 40 (21) 7.8 (5.9)
Companies)
FTSE All-Share 50 (52) 18.2 (13.4)
Source: * FactSet, Worldscope.
# UBS. Data as at 31 August 2010.
Comparatives as at 30 June 2009 are shown in brackets.
(e) Takeover Activity
Takeover activity slowed in 2009 and remained relatively depressed during the
first eight months of 2010, with potential acquirers placing greater emphasis
on building up their cash reserves. Nevertheless, some corporates and venture
capitalists have continued to take advantage of specific opportunities,
attracted by the low relative valuations and potential for strong earnings
growth in the Fledgling area of the market. We believe that the pace of
takeover activity will increase, as large companies seek to grow their
businesses in a weak economic environment.
Period Takeovers as Number of
Proportion of Takeovers
the Portfolio
%
2002 6.9 36
2003 10.8 30
2004 10.3 24
2005 8.7 15
2006 11.9 17
2007 15.5 13
2008 14.7 12
2009 9.2 6
2010 (First Eight 4.3 2
Months)
Gartmore Investment Limited
Manager
28 October 2010
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Annual Report Page 17
Financial Highlights
At At Change
31 August 30 June %
2010 2009
Total Return
Net Asset Value per Ordinary share +24.3
FTSE Fledgling (ex. Investment Companies) +19.1
Index
Capital
Net Assets (GBP'000) 84,996 71,264 +19.3 *
Net Assets ex. undistributed revenue (GBP'000) 83,454 69,138 +20.7
FTSE Fledgling (ex. Investment Companies) 4783.8 4135.4 +15.7
Index
Market Capitalisation of Ordinary shares in 70,845 59,775 +18.5
issue (GBP'000)
Ordinary Shares
Net Asset Value ** 457.1p 376.7p +21.3
Middle Market Price 381.0p 316.0p +20.6
Discount 16.6% 16.1%
* The Company's assets were reduced during the period by GBP1,175,000 utilised in
the repurchase and cancellation of 321,500 Ordinary shares, representing 1.7%
of the number of Ordinary shares in issue at 30 June 2009. In broad terms, this
reduction reflects the difference between the increase of 19.3% in Net Assets
and the increase of 21.3% in Net Asset Value per Ordinary share for the period
to 31 August 2010.
** Based on investments at bid-market value and including undistributed revenue
and after applying the accounting policies set out on pages 47 and 48.
Revenue and Dividends Period to Year to
31 August 30 June
2010 2009
Net revenue after taxation (GBP'000) 1,317 2,211¹
Revenue return per Ordinary share 7.02p 11.54p¹
Dividends per Ordinary share 7.5p 10.1p²
Total Expense Ratio 1.2% 1.3%
¹ Includes non-recurring VAT repayment and related interest of GBP888,000 (4.63p
per Ordinary share).
² Includes special dividend of 2.6 pence.
Total Return to Equity Shareholders (GBP'000)
Revenue return after taxation 1,317 2,211
Capital return after taxation 15,491 3,989
Total return 16,808 6,200
Total Return per Ordinary share |
Revenue 7.02p 11.54p
Capital 82.53p 20.81p
Total 89.55p 32.35p
| Based on the weighted average number of shares in issue during the period.
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Annual Report Page 18
Principal Investments
at 31 August 2010
Company Sector Valuation Percentage
GBP'000 of
Portfolio %
Nestor Healthcare Health Care Equipment & 3,950 (1,049) 4.5 (1.5)
Services
Future Media 2,681 (-) 3.0 (-)
Acal Support Services 2,571 (850) 2.9 (1.2)
Phytopharm Pharmaceuticals & 2,150 (-) 2.4 (-)
Biotechnology
Renold Industrial Engineering 2,149 (-) 2.4 (-)
Zotefoams Chemicals 2,121 (828) 2.4 (1.2)
Norcros Construction & Materials 2,063 (-) 2.3 (-)
Creston Media 2,016 (1,066) 2.3 (1.5)
Filtronic Technology Hardware & 1,952 (922) 2.2 (1.3)
Equipment
AEA Technology Support Services 1,826 (2,188) 2.1 (3.2)
Top Ten Investments 23,479 26.5
Alpha Pyrenees Trust Real Estate Investment & 1,800 (-) 2.0 (-)
Services
Alexon Group General Retailers 1,782 (1,077) 2.0 (1.6)
Carr's Milling Industries Food Producers 1,764 (1,254) 2.0 (1.8)
Vernalis Pharmaceuticals & 1,711 (987) 1.9 (1.4)
Biotechnology
Air Partner Travel & Leisure 1,683 (-) 1.9 (-)
AXA Property Trust Real Estate Investment & 1,641 (846) 1.9 (1.2)
Services
Blacks Leisure General Retailers 1,619 (-) 1.8 (-)
Sinclair Pharma Pharmaceuticals & 1,618 (-) 1.8 (-)
Biotechnology
Antisoma Pharmaceuticals & 1,607 (-) 1.8 (-)
Biotechnology
Avon Rubber General Industrials 1,556 (827) 1.8 (1.2)
Top Twenty Investments 40,260 45.4
French Connection General Retailers 1,552 (-) 1.8 (-)
Dee Valley Group Gas, Water & 1,527 (1,125) 1.7 (1.6)
Multiutilities
Communisis Support Services 1,442 (-) 1.6 (-)
Porvair Alternative Energy 1,432 (1,251) 1.6 (1.8)
NXT Leisure Goods 1,425 (974) 1.6 (1.4)
Harvard International | Leisure Goods 1,377 (-) 1.6 (-)
Harvey Nash Group Support Services 1,368 (851) 1.6 (1.2)
4Imprint Group Media 1,366 (930) 1.5 (1.3)
Jersey Electricity Electricity 1,344 (1,216) 1.5 (1.8)
Central Rand Gold Mining 1,335 (-) 1.5 (-)
Top Thirty Investments 54,428 61.4
Cadogan Petroleum Oil & Gas Producers 1,328 (-) 1.5 (-)
Tamar European Industrial Real Estate Investment & 1,316 (-) 1.5 (-)
Fund Services
Trifast Industrial Engineering 1,304 (753) 1.5 (1.1)
STV Media 1,284 (-) 1.4 (-)
Source BioScience Pharmaceuticals & 1,225 (674) 1.4 (1.0)
Biotechnology
Microgen Software & Computer 1,066 (1,802) 1.2 (2.6)
Services
Uniq Food Producers 1,053 (1,082) 1.2 (1.6)
Moss Bros General Retailers 1,020 (-) 1.1 (-)
Office2office Support Services 975 (1,682) 1.1 (2.4)
Vislink Technology Hardware & 900 (1,167) 1.0 (1.7)
Equipment
Top Forty Investments 65,899 74.3
Other listed investments 22,803 25.7
(64 stocks)
Total Investments at Fair 88,702 100.0
Value
| Quoted on the Alternative Investment Market
Comparative valuations and percentages of portfolio for the previous year-end
are shown in brackets.
At 30 June 2009, the top 40 investments were valued at GBP47,318,000 and
represented 68.4% of the portfolio.
=---------
Annual Report Page 19
Sector Classification and Weightings
at 31 August 2010
Sector Gartmore Fledgling Overweight/
Fledgling Index (ex.
Trust plc Investment Underweight
Companies)
% %
%
Oil & Gas 3.1 2.5 +0.6
Oil & Gas Producers 1.5 1.3 +0.2
Alternative Energy 1.6 1.2 +0.6
Basic Materials 5.6 6.3 -0.7
Chemicals 3.3 3.2 +0.1
Mining 2.3 3.1 -0.8
Industrials 25.9 27.4 +1.5
Construction & Materials 4.6 7.5 -2.9
Aerospace & Defence 1.8 1.5 +0.3
General Industrials 1.9 2.1 -0.2
Electronic & Electrical 0.0 0.1 -0.1
Equipment
Industrial Engineering 6.6 6.0 +0.6
Support Services 11.0 10.2 +0.8
Consumer Goods 8.1 6.1 -+2.0
Automobiles & Parts 0.7 1.5 -0.8
Food Producers 3.2 2.9 +0.3
Household Goods & Home 0.2 0.5 -0.3
Construction
Leisure Goods 3.2 0.8 +2.4
Personal Goods 0.8 0.4 +0.4
Health Care 16.5 16.0 +0.5
Health Care Equipment & Services 5.7 7.5 -1.8
Pharmaceuticals & Biotechnology 10.8 8.5 +2.3
Consumer Services 20.6 18.8 +1.8
General Retailers 9.3 7.1 +2.2
Media 8.9 9.7 -0.8
Travel & Leisure 2.4 2.0 +0.4
Utilities 3.2 3.6 -0.4
Electricity 1.5 1.8 -0.3
Gas, Water & Multiutilities 1.7 1.8 -0.1
Financials 9.6 15.1 -5.5
Real Estate Investment & 7.0 8.7 -1.7
Services
Real Estate Investment Trusts 0.4 2.9 -2.5
Financial Services 2.2 3.5 -1.3
Technology 7.4 4.2 +3.2
Software & Computer Services 3.6 1.1 +2.5
Technology Hardware & Equipment 3.8 3.1 +0.7
Total Investments 100.0 100.0
=---------
Annual Report Page 21
Report of the Directors
The Directors present their report and the audited accounts for the 14-month
period to 31 August 2010. The Corporate Governance Statement on pages 31 to 37
forms part of the Report of the Directors.
Business Review
The Business Review has been prepared in accordance with the Companies Act
2006. For additional information, please refer to the Chairman's Statement on
pages 6 to 9, the Manager's Review on pages 11 to 17 and the portfolio analyses
on pages 17 to 20.
Nature and Status
The Company is an investment trust company and was incorporated and registered
in England and Wales as a public limited company on 6 October 1994 with
registration number 2974633. It is an investment company as defined by section
833 of the Companies Act 2006 and is a member of The Association of Investment
Companies. The Company's shares are listed on the Official List of the UK
Listing Authority and are traded on the main market of the London Stock
Exchange.
During the period covered by this report, the Company formed an investment
dealing subsidiary, GFT Dealing Limited, to allow the Manager to take advantage
of short-term opportunities. The subsidiary did not trade during the period to
31 August 2010. Therefore, as permitted by the Companies Act 2006, the Company
has not prepared consolidated accounts.
The Company was last approved by the Commissioners for Her Majesty's Revenue &
Customs (HMRC) as an investment trust under Section 842 of the Income and
Corporation Taxes Act 1988 (Section 842) in respect of the year ended 30 June
2009. This approval is subject to there being no subsequent enquiry under
corporation tax self-assessment. The Company has been approved as an Investment
Trust for all previous years. Since 30 June 2009, the Company has directed its
affairs so as to be able to continue to qualify for approval as an investment
trust under Section 1158 of the Corporation Tax Act 2010 (formerly Section
842).
The close company provisions of the Income and Corporation Taxes Act 1988 do
not apply to the Company.
Investment Objective
The Company seeks long-term growth in capital and dividends from investment
predominantly in the constituents of the FTSE Fledgling (ex. Investment
Companies) Index (the Fledgling Index).
Investment Policy
The Company is managed using a hybrid investment style. For the most part, a
policy of broad indexation of the Fledgling Index is adopted. An active overlay
is then applied to up to a maximum of 35% of the portfolio. However, the
Directors intend that no more than 30% of the Company's assets would normally
be allocated to the active overlay.
This overlay takes the form of overweighting and/or underweighting holdings in:
* Fledgling Index companies; and/or
* AIM-traded companies which were formerly admitted to trading on the Official
List and which meet the Fledgling Index market capitalisation criteria (as at
the time of investment)
that are strongly favoured and/or less favoured by Gartmore's investment
process, and/or where directors have recently purchased or sold their own
shares. The Company will not invest more than 20% of the Company's assets (as
at the time of investment) in AIM-traded stocks which were formerly admitted to
trading on the Official List. However, it is the Directors' intention that no
more than 15% of the Company's assets (as at the time of investment) would
normally be invested in such stocks.
=---------
Annual Report Page 22
Companies which meet the investment criteria above but which are considered
unlikely to remain solvent on a one-year view will be excluded from the
portfolio.
This dual approach of broad indexation coupled with an active overlay is seen
as the most practicable way of obtaining full exposure to the anticipated
long-term outperformance of the Fledgling Index. It offers a widely diversified
portfolio, close in structure to that of the Fledgling Index. The active
overlay is intended to help the Company to perform in line with or slightly
ahead of its benchmark index, by adding sufficient value at least to mitigate
the Company's management fees and the sometimes significant portfolio dealing
costs associated with the periodic rebalancing of the Fledgling Index.
Performance
The Board considers a number of key performance indicators to assess the
Company's success in achieving its investment objective. The principal measure
of performance is considered to be the movement of the net asset value per
Ordinary share (NAV), compared with the movement of the Fledgling Index, as the
Company's primary investment objective is to broadly match the capital
performance of this Index.
Over the 14-month reporting period to 31 August 2010, the Company's assets
delivered a net asset value total return of 24.3%, compared with a total return
of 19.1% from the Fledgling Index. The Company's relative performance benefited
from the Manager's overweighting of selected stocks, particularly in the
Chemicals, Industrials, and Technology sectors. Positive contributions came
from overweight positions in Acal, an electronic components distributor; Avon
Rubber, which manufactures products for the international automotive,
engineering, dairy and defence industries; STV, a Scottish TV group; Nestor
Healthcare, the largest independent provider of services to the UK health and
social care market; and Zotefoams, a leading manufacturer of foam products.
Performance also benefited from underweight positions in health care company
Puricore. Conversely, overweight positions in clothing retailers Alexon and
Blacks Leisure detracted from performance, as did holdings in biotech company
Phytopharm and food producer Uniq.
The Company's performance over the longer term is summarised in the tables in
the Manager's Review on pages 11 and 12.
The Directors also monitor the performance of the Company's Ordinary shares
and, in particular, the level of discount at which the Ordinary shares trade
relative to the net asset value. Over the period to 31 August 2010, the
mid-market price of the Company's Ordinary shares rose by 20.6%. An active
share buy-back policy is in place which aims to reduce discount volatility and
the level of the discount, compared with the Company's peer group. During the
14-month reporting period, the Company repurchased 1.7% of the Ordinary shares
in issue at 30 June 2009, at an average price of 363.6 pence and a weighted
average discount of 16.4%. Over this period, the Ordinary shares traded at a
discount ranging between 10.0% and 22.2%, compared with a range of 13.1% and
18.7% for the AIC UK Smaller Companies sector. The Ordinary shares ended the
financial year at a discount of 16.6% to net asset value (including
undistributed revenue), although this has since narrowed to 11.1% at the date
of this Report.
Additionally, the Board regularly reviews the costs of running the Company. For
the accounting period to 31 August 2010, the Company's total expense ratio
(TER) was 1.2%, compared with 1.3% for the year to 30 June 2009.
Financial Position and Total Return
At 31 August 2010, net assets amounted to GBP84,996,000, compared with GBP
71,264,000 at 30 June 2009. All of the Company's investments are listed on
recognised exchanges and would normally be realisable within a relatively short
timeframe.
The Company made a net revenue surplus in the 14-month accounting period, after
expenses and taxation, of GBP1,317,000, compared with GBP2,211,000 for the year to
=---------
Annual Report Page 23
30 June 2009. The Directors recommend a final dividend of 4.0 pence per
Ordinary share which, subject to shareholders' approval, will be paid on 8
December 2010 to shareholders on the register on 12 November 2010. This
dividend, together with the interim dividend of 3.5 pence per Ordinary share
paid on 31 March 2010, makes a total of 7.5 pence.
Borrowing Facilities
The Company has an overdraft facility of GBP9,000,000, which is provided by The
Royal Bank of Scotland plc. The facility is used from time to time to
facilitate periodic rebalancing of the portfolio. The facility is also used
occasionally to fund share buy-backs and corporate actions, including placings
and open offers. Drawings on the facility, when made, are therefore normally
short-term in nature. At 31 August 2010, the amount drawn on this facility was
to GBP3,600,000.
Socially Responsible Investment
The Company has no employees and the Board is comprised entirely of
non-executive Directors. As an investment trust, the Company has no direct
impact on the environment. In carrying out its activities and in relationships
with suppliers and the community, the Company aims to conduct its business
responsibly, ethically and fairly.
The Company has delegated responsibility for making and holding investments to
the Manager, Gartmore Investment Limited, on the basis that, subject to an
overriding requirement to pursue the best economic interests of the Company and
its shareholders, the Manager should take account of social, environmental and
ethical factors.
Future Trends
Although we are cautious over the short-term, particularly with regard to the
UK Government's austerity measures and their impact on economic growth, we
believe that the considerable attractions of Fledgling companies remain
undiminished. The annual rebalancing also continues to provide the Manager with
attractive opportunities to enhance portfolio returns over the medium to longer
term.
Principal Risks and Uncertainties
The Company's performance is dependent on the performance of the companies and
securities markets in which it invests. Smaller company markets are, by their
very nature, less liquid than their larger counterparts and therefore tend to
be more sensitive to economic and other factors, and hence more volatile. A
significant and/or prolonged fall in these equity markets would have a serious
impact on the Company's net asset value and share price. The key
characteristics and differences between the Fledgling Index and the larger UK
equity markets are provided in the Manager's Review on pages 11 to 17.
The Company is permitted to invest in AIM companies which were formerly traded
on the Official List. An investment in shares traded on AIM may be less liquid
and may carry a higher risk than an investment in shares traded on the Official
List. In addition, the rules of AIM and the continuing obligations imposed on
AIM companies are less demanding than those of the Official List.
The Company's ability to provide returns to shareholders and achieve its
investment objective is dependent on the ability of the Manager to add further
value through the active investment overlay.
The Company is also subject to the risk that the market rating of its Ordinary
shares will fail to reflect its investment performance, as a consequence of
poor sentiment towards equities in general or smaller companies in particular.
The Board regularly reviews the relative level of discount against the sector,
giving consideration to ways in which share price performance can be enhanced
including marketing initiatives and effective communication of the Company's
investment performance to existing and potential investors by the Manager and
the corporate broker.
=---------
Annual Report Page 24 (extract)
In common with most other investment trust companies the Company has no
employees other than the non-executive directors. The Company therefore relies
on services provided by third parties, including, in particular, the investment
manager and company secretary Gartmore Investment Limited. As described in the
Corporate Governance Statement on pages 36 and 37, the Board keeps under review
the risks facing the Company and minimises operational risks through its
arrangements with service providers and reviews of their services and internal
controls.
The Company is an investment trust and as such, must satisfy the conditions of
Section 1159 of the Corporation Tax Act 2010 (formerly Section 842 of the
Income and Corporation Taxes Act 1988). A breach of these requirements may
result in the Company losing its investment trust status and, as a consequence,
becoming subject to tax on capital gains. The Board receives monthly reports
from the Manager with regard to the Company's compliance with Section 1159
requirements.
Other principal risks associated with the Company's financial instruments and
policies for managing these risks are given in note 22 to the accounts.
=---------
Annual Report Page 30 (extract)
Statement under DTR 4.1.12
The Directors of the Company, whose names are shown on pages 4 and 5 of this
Report, each confirm to the best of their knowledge that:
* the accounts, which have been prepared in accordance with applicable
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Company; and
* this Annual Report includes a fair review of the development and
performance of the business and the position of the Company, together with
a description of the principal risks and uncertainties that it faces.
Jimmy West
Chairman
28 October 2010
=---------
Annual Report Page 42
Income Statement Period to 31 August 2010
to 31 August 2010 Notes Revenue Capital Total
GBP'000 GBP'000 GBP'000
Income and Capital Losses
Gains on investments held at fair value 2 - 15,878 15,878
through profit or loss
Income from investments 3 2,459 - 2,459
Other income 3 42 - 42
Net exchange loss - ( 2 ) ( 2 )
Return before Expenses, Finance Costs and 2,501 15,876 18,377
Taxation
Expenses
Management fees 4 ( 755 ) - ( 755 )
VAT on management fees recovered 4 - - -
Other fees and expenses 4 ( 379 ) ( 385 ) ( 764 )
Return before Finance Costs and Taxation 1,367 15,491 16,858
Finance Costs
Interest payable 6 ( 38 ) - ( 38 )
Return on Ordinary Activities before Taxation 1,329 15,491 16,820
Taxation 7 ( 12 ) - ( 12 )
Return to Equity Shareholders after Taxation 1,317 15,491 16,808
Total Return per Ordinary share 9 7.02p 82.53p 89.55p
The total column above represents the Profit and Loss Account of the Company.
The revenue and capital items derive from continuing activities.
A Statement of Total Recognised Gains and Losses has not been presented as all
gains and losses are recognised in the Income Statement.
No operations were acquired or discontinued during the year.
The Notes on pages 47 to 58 form part of these Accounts.
=---------
Annual Report Page 43
Income Statement Year to 30 June 2009
to 30 June 2009 Revenue Capital Total
Notes GBP'000 GBP'000 GBP'000
Income and Capital Profits
Gains on investments held at fair value 2 - 4,279 4,279
through profit or loss
Income from investments 3 2,062 - 2,062
Other income 3 169 - 169
Net exchange gain - 2 2
Return before Expenses, Finance Costs and 2,231 4,281 6,512
Taxation
Expenses
Management fees 4 ( 443 ) - ( 443 )
VAT on management fees recovered 4 739 - 739
Other fees and expenses 4 ( 280 ) ( 292 ) ( 572 )
Return before Finance Costs and Taxation 2,247 3,989 6,236
Finance Costs
Interest payable 5 ( 32 ) - ( 32 )
Return on Ordinary Activities before 2,215 3,989 6,204
Taxation
Taxation 6 ( 4 ) - ( 4 )
Return to Equity Shareholders after Taxation 2,211 3,989 6,200
Return per Ordinary share 8 11.54p 20.81p 32.35p
The total column above represents the Profit and Loss Account of the Company.
The revenue and capital items derive from continuing activities.
A Statement of Total Recognised Gains and Losses has not been presented as all
gains and losses are recognised in the Income Statement.
No operations were acquired or discontinued during the year.
The Notes on pages 47 to 58 form part of these Accounts.
=---------
Annual Report Page 44
Period to 31 August 2010
Reconciliation of Capital
Movements in
Shareholders' Funds Share redemption Capital Revenue
capital reserve reserve reserve* Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 30 June 2009 4,729 5,569 58,840 2,126 71,264
Net capital return from
ordinary activities - - 15,491 - 15,491
Net revenue return from
ordinary activities - - - 1,317 1,317
Equity dividends paid 7 - - - ( 1,901 ( 1,901
) )
Repurchase and
cancellation
of Ordinary shares ( 80 ) 80 ( 1,175 - ( 1,175
) )
At 31 August 2010 4,649 5,649 73,156 1,542 84,996
Year to 30 June 2009
Capital
Share redemption Capital Revenue
capital reserve reserve reserve* Total
Notes GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 30 June 2008 4,946 5,352 57,020 1,265 68,583
Net capital return from
ordinary activities - - 3,989 - 3,989
Net revenue return from
ordinary activities - - - 2,211 2,211
Equity dividends paid 7 - - - ( 1,350 ( 1,350
) )
Repurchase and
cancellation
of Ordinary shares ( 217 ) 217 ( 2,169 - ( 2,169
) )
At 30 June 2009 4,729 5,569 58,840 2,126 71,264
* The revenue reserve represents the amount of the Company's reserves
distributable by way of dividend.
The Notes on pages 47 to 58 form part of these Accounts.
=---------
Annual Report Page 45
Balance Sheet At 31 August At 30 June
at 31 August 2010 2010 2009
Notes GBP'000 GBP'000
Fixed Assets
Investments held at fair value through 9 88,702 69,158
profit or loss
Current Assets
Debtors - amounts receivable within one year 12 262 1,963
Cash at bank 117 1,185
379 3,148
Current Liabilities
Creditors - amounts payable within one year 13 (4,085) (1,042)
Net Current (Liabilities)/Assets (3,706) 2,106
Net Assets 84,996 71,264
Capital and Reserves
Called-up share capital 14 4,649 4,729
Capital redemption reserve 15 5,649 5,569
Capital reserve 16 73,156 58,840
Revenue reserve 17 1,542 2,126
Equity Shareholders' Funds 84,996 71,264
Net Asset Value per Ordinary share 18 457.1p 376.7p
The accounts were approved and authorised for issue by the Board of Directors
on 28 October 2010 and were signed on its behalf by:
Jimmy West
Chairman
The Notes on pages 47 to 58 form part of these Accounts.
=---------
Annual Report Page 46
Cash Flow Statement Period to Year to
to 31 August 2010 31 August 30 June
2010 2009
Notes GBP'000 GBP'000
Operating Activities
Dividends and interest received from 2,499 2,320
investments
Interest received on deposits 2 20
Underwriting commission 40 -
VAT reclaim interest received - 149
VAT on management fees recovered - 739
Expenses paid (1,034) (738)
Net Cash Inflow from Operating Activities 19 1,507 2,490
Servicing of Finance
Bank overdraft interest paid (24) (32)
Investment Activities
Acquisitions of investments (69,871) (43,741)
Disposals of investments 66,799 45,085
(3,072) 1,344
Equity Dividends Paid
Ordinary shares (1,901) (1,350)
Financing Activities
Cost of Ordinary shares repurchased (1,176) (2,165)
Net Cash (Outflow)/Inflow (4,666) 287
Reconciliation of Net Cash (Outflow)/Inflow
to Movement in Net (Debt/Cash
Net cash at the beginning of the period 1,185 896
Net cash (outflow)/inflow (4,666) 287
Net exchange (loss)/gain (2) 2
Net (debt)/cash at the end of the period 19 (3,483) 1,185
The Notes on pages 47 to 58 form part of these Accounts.
=---------
Annual Report Page 47
Notes to the Accounts
1. Accounting Policies
The principal accounting policies have been applied consistently throughout the
period ended 31 August 2010, are unchanged from the year ended 30 June 2009 and
are set out below.
Basis of Preparation
The accounts have been prepared on a going concern basis in accordance with the
Companies Act 2006, applicable UK Accounting Standards (United Kingdom
Generally Accepted Accounting Practice) and with the Statement of Recommended
Practice (`SORP') for "Financial Statements of Investment Trust Companies and
Venture Capital Trusts" issued in January 2009 by The Association of Investment
Companies.
Consolidation
The balance sheet of the Company's wholly-owned subsidiary, GFT Dealing
Limited, has not been consolidated, as the subsidiary did not trade during the
period from 20 October 2009, the date of its incorporation, to 31 August 2010
and the amounts are immaterial. The accounts therefore reflect the position of
the parent Company, Gartmore Fledgling Trust plc, only and do not represent the
accounts of the Group.
Revenue, Expenses and Interest Payable
Investment income includes dividends receivable from investments marked
ex-dividend on or before the Balance Sheet date. Investment income is treated
as revenue in the Income Statement, with the exception that dividends of a
capital nature are treated as capital. Where the Company elects to receive its
dividend in the form of additional shares rather than cash, the amount of cash
dividend foregone is recognised as revenue in the Income Statement. Other
income is accounted for on an accruals basis.
Management fees, other administrative expenses and interest payable are
accounted for on an accruals basis and charged to the Income Statement as a
revenue item.
The Board believes that any allocation of management fees to capital is
inappropriate as it would distort the tracking of the Company's capital
performance against the FTSE Fledgling Index. Accordingly, Management fees are
treated as a revenue item in the Income Statement.
Expenses which are incidental to the acquisition of an investment are expensed
through the Income Statement as a capital item. Expenses which are incidental
to the disposal of an investment are deducted from the proceeds of the sale of
the investment.
Taxation
Deferred tax is recognised in respect of all timing differences that have
originated, but not reversed at the Balance Sheet date where transactions or
events that result in any obligation to pay more, or right to pay less, tax in
the future have occurred at the Balance Sheet date. This is subject to deferred
tax assets only being recognised if it is considered more likely than not that
there will be suitable profits from which the future reversal of the underlying
timing differences can be deducted. Timing differences are differences between
the Company's taxable profits and its results as stated in the accounts, which
are capable of reversal in one or more subsequent periods.
Dividends Payable
Dividends payable to shareholders are recognised in the period in which they
are paid and are shown in the Reconciliation of Movement in Shareholders'
Funds.
Investments
All investments are classified as held at fair value through profit or loss.
They are initially recognised on the trade date and measured, then and
subsequently, at fair value. Fair value is assumed to be the bid price, or last
traded price where no bid price is available. Changes in fair value are
included in the Income Statement as a capital item and are not distributable by
way of a dividend.
An amendment to Financial Reporting Standard 29 'Financial Instruments -
Disclosures' requires enhanced disclosure about fair value measurements. The
additional disclosures resulting from this amendment are provided in note 22 on
page 58.
No provision for taxation is required in respect of any realised or unrealised
appreciation of investments which arises, as the Company expects to continue to
qualify as an investment trust for tax purposes, thereby rendering capital
profits exempt from tax.
=---------
Annual Report Page 48
Rates of Exchange
The Company is a UK listed company with a predominantly UK shareholder base.
The results and financial position of the Company are expressed in sterling,
which is the functional and presentational currency of the Company.
Transactions denominated in foreign currencies are calculated in sterling at
the rate of exchange ruling at the date of such transactions. Assets and
liabilities in foreign currencies are translated at the rates of exchange
ruling at the balance sheet date, and the resulting gains or losses are taken
to the capital return.
2. Gains/(Losses) on Investments held at Fair Value through Profit or Loss
Period to Year to
31 August 30 June
2010 2009
GBP'000 GBP'000
Realised gains on disposal of investments 13,850 466
Unrealised investment holding losses recognised in 5,406 9,777
earlier years
Net realised gains on fair values at the previous 19,256 10,243
balance sheet date
Unrealised investment holding losses arising during (3,378) (5,964)
the period
15,878 4,279
3. Dividends and Other Income
Period to Year to
31 August 30 June
2010 2009
GBP'000 GBP'000
Income from UK listed investments:
Franked dividends 1,734 1,734
Overseas dividends 328 328
2,062 2,062
Other income:
Underwriting commission 40 -
Interest on bank deposits 2 20
VAT reclaim interest received - 149
42 169
2,501 2,231
4. Expenses
Period to Year to
31 August 30 June
2010 2009
GBP'000 GBP'000
Revenue:
Management fees 755 443
VAT on management fees recovered - (739)
755 (296)
Other fees and expenses:
Directors' fees 118 101
Auditor's remuneration - statutory audit 21 21
General expenses 240 158
379 280
1,134 (16)
Capital:
Transaction costs incurred on acquisitions of 385 292
investments
=---------
Annual Report Page 49
5. Interest Payable
Period to Year to
31 August 30 June
2010 2009
GBP'000 GBP'000
Bank overdraft 38 32
6. Taxation
Period to Year to
31 August 30 June
(a) Analysis of charge in year: 2010 2009
GBP'000 GBP'000
Overseas tax 12 4
Total current tax charge for the period 12 4
(b) Factors affecting current tax charge for the period:
The tax assessed for the period is lower than the standard rate of corporation
tax in the UK for an investment trust of 28% (2009: 28%). The differences are
explained below:
Period to Year to
31 August 30 June
2010 2009
GBP'000 GBP'000
Total return on ordinary activities before taxation 16,820 6,204
Corporation tax at 28%* 4,710 1,737
Effects of:
Capital profits not subject to corporation tax (4,445) (1,199)
Dividends not subject to corporation tax (687) (497)
Expenses not deductible for tax purposes 113 86
Utilisation of excess management expenses - (127)
Management expenses not utilised 309 -
Overseas tax 12 4
Total current tax charge for the period 12 4
(c) Provision for deferred taxation
The Company has not recognised a deferred tax asset of GBP3,107,000 (2009: GBP
2,798,000) in respect of unrelieved management expenses and non-trading loan
relationship deficits. It is unlikely that these amounts will be utilised in
future accounting periods unless the investment policy of the Company or the
tax treatment is changed.
=---------
Annual Report Page 50
7. Dividends on the Ordinary Shares
Period to Year to
31 August 30 June
2010 2009
GBP'000 GBP'000
Amounts recognised as distributions to Ordinary shareholders in the year:
Rate per No. of Payment date
share shares
2008 final 3.5p 19,613,580 1 October 2008 - 686
2009 interim 3.5p 18,966,080 20 March 2009 - 664
2009 final 4.0p 18,826,080 7 October 2009 753 -
2009 special 2.6p 18,826,080 7 October 2009 490 -
2010 interim 3.5p 18,796,080 31 March 2010 658 -
1,901 1,350
The total dividend payable in respect of the financial period, which is the
basis on which the requirements of Section 1159 Corporation Tax Act 2010 are
considered, is set out below:
Rate per No. of Payment date
share shares
2009 interim 3.5p 18,966,080 20 March 2009 - 664
2009 final 4.0p 18,826,080 7 October 2009 - 753
2009 special 2.6p 18,826,080 7 October 2009 - 490
2010 interim 3.5p 18,796,080 31 March 2010 658 -
2010 final * 4.0p 17,941,580 8 December 2010 718 -
1,376 1,907
Revenue available for distribution by way of 1,317 1,537
dividend
* The cost of the final dividend is based on the number of Ordinary shares in
issue as at 27 October 2010. This figure may change as a result of further
repurchases of Ordinary shares for cancellation prior to the ex-dividend date
of 10 November 2010.
8. Total Return per Ordinary Share
Period to Year to
31 August 30 June
2010 2009
GBP'000 GBP'000
Revenue return after taxation 1,317 2,211
Capital return after taxation 15,491 3,989
Total return after taxation 16,808 6,200
Weighted average number of shares 18,770,315 19,167,683
Revenue return per Ordinary share 7.02p 11.54p
Capital return per Ordinary share 82.53p 20.81p
Total return per Ordinary share 89.55p 32.35p
=---------
Annual Report Page 51
9. Investments held at Fair Value through Profit or Loss
Period to Year to
31 August 30 June
2010 2009
GBP'000 GBP'000
Opening book-cost 94,001 95,957
Acquisitions at cost (excluding transaction costs) 68,813 44,324
Proceeds of disposals* (net of transaction costs) (65,147) (46,746)
Realised gains on disposals 13,850 466
Disposals at cost (51,297) (46,280)
Closing book-cost 111,517 94,001
Unrealised investment holding losses (22,815) (24,843)
Valuation of investments 88,702 69,158
The investments are all equities which are either listed in the United Kingdom
or traded on the Alternative Investment Market in the UK and are included in
the Balance Sheet at fair value.
Analysis of investments by place of listing:
London Stock Exchange 87,303 68,308
Alternative Investment Market 1,399 850
Valuation of investments 88,702 69,158
The Company's investments are registered in the name of nominees of, and held
to the order of, The Bank of New York Mellon, as custodians to the Company.
There were no contingent liabilities in respect of the investments held at the
year-end.
*Proceeds of disposals of investments include special dividends of GBP128,000
(2009: GBP487,000).
Period to Year to
31 August 30 June
2010 2009
GBP'000 GBP'000
The following transaction costs were incurred during
the period:
On acquisitions 385 292
On disposals 163 120
548 412
=---------
Annual Report Page 52
10. Significant Interests
At 31 August 2010 the Company held interests amounting to 3% or more of any
class of capital in the following investee companies:
% of % of
class class
Abbeycrest 12.6 Future 4.4
Uniq 9.2 Nestor Healthcare 4.3
Source BioScience 8.3 Asterand 4.2
Parity 8.3 Harvey Nash Group 4.1
NXT 8.0 Trifast 4.0
Beale 7.5 Worthington 4.0
Filtronic 7.1 Renold 3.8
Alexon 7.0 Creston 3.8
Phytopharm 6.7 Vislink 3.8
Dawson Holdings 6.0 STV 3.8
Porvair 5.6 Dee Valley Group 3.7
Manganese Bronze 5.6 600 Group 3.7
Blacks Leisure 5.4 Gresham Computing 3.7
Waterman 5.2 French Connection 3.6
Flying Brands 5.2 Mallett 3.6
Ark Therapeutics 5.2 Alexandra 3.6
Alpha Pyrenees Trust 5.1 Jersey Electricity 3.6
Luminar Group 5.0 Carr's Milling Industries 3.6
Air Partner 5.0 Cadogan Petroleum 3.6
Vernalis 4.9 Alizyme 3.6
Moss Bros 4.9 GB Group 3.6
Molins 4.8 AXA Property Trust 3.5
Styles & Wood 4.7 MacFarlane 3.4
AEA Technology 4.7 Electronic Data 3.4
Processing
Avon Rubber 4.6 Sinclair Pharma 3.3
Zotefoams 4.6 Walker Crips Weddle Beck 3.2
Acal 4.6 Puricore 3.2
Antisoma 4.6 Tamar European Industrial 3.2
Fund
Harvard International 4.6 Havelock Europa 3.2
Communisis 4.5 Superglass Holdings 3.1
Cosalt 4.4 Caffyns 3.1
Central Rand Gold 4.4 Haynes Publishing 3.1
11. Investment in Subsidiary
The Company owns the whole of the issued ordinary share capital (GBP1) of GFT
Dealing Limited, a dealing company incorporated and registered in England and
Wales on 20 October 2009. The subsidiary did not trade during the period to 31
August 2010.
=---------
Annual Report Page 53
12. Debtors
As at As at
31 August 30 June
2010 2009
GBP'000 GBP'000
Amounts receivable within one year:
Investments sold 73 1,725
Prepaid expenses 13 11
Accrued income 174 226
Other debtors 2 1
262 1,963
13. Creditors
As at As at
31 August 30 June
2010 2009
GBP'000 GBP'000
Amounts payable within one year:
Investments purchased 212 885
Accrued expenses and interest 273 157
Bank overdraft 3,600 -
4,085 1,042
The Company has an overdraft facility of GBP9,000,000 (2009: GBP9,000,000) with The
Royal Bank of Scotland plc. Interest on amounts drawn is charged at 1.5% over
the bank's base rate. Drawings on the facility are repayable on demand.
14. Called-up Share Capital
Authorised
As at As at
31 August 30 June
2010 2009
GBP'000 GBP'000
100,000,000 Ordinary shares of 25p each 25,000 25,000
Allotted, Called-up
and Fully- paid
As at As at
31 August 30 June
2010 2009
GBP'000 GBP'000
18,594,580 (2009: 18,916,080) Ordinary shares of 25p 4,649 4,729
each
During the 14-month period to 31 August 2010, the Company repurchased 321,500
(2009: 867,500) Ordinary shares at a cost of GBP1,175,000 (2009: GBP2,169,000). The
shares repurchased represented approximately 1.7% of the Company's issued share
capital as at 30 June 2009 and reduced the number of Ordinary shares from
18,916,080 to 18,594,580
15. Capital Redemption Reserve
As at As at
31 August 30 June
2010 2009
GBP'000 GBP'000
Balance brought forward 5,569 5,352
Nominal value of Ordinary shares repurchased 80 217
Balance carried forward 5,649 5,569
=---------
Annual Report Page 54
16. Capital Reserve
As at As at
31 August 30 June
2010 2009
GBP'000 GBP'000
Balance brought forward 58,840 57,020
Gains on disposal of investments 13,850 466
Investment holding gains 2,028 3,813
Transaction costs incurred on acquisitions of (385) (292)
investments
Cost of shares repurchased (1,175) (2,169)
Net exchange (loss)/gain (2) 2
Balance carried forward 73,156 58,840
The split of capital reserve between realised and investment holding losses in
order to determine distributable profits (those reserves which are considered
to be readily convertible into cash) is as follows:
As at As at
31 August 30 June
2010 2009
GBP'000 GBP'000
Realised 95,971 83,683
Investment holding losses (22,815) (24,843)
73,156 58,840
17. Revenue Reserve
As at As at
31 August 30 June
2010 2009
GBP'000 GBP'000
Balance brought forward 2,126 1,265
Net revenue return for the year 1,317 2,211
Dividends paid on Ordinary shares (1,901) (1,350)
Balance at 30 June 1,542 2,126
18. Net Asset Value per Ordinary Share
The Net Asset Value per Ordinary share and Net Assets attributable to the
Ordinary shares at the period-end were as follows:
As at As at
31 August 30 June
2010 2009
Net Assets attributable to Ordinary shareholders GBP84,996,000 GBP71,264,000
Ordinary shares in issue 18,594,580 18,916,080
Net Assets Value per Ordinary share 457.1p 376.7p
19. Cash Flow from Operating Activities
Period to Year to
31 August 30 June
2010 2009
GBP'000 GBP'000
Total return before finance costs and taxation 16,858 6,236
Less: capital return before finance costs and (15,491) (3,989)
taxation
Revenue return before finance costs and taxation 1,367 2,247
Decrease in accrued income 52 261
(Increase)/decrease in prepaid expenses (2) 6
Increase/(decrease) in accrued expenses 102 (20)
Overseas tax withheld (12) (4)
Net cash inflow from operating activities 1,507 2,490
=---------
Annual Report Page 55
20. Analysis of Changes in Net Cash/(Debt)
At 30 June At 31
August
2009 Cash Flow Exchange 2010
loss
GBP'000 GBP'000 GBP'000 GBP'000
Cash at bank 1,185 (1,066) (2) 117
Bank overdraft - (3,600) - (3,600)
1,185 (4,666) (2) (3,483)
21. Transactions with the Manager
Management fees were paid to Gartmore Investment Limited at the rate disclosed
in the Report of the Directors, on page 23. Fees payable for the 14-month
period to 31 August 2010 amounted to GBP755,000 (year to 30 June 2009: GBP443,000).
At the Balance Sheet date, management fees totalling GBP164,000 (2009: GBP90,000)
were accrued.
22. Financial Instruments: Risk Management
The Directors manage investment risk principally through setting an investment
policy (see page 2) that is approved by shareholders, by delegating management
of the Company's investments to an investment manager under an agreement which
incorporates appropriate duties and restrictions, and by monitoring performance
in relation thereto. The Board's relationship with the investment manager is
set out on page 33 of this Report. Internal control procedures and the Board's
approach to risk is summarised on pages 36 and 37.
In pursuit of its investment objective (see page 2), the Company is faced with
a variety of risks which could result in either a reduction in the Company's
net assets or a reduction in the revenue available for distribution by way of
dividend. The principal risks associated with the Company's financial
instruments are market risk, liquidity risk and credit risk.
Market risk
Market risk comprises three types of risk: market price risk, interest rate
risk and currency risk.
Market price risk
The Company is an investment company and as such its performance is dependent
on the performance of the companies and securities in which it invests.
Consequently, market price risk is the most significant to which the Company is
exposed. The Company's investment objective and policy require it to invest
predominantly in the constituents of the FTSE Fledgling (ex. Investment
Companies) Index. At 31 August 2010, companies comprising the Fledgling Index
represented the smallest 0.14% of the UK listed equity market by market
capitalisation. Fledgling companies are, by their very nature, riskier and
significantly less liquid than larger companies an as a result their share
prices tend to more volatile. The principal risk characteristics of the
portfolio and the key differences between the Fledgling Index and the FTSE
All-Share Index are described in the Manager's Review on pages 11 to 17.
At 31 August 2010, the fair value of the Company's assets exposed to market
price risk was GBP88,702,000 (2009: GBP69,158,000). The fair value of the
investments in the portfolio is normally their bid-market price.
The market price of the investee companies' shares is subject to their
performance, supply and demand for the shares and investor sentiment regarding
the companies, or their industry sectors. The increase in the value of assets
exposed to market risk was attributable principally to a rise in the market
prices of investments held.
The maximum percentage of the Company's assets which may comprise the active
investment overlay is 35%.
=---------
Annual Report Page 56
22. Financial Instruments: Risk Management (continued)
In addition, the investment manager may invest up to 20% of the Company's
assets in AIM-traded companies which were formerly admitted to trading on the
Official List and which meet the Fledging Index market capitalisation criteria.
By increasing the level of active investment overlay, certain investments may
represent a more significant proportion (and others a lesser proportion) of the
Company's total assets. Also, an investment in shares traded on AIM may be less
liquid and may carry a higher risk than an investment traded on the Official
List. As a result, the risk that the Company's performance will be adversely
affected if any one of the investments comprising the active overlay were to
perform badly is greater than would be the case if the Company's portfolio of
investments were more diversified. As a consequence, the Company's returns may
diverge from those of the Fledgling Index.
At 31 August 2010, the active investment overlay represented approximately 22%
(2009: 18%) of the investment portfolio by value, of which 1.6% (2009: 1.2%)
was in AIM-traded stocks.
The net increase in the benchmark index over the 10-year period to 31 August
2010 was 97.4%, with the annual movement over that period averaging 18.6%. This
illustrates the volatility of the Fledgling sector and indicates that it could
move by a similar percentage in the forthcoming financial year. Accordingly, to
illustrate the Company's sensitivity to market prices, an 18.6% change in the
market value of the equity portfolio at 31 August 2010 would generate a
corresponding increase or decrease in the net asset value per Ordinary share of
19.5% and, because of the effect of the management fee, would have a converse
effect on revenue return of approximately 0.7p per Ordinary share. The effect
on capital return would be materially the same as the effect on net assets.
Interest rate risk
The Company finances part of its activities through the use of a short-term
overdraft facility of GBP9,000,000 provided by the Royal Bank of Scotland.
Drawings on the facility are made from time to time to facilitate periodic
rebalancing of the portfolio, are normally short term in nature and, when made,
are generally arranged on a rolling weekly basis. The interest rate is 1.5%
above the Bank's fluctuating base rate and no hedging of the rate is
undertaken. The Manager minimises the risk of exposure to excessive interest
costs by monitoring the Company's cash position on a regular basis. During the
14-month period to 31 August 2010, the maximum drawing on the overdraft
facility was GBP5,700,000 (2009: GBP5,625,000). The weighted average interest rate
paid was 2.0% (2009: 2.4%).
The Company also earns interest on its cash and short-term deposits although,
generally, cash balances held are not significant. Where funds are placed on
deposit, they are rarely fixed for periods of more than one week.
At the period-end, financial assets and liabilities exposed to floating
interest rates were as follows:
As at As at
31 August 30 June
2010 2009
GBP'000 GBP'000
Financial Assets:
Cash at bank 117 1,185
Financial Liabilities
Bank overdraft 3,600 -
The Company has no direct exposure to fixed interest rates.
The period-end amounts are not representative of the exposure to interest rates
either during the period just ended or in the period ahead, since the level of
borrowings and/or cash held are determined to a great extent by the level of
takeovers in the Fledgling sector and by the effects of the annual rebalancing.
However, to illustrate the potential sensitivity to changes in interest rates,
if the overdraft facility of GBP9,000,000 was fully drawn, a change of 0.5% in
the rate of interest charged would, over the course of a period, amount to GBP
45,000, less than 0.1% of period-end net assets.
=---------
Annual Report Page 57
22. Financial Instruments: Risk Management (continued)
Interest rate changes may have an impact on the earnings of companies held
within the portfolio and therefore may have a significant impact on the market
value of the Company's investments.
Currency risk
At 31 August 2010, all the Company's investments were priced in sterling.
Although there may be occasions when the Company will hold investments
denominated in currencies other than sterling, the Company's exposure to
movements in exchange rates relative to sterling is unlikely to have a material
adverse impact on either the value of the portfolio or on the revenue return.
Credit risk
Credit risk is the Company's exposure to financial loss from failure of a
counterparty to deliver securities or cash for acquisitions or disposals of
investments or to repay deposits. The Company manages credit risk by using
brokers from a database of approved financial institutions who have undergone
rigorous due diligence tests by the Manager's Risk Management Team and by
dealing through Gartmore Investment Limited with banks approved by the
Financial Services Authority.
At 31 August 2010, the maximum exposure to credit risk was GBP364,000 (2009: GBP
3,136,000), comprising:
As at As at
31 August 30 June
2010 2009
GBP'000 GBP'000
Cash at bank 117 1,185
Investments sold awaiting settlement 73 1,725
Accrued income 174 226
All of the above financial assets are current, their fair values are considered
to be the same as the values shown and the likelihood of default is considered
to be low.
Liquidity risk
Liquidity risk is the possibility of the Company failing to realise sufficient
assets to meet its financial obligations.
The Company minimises this risk by investing in primarily marketable securities
which can be expected to generate cash inflows and by ensuring that it has
adequate cash and credit facilities in place to meet cash outflows on
liabilities. The Company's liquidity is held in sterling, almost entirely on
interest-bearing current accounts or short-term deposits in the money market.
Deposits are rarely fixed for terms in excess of one week and, if amounts are
substantial, placed with different deposit takers so that, at any given time,
deposits do not exceed GBP2,500,000 with any one deposit taker.
At 31 August 2010, the fair value of financial liabilities was GBP485,000 (2009:
GBP1,042,000), comprising:
As at As at
31 August 30 June
2010 2009
GBP'000 GBP'000
Due within one month:
Investments purchased awaiting settlement 212 885
Accrued expenses and interest 273 157
Gearing
The Company does not use gearing as a strategic tool. However, the Company does
have in place an overdraft facility of GBP9,000,000 which is used from time to
time to facilitate rebalancing of the portfolio. The facility is also used
occasionally to fund share buy-backs and corporate actions, including placings
and open offers. At 31 August 2010, the amount drawn on the facility was GBP
3,600,000 (2009: nil).
As noted above in the section dealing with interest rate risk, the level of
borrowings and/or cash held during the period are determined to a great extent
by the level of takeovers in the Fledgling sector and by the effects of the
annual rebalancing.
=---------
Annual Report Page 58
22. Financial Instruments: Risk Management (continued)
Fair Value Hierarchy
The Company adopted the amendments to FRS29 `Financial Instruments:
Disclosures' effective for periods beginning on or after 1 January 2009. These
amendments require an entity to classify fair value measurements using a fair
value hierarchy that reflects the significance of these inputs used in making
the measurements. The fair value hierarchy shall have the following levels:
Level 1 - valued using quoted prices in active markets for identical assets.
Level 2 - valued by reference to valuation techniques using observable inputs
other than quoted prices included within Level 1.
Level 3 - valued by reference to valuation techniques using inputs that are not
based on observable market data.
Categorisation within the hierarchy has been determined on the basis of the
lowest level of input that is significant to the fair value measurement of the
relevant asset as follows:
Financial assets and liabilities measured at fair value are grouped into the
fair value hierarchy at 31 August 2010 as follows:
Note Level 1 Level 2 Level 3 Total
GBP'000 GBP'000 GBP'000 GBP'000
Financial assets at fair value
through
Profit or loss
Quoted equities a) 88,702 - - 88,702
Net fair value 88,702 - - 88,702
a) Quoted equities
The fair value of the Company's investments in quoted equities has been
determined by reference to their quoted bid prices at the reporting date.
Quoted equities included in Level 1 are actively traded on recognised stock
exchanges.
23. Capital Management Policies and Procedures
The Company's capital is represented by its net assets, which are managed to
achieve the Company's investment objective, set out on page 2.
The Board monitors and reviews the broad structure of the Company's capital on
an ongoing basis. This review includes:
(i) the planned level of gearing through the Company's overdraft facility;
(ii) the need to buy back or issue equity shares; and
(iii) the determination of dividend payments.
The Company's objectives, policies and processes for managing capital are
unchanged from the preceding accounting period.
The Company is subject to externally imposed capital requirements through the
Companies Act, with respect to its status as a public company.
In addition, with respect to the obligation and ability to pay dividends, the
Company must comply with the provisions of section 1159 Corporation Tax Act
2010and the Companies Act respectively.
These provisions are unchanged since the previous period and the Company has
complied with them.
Gartmore Investment Limited
Company Secretary
END
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