Smithson Inv.Trust - Annual Financial Report
LEI: 52990070BDK2OKX5TH79
RESULTS ANNOUNCEMENT
Audited results for the year ended
Performance Highlights
|
|
At |
At |
|
|
|
|
|
Net assets |
|
|
|
Net asset value ("NAV") per ordinary share ("share") |
1,410.7p |
1,961.0p |
|
Share price |
1,308.0p |
2,020.0p |
|
Share price (discount)/premium to NAV1 |
(7.3)% |
3.0% |
|
|
|
|
For the period from |
|
|
|
|
Company's listing on |
|
|
For the year ended |
For the year ended |
|
|
|
|
|
|
|
|
% change2 |
% change2 |
% change2 |
|
NAV total return per share1 |
-28.1% |
+18.9% |
41.1% |
|
Share price total return1 |
-35.2% |
+18.1% |
30.8% |
|
Benchmark total return3 |
-8.7% |
+17.8% |
34.9% |
|
Ongoing charges ratio1 |
0.9% |
1.0% |
- |
Source: Bloomberg
This report contains terminology that may be unfamiliar to some readers. The Glossary in the Annual Report gives definitions for frequently used terms.
4 Year Record
|
At 31 December |
2022 |
2021 |
2020 |
2019 |
|
Net assets |
|
|
|
|
|
NAV per ordinary share |
1,410.7p |
1,961.0p |
1,648.9p |
1,255.2p |
|
Share price |
1,308.0p |
2,020.0p |
1,710.0p |
1,298.0p |
|
Share price (discount)/ premium to NAV1 |
(7.3)% |
3.0% |
3.7% |
3.4% |
|
Year ended 31 December |
|
|
|
|
|
NAV total return per share1 |
-28.1% |
+18.9% |
+31.4% |
+33.2% |
|
Share price total return1 |
-35.2% |
+18.1% |
+31.7% |
+29.8% |
|
Benchmark total return3 |
-8.7% |
+17.8% |
+12.2% |
+21.9% |
|
Ongoing charges ratio1 |
0.9% |
1.0% |
1.0% |
1.0% |
1 These are Alternative Performance Measures ("APMs"). Definitions of these, together with how these measures have been calculated, are disclosedin the Annual Report where itis made clear how these APMs relate to figures disclosed and calculated under IFRS.
2 Total returns are stated in GBP sterling.
3 MSCI World SMID Cap Index, £Net Source:www.msci.com.
Chairman's Statement
Introduction
I am pleased to present the Annual Report of
There are two points which are worth emphasising, both of which are covered in greater detail in the Investment Manager's Review. Firstly, our portfolio companies grew their businesses in 2022 despite the difficult market conditions and their financial key performance indicators were all materially better than those of the comparator index, demonstrating their characteristics as high quality companies. Unfortunately, the progress made by the portfolio companies was not sufficient to offset the impact on growth company valuations of the hike in interest rates. Secondly, only two segments of the comparator index actually registered positive returns in 2022 (Energy and Utilities); those two segments are therefore largely responsible for the index' comparatively better performance. The Company does not invest in either of these segments as they do not meet the Investment Manager's criteria for potential long term shareholder returns. Whilst it is disappointing to report on periods when asset values fall, the focus remains on long term value creation.
The Company's performance and the Board's actions in response to the discount are summarised below, and the Investment Manager's Review discusses the portfolio's performance in greater detail.
Performance
The decline in the Company's net asset value (NAV) per share for the year was 28.1%1, underperforming the MSCI World SMID Index by 19.4 percentage points. At the interim stage, the fall in net asset value which the Company reported was 31.7%, so the outturn for the year is after recording a small improvement in the second half. Despite this significant underperformance, the Company's annualised NAV per share total return since inception is +8.5%1, 1.1% higher than the annualised return from the index with dividends reinvested.
As noted in the Investment Manager's Review, the decrease in portfolio company valuations during the year was such that at the year end, they were trading on free cash flow ratings comparable to those at the time of the Company's launch in 2018. This means that the growth in the Company's net asset value per share since IPO, which exceeds that of the comparator index, can largely be attributed to the underlying trading performance of the portfolio companies.
The Company's shares, which traded at a premium to NAV for the vast majority of the period from launch in 2018 through to the end of 2021, have traded at a discount for almost all of 2022, and have continued to do so in the first part of 2023. The discount at the end of the year was 7.3%1, narrower than the 11.5% at the end of the first half of the year, but representing a very significant shift down from the 3.0% premium at the end of 2021. Combined with the negative total return on the NAV, to move from a modest premium to a discount has resulted in the share price total return for the year of negative 35.2%1. This has reduced the annualised share price return total return since inception to 6.6%1, 1.9 percentage points lower than the annualised increase in NAV per share.
The Company is a member of the
Capital
The Company was floated on the premium list of the
When the Company's shares started trading at a discount in the first half of last year, the Board, in consultation with its advisers and the Investment Manager, sought to address the situation through the use of share buy backs.
During 2022 the Company issued 5.4 million new ordinary shares to raise
The buyback programme is continuing and since the year end up until
As a matter of law, the Company is only permitted to fund purchases of its own shares out of its distributable reserves or the proceeds of a fresh issue of shares; and while the ordinary shares are trading at a price less than the latest published net asset value per share, the Company is not able to issue new shares.
As at
The Board intends to continue with its current programme of regular market purchases while the shares trade at a material discount. All shares purchased are held in treasury and will only be reissued at a premium to net asset value, net of all costs. Resolutions to replace the existing authorities granted by shareholders to the Board to allot new shares and buy back shares will be proposed at the forthcoming Annual General Meeting.
Results and Dividends
The Company's total loss after tax for the year was
The revenue profit after tax arises because the Company's dividend income in the year was higher than its operating expenditure. All the Company's operating expenditure is charged to revenue, rather than a percentage being allocated to the capital reserve. This reflects the Company's objective of focusing on capital growth which means that its accounting policy is not designed to facilitate maximisation of revenue reserves and dividend payments.
The Company's cumulative revenue reserves were negative at
The Company has never paid a dividend. It should not be expected that the Company will pay a significant annual dividend and it is likely that no interim dividends will be declared. The Board intends to declare such annual dividends as are necessary to maintain the Company's
Investment Approach
In common with all funds managed by
As a closed-end investment vehicle focusing on capital growth, the Company is free to focus its energies on pursuing its strategy without having the limiting factors of funding client redemptions, dividend payments (other than a minimum to maintain investment trust status) or gearing concerns. The Company has a strong balance sheet of highly liquid investments.
The Company expects to hold between 25 and 40 investments; at the year-end it held 31. The composition of the portfolio at
Investment Policy
At the Company's AGM in April the shareholders approved a revision to the investment policy, which clarified that the investment restriction as to market capitalisation range applies at the time of initial investment in a company and removed the expectation of the average market capitalisation of investee companies. This change, which came into effect on
Governance
I took over as Chairman of the Board at the end of
ESG and Stewardship
During the year I have been asked quite a few questions by shareholders about the Company's approach to ESG and the stewardship of its portfolio companies. This is explained in greater detail in the document on the Company's website entitled ESG Integration, which has also been uploaded to the
Annual General Meeting ("AGM") and ShareholderEngagement
The Company will hold its AGM on
We encourage shareholders to visit the Company's website where more information is available on the Company.
Outlook
The improvement in the Company's net asset value which commenced in the second half of 2022 has continued, to date, in 2023. However, uncertainty around future interest rate rises, high levels of inflation and fears of a recession are likely to continue in the coming year. Whether the opening of the Chinese market post the lifting of COVID‑19 restrictions will have a positive impact by generating economic growth or unleash further inflation or both is also uncertain. Political uncertainty has increased and there seems no end in sight to the
The Investment Manager's Review provides an overview of how our portfolio companies might be expected to respond to the continuing economic uncertainties and why we believe they are high quality companies with robust business models which will continue to demonstrate resilience during periods of challenging market conditions.
The Board is pleased that our portfolio manager and his team remain focused on the things they can control and remain resolute in maintaining their investment approach. The strategy of identifying and owning high quality companies that are capable of sustainable growth and that can compound in value over many years, has been shown to work well over the long term through different economic conditions.
The Board continues to have confidence that the Company's Investment Manager can execute the strategy successfully, and the Board believes that as the Company offers investors exposure to some of the best companies available in the small and mid-cap sector, the long term investor will be well rewarded.
Chairman
1 These are APMs Definitions of these and other APMs used in the Annual Report, together with how these measures have been calculated, are disclosed in the Annual Report.
Investment Manager's Review
The Investment Manager's Review was first published as a letter to shareholders on
Dear Fellow Shareholder,
The performance of
|
|
Total Return5 to % |
Launch to |
|
|
Cumulative % |
Annualised % |
||
|
Smithson NAV1 |
-28.1 |
+41.1 |
+8.5 |
|
Smithson Share Price |
-35.2 |
+30.8 |
+6.6 |
|
|
-8.7 |
+34.9 |
+7.4 |
|
|
-15.0 |
-9.9 |
-2.5 |
|
Cash4 |
+1.4 |
+2.8 |
+0.6 |
1Source: Bloomberg, starting NAV 1000.
2MSCI World SMID Cap Index, £ Net source: www.msci.com.
3Bloomberg/Barclays Bond Indices
4Month £ Interest Rate source: Bloomberg.
5Alternative Performance Measure (see the Annual Report).
In the first paragraph of last year's letter we suggested that it would not be possible to outperform every year and that there would be some periods of underperformance. Despite knowing that no strategy, if followed with discipline, can outperform in all periods, it is always unpleasant when a year of underperformance arrives, and the extent of the poor performance this year was particularly painful.
There was clearly one dominant factor at play contributing to this outcome, and it impacted the portfolio consistently throughout the year: the rising market expectation for interest rates.
As we now know, inflation started accelerating in 2021 and did not turn out to be 'transitory' as several of those in charge of central banks believed it to be at the time. In fact, it quickly became entrenched, and was exacerbated by the war in
This caused a sharp volte-face by central banks, which began raising interest rates in
While not at the 19% level it took to shock the US economy into submission in 1980, it is difficult to overstate the impact this move had on asset prices. By which, of course, I am not just talking about stocks, bonds and crypto currencies, where price movements are observed most immediately, but also real estate, art, classic cars and anything else that was a recipient of the world's recent savings glut. We always restrict ourselves to a maximum of one quote from
The reason for this is because the value of any asset, companies included, is the total of the future cash flows you can expect to receive, discounted back to today's monetary value using the prevailing interest rate. As rates rise, today's value of the future cash flows decreases, and thus the value of the asset declines.
While this increase in interest rate expectations affected the whole stock market, unfortunately the shares owned in the portfolio were affected more than most. This is because our high quality companies are growing faster than the market average and generating more cash flows in the future. In practical terms, their faster growth meant the valuations of our companies at the end of 2021 were higher than the average in the market, and therefore fell further than the market as rate expectations moved.
Another way of explaining the relative underperformance is by looking at the sector performance of the MSCI World Small and Midcap Index alongside the sector weightings of the portfolio.
Twelve months to
|
Sectors |
MSCI W SMID (%) |
|
|
Energy |
+64% |
- |
|
Utilities |
+12% |
- |
|
Consumer Staples |
0% |
4% |
|
Financials |
-2% |
3% |
|
Materials |
-3% |
- |
|
Industrials |
-8% |
23% |
|
Health Care |
-15% |
15% |
|
Real Estate |
-16% |
- |
|
Consumer Discretionary |
-18% |
13% |
|
Information Technology |
-20% |
38% |
|
Communication Services |
-23% |
3% |
It becomes immediately apparent that the worst performing sectors of the index were also those to which Smithson is most exposed and, just as unfortunately, the positively performing sectors were commodity driven and therefore contain companies which we will never own.
Other factors weighing on share prices are the potential effects of cost inflation, and a likely recession brought about by the tightening of monetary policy. In fact, it was expected by the
While recession holds some trepidation for us, the quality of the companies held in the portfolio, including their lower level of cyclicality and generally strong balance sheets, should enable them to weather the storm better than other companies in the market.
However, they will still be susceptible to share price falls should the recession turn out to be worse than currently expected by market participants.
It is perhaps worth stating again that we are not particularly concerned about the effects of inflation on our portfolio companies, especially compared to other companies in our reference index. The reason for this is that our companies tend to have high gross margins and low capital requirements, which mean that they are less susceptible to cost increases than other companies. They are also in strong competitive positions, which typically allows them to increase prices to offset higher costs, should they choose to do so.
So what next? While we would like to say that all the poor performance is behind us, there is no guaranteed way to tell what is ahead. The best we can do is to follow the advice of veteran bond investor
We also observe signs of significant bearishness in the market. The
We therefore suspect that we are potentially close to the end of stock market declines for reasons of inflation and interest rates, although possibly not yet through the worst in terms of recessionary fears, given these have yet to be realised (or disproved). This last point might be helped in the near future by the recent reopening of
Unfortunately, not all of the underperformance against the market was inflicted upon us by macroeconomic factors; we made some mistakes too. Principal among these was not selling certain companies which were overvalued at the end of 2021. These included Domino's Pizza Enterprises and Fortinet, two positions that we reduced in size due to our concerns over valuation, but on reflection, could have trimmed more aggressively or perhaps even exited. We remain holders as the falling share prices quickly returned the valuations to more comfortable levels.
There is some good news. Save for a couple of positions, we are very confident in the fundamentals of the businesses held in the portfolio. While a recession may continue to hold back cash flow growth for a while, none of these companies will suffer meaningfully, and certainly not to a degree which would keep us awake at night.
As the below list of largest detractors of performance shows, there are a couple of exceptions to this; companies whose poor share price performance was exacerbated by deteriorating fundamentals.
|
|
Country |
Contribution % |
|
Fevertree Drinks |
|
-3.2% |
|
Temenos |
|
-2.6% |
|
Nemetschek |
|
-2.1% |
|
Rightmove |
|
-1.7% |
|
Domino's Pizza Group |
|
-1.3% |
Temenos has been going through a transition from selling its banking software as a perpetual licence, to selling it as a subscription or a service, otherwise known as 'SaaS'. This should make little difference to the business structure over the long term, although some argue it could be a positive due to higher potential revenue from individual customers over time, but in the interim it causes a decline in profits and cash flow as the high up-front payments for licences are substituted for smaller annual or monthly subscription payments. On top of this, there appears to have been a slowdown in the number of new contract signings for the company, as its bank clients are hesitating to spend more on their IT systems ahead of a potential recession. Having spent some time with the CEO and Chairman to understand what was going on behind the scenes, we were growing concerned that these issues weren't being managed as well as they could be, and so were not upset by the recent announcement of the CEO stepping down and a previous CEO taking over in the interim.
Nemetschek is a company selling design software to the construction and media industries and suffered from a combination of a high valuation owing to its fast growth, and market concerns regarding a future recession in the construction industry.
Rightmove, the
Domino's Pizza Group declined due to market worries about a
Top five contributors to performance are shown below.
|
|
Country |
Contribution % |
|
|
|
Rollins |
|
0.4% |
|
|
Technology One |
|
0.2% |
|
|
Moncler |
|
0.2% |
|
|
IDEX |
|
0.1% |
|
|
Qualys |
|
-0.1% |
It may come as a surprise that there were some companies in our quality growth portfolio that rose during the year.
Rollins, a US pest control company, was the best performer. This is a business with highly repeatable earnings given that in some parts of the US where it operates it is necessary to have frequent visits from pest control to keep buildings habitable. This leads to much of its revenue being paid on subscription and thus fairly dependable, which is almost certainly why the shares performed well in a period of concerns regarding inflation and recession.
TechnologyOne is perhaps the most surprising performance contributor, given that it is a fast growing software company. However, the shares reacted well as sales and earnings continued growing strongly throughout the year, more than offsetting the downward pressure on market valuations. The institutions it sells to include governments, universities and the military, which are yet to be affected by the macroeconomic environment.
While Moncler's share price declined during the year, we were fortunate to acquire the position at a relatively low point, which meant that it was a positive contributor to the fund by the end of the period. This was also the case for IDEX.
Qualys, the US cyber security company, did better than average as its revenue growth continued accelerating throughout the year. While we do expect a recession to weigh on companies' information technology budgets, and therefore cyber security sales, it should still be more robust than other categories given the constant and increasing threat of cyber crime.
As ever, we continue to follow the same simple strategy:
· Buy good companies
· Don't overpay
· Do nothing
To demonstrate that we do indeed buy good companies, we include the table below, which is the weighted average operating metrics of our owned companies over the last 12 months compared to the reference Index.
|
LTM Figures |
|
MSCI WSMID |
|
ROCE |
43%# |
11% |
|
Gross Margin |
65% |
34% |
|
Operating Profit Margin |
25% |
9% |
|
Cash Conversion |
101% |
66% |
|
Interest Cover |
34x |
7x |
Data for the MSCI World SMID Cap Index is shown ex-financials, with weightings as at
Data for MSCI World SMID Cap Index is on a weighted average basis, using last available reported financial year figures as at
Data for Smithson is on a weighted average basis, ex-cash, using last available reported financial year figures as at
Interest cover (EBIT ÷ net interest) data for Smithson and MSCI World SMID Cap Index is done on a median average basis.
# ROCE for Smithson includes Rightmove (206% ROIC) and Verisign (330% ROIC). Excluding Rightmove, the ROIC is 38%; excluding Verisign it is 30%; and excluding both, it is 23%.
The table shows that our portfolio companies remain superior to those in the Index on every metric, with return on capital employed, gross margin and operating margin being of significant importance in the current environment and particularly in excess of that observed for the Index.
The next step, of not overpaying for these companies, can be assessed by looking at the average free cash flow yield (the free cash flow divided by the market capitalisation) of the portfolio. Valuations are now more attractive than they were a year ago. The free cash flow yield of the portfolio is 3.3%, having been at 2.0% at the start of 2022. By coincidence, the current level is roughly where the portfolio was trading when we launched the Trust at the end of 2018, although it is worth bearing in mind that this figure includes Sabre and Ambu, two companies which did not produce any free cash flow in 2022, but did in 2018. They also contributed to the fact that the free cash flow generated by the portfolio was actually 7% lower than in 2021. Much of this was also due to companies in the portfolio spending more cash on re-building their inventories from a low point in 2021 as supply chains eased, but at higher component prices, due to inflation. This dynamic is confirmed by looking at the average growth of earnings per share, which excludes working capital expenses, and which was +7% in the period. It is perhaps worth mentioning that if recession starts to bite in 2023, we may have to wait some time for these figures to improve meaningfully. But we are confident that they will.
Regarding the final step, do nothing, it must be noted that as share prices were volatile throughout the year, trading activity increased significantly as we set out to take advantage of buying new positions or increasing existing ones at lower valuations. This meant that discretionary portfolio turnover, excluding any buybacks and the investment of proceeds from new shares issued, was 42.8% compared to just 9.5% in 2021. While this sounds like a high level, it is worth noting that according to Morningstar, the average turnover for actively managed equity funds tends to be above 60% and in 2020, the last year of such volatile markets, it was 86%.
Costs of dealing, including taxes, amounted to 0.03% (3 basis points) of NAV in the period, slightly higher than the 0.02% incurred in 2021. This may seem odd given there was much more discretionary turnover this year, but the reason is that the overall turnover of the fund, including the investment of the proceeds from share issuance, which was very limited in 2022, was not that much higher than last year. The Ongoing Charges Figure1 was 0.9% of NAV compared to 1.0% in 2021. This includes the Management Fee of 0.9%, applied to the market capitalisation of the Trust, which was lower than the NAV for most of the year. Combined, this means the Total Cost of Investment in the Trust was 0.93%.1
Part of the turnover was generated by buying three companies during the year after the decline in share prices resulted in attractive valuations. Moncler, the Italian clothing company which designs and produces high-end branded apparel, traces its roots back to 1952 and the invention of down-filled mountaineering coats, but fell on hard times in the 1990s before being rejuvenated in the 2000s. It now produces luxury items across several categories in clothing and accessories. The company has until recently been expanding by opening new Moncler branded stores, but this growth has been boosted by acquiring the Stone Island brand in 2020.
Since the inception of the fund, we have experienced success in owning decentralised industrial conglomerates such as Halma and Diploma. While the organic growth of these businesses is acceptable, around the mid-single digit percent level, it is the consistent, disciplined acquisition of high quality 'bolt-on' companies that allow the groups to create substantial shareholder value over time. In fact, we believe that in an era of higher interest rates and lower asset prices, companies such as these, making frequent small acquisitions - without significant additional debt - should stand to benefit greatly. We acquired Addtech as it is another high quality example of this type of company, with a very small head office directing the allocation of the cash flow that is generated by its independently managed businesses. Addtech, based in
Finally, we bought a position in IDEX, an industrial company based in the US. IDEX is another decentralised industrial conglomerate which grows through small acquisitions, but this time in areas such as pumps, meters and systems for high-value materials, high-precision instrumentation for health and science industries, and tools, valves and controls for the fire and rescue industry and other applications, including clamping devices used on the Mars rover.
We also sold three companies in the period. The first was a US-based boiler and heater manufacturer, AO Smith. While the company has a very attractive US business operating in a tight oligopoly, its future growth opportunities lie in areas with much more aggressive competition, such as water heaters in
The second company we sold was Wingstop. After the shares troughed in the summer, the share price more than doubled into the autumn, at which point they were trading at levels we no longer felt comfortable with given the decline in cash flow the company was experiencing post its pandemic boost. In addition, we were concerned about the long-term CEO deciding to leave for 'another challenge', a potential capital intensive investment into chicken farming and an increasingly levered balance sheet.
Towards the end of the year, we also sold Ansys, a US company producing simulation software. While we still appreciate the dominant position it occupies in its software niche, maintained by the most advanced and accurate physics simulation engines, we have growing concerns about its frequent acquisition of companies that are clearly producing little or no profit. In the three years prior to our original investment in 2018, the company spent
The result of this activity is shown below, with a breakdown of the portfolio in terms of sector and geography at the end of the period. The median year of foundation of the companies in the portfolio at the year end was 1973.
|
Sector |
(%) |
(%) |
|
Information Technology |
38% |
44% |
|
Industrials |
23% |
22% |
|
Healthcare |
15% |
11% |
|
Consumer Discretionary |
13% |
9% |
|
Consumer Staples |
4% |
5% |
|
Communication Services |
3% |
5% |
|
Financials |
3% |
3% |
|
Cash - Uninvested |
1% |
1% |
Source:
Information Technology now has a lower weighting, mostly due to the sale of Ansys. As we say every year, while the Information Technology weighting appears large, we do not think of ourselves as running a 'tech fund', because this is an MSCI defined sector which includes a number of diverse businesses and end markets. To illustrate this more clearly, we list below the companies that fall into the sector definition, along with a more detailed business description and country of listing.
|
|
Country of Listing |
Business Description |
|
Cognex |
|
Logistics Electrical Equipment |
|
Fortinet |
|
Cyber Security |
|
Halma |
|
Safety and Environmental Electrical Equipment |
|
IPG Photonics |
|
High Powered Lasers |
|
Nemetschek |
|
Software - Construction and Media |
|
Paycom Software |
|
Software - Human Resources |
|
Qualys |
|
Cyber Security |
|
Sabre |
|
Travel and Leisure |
|
Simcorp |
|
Software - Asset Management |
|
Technology One |
|
Software - Government Institutions |
|
Temenos |
|
Software - Banks |
|
Verisign |
|
Internet Domain Management |
Hopefully from this list it is possible to see that the companies have a diverse range of end markets, and even the collection of software companies provide software products to very different industries. This serves to highlight the fact that we would not expect the revenue trends of these companies to move in lock step through economic cycles, as perhaps the single sector weighting might suggest.
While the size of the Industrials weight was little changed, Health Care increased due to adding to existing positions, while Consumer Discretionary increased from the addition of Moncler to the portfolio.
|
Country of Listing |
(%) |
(%) |
|
|
40% |
47% |
|
|
17% |
21% |
|
|
10% |
4% |
|
|
8% |
5% |
|
|
7% |
7% |
|
|
6% |
7% |
|
|
6% |
6% |
|
|
3% |
2% |
|
|
2% |
- |
|
Cash |
1% |
1% |
Source:
The
The geographical weighting that we pay most attention to though, is the economic exposure of our companies, measured by the origin of revenue. This year,
|
Source of Revenue |
(%) |
(%) |
|
|
39% |
38% |
|
|
36% |
38% |
|
|
19% |
19% |
|
Eurasia, |
4% |
3% |
|
|
2% |
2% |
Given the importance of Environmental, Social and Governance (ESG) issues in investing, we outlined our ESG approach in last year's report. Instead of repeating what was written there, it might be more interesting for you to read about some of our engagements with portfolio companies regarding ESG issues during the course of the year. One of the most challenging situations experienced by our companies this year was when
Another situation which immediately attracted our focus was the announcement that the recently hired CEO of Domino's Pizza Group was leaving to re-join his previous employer, Whitbread, to become CEO of that company. Our first call was to the Chairman of Domino's Pizza Group to express our frustration at this outcome. What had driven him away - colleagues or company culture? Undue pressures from the Supervisory Board? We were also eager to understand whether the remuneration structure was motivating enough to keep the right person in the job.
Once you find the managerial talent that you believe will create value for shareholders, you want to be able to compensate them to a level and in a method that keeps them in that role and working as effectively as possible to increase the value of the company. Through several further interactions with the company, including meetings with the CEO, Financial Director and Investor Relations executive, we came to the conclusion that neither the culture, Board or incentive structure had pushed out the CEO, but he was simply driven by his desire to manage a larger company, one where he had already spent several years of his career, and already knew many of the people that he would now be leading. There is therefore a simple one-word explanation for the departure - ego - which probably means that we need not worry about the company itself. The search for a new CEO is ongoing and we will remain shareholders in the interim.
Finally, we would like to once again thank all shareholders for their support of
While we hope that market conditions are more favourable in 2023, we continue undiscouraged with our strategy of buying high quality, growing companies. Although style drift - the act of becoming less disciplined in the execution of your original strategy in an attempt to make money in all periods - may sound attractive after a year like 2022, it's only a short while before your North Star becomes so clouded by opportunism that you end up far away from a cohesive strategy and no longer know what type of investments you are looking for. Be assured, this will never happen at Smithson. As
Investment Manager
27 February 2023
1These are APMs Definitions of these and other APMs used in the Annual Report, together with how these measures have been calculated, are disclosed in the Annual Report.
Investment Portfolio
Investments held as at 31 December 2022
|
Security |
Country of |
Fair value |
% |
|
Moncler |
|
136,953 |
5.7 |
|
Recordati |
|
112,061 |
4.7 |
|
Sabre |
|
110,275 |
4.6 |
|
Verisign |
|
109,101 |
4.6 |
|
Simcorp |
|
102,126 |
4.3 |
|
Ambu |
|
100,536 |
4.2 |
|
Fortinet |
|
88,998 |
3.7 |
|
Masimo |
|
88,998 |
3.7 |
|
Domino's Pizza Enterprises |
|
86,970 |
3.6 |
|
Fevertree Drinks |
|
86,966 |
3.6 |
|
Top 10 Investments |
|
1,022,984 |
42.7 |
|
Domino's Pizza Group |
|
81,076 |
3.4 |
|
Rightmove |
|
79,113 |
3.3 |
|
Geberit |
|
78,880 |
3.3 |
|
MSCI |
|
77,423 |
3.2 |
|
Cognex |
|
76,311 |
3.2 |
|
Equifax |
|
75,777 |
3.2 |
|
Diploma |
|
74,341 |
3.1 |
|
Nemetschek |
|
73,883 |
3.1 |
|
Verisk Analytics |
|
73,539 |
3.1 |
|
Technology One |
|
70,703 |
3.0 |
|
Top 20 Investments |
|
1,784,030 |
74.6 |
|
Temenos |
|
70,194 |
2.9 |
|
Fisher & Paykel Healthcare |
|
68,459 |
2.9 |
|
Rational |
|
64,203 |
2.7 |
|
IPG Photonics |
|
63,626 |
2.7 |
|
Qualys |
|
58,113 |
2.4 |
|
Addtech |
|
51,686 |
2.2 |
|
Spirax-Sarco Engineering |
|
51,381 |
2.1 |
|
Rollins |
|
49,631 |
2.1 |
|
IDEX |
|
47,396 |
2.0 |
|
Halma |
|
45,817 |
1.9 |
|
Paycom Software |
|
39,312 |
1.5 |
|
Total Investments |
|
2,393,848 |
100.0 |
Investment Objective, Policy and Investment Methodology
Investment Objective
The Company's investment objective is to provide shareholders with long term growth in value through exposure to a diversified portfolio of shares issued by listed or traded companies.
Investment Policy
The Company's investment policy is to invest in shares issued by small and mid-sized listed or traded companies globally with a market capitalisation (at the time of initial investment) of between £500 million and £15 billion. The Company's approach is to be a long-term investor in its chosen shares. It will not adopt short-term trading strategies. Accordingly, it will pursue its investment policy by investing in approximately 25 to 40 companies as follows:
(a) the Company can invest up to 10 per cent. in value of its gross assets (as at the time of investment) in shares issued by any single body;
(b) not more than 20 per cent. in value of its gross assets (as at the time of investment) can be in deposits held with a single body. This limit will apply to all uninvested cash (except cash representing distributable income or credited to a distribution account that the depositary holds);
(c) not more than 20 per cent. in value of its gross assets (as at the time of investment) can consist of shares issued by the same group. When applying the limit set out in (a) this provision would allow the Company to invest up to 10 per cent. in the shares of two group member companies (as at the time of investment);
(d) the Company's holdings in any combination of shares or deposits issued by a single body must not exceed 20 per cent. in value of its gross assets (as at the time of investment);
(e) the Company must not acquire shares issued by a body corporate and carrying rights to vote at a general meeting of that body corporate if the Company has the power to influence significantly the conduct of business of that body corporate (or would be able to do so after the acquisition of the shares). The Company is to be taken to have power to influence significantly if it exercises or controls the exercise of 20 per cent. or more of the voting rights of that body corporate; and
(f) the Company must not acquire shares which do not carry a right to vote on any matter at a general meeting of the body corporate that issued them and represent more than 10 per cent. of the shares issued by that body corporate.
The Company may also invest cash held for working capital purposes and awaiting investment in cash deposits and money market funds.
For the purposes of the investment policy, certificates representing certain shares (for example, depositary interests) will be deemed to be shares.
Hedging Policy
The Company will not use portfolio management techniques such as interest rate hedging and credit default swaps.
The Company will not use derivatives for purposes of currency hedging or for any other purpose.
Borrowing Policy
The Company has the power to borrow using short-term banking facilities to raise funds for short-term liquidity purposes or for discount management purposes including the purchase of its own shares, provided that the maximum gearing represented by such borrowings shall be limited to 15 per cent. of the net asset value at the time of drawdown of such borrowings. The Company may not otherwise employ leverage.
Not attempting market timing
The Investment Manager will not attempt to manage the percentage invested in equities in the Company's portfolio to reflect any view of market levels, timing or developments. The Investment Manager's unwillingness to make investment decisions on the basis of market timing is one factor that will prevent the Company from investing in sectors that are highly cyclical.
Investment Methodology and Management Process
The Investment Manager seeks to apply the investment methodology and management process summarised below (to the extent appropriate given the nature of a relevant investment opportunity):
Seeking high-quality businesses with specific characteristics and intangible assets
In the Investment Manager's view, a high-quality business is one which can sustain a high return on operating capital employed and which generates substantial cash flow, as opposed to only creating accounting earnings. If it also reinvests some of this cash back into the business at its high returns on capital, the Investment Manager believes the cash flow will then compound over time, along with the value of the Company's investment.
The Investment Manager will not just look for a current high rate of return, but will seek a sustainable high rate of return. Fundamentally, such companies need to demonstrate the ability to continue competing against all other companies which are trying to take a share of their profits. This can come in many forms, but the Investment Manager will look for companies that rely on intangible assets such as one or more of the following: brand names; patents; customer relationships; distribution networks; installed bases of equipment or software which provide a captive market for services, spares and upgrades; or dominant market shares.
The Investment Manager will generally seek to avoid companies that rely on tangible assets such as buildings or manufacturing plants, as it believes well-financed competitors can easily replicate and compete with such businesses. In many instances, such competitors are able to become better than the original simply by installing the latest technology in their new factory. Banks are quite keen to lend against the collateral of tangible assets, and such companies tend to be more heavily leveraged as a result. The Investment Manager believes that intangible assets are much more difficult for competitors to replicate, and companies reliant on intangible assets require more equity and are less reliant on debt as banks are less willing to lend against such assets.
The Investment Manager believes such companies will resist the rule of mean reversion that states returns will revert to the average over time as new capital is attracted to business activities which earn above average returns. They can do this because their most important assets are intangible and difficult for a competitor to replicate. Since stock markets typically value companies on the assumption that their returns will regress to the mean, businesses whose returns do not do so can become undervalued. This presents an opportunity for the Company.
The Investment Manager will seek businesses which have growth potential. The Investment Manager views growth potential as the ability of a company to be able to reinvest at least a portion of its excess cash flow back into the business to grow, whilst generating a high return on the cash thus reinvested. Over time, this should compound their shareholders' wealth by generating more than a pound of stock-market value for each pound reinvested.
The Investment Manager is interested in growth that is driven through either increases in volume or increases in price and will prefer a mixture of both. The ability to increase product prices above the rate of inflation is the most profitable way to grow and demonstrates that the company has a healthy competitive position selling products or services which are strongly desired by their customers. However, growth through price alone can build a shelter under which competitors can flourish, eventually resulting in cheaper competition gaining significant market share. On the other hand, growth through additional unit volumes almost always requires more cost, in both manufacturing capacity and materials used to produce the products, as well as transportation to get them to customers. Increasing scale in this way will eventually make a company's market position more difficult to compete against, however, unlike growing through price alone, with the further benefit that volume growth can sometimes continue indefinitely.
The Company will only invest in companies that earn a high return on their capital on an unleveraged basis and do not require borrowed money to function. The Investment Manager will avoid sectors such as banks and real estate which require significant levels of debt in order to generate a reasonable shareholder return given their returns on unlevered equity investment are low.
While the Investment Manager favours companies that are able and willing to spend cash on the research and development of their products to create important intangible assets such as patents and manufacturing efficiency, it will avoid industries that innovate very quickly and are subject to rapid technological change. Innovation is often sought by investors, but does not always produce lasting value for them and can have high capital costs.
Avoiding overpaying for shares
The Company will only invest in shares where the Investment Manager believes the valuation is attractive. The Investment Manager will estimate the free cash flow of every company after tax and interest, but before dividends and other distributions, and after adding back any discretionary capital expenditure which is not needed to maintain the business. The Investment Manager aims to invest only when free cash flow per share as a percentage of a company's share price (the "free cash flow yield") reflects value relative to long-term interest rates and when compared with the free cash flow yields of other investment candidates both within and outside the Company's portfolio. The Investment Manager will buy securities that it believes will grow and compound in value, which bonds cannot, at yields that are similar to or better than the Company would get from a bond.
Buying and holding
The Company will seek to be a long-term, buy-and-hold investor. The Investment Manager believes this will facilitate the compounding of the Company's investments over time as the investee companies continue to reinvest their cash flows. The Investment Manager, however, will continually test its original views against new information it may discover while regularly reviewing the news and results concerning the investee companies. The resulting low level of dealing activity also minimises the frictional costs of trading, a cost which is often overlooked by investors as it is not normally disclosed as part of the costs of running funds.
Business Review
The Strategic Report has been prepared in accordance with the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013 to provide information to shareholders to assess how the Directors have performed their duty to promote the success of the Company.
The Strategic Report contains certain forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.
Purpose, Strategy and Business Model
The Company is registered in
The purpose of the Company is to provide a vehicle for investors to gain exposure to a portfolio of small and mid-sized listed or traded companies globally, through a single investment.
The Company's strategy is to create value for shareholders by addressing its investment objective. Please see the Annual Report for the investment objective and approach.
The Company is an alternative investment fund ("AIF") under the alternative investment fund managers' directive ("AIFMD") and has appointed
As an externally managed investment trust the Company has delegated its operational activities to specialised third party service providers who are overseen by the Board of non-executive Directors. Details regarding the Company's key third party service providers are included in the Management Engagement Committee Report. The Company has no executive directors, employees or internal operations.
Key Performance Indicators ("KPI")
The Company's Board of Directors meets regularly and reviews performance against a number of key measures, as follows:
· Net asset value total return against the MSCI World SMID Cap Index measured on a net sterling adjusted basis;
· Share price total return;
· Premium/discount of share price to net asset value per share; and
· Ongoing charges ratio.
The KPI measures are Alternative Performance Measures ("APMs"). Please refer to the APM section and Glossary for definitions of these terms and an explanation of how they are calculated.
Net asset value total return against the benchmark
The Directors regard the Company's net asset value total return as being the overall measure of value delivered to shareholders over the long term. The Investment Manager's investment style is such that performance is likely to deviate from that of the benchmark index.
The Company's net asset value per share at 31 December 2022 was 1,410.7p and it reported a total loss after tax for the year of £967.7 million (2021: £503.7 million profit), comprising a capital loss of £972.0 million (2021: £512.1 million profit) and a revenue profit of £4.4 million (2021: revenue loss of £8.4 million) (see financial statements section). The net asset value total return for the year to 31 December 2022 was -28.1%1 and the annualised net asset return for the period from listing on 19 October 2018 to 31 December 2022 was 8.5%1. The Board considers the MSCI World SMID Cap Index measured on a net, sterling-adjusted basis, to be the most appropriate comparator to the Company's performance. The returns generated by the MSCI World SMID Cap Index over the same periods were -8.7% and +7.4% respectively, thus the Company underperformed the benchmark by 19.4 percentage points for the year ended 31 December 2022 but has outperformed the Index by 1.1 percentage points, annualised for the period from the Company's listing to the year end.
A full description of performance during the period under review is contained in the Investment Manager's Review.
Share price total return
The Directors also regard the Company's share price total return to be a key indicator of performance.
The share price total return for the year to 31 December 2022 was -35.2%1 and the annualised share price total return for the period from listing on 19 October 2018 to 31 December 2022 was +6.6%1, underperforming the MSCI World SMID Cap Index reference benchmark by 26.5 percentage points and 0.8 percentage points respectively. The Company's share price moved from a premium to net asset value at the start of the year to a discount to net asset value. Further detail is given in the following section.
Premium/discount of share price to net asset value per share
The Board undertakes a regular review of the level of premium/discount and the average discount to net asset value for the year to 31 December 2022 was 6.1%. From 1 January until late February 2022, the Company's shares had consistently traded at a premium to the net asset value, before predominantly trading at a discount to net asset value for the remainder of the year. The Board seeks to manage the premium/discount and generate value for shareholders through the issue of shares at a premium to net asset value or repurchase of shares at a discount to net asset value. To this end, during the period the Company's shares traded at a premium to net asset value, the Company issued 5.4 million new ordinary shares at an average premium to the prevailing net asset value of 2.6%, raising net proceeds of £92.5 million. During the period the Company's shares traded at a discount to the net asset value, the Company repurchased 5.7 million ordinary shares at an average discount to the prevailing net asset value of 8.7%, for a cost of £74.0 million (see Statement of Changes in Equity). Together, the share issues and repurchases generated a benefit to net asset value per share of approximately £7.4 million net of costs. The decision and timing of any share issuance and/or buy-back is at the discretion of the Board.
As at 31 December 2022, the discount of the Company's share price to the net asset value per share was 7.3%1.
The Directors intend to seek renewal at each Annual General Meeting of their authority to allot shares or to buy back shares with a view to managing the premium/discount as well as creating further shareholder value. Shares will only be issued at a premium to net asset value and bought back at a discount to net asset value.
If, after the end of the fourth financial year of the Company's existence (being 31 December 2022) or any subsequent year, the Company's shares have traded, on average, at a discount in excess of 10 per cent. of net asset value per share in any such year, the Directors will consider proposing a special resolution at the Company's next Annual General Meeting that the Company ceases to continue in its present form. If such a vote is proposed and passed, the Board will be required to formulate proposals to be put to shareholders within four months to wind up or otherwise reconstruct the Company, having regard to the liquidity of the Company's underlying assets. Any such proposals may incorporate arrangements which enable investors who wish to continue to be exposed to the Company's investment portfolio to maintain some or all of their existing exposure.
Ongoing charges ratio
The Directors monitor the Company's expenditure at each board meeting and review the ongoing charges ratio disclosed in the Interim and Annual Reports. The Directors regard the ongoing charges ratio as a measure of the regular recurring costs of running an investment company. Expressed as a percentage of average net asset value, the annualised ongoing charges ratio for the year was 0.9% (2021: 1.0%)1. The primary contribution to this fall in the Company's ongoing charges ratio was that the Investment Manager's fees were based upon the Company's market capitalisation which fell by a greater degree than the Company's net asset value. The Board seeks to manage and where possible to improve the ongoing charges ratio and to this end the Management Engagement Committee regularly reviews its service provider fee rates.
1 These are APMs. Definitions of these and other APMs used in the Annual Report, together with how these measures have been calculated, are disclosed in the Annual Report.
Risk Management
Risk Management
The Board is responsible for the ongoing identification, evaluation and management of emerging and principal risks faced by the Company and the Board has established a process for the regular review of these risks and their mitigation. This process accords with the
· The Board maintains and regularly reviews a matrix of risks faced by the Company and controls in place to mitigate those risks. The impact and probability of those risks occurring after controls are performed are charted on a risk heat map and reviewed by the Board along with a risk appetite statement that reflects the Board's relative level of risk tolerance and establishes key triggers necessitating Board management. An annual formal review of the risk procedures and controls in place at the Investment Manager and other key service providers is performed. Emerging risks are actively discussed as part of this process and this should ensure that emerging (as well as known) risks are adequately identified and, so far as practicable, mitigated.
The market and economic impacts of the war in
· Each Director brings external knowledge of the investment company sector (and financial services generally), trends, threats as well as strategic insight;
· The Investment Manager advises the Board at quarterly Board meetings on industry trends, providing insight on future challenges in the markets in which the Company operates/ invests. The Company's broker regularly reports to the Board on markets, the investment company sector and the Company's peer group;
· The Board receives quarterly reports from the Investment Manager's Compliance officer and the Depositary on any matters of regulatory concern and developments;
· The company secretary briefs the Board on forthcoming legislation/regulatory change that might impact on the Company. The auditor also provides updates which are relevant to the Company; and
· The Company is a member of the AIC, which provides regular technical updates as well as drawing members' attention to forthcoming industry/regulatory issues and advising on compliance obligations.
Principal Risks
The Directors have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency and liquidity.
1.Investment objective and policy risks
The Company may not achieve its investment objective.
The Company is dependent upon the Investment Manager's successful implementation of the Company's investment policy and ultimately on its ability to create an investment portfolio capable of generating attractive returns.
The Company is not constrained on weightings in any sector or geography. This may lead to the Company having significant exposure to portfolio companies from certain business sectors or based in certain geographies. Greater concentrations of investments in any one sector or geography may lead to greater volatility in the Company's investments and may adversely affect performance. This may be exacerbated by the small number of investments held at any time.
Mitigation
The Investment Manager has a proven and extensive track record, and the Board undertakes a review of the performance of the Company and its transactions at each quarterly Board meeting. The Investment Manager spreads the investment risk over a portfolio of investments in accordance with the Company's investment policy, and at the year end the Company held investments in 31 companies with details of the geographic and sector weightings given in the Investment Manager's Review.
2.Market risks
Price movements and stock market conditions may have a negative impact on the Company's portfolio and its ability to identify and execute suitable investments that might generate acceptable returns. Market conditions may also restrict the supply of suitable investments at a price the Investment Manager considers may generate acceptable returns.
If conditions (such as those experienced as a consequence of the COVID-19 pandemic or the current conflict in
Interest rate movements may affect the level of income receivable on cash deposits and the interest payable both by the Company and by investee companies on their borrowings. In addition, where the Company invests in high growth investee companies, any increase in interest rates may compress the growth of such companies and therefore affect their valuations. As such, interest rate fluctuations may reduce the Company's returns.
The Company's ordinary shares are denominated in pounds sterling while the majority of the Company's investments are denominated in a currency other than pounds sterling. The Company does not hedge its currency exposures and changes in exchange rates may lead to depreciation in the Company's net asset value.
Mitigation
The Company's investment policy and the fact that it will not use hedging instruments to mitigate interest rate or foreign currency risk is clearly explained in the Owner's Manual (which can be found on the Company's website at www.smithson.co.uk). The Investment Manager has a proven and extensive track record and reports regularly to the Board on market developments. The Investment Manager's policy is to hold investments for the long term and not look at market timing issues.
Further details on Market and Financial Instrument risk are disclosed in note 15 to the financial statements.
3.Outsourcing risks
The Company has outsourced all its operations to third party service providers. Failure by any service provider to carry out its obligations in accordance with the terms of its appointment could result in negative implications for the Company. Such failures could include cyber breaches or other IT failures, fraud (including unauthorised payments by the administrator), poor record keeping and loss of assets and failure to collect all the Company's dividend income. Cyber incidents are becoming increasingly common and may cause disruption and impact business operations, potentially resulting in financial losses, theft, interference with the ability to calculate the Net Asset Value or additional operating costs. If the Investment Manager fails to identify risks or liabilities associated with investee companies adequately, this could give rise to an investee company not fitting the Company's investment policy or unexpected losses and adverse performance. The rapid spread of infectious disease such as the COVID-19 pandemic, and measures introduced to combat its spread, could cause disruption to the operations of the Company and its key service providers.
Mitigation
The Company has appointed experienced service providers, each of whom has a service agreement, and the performance of the key service providers is reviewed annually by the Management Engagement Committee. Cyber risk management questions were incorporated in this review to confirm the existence and application of cyber security controls and procedures. The Company's key service providers report periodically to the Board on their business continuity plans and procedures. The Board monitors the adequacy of controls in place at the key service providers and their planned response to an extended period of disruption, to ensure that the impact to the Company is limited. Each key service provider was asked to present reports on their actions and responses, all of which were entirely satisfactory, and there was no noticeable change in any of the key services provided.
The procedures of the AIFM, depositary and custodian are reviewed and tested by their external auditors and such reports on the service providers control environment are made available to clients. These reports are also reviewed by the Management Engagement Committee and where any control failures are identified, the key service provider is required to explain and provide assurance to the Company on any impact or potential risk to the Company and its mitigation.
4.Key individuals risk
Mitigation
The Investment Manager has a remuneration policy in place seeking to incentivise key individuals to take a long-term view. Additionally, the Company's key individuals are significantly invested in the Company (see note 17 to the financial statements), therefore their interests and the Company's shareholders are more aligned. Finally, the Investment Manager has plans in place to ensure continuity in the event of the departure of key individuals.
5.Regulatory risks
The Company benefits from the current exemption for investment trusts from
Mitigation
The Investment Manager and the company secretary monitor proposed changes to tax rules and report to the Board thereon.
Viability Statement
Viability Statement
In accordance with the
In reviewing the Company's viability, the Board considered the Company's business model, the principal risks and uncertainties, including the economic and market conditions, higher inflation and interest rates arising from the continuing war in
The Board will consider putting a continuation vote to shareholders if in any year the Company's share price trades at an average discount of 10% or more to net asset value. During 2022, the average discount to NAV was 6.1%, the first period of a sustained discount since the launch of the Trust. The Board seeks to address the level of discount through the use of share buybacks and the Company intends to continue with its current programme of regular market purchases whilst the shares trade at a material discount to net asset value.
The Company benefits from certain tax benefits relating to its status as an investment trust. Any change to such taxation arrangements would inevitably affect the attractiveness of an investment in the Company and consequently its viability as an effective investment vehicle. At the time of consideration, no such changes in taxation arrangements are planned.
The Directors have assumed that:
· the Board will not change the Company's investment objective of providing shareholders with long-term growth in value;
· the premium/discount management programme described above will continue to operate in such a way, that the Board will not elect to put a continuation vote to shareholders;
· the performance of the Company will continue to be satisfactory such that the shareholders will want the Company to continue in existence; and
· the Board will continue to manage the Company's business to ensure it retains its status as an investment trust.
Based on the results of this review, the Directors have formed a reasonable expectation that the Company will continue in its operations and meet its expenses and liabilities as they fall due over the next 10 years.
Non-Financial Information
Section 172 of Companies Act 2006 Statement
The Board sets the Company's strategy and objectives, taking into account the interests of all its stakeholders. It is ultimately responsible for the direction, management, performance and long-term sustainable success of the Company. A good understanding of the Company's stakeholders enables the Board to consider the potential impact of strategic decisions on each stakeholder group during the decision-making process. By considering the Company's purpose, vision and values, together with its strategic priorities, the Board aims for its decisions to be fair and take account of the interests of the key stakeholder groups, together with the impact of its operations on the environment.
During the period under review, the Board believes that it has acted in good faith and discharged its duty per section 172 of the Companies Act 2006 ("s172"), to promote the success of the Company for the benefit of its members as a whole and having regard to the interests of stakeholders and the factors set out in s172. The Board performed its role as outlined in the schedule of matters reserved for the Board and taking into account the interests of the key stakeholders.
Company Culture and Values
Culture
The culture of the Company is set by the Board and is based on the values of the Company summarised below. The Board seeks to apply these values in all its dealings with its stakeholders and encourages the same values to be adopted by its key service providers.
Values
High Standards
The Directors want to ensure the success of the Company and generate long term value for its shareholders. To this end the Board will seek to adopt high standards of corporate governance and encourage best practice in all its activities. This approach extends to the Company's dealings with its stakeholders including shareholders, the Investment Manager and other service providers.
Honesty and Integrity
The Board seeks to comply with all relevant laws and regulations which apply to investment companies and has zero tolerance to bribery and corruption or any other fraudulent behaviour. The Board further expects the same standards to be applied by its service providers. As part of its service provider annual review, the Board seeks assurance of high standards from its service providers in relation to their policies with regard to governance including whistleblowing, tax evasion, human rights, modern slavery and bribery.
Transparency and accountability
The Board encourages clarity and transparency in its Board discussions and in communications with its stakeholders. The Board seeks to work with all service providers in a collaborative manner while at the same time recognising that the Board's role involves exercising oversight and challenge. The Board further recognises that it is accountable to shareholders and will endeavour to give a fair, balanced and understandable overview of the Company's performance to this end.
Company Sustainability and Stakeholders
As part of its work to evaluate its principal risks, the Board identified its key stakeholders, as applicable for the investment company, which can be summarised as follows:
· Investors;
· Investment Manager;
· Other key service providers; and
· Investee companies.
Examples below provide an overview of how the Board considered the factors set out in s172, including how its engagement with the Company's key stakeholders helps the Board in its decision-making.
Stakeholder Management
To understand the views of the Company's key stakeholders, the Board aims to ensure there is a regular and sustained engagement, which is to be taken into consideration in its decision-making and discussions.
Investors
Communications are key to establishing a meaningful relationship with our shareholders. The Company publishes monthly fact sheets and reports on its financial performance at the half year and year end, all of which are available on the Company's website. An Owners' Manual can be downloaded from the website which provides an understanding of the Investment Manager's goals and how they are to be achieved.
The Company raised £822 million in its initial public offering ("IPO") in October 2018, which was the largest amount that had been raised by any investment trust Initial Public Offering ('IPO') on the London Stock Exchange to that date.
From inception until April 2022 the Company continuously issued new shares at a premium to NAV (net of all costs). The Company's shares began the year trading at a 3% premium to NAV but in late February the shares began trading at a discount, ending the year at a discount of (7.3)%1. The average discount across the year was (6.1)%, the first period of a sustained discount since the launch of the Trust. In response to the emergence of the discount, the Board, in consultation with its advisers and the investment manager, has sought to address the situation through the use of share buybacks. The Company started to buy back shares at the end of April, and by the end of December 2022 had acquired 3.2% of the total shares in issue. A further 0.6% has since been bought back and at 22 February 2023, the discount was 8.6%. The Company intends to continue with its current programme of regular market purchases whilst the shares trade at a material discount. As a matter of law, the Company is only permitted to fund purchases of its own shares out of its distributable reserves or the proceeds of a fresh issue of shares. To ensure that a lack of distributable reserves does not prevent the Board in the future from continuing share buybacks when they feel they are appropriate, the Board at a General Meeting held 6 February 2023, obtained the approval of shareholder to apply to the High Court to reduce the Company's share premium by £500 million. The reduction, if approved by the High Court, will result in a corresponding increase in the Company's distributable reserves to facilitate future buybacks. All shares purchased are held in treasury and will only be reissued at a premium, net of all costs. An application has been made to the High Court to sanction the capital reduction.
The Board is seeking to renew its authorities to issue and buyback shares at the Company's AGM (for further details, please see the Annual Report) with a view to managing the premium/discount and to continue to create value for shareholders. The Board is mindful that there should be an active, liquid market in the Company's shares. As a closed-ended fund listed on the Premium segment of the main market, shareholders should always be able to exit through the stock market. The Board recognises the importance of shareholders being able to sell at a price not disadvantageous to them and the premium/discount to net asset value at which the Company's shares trade is monitored at all times.
The Board encourages communications with its Investment Manager and key service providers to be open and transparent, with all parties working together in a collaborative manner at the same time as the Board exercising oversight and challenge (further information can be found in the Business Review section, describing the Key Performance Indicators). The Board believes that effective risk management contributes to the safeguarding of shareholder value and successful operation of the Company and therefore assesses and manages, where possible or appropriate, the risks faced by the Company.
During the year the Board took the decision to increase the size of the Board to four non-executive Directors, with Denise Hadgill being appointed effective 1 June 2022. This decision was taken as part of the Board's succession planning and to broaden the experience and diversity of the Board for the benefit of the Company and its shareholders as a whole.
The Company and Investment Manager are seeking to promote an investor base that is interested in a long-term holding in the Company. The Board, through the Company's broker and the Investment Manager, maintains regular contact with shareholders and welcomed shareholders in May 2022 to the first in person AGM since the IPO and the lifting of COVID-19 restrictions. It is the intention that the full Board will attend the forthcoming AGM and the Chairman will chair the meeting. Shareholders have the opportunity to attend the AGM where they can question the Board and representatives of the Investment Manager. The Chairs of the Board's committees will also normally attend the AGM, to engage with shareholders on significant matters related to their areas of responsibility.
The Directors welcome the views of all shareholders and place considerable importance on maintaining open dialogue with them. Shareholders wishing to contact the Chairman, or any other member of the Board, may do so at any time by writing to the company secretary. Alternatively, the Chairman can be emailed at the following address: smithsonchairman@fundsmith.co.uk.
Directors take into account the proxy voting agencies guidelines to assess the voting recommendations published to shareholders ahead of AGM. This is a helpful tool to understand the investors' views on certain resolutions.
Shareholder feedback is discussed in Board meetings with the broker and Investment Manager, whether received directly to the Board or through the Investment Manager and broker's shareholder meetings and the Board is pleased that the feedback received remained positive throughout the period. The Board also received a number of questions on the Company's performance and strategy ahead of and during a question and answer session at the AGM which were either addressed in the manager's presentation or responded to directly. The Company's shareholder engagement strategy and details of shareholder communications can be found in the Annual report.
In addition to this, the Investment Manager engages with shareholders at regular webinars, where questions are received and answered. The majority of the questions are around the fundamentals of the investee companies and whether they continue to be congruent with the Company's investment philosophy. In all cases it is noted that this is the case, with specific attention paid towards regular meetings with the investees' executive management and ensuring that investment criteria are being met in all areas.
Investment Manager
As explained above, the Company's business model is such that it has no employees and relies on services provided by third party service providers to manage the Company's operations. The Investment Manager is the most significant service provider of the Company, and a description of its role can be found in the Report of the Directors in the Annual Report.
The Board receives regular reports from the Investment Manager, discusses the portfolio at each Board meeting as well as maintaining a constructive dialogue between meetings. Additionally, the Board held a strategy session in November 2022 at which the Board and Investment Manager discussed in detail the performance of the Company's portfolio of investments and the investible universe for the Company. The Board and Investment Manager along with the broker also discussed at the strategy session the investment trust market and the Company's position within it, the Company's portfolio structure as well as ESG considerations (including diversity) and shareholder engagement strategies. A representative of the Investment Manager also attends each quarterly Board meeting and most ad hoc meetings.
The Investment Manager's remuneration is based on the market capitalisation of the Company which aligns the manager's interests with those of shareholders. Furthermore, partners and employees of the Investment Manager are significantly invested in the Company as disclosed in note 17 of the financial statements; further aligning the Investment Manager's interests with those of the shareholders. The Investment Manager paid costs of £5.1 million in respect of the Company's IPO and the Placing Programme prospectus issued in 2020. This means that shareholders' investment was not discounted by the cost of the IPO and that the Company only gains from its ordinary share issues, as prospectus costs were met. This is unusual for investment trusts and is a testament to the relationship which the Company enjoys with its Investment Manager.
The Management Engagement Committee reviews the performance of the Investment Manager, its remuneration and the discharge of its contractual obligations at least annually. Further detail on the Committee's activities and recommendations can be found in the Management Engagement Committee Report in the Annual Report.
Other key service providers
In ensuring the smooth operation of the Company, the Board also monitors the performance of other key service providers such as the fund administrator, depositary and custodian (please see the Management Engagement Committee Report) and maintains regular contact through direct reports at Board meetings or through the company secretary to ensure there is open dialogue and good relationship management at the Board level. Additionally, in view of the operational challenges and restrictions caused by the COVID-19 pandemic, the Board continues to receive regular updates and assurance on the operational effectiveness of its key service providers, taking this feedback into consideration when assessing the Company's risks. The Board was pleased to note its service providers continued to operate effectively.
In maintaining the Company's reputation and high standards of business conduct, the Board is provided with regular reports from the Company's broker and company secretary who alert the Board to recent and proposed changes in regulation and market practice, as well as any likely reputational threats which, in turn, influence the Board's decision-making process. The Company's corporate values, established to manage its business relationship with its stakeholders, are stated above and the Company's approach on anti-bribery and prevention of tax evasion can be found below and on the Company's website at www.smithson.co.uk. The Board also seeks assurance of high standards from its service providers as regards governance including whistleblowing, tax evasion, and bribery as part of its service provider annual review. The Board also periodically reviews the market rates for services provided, to ensure that the Company continues to receive high quality service at a competitive cost.
Investee companies
As an investment trust with no trading activity and an outsourced business model, the Company has no direct social, community or environment responsibilities. However, the Company does have such responsibilities through its investment portfolio. The Company is a long-term investor (please see Owner's Manual at the Company's website at www.smithson.co.uk) and the Investment Manager's Review sets out how the Investment Manager considers ESG matters and explains and summarises their approach and engagement with investee companies.
The Company recognises the increased interest in reporting on ESG matters and supports the Association of Investment Companies ("AIC") initiative to provide information on investment companies' ESG practices in a centralised database and accordingly has submitted its own commentary in that regard and shareholders can access the statement on the Company's information page of the AIC website (www.theaic.co.uk) and on the Company's website at www.smithson.co.uk.
ESG initiatives of the investee companies are included in the Investment Manager's Review.
Dividend Policy
The Company's intention is to look for overall return rather than seeking any particular level of dividend. The Company will comply with the investment trust rules regarding distributable income which states that 85% of recognised income be distributed to shareholders.
Any dividends and distributions will be at the discretion of the Board. Subject to the Companies Act, the Company may, by ordinary resolution, declare a final dividend to be paid to members of the Company according to their rights and interests in the profits of the Company available for distribution, but no dividend shall be declared in excess of the amount recommended by the Board. The Company does not intend to pay any interim dividends.
Were the Company to be in a position to pay a dividend, then it may, subject to complying with all relevant criteria and with the approval of the shareholders by ordinary resolution, choose to offer shareholders a scrip dividend alternative or may establish a scrip dividend scheme that would allow shareholders to receive ordinary shares instead of a cash dividend.
Environmental Matters
As mentioned earlier, the Company is an investment company. As such, it does not have any physical assets, property, employees or operations of its own. The Company does not provide goods or services in the normal course of its business and nor does it have customers. In consequence, the Company has no greenhouse gas emissions to report from its operations. As the Company has no material operations and therefore has little to no energy use, it falls below 40,000kWh of energy use and is therefore exempt from the disclosures under the Companies (Directors' Report) and Limited Liability Partnership (Energy and Carbon Report) Regulations 2018 or Streamlined Energy and Carbon Reporting criteria. The Investment Manager evaluates environmental matters concerning investee companies as summarised in the Investment Manager's Review.
Due to an outsourced business model, the Company has no direct environmental responsibilities, but it does have such through its investment portfolio.
ESG Integration
The Company aims to be a long-term, buy-and-hold investor, building a portfolio of high-quality companies that will generate superior, risk-adjusted returns over the long term. As a long-term investor, developing a detailed understanding of the business, its industry, and the variety of risks and opportunities that may influence the performance of the companies we invest in is essential. Assessment of the risks associated with the business environmental and social performance, as well as the quality of corporate governance, known as ESG factors, is a fully integrated component of our pre-investment research; poor ESG performance can generate significant, negative impacts on the financial performance of the company as well as increase its risk profile, particularly over the long term. The Company builds an investable universe of, as we define them, "good companies". Good companies are those that can generate a sustainable high return on invested capital over the full business cycle and have the ability to reinvest these returns to generate consistent growth.
Please see ESG Integration document and Owner's Manual at the Company's website at www.smithson.co.uk and the Investment Manager's Review to read more on how the Investment Manager considers environmental matters.
Exercise of Voting Powers and Stewardship Code
The Company and the Investment Manager support the
Modern Slavery Disclosure
Due to the nature of the Company's business, being a company that does not offer goods or services to customers, the Board considers there are no relevant disclosures with regard to the Modern Slavery Act 2015 in relation to the Company's own operations. The Board considers the Company's supply chains, dealing predominately with professional advisers and service providers in the financial services industry, to be low risk in this regard.
Anti-bribery and Corruption
The Company takes a zero-tolerance approach to bribery and corruption and is committed to acting professionally, fairly and with integrity in all its business dealings and relationships wherever it operates. The Company's policy and the procedures that implement it are designed to support that commitment. A summary of the Company's anti-bribery and corruption policy can be found on the Company's website at www.smithson.co.uk.
Prevention of the Facilitation of Tax Evasion
In response to the Criminal Finances Act 2017, the Board has adopted a zero-tolerance approach to the criminal facilitation of tax evasion. A summary of the Company's policy can be found on the Company's website at www.smithson.co.uk.
Employees, Human Rights and Community Issues
The Board recognises the requirement to provide information about employees, human rights and community issues. As the Company has no employees, all its Directors are non-executive and all its functions are outsourced, there are no disclosures to be made in respect of employees, human rights and community issues. As at the date of this report the Company had four Directors, of whom two are male and two are female. The Board's policy on diversity is contained in the Corporate Governance Report of the Annual Report.
Conclusion
The Board is mindful of the directors' duties as described by s172 in considering the interests of stakeholders when deliberating all important decisions. Work of the Board and its Committees is described in the Governance Report in the Annual Report.
Strategic Report
The Strategic Report set out in the Annual Report was approved by the Board of Directors on the 27 February 2023.
On behalf of the Board
Chairman
27 February 2023
1 These are APMs Definitions of these and other APMs used in the Annual Report, together with how these measures have been calculated, are disclosed in the Annual Report.
Statement of Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and 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 international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRSs) as issued by the
· selected suitable accounting policies and then applied them consistently;
· made judgements and accounting estimates that are reasonable and prudent;
· presented information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
· provided additional disclosures when compliance with the specific requirements in IFRS were insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Company's financial position and financial performance; and
· prepared the financial statements on a going concern basis.
The Directors are responsible for keeping 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 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 financial statements are published on the Company's website at www.smithson.co.uk. The Investment Manager has delegated authority for the maintenance and integrity of the website on behalf of the Company. The work carried out by the auditor does not involve consideration of the maintenance and integrity of the website and, accordingly, the auditor accepts no responsibility for any changes that have occurred to the financial statements since they were initially presented on the website. Visitors to the website need to be aware that legislation in the
The Directors consider that the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
Each of the Directors confirm that, to the best of their knowledge:
· the financial statements, which have been prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and net return of the Company for the year ended 31 December 2022; and
· the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.
On behalf of the Board
Chairman
27 February 2023
Financial Statements
Independent Auditor's Report
Report on the audit of the financial statements
1. Opinion
In our opinion the financial statements of
· give a true and fair view of the state of the company's affairs as at 31 December 2022 and of its loss for the year then ended;
· have been properly prepared in accordance with
· have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements which comprise:
· the statement of comprehensive income;
· the statement of financial position;
· the statement of changes in equity;
· the statement of cash flows; and
· the related notes 1 to 18.
The financial reporting framework that has been applied in their preparation is applicable law,
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (
We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
3. Summary of our audit approach
|
Key audit matters |
The key audit matter that we identified in the current year was: ● Valuation and ownership of investments Within this report, key audit matters are identified as follows: ● Newly identified ● Increased level of risk ● Similar level of risk ● Decreased level of risk |
|
Materiality |
The materiality that we used in the current year was £24.2m which was determined on the basis of 1% of net assets as at 31 December 2022. |
|
Scoping |
Audit work to respond to the risks of material misstatement are performed directly by the audit engagement team. |
|
Significant changes in our approach |
There were no significant changes in our approach in the current year. |
4. Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Our evaluation of the directors' assessment of the company's ability to continue to adopt the going concern basis of accounting included:
· Assessing the controls in place to evaluate the ability of the company to continue to operate as an Investment Trust;
· Challenging the underlying data and key assumptions used to make the assessment, and evaluating their plans for future actions in relation to their going concern assessment;
· Assessing the projected period of time to liquidate the portfolio and expense cover for the subsequent 12 month period from the date of signing the financial statements (from February 2023) for reasonableness;
· Assessing any other market altering factors such as inflation, high energy costs and rising interest rates by looking at the operational impact and business continuity plans; and
· Assessing the appropriateness of the going concern disclosures in the financial statements relating to going concern.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
In relation to the reporting on how the company has applied the
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
5. Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
5.1. Valuation and ownership of Investments
|
Key audit matter description |
As an investment entity, the Company holds investments of £2,394m as at 31 December 2022 (2021: £3,339m) which have decreased by 28% from the prior year. These represent the most quantitatively significant financial statement line on the statement of financial position. There is a risk that investments may not be valued correctly or may not represent the property of the company. This may result in a material misstatement within the investments held at fair value through profit or loss and we consider that there is a potential area for fraud. Refer to note 1f to the financial statements for the accounting policy on investments and details of the investments are disclosed in note 9 to the financial statements. The valuation and ownership of investments is included in the Audit Committee report as a significant reporting matter in the Annual Report. |
|
How the scope of our audit responded to the key audit matter |
We performed the following procedures to address the valuation and ownership of investment key audit matter: ● We obtained an understanding and tested relevant controls over valuation and ownership of investments. ● We independently valued 100% of the investment portfolio to the closing bid prices published by an independent pricing source. ● We confirmed the ownership of 100% of investments at the year-end date by obtaining independent third-party confirmations directly from the depositary. In addition, we performed the following procedures to address whether the investment portfolio was actively traded and designated with the correct fair value hierarchy: ● We assessed the post year-end volume of trade date in order to identify investments that are not actively traded. ● We tested the completeness and accuracy of disclosures in relation to fair value measurements and liquidity risk. |
|
Key observations |
Based on the work performed we concluded that the valuation and ownership of investments is appropriate. |
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
|
Materiality |
£24.2m (2021: £33.6m) |
|
Basis for determining materiality |
1% (2021: 1%) of net assets |
|
Rationale for the benchmark applied |
Net assets has been chosen as a benchmark as it is the most relevant benchmark for investors and is a key driver of shareholder value. The decrease in materiality year on year arose principally from the decrease in the company's net assets. |
6.2. Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the financial statements as a whole. Performance materiality was set at 70% of materiality for the 2022 audit (2021: 65%). In determining performance materiality, we considered the following factors:
a. no significant changes in business structure and operations;
b. our experience from previous audits has indicated a low number of corrected and uncorrected misstatements identified in prior periods; and
c. no significant changes in the company's operating environment caused by the uncertainty and volatility brought about by the inflation, high energy costs and rising interest rates.
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £1.2m (2021: £0.67m), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
7. An overview of the scope of our audit
7.1. Scoping
Our audit was scoped by obtaining an understanding of the Company and its environment, including internal control and assessing the risks of material misstatement. Audit work to respond to the risks of material misstatement was performed directly by the audit engagement team.
7.2. Our consideration of the control environment
We assessed the control environment including the use of service organisations. We tested relevant controls in respect to the valuation and ownership of investments and adopted a control reliance strategy. We performed an understanding of relevant business process and relevant controls that address the risk of material misstatement in financial reporting.
7.3. Our consideration of climate related risks
In planning our audit, we have considered the potential impact of climate change on the Company's business and its financial statements. The Company continues to develop its assessment of the potential impacts of environmental, social and governance ("ESG") related risks, including climate change, as outlined in the Annual Report. As a part of our audit, we held discussions to understand the process of identifying climate-related risks, the determination of mitigating actions and the impact on the Company's financial statements. We performed our own qualitative risk assessment of the potential impact of climate change on the Company's account balances and classes of transactions. We have read the disclosures in relation to climate change made in the other information within the annual report and ascertain whether the disclosures are materially consistent with the financial statements and our knowledge from our audit.
8. Other information
The other information comprises the information included in the annual report, other than the financial statements and our auditor's report thereon. The directors are responsible for the other information contained within the annual report.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
9. Responsibilities of directors
As explained more fully in the directors' responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.
10. Auditor's responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (
A further description of our responsibilities for the audit of the financial statements is located on the FRC's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.
11. Extent to which the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of detecting irregularities, including fraud is detailed below.
11.1. Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, we considered the following:
· the nature of the industry and sector, control environment and business performance including the design of the company's remuneration policies, key drivers for directors' remuneration, bonus levels and performance targets;
· results of our enquiries of management and the audit committee about their own identification and assessment of the risks of irregularities;
· any matters we identified having obtained and reviewed the company's documentation of their policies and procedures relating to:
· identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-compliance;
· detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
· the internalcontrols established to mitigate risks of fraud or non-compliance with laws and regulations;
· the matters discussed among the audit engagement team regarding how and where fraud might occur in the financial statements
As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and identified the greatest potential for fraud in the valuation and ownership of investments. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override.
We also obtained an understanding of the legal and regulatory framework that the company operates in, focusing on provisions of those laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements. The key laws and regulations we considered in this context included the UK Companies Act, Listing Rules and tax legislation.
In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements but compliance with which may be fundamental to the company's ability to operate or to avoid a material penalty.
11.2. Audit response to risks identified
As a result of performing the above, we identified the valuation and ownership of investments as a key audit matter related to the potential risk of fraud. The key audit matters section of our report explains the matter in more detail and also describes the specific procedures we performed in response to the key audit matter.
In addition to the above, our procedures to respond to risks identified included the following:
· reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of relevant laws and regulations described as having a direct effect on the financial statements;
· enquiring of management and the audit committee concerning actual and potential litigation and claims;
· performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud;
· reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with HMRC and the FCA; and
· in addressingthe risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.
Report on other legal and regulatory requirements
12. Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the directors' remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
· theinformation given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
· the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified any material misstatements in the strategic report or the directors' report.
13. Corporate Governance Statement
The Listing Rules require us to review the directors' statement in relation to going concern, longer-term viability and that part of the Corporate Governance Statement relating to the company's compliance with the provisions of the UK Corporate Governance Code specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements and our knowledge obtained during the audit:
· the directors' statement with regards to the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified set out in the Annual Report;
· the directors' explanation as to its assessment of the company's prospects, the period this assessment covers and why the period is appropriate set out in the Annual Report;
· the directors' statement on fair, balanced and understandable set out in the Annual Report;
· the board's confirmation that it has carried out a robust assessment of the emerging and principal risks set out in the Annual Report;
· the section of the annual report that describes the review of effectiveness of risk management and internal control systems set out in the Annual Report; and
· the section describing the work of the audit committee set out in the Annual Report.
14. Matters on which we are required to report by exception
14.1. Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
· we have not received all the information and explanations we require for our audit; or
· adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or
· the financial statements are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
14.2. Directors' remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors' remuneration have not been made or the part of the directors' remuneration report to be audited is not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
15. Other matters which we are required to address
15.1. Auditor tenure
Following the recommendation of the audit committee, we were appointed by the Board on 24 July 2019 to audit the financial statements for the year ending 31 December 2019 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 4 years, covering the years ending 31 December 2019 to 31 December 2022.
15.2. Consistency of the audit report with the additional report to the audit committee
Our audit opinion is consistent with the additional report to the audit committee we are required to provide in accordance with ISAs (UK).
16. Use of our report
This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.
Chris Hunter CA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Edinburgh, United Kingdom
27 February 2023
Statement of Comprehensive Income
|
|
|
For the year ended |
For the year ended |
||||
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
Notes |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Income from investments held at fair value through profit or loss |
2 |
31,341 |
- |
31,341 |
21,638 |
- |
21,638 |
|
(Losses)/gains on investments held at fair value through profit or loss |
9 |
- |
(970,879) |
(970,879) |
- |
513,312 |
513,312 |
|
Foreign exchange gains/(losses) |
|
147 |
(399) |
(252) |
(25) |
(565) |
(590) |
|
Investment management fees |
4 |
(21,998) |
- |
(21,998) |
(25,884) |
- |
(25,884) |
|
Other expenses and transaction costs |
5 |
(1,463) |
(743) |
(2,206) |
(1,583) |
(639) |
(2,222) |
|
(Loss)/profit before tax |
|
8,027 |
(972,021) |
(963,994) |
(5,854) |
512,108 |
506,254 |
|
Tax |
6 |
(3,670) |
- |
(3,670) |
(2,540) |
- |
(2,540) |
|
(Loss)/profit for the year |
|
4,357 |
(972,021) |
(967,664) |
(8,394) |
512,108 |
503,714 |
|
(Loss)/return per share (basic and diluted) (p) |
7 |
2.49 |
(555.60) |
(553.11) |
(5.27) |
321.50 |
316.23 |
The Company does not have any income or expenses which are not included in the (loss)/return for the year.
All of the (loss)/return and total comprehensive income for the year is attributable to the owners of the Company.
The "Total" column of this statement represents the Company's Income Statement, prepared in accordance with International Financial Reporting Standards (IFRS). The "Revenue" and "Capital" columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies (AIC).
All items in the above statement derive from continuing operations.
The accompanying notes are an integral part of these financial statements.
Statement of Financial Position
|
|
|
As at |
As at |
|
|
|
31 December 2022 |
31 December 2021 |
|
|
Notes |
£'000 |
£'000 |
|
Non-current assets |
|
|
|
|
Investments held at fair value through profit or loss |
9 |
2,393,848 |
3,339,150 |
|
Current assets |
|
|
|
|
Receivables |
10 |
3,853 |
1,203 |
|
Cash and cash equivalents |
|
24,589 |
32,081 |
|
|
|
28,442 |
33,284 |
|
Total assets |
|
2,422,290 |
3,372,434 |
|
Current liabilities |
|
|
|
|
Trade and other payables |
11 |
(4,323) |
(5,364) |
|
Total assets less current liabilities |
|
2,417,967 |
3,367,070 |
|
Equity attributable to equity shareholders |
|
|
|
|
Share capital |
12 |
1,771 |
1,717 |
|
Share premium |
13 |
2,219,487 |
2,126,997 |
|
Capital reserve |
|
203,358 |
1,249,362 |
|
Revenue reserve |
|
(6,649) |
(11,006) |
|
Total equity |
|
2,417,967 |
3,367,070 |
|
Net asset value per share (p) |
14 |
1,410.7 |
1,961.0 |
The financial statements were approved by the Board on 27 February 2023 and were signed on its behalf by:
Lord St John of Bletso
Director
The accompanying notes are an integral part of these financial statements.
Smithson Investment Trust plc - Company Registration Number 11517636 (Registered in England and Wales)
Statement of Changes in Equity
For the year ended 31 December 2022
|
|
|
Share |
Share |
Capital* |
Revenue* |
|
|
|
|
Capital |
Premium |
Reserve |
Reserve |
Total |
|
|
Notes |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Balance at 1 January 2022 |
|
1,717 |
2,126,997 |
1,249,362 |
(11,006) |
3,367,070 |
|
Issue of new shares |
|
54 |
93,050 |
- |
- |
93,104 |
|
Costs on new share issues |
|
- |
(560) |
- |
- |
(560) |
|
Ordinary shares bought back and held in treasury |
|
- |
- |
(73,604) |
- |
(73,604) |
|
Costs on buybacks |
|
- |
- |
(379) |
- |
(379) |
|
(Loss)/profit for the year |
|
- |
- |
(972,021) |
4,357 |
(967,664) |
|
Balance at 31 December 2022 |
12 |
1,771 |
2,219,487 |
203,358 |
(6,649) |
2,417,967 |
For the year ended 31 December 2021
|
|
|
Share |
Share |
Capital* |
Revenue* |
|
|
|
|
Capital |
Premium |
Reserve |
Reserve |
Total |
|
|
Notes |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Balance at 1 January 2021 |
|
1,414 |
1,595,894 |
737,254 |
(2,612) |
2,331,950 |
|
Issue of new shares |
|
303 |
533,918 |
- |
- |
534,221 |
|
Costs on new share issues |
|
- |
(2,815) |
- |
- |
(2,815) |
|
Profit/(loss) for the year |
|
- |
- |
512,108 |
(8,394) |
503,714 |
|
Balance at 31 December 2021 |
12 |
1,717 |
2,126,997 |
1,249,362 |
(11,006) |
3,367,070 |
* Distributable reserve.
The accompanying notes are an integral part of these financial statements.
Statement of Cash Flows
|
|
|
For the year to |
For the year to |
|
|
|
31 December 2022 |
31 December 2021 |
|
|
Notes |
£'000 |
£'000 |
|
Operating activities |
|
|
|
|
(Loss)/profit before tax |
|
(963,994) |
506,254 |
|
Adjustments for: |
|
|
|
|
Loss/(gain) on investments held at |
|
|
|
|
fair value through profit or loss |
9 |
970,879 |
(513,312) |
|
Decrease in receivables |
|
25 |
592 |
|
(Decrease)/increase in payables |
|
(1,175) |
751 |
|
Overseas taxation paid |
6 |
(4,584) |
(2,705) |
|
Net cash used in operating activities |
|
1,151 |
(8,420) |
|
Investing activities |
|
|
|
|
Purchases of investments |
9,11 |
(651,473) |
(673,005) |
|
Sale of investments |
9 |
624,269 |
127,272 |
|
Net cash used in investing activities |
|
(27,204) |
(545,733) |
|
Financing activities |
|
|
|
|
Proceeds from issue of new shares |
12 |
93,104 |
539,023 |
|
Issue costs relating to new shares |
12 |
(560) |
(2,835) |
|
Purchase of shares held in treasury |
12 |
(73,604) |
- |
|
Costs relating to buy backs |
12 |
(379) |
- |
|
Net cash generated from financing activities |
|
18,561 |
536,188 |
|
Net decrease in cash and cash equivalents |
|
(7,492) |
(17,965) |
|
Cash and cash equivalents at start of the year |
|
32,081 |
50,046 |
|
Cash and cash equivalents at end of the year |
15 |
24,589 |
32,081 |
|
Comprised of: |
|
|
|
|
Cash at bank |
|
24,589 |
32,081 |
Dividends and interest received in cash during the year amounted to £31,348,000 and £56,000 (2021: £22,197,000 and £nil), respectively.
The accompanying notes are an integral part of these financial statements.
Notes to the Financial Statements
1.Accounting policies
Smithson Investment Trust plc is a company incorporated on 14 August 2018 in the United Kingdom under the Companies Act 2006.
The financial statements of the Company have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB).
(a) Accounting convention
The financial statements have been prepared under the historical cost convention (modified to include investments at fair value through profit or loss) on a going concern basis and in accordance with UK‑adopted international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRSs as issued by the International Accounting Standards Board (IASB) and with the Statement of Recommended Practice ("SORP") 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued by the Association of Investment Companies ("AIC") in November 2014 (and updated in July 2022). They have also been prepared on the assumption that approval as an investment trust will continue to be granted. The Directors believe that it is appropriate to continue to adopt the going concern basis for preparing the financial statements for the reasons stated in the Annual Report. The Company is a UK listed company with a predominantly UK shareholder base. The results and the financial position of the Company are expressed in sterling, which is the functional and presentational currency of the Company. The accounting policies have been disclosed consistently and in line with Companies Act 2006.
(b) Critical accounting judgements and sources of estimation uncertainty
The Board confirms that no significant accounting judgements or estimates have been applied to the financial statements and therefore there is not a significant risk of a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
(c) Presentation of the Statement of Comprehensive Income
In order to better reflect the activities of an investment trust company, and in accordance with guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income. The net revenue is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in section 1158 of the Corporation Tax Act 2010.
(d) Income
Income from investments (other than capital dividends), including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend, or where no ex-dividend date is quoted, when the Company's right to receive payment is established. Special dividends are credited to capital or revenue, according to the circumstances.
Interest receivable on cash at bank is recognised on an accruals basis.
(e) Expenses
All expenses, other than those of a capital nature, are charged to the revenue account. Expenses of a capital nature are charged to the capital account. Revenue and capital expenses are recognised on an accruals basis.
(f) Investments
Investments in equity instruments are classified upon initial recognition as financial assets measured at fair value through profit or loss. Investments are recognised and de-recognised at trade date where a purchase or sale is under a contract whose terms require delivery within the time frame established by the market concerned, and are initially measured at fair value. Subsequent to initial recognition, investments are valued at fair value. For listed investments, this is deemed to be bid market price. Gains and losses arising from changes in fair value are included in net profit or loss for the year as a capital item in the Statement of Comprehensive Income and are ultimately recognised in the capital reserve.
Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the Statement of Comprehensive Income.
The Company derecognises a financial asset only when the contractual right to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. On derecognition of a financial asset, the difference between the asset's carrying amount and the sum of the consideration received and receivable and the cumulative gain or loss that had been accumulated in equity is recognised in capital in the Statement of Comprehensive Income.
(g) Foreign currencies
Monetary assets and liabilities denominated in foreign currencies are translated into sterling at rates of exchange ruling at the date of the Statement of Financial Position or at the related forward contract rate. Transactions in foreign currency are converted to sterling at the rate ruling at the date of the transaction. Differences in the sterling equivalent value arising between the transaction date and the settlement or payment date are included as exchange gains or losses in the capital account or the revenue account depending on whether the underlying transaction is of a capital or revenue nature.
(h) Cash and cash equivalents
Cash and cash equivalents comprise cash and demand deposits which are readily convertible to a known amount of cash and are subject to insignificant risk of changes in value.
(i) Equity dividends
Interim dividends are recognised in the period in which they are paid. Final dividends are not recognised until approved by shareholders in the Annual General Meeting.
(j) Other receivables and other payables
Other receivables and other payables do not carry any interest and are short term in nature and are accordingly stated at their amortised cost, which is the same as fair value.
Financial assets held at amortised cost are reviewed for impairment using the expected credit loss model. Given the nature of the Company's short-term receivables, no credit losses have occurred to date and no credit losses are currently expected to occur in the future.
(k) Nature and purpose of reserves
Share capital
This represents nominal value of the issued share capital.
Share premium account
This account represents share premium that arose on the issue of new shares.
Capital reserve
This reserve reflects any:
· gains or losses on the disposal of investments
· foreign exchange gains and losses of a capital nature;
· the increases and decreases in the fair value of investments which have been recognised in the capital account; and
· expenseswhich are capital in nature.
The capital reserve may be distributed by way of dividends. However, any gains in the fair value of investments that are not readily convertible to cash are treated as unrealised gains in the capital reserve and are non-distributable.
Revenue reserve
This reserve reflects all income and expenditure recognised in the revenue account and is distributable by way of dividend.
Treasury shares
Treasury shares are recognised at cost as a deduction from equity shareholders' funds. Subsequent consideration received for the sale of such shares is also recognised in equity, with any difference between the sale proceeds and the original cost being taken to share premium account. No gain or loss is recognised in the financial statements on transactions in treasury shares.
(l) Taxation
The charge for taxation is based upon the revenue for the year and is allocated according to the marginal basis between revenue and capital using the Company's effective rate of corporation tax for the accounting year.
Deferred taxation is recognised in respect of all timing differences that have originated, but not reversed, relating to transactions or events that result in an obligation to pay more or a right to pay less tax in future, that have occurred at the Statement of Financial Position date. Deferred tax is measured on an undiscounted basis and based on enacted tax rates. 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 temporary differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in the financial statements which are capable of reversal in one or more subsequent periods. Due to the Company's status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
(m) Adoption of new and revised standards
At the date of authorisation of these financial statements the following standards and amendments to standards, which have not been applied in these financial statements, were in issue, but will be effective in the future accounting periods.
· IFRS 17, 'Insurance contracts' (effective for accounting periods beginning on or after 1 January 2023).
· Amendments to IAS1 'Classification of liabilities as current or non-current' (effective for accounting periods beginning on or after 1 January 2023).
· Amendments to IAS 8 'Definition of Accounting Estimates' (effective for accounting periods on or after 1 January 2023).
· Amendments to IAS 1 and IFRS Practice Statement 2 'Disclosure of Accounting Policies' (effective for accounting periods on or after 1 January 2023).
· Amendments to IAS 12 'Deferred Tax related to Assets and Liabilities arising from a Single Transaction' (effective for accounting periods on or after 1 January 2023).
The Company does not believe that there will be a material impact on the financial statements or the amounts reported from the adoption of these standards.
There were no new standards or interpretations effective for the first time for periods beginning on or after 1 January 2022.
2. Dividend income
|
|
2022 |
2021 £'000 |
|
UK dividends |
6,603 |
7,119 |
|
UK dividends - special |
3,324 |
- |
|
Overseas dividends |
16,921 |
14,232 |
|
Overseas dividends - special |
4,437 |
287 |
|
Bank interest |
56 |
- |
|
Total |
31,341 |
21,638 |
3.Segmental reporting
The Directors are of the opinion that the Company is engaged in a single segment of business being the investment business. The Company's objective is to be an investment for investors seeking increasing capital growth and income over the long term. The accounting policies of the operating segment, which operates in the UK, are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on total profit before tax, which is shown in the Statement of Comprehensive Income. A geographical split of the portfolio can be seen in the Strategic Report.
4.Investment management fee
|
|
2022 |
2021 |
|
|
£'000 |
£'000 |
|
Investment management fee |
21,998 |
25,884 |
As at 31 December 2022, an amount of £1,659,000 (2021: £2,576,000) was payable to the Investment Manager. Details of the terms of the Investment Management Agreement are provided in the Annual Report.
5. Other expenses
|
|
2022 |
2021 |
||||
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Transaction costs on investments held at fair value |
|
|
|
|
|
|
|
through profit or loss |
- |
743 |
743 |
- |
639 |
639 |
|
Directors' fees |
135 |
- |
135 |
120 |
- |
120 |
|
Employer national insurance contributions |
- |
- |
- |
5 |
- |
5 |
|
Auditor fees in relation to audit# |
47 |
- |
47 |
36 |
- |
36 |
|
Tax compliance fee |
(11) |
- |
(11) |
20 |
- |
20 |
|
Registrar fees |
44 |
- |
44 |
40 |
- |
40 |
|
Broker fees |
40 |
- |
40 |
40 |
- |
40 |
|
Company secretarial fees |
93 |
- |
93 |
117 |
- |
117 |
|
Custody fees |
190 |
- |
190 |
338 |
- |
338 |
|
Depositary fees |
244 |
- |
244 |
233 |
- |
233 |
|
Postage and printing |
30 |
- |
30 |
28 |
- |
28 |
|
Legal fees |
(23) |
- |
(23) |
25 |
- |
25 |
|
Fund administration fees |
360 |
- |
360 |
344 |
- |
344 |
|
Other expenses* |
314 |
- |
314 |
237 |
- |
237 |
|
Total Expenses |
1,463 |
743 |
2,206 |
1,583 |
639 |
2,222 |
#The Auditor fee for the 2022 audit is £45,000.
* Other expenses include a net charge for unrecoverable VAT of £79,000 (2021: £56,000 net charge), which includes £92,000 recovered in relation to 2022, (2021: £181,000 recovered in relation to 2021).
Transaction costs on investments held at fair value through profit or loss represent such costs incurred on both purchases and sales of those investments. Transaction costs on purchases amounted to £538,000 (2021: £593,000) and on sales amounted to £205,000 (2021: £46,000).
No non-audit fees were paid during the year to Deloitte LLP by the Company (2021: nil).
6. Taxation
(a) Analysis of tax charge in the year
|
|
2022 |
2021 |
||||
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Taxation on ordinary activities |
|
|
|
|
|
|
|
Irrecoverable overseas withholding tax |
3,670 |
- |
3,670 |
2,540 |
- |
2,540 |
|
Total tax |
3,670 |
- |
3,670 |
2,540 |
- |
2,540 |
(b)The tax charge for the year is lower than the standard rate of corporation tax in the UK of 19%. The differences are explained below:
|
|
2022 |
2021 |
||||
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Profit/(loss) before tax |
8,027 |
(972,021) |
(963,994) |
(5,854) |
512,108 |
506,254 |
|
Corporation tax at standard rate of 19% |
1,525 |
(184,684) |
(183,159) |
(1,112) |
97,301 |
96,189 |
|
Effects of non taxable items: |
|
|
|
|
|
|
|
UK dividends |
(1,886) |
- |
(1,886) |
(1,353) |
- |
(1,353) |
|
Overseas dividends |
(4,058) |
- |
(4,058) |
(2,759) |
- |
(2,759) |
|
Interest income |
(11) |
- |
(11) |
- |
- |
- |
|
Net losses/(gains) on investments held at fair value through profit or loss |
- |
184,467 |
184,467 |
- |
(97,529) |
(97,529) |
|
Expenses and foreign exchange (gains)/losses |
(28) |
217 |
189 |
5 |
228 |
233 |
|
Deferred tax asset not recognised |
4,458 |
- |
4,458 |
5,219 |
- |
5,219 |
|
Total corporation tax |
- |
- |
- |
- |
- |
- |
|
Irrecoverable overseas withholding tax |
3,670 |
- |
3,670 |
2,540 |
- |
2,540 |
|
Total tax |
3,670 |
- |
3,670 |
2,540 |
- |
2,540 |
As at 31 December 2022, the Company had unrecognised tax losses of £82.4 million (2021: £58.9 million) carried forward. Due to the Company's status as an investment trust and the intention to continue to meet the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on capital gains and losses arising on the revaluation or disposal of investments.
7. Return per share
Return per ordinary share is as follows:
|
|
2022 |
2021 |
||||
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
Profit/(loss) for the year (£'000) |
4,357 |
(972,021) |
(967,664) |
(8,394) |
512,108 |
503,714 |
|
Return/(loss) per ordinary share (p) |
2.49 |
(555.60) |
(553.11) |
(5.27) |
321.50 |
316.23 |
Return per share is calculated based on returns for the year and the weighted average number of 174,950,862 ordinary shares in issue from 1 January 2022 to 31 December 2022. (2021: 159,284,761)
8.Dividends
There are no dividends proposed, declared or payable for the year (2021: nil).
9.Investments held at fair value through profit or loss
All investments are designated as fair value through profit or loss on initial recognition, therefore all gains and losses arise on investments designated as fair value through profit or loss.
|
|
2022 |
2021 |
|
As at 31 December |
£'000 |
£'000 |
|
Opening book cost |
2,162,638 |
1,581,420 |
|
Opening investment holding gains |
1,176,512 |
698,518 |
|
Opening fair value at 1 January |
3,339,150 |
2,279,938 |
|
Purchases at cost |
651,607 |
673,172 |
|
Sales - proceeds |
(626,030) |
(127,272) |
|
(Loss)/gain on investments |
(970,879) |
513,312 |
|
Closing fair value at 31 December |
2,393,848 |
3,339,150 |
|
Closing book cost at 31 December |
2,353,438 |
2,162,638 |
|
Closing unrealised gain at 31 December |
40,410 |
1,176,512 |
|
Valuation at 31 December |
2,393,848 |
3,339,150 |
The Company received £626,030,000 (2021: £127,272,000) excluding transaction costs from investments sold in the year. The book cost of the investments when they were purchased was £461,550,000 (2021: £92,593,000) excluding transaction costs. These investments have been revalued over time until they were sold and unrealised gains/losses were included in the fair value of the investments.
All investments are listed.
Fair value of financial instruments
Under IFRS 13 'Fair Value Measurement' an entity is required to classify investments using a fair value hierarchy that reflects the significance of the inputs used in making the measurement decision.
The following shows the analysis of financial assets recognised at fair value based on:
· Level 1 - quoted prices in active markets for identical instruments.
· Level 2 - other significant observable inputs (including quoted prices for similar investments, interest rates, prepayments, credit risk, etc.).
· Level 3 - significant unobservable inputs (including the Company's own assumptions in determining the fair value of investments).
Fair value measurements recognised in the Statement of Financial Position
|
|
2022 |
|||
|
|
Level 1 |
Level 2 |
Level 3 |
Total |
|
As at 31 December |
£'000 |
£'000 |
£'000 |
£'000 |
|
Investments held at fair value through profit or loss |
2,393,848 |
- |
- |
2,393,848 |
|
Total |
2,393,848 |
- |
- |
2,393,848 |
|
|
2021 |
|||
|
|
Level 1 |
Level 2 |
Level 3 |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|
Investments held at fair value through profit or loss |
3,339,150 |
- |
- |
3,339,150 |
|
Total |
3,339,150 |
- |
- |
3,339,150 |
10.Receivables
|
|
2022 |
2021 |
|
As at 31 December |
£'000 |
£'000 |
|
Accrued income |
182 |
247 |
|
Overseas tax recoverable |
1,810 |
896 |
|
Securities sold receivable |
1,761 |
- |
|
Other receivables |
100 |
60 |
|
|
3,853 |
1,203 |
The above receivables do not carry any interest and are short term in nature. The Directors consider that the carrying values of these receivables approximate their fair value.
11. Payables
|
|
2022 |
2021 |
|
As at 31 December |
£'000 |
£'000 |
|
Securities purchased payable |
2,399 |
2,265 |
|
Investment management fee payable |
1,659 |
2,576 |
|
Other payables |
265 |
523 |
|
|
4,323 |
5,364 |
12. Share capital
|
|
2022 |
2021 |
||||
|
|
Ordinary |
Treasury |
Total |
Nominal |
Total |
Nominal |
|
|
Shares |
Shares |
Shares |
Value |
Shares |
Value |
|
As at 31 December |
Number |
Number |
Number |
£'000 |
Number |
£'000 |
|
Issued, allotted and fully paid (ordinary) |
|
|
|
|
|
|
|
Ordinary shares in issue at 1 January |
171,697,958 |
- |
171,697,958 |
1,717 |
141,420,958 |
1,414 |
|
Ordinary shares issued |
5,410,000 |
- |
5,410,000 |
54 |
30,277,000 |
303 |
|
Ordinary shares bought back and held in treasury |
(5,700,000) |
5,700,000 |
- |
- |
- |
- |
|
|
171,407,958 |
5,700,000 |
177,107,958 |
1,771 |
171,697,958 |
1,717 |
During the year ended 31 December 2022, the Company issued 5,410,000 (2021: 30,277,000) shares of £0.01 each for a net consideration of £92,544,000 (2021: £531,406,000).
During the year ended 31 December 2022, the Company bought back to hold in treasury 5,700,000 shares (31 December 2021: nil) at an aggregate cost of £73,983,000 (31 December 2021: nil). At the year end, the Company held 5,700,000 (31 December 2021: nil) shares in treasury.
Details of the shareholder authorities granted to Directors to issue and buy back shares during the year are provided in the Annual Report.
13.Share premium account
|
|
2022 |
2021 |
|
As at 31 December |
£'000 |
£'000 |
|
Balance at 1 January |
2,126,997 |
1,595,894 |
|
Issue of new shares on secondary market |
93,050 |
533,918 |
|
Costs on new share issues on secondary market |
(560) |
(2,815) |
|
|
2,219,487 |
2,126,997 |
14.Net asset value per share
|
As at 31 December |
2022 |
2021 |
|
Net asset value |
£2,417,967,000 |
£3,367,070,000 |
|
Shares in issue |
171,407,958 |
171,697,958 |
|
Net asset value per ordinary share |
1,410.7 |
1,961.0p |
15.Risk management and financial instruments
The Company's investing activities undertaken in pursuit of its investment objective, as set out in the Strategic Report, involve certain inherent risks. The Board monitors the Company's risk as described in the Strategic Report. The main risks arising from the Company's financial instruments are market price risk, interest rate risk, liquidity risk, credit risk and currency risk. The Board reviews and agrees policies for managing each of these risks as summarised below. These policies have remained substantially unchanged during the current year.
Market price risk
Market price risk arises mainly from uncertainty about future prices of financial instruments used in the Company's business. It represents the potential loss the Company might suffer through holding market positions in the face of price movements. The Board meets on four scheduled occasions in each year and at each meeting it receives sufficient financial and statistical information to enable it to monitor adequately the investment performance and status of the business. The Board has also established a series of investment parameters, per the Company's investment policy, designed to manage the risk inherent in managing a portfolio of investments.
Interest rate risk
Interest rate risk is the risk of movements in the value of, or income from, cash balances that arise as a result of fluctuations in interest rates. The Company finances its operations through equity and retained profits including capital profits, with no additional financing.
Liquidity risk
The Company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the use of cash balances and short-term bank deposits. All payables are due within three months.
Credit risk
Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. This is mitigated by the Investment Manager reviewing the credit ratings of broker counterparties and key third party service providers. The risk attached to dividend flows is mitigated by the Investment Manager's research of potential investee companies. The Company's custodian bank is responsible for the collection of income on behalf of the Company. Cash is held with Northern Trust Company which has a Fitch rating of AA-.
The carrying amounts of financial assets best represents the maximum credit risk exposure at the Statement of Financial Position date, and the main exposure to credit risk is via the Company's custodian who is responsible for the safeguarding of the Company's investments and cash balances.
At the reporting date, the Company's financial assets exposed to credit risk amounted to the following:
|
|
2022 |
2021 |
|
As at 31 December |
£'000 |
£'000 |
|
Cash and cash equivalents |
24,589 |
32,081 |
|
Receivables |
3,853 |
1,203 |
|
|
28,442 |
33,284 |
All the assets of the Company which are traded on a recognised exchange are held by Northern Trust, the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed or limited.
Currency risk
The income and capital value of the Company's investments and liabilities can be affected by exchange rate movements as some of the Company's assets and income are denominated in currencies other than sterling which is the Company's functional currency. The key areas where foreign currency risk could have an impact on the Company are:
· movements in rates that would affect the value of investments, assets and liabilities; and
· movements in rates thatwould affect the income received.
The Company had the following currency exposures, all of which are included in the Statement of Financial Position at fair value based on the exchange rates ruling at the year end.
|
|
31 December 2022 |
31 December 2021 |
|||||||||
|
|
Investments |
Cash |
Receivables |
Payables |
Total |
Investments |
Cash |
Receivables |
Payables |
Total |
|
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
- |
£'000 |
|
|
Australian Dollar |
157,673 |
- |
1,761 |
(1,761) |
157,673 |
219,406 |
- |
- |
- |
219,406 |
|
|
Danish Krone |
202,662 |
507 |
323 |
(2,399) |
201,093 |
172,599 |
- |
144 |
- |
172,743 |
|
|
Euro |
387,099 |
- |
346 |
- |
387,445 |
342,925 |
- |
167 |
- |
343,092 |
|
|
New Zealand |
|
|
|
|
|
|
|
|
|
|
|
|
Dollar |
68,459 |
- |
- |
- |
68,459 |
72,356 |
- |
2,265 |
(2,265) |
72,356 |
|
|
Swedish Krona |
51,686 |
- |
156 |
- |
51,842 |
- |
- |
- |
- |
- |
|
|
Swiss Franc |
149,073 |
- |
985 |
- |
150,058 |
218,311 |
- |
586 |
- |
218,897 |
|
|
US Dollar |
958,501 |
110 |
- |
- |
958,611 |
1,603,229 |
137 |
- |
- |
1,603,366 |
|
|
|
1,975,153 |
617 |
3,571 |
(4,160) |
1,975,181 |
2,628,826 |
137 |
3,162 |
(2,265) |
2,629,860 |
|
The Company mitigates the risk of loss due to exposure to a single currency by way of diversification of the portfolio.
Foreign currency sensitivity
At 31 December 2022, an exchange rate move of +/-5% (2021: +/-5%) against sterling which is a reasonable approximation of possible changes would have increased or decreased total net assets and total return by £98,759,000 (2021: £131,493,000).
Interest rate risk
The majority of the Company's financial assets are equity shares and other investments which neither pay interest nor have a maturity date. The Company's cash balance of £24,589,000 (2021: £32,081,000) earns interest, calculated on a tiered basis, depending on the balance held, by reference to the base rate. The level of interest paid fluctuates in line with the base rate. At 31 December 2022 the interest rate was 1.4% (2021: 0%).
From interest earned on the Company's cash balances, an increase or decrease in interest rates of 0.5% would have a positive or negative impact respectively on the profit or loss and net assets of the Company equating to £123,000 (2021: £160,000). The calculations are based on the cash balances at the year end date and are not representative of the year as a whole.
No current liabilities incur interest and all are payable within one year.
Other price risk exposure
If the investment valuation had fallen by 20% (2021: 20%) at 31 December 2022, the impact on profit or loss and net assets would have been negative £478,769,600 (2021: £667,830,000). An increase of 20% (2021: 20%) would have had an equivalent opposite effect. The calculations are based on the portfolio valuations as at the respective year end date and are not representative of the year as a whole, as well as the assumption that all other variables remained constant.
The Company held the following categories of financial instruments, all of which are included in the Statement of Financial Position at fair value.
|
|
2022 |
2021 |
|
As at 31 December |
£'000 |
£'000 |
|
Assets at fair value through profit or loss |
2,393,848 |
3,339,150 |
|
Cash and cash equivalents |
24,589 |
32,081 |
|
Investment income receivable |
182 |
247 |
|
Securities sold receivable |
1,761 |
- |
|
Other receivables |
100 |
60 |
|
Payables |
(4,323) |
(5,364) |
|
|
2,416,157 |
3,366,174 |
|
Non-financial assets held at fair value |
|
|
|
Overseas tax recoverable |
1,810 |
896 |
|
Net assets |
2,417,967 |
3,367,070 |
Liquidity risk exposure
This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. All payables are due within three months.
Liquidity risk is not significant as the majority of the Company's assets are investments in quoted securities that are easily and readily realisable. The Company does not have any borrowing facilities and as at 31 December 2022 held £24,589,000 (2021: £32,081,000) in cash.
Capital management policies and procedures
The Company's capital management objectives are to ensure that it will be able to continue as a going concern, and to provide long-term growth in revenue and capital.
The Company's capital is its equity share capital and reserves that are shown in the Statement of Financial Position at a total of £2,417,967,000 (2021: £3,367,070,000).
The Board, with the assistance of the AIFM, monitors and reviews the broad structure of the Company's capital on an ongoing basis. This includes a review of the planned level of gearing (if any), the need to repurchase or issue equity shares, and the extent to which any revenue in excess of that which is required to be distributed be retained.
16.Contingent liabilities
As at 31 December 2022 there were no contingent liabilities or capital commitments (2021: nil).
17.Related party transactions
IAS 24 'Related party disclosures' requires the disclosure of the details of material transactions between the Company and any related parties. Accordingly, the disclosures required are set out below:
Directors - The remuneration of the Directors totalling £137,500 (2021: £120,000), is set out in the Directors' Remuneration Report in the Annual Report. There were no contracts subsisting during or at the end of the year in which a Director of the Company is or was interested and which are or were significant in relation to the Company's business. There were no other material transactions during the year with the Directors of the Company. The Company has no employees.
AIFM and Investment Manager - Details of the contract including the remuneration due to the AIFM and Investment Manager are set out in the Annual Report.
Terry Smith and other founder partners and key employees of the AIFM and Investment Manager directly or indirectly and in aggregate, held 2,919,112 (2021: 3,073,866) shares in the Company amounting to 1.7% (2021: 1.7%) of the issued share capital of the Company as at 31 December 2022.
18.Events after the reporting period
Since the year end and up to 22 February 2023 (the latest practical date before publication of the Annual Report), the Company has bought back to hold in treasury 1,050,000 ordinary shares at an aggregate cost of £15.0 million.
On 6 February 2023, shareholder approval was obtained to apply to the High Court to reduce the Company's share premium by £500 million. The capital reduction, if approved by the High Court, will result in a corresponding increase in the Company's distributable reserves.
19. Financial information
This announcement does not constitute the Company's statutory accounts. The financial information is derived from the statutory accounts for the year ended 31 December 2022, which will be delivered to the Registrar of Companies after being put forward for adoption at the Company's Annual General Meeting. The auditors have reported on the accounts for the year ended 31 December 2022, 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 2022 was approved by the Board on27 February 2023. It will be made available on the Company's website at www.smithson.co.uk
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 Rules and Transparency Rules of the FCA.
20. Annual general meeting
The Annual General Meeting will be held at 1.00 p.m. on 27 April 2023 at the Max Rayne Auditorium,The Royal Society of Medicine, 1 Wimpole Street, Westminster, London W1G 0AE. Details of the meeting are available in the Notice of Meeting published on the Company's website www.smithson.co.uk.
28 February 2023
Secretary and registered office:
Apex Listed Companies Services (UK) Limited
6th Floor
125 London Wall
London
EC2Y 5AS
For further information contact:
Apex Listed Companies Services (UK) Limited
Tel: 020 3327 9720
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