Smithson Inv.Trust - Final Results
LEI: 52990070BDK2OKX5TH79
RESULTS ANNOUNCEMENT
The full Annual Report for the year ended
Financial Highlights
|
|
At |
At |
|
|
|
|
|
Net assets |
|
|
|
Net asset value ("NAV") per ordinary share ("share") |
1,648.9p |
1,255.2p |
|
Share price |
1,710.0p |
1,298.0p |
|
Share price premium to NAV1 |
3.7% |
3.4% |
|
|
|
|
For the period from |
|
|
|
|
Company's listing on |
|
|
For the year ended |
For the year ended |
|
|
|
|
|
|
|
|
|
% change2 |
% change2 |
|
NAV total return per share1 |
+31.4% |
+33.2% |
+64.9% |
|
Share price total return1 |
+31.7% |
+29.8% |
+71.0% |
|
Benchmark total return |
+12.2% |
+21.9% |
+25.4% |
|
Ongoing charges ratio1 |
1.0% |
1.0% |
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.
1 These are Alternative Performance Measures ("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.
2 Total returns are stated in GBP sterling.
Chairman's Statement
Introduction
I am pleased to present the Annual Report of
The Company was floated on the premium list of the
In common with all funds managed by
Performance
In the year to
The Company holds 31 investments. During the year, 3 new investments were made with 1 outright divestment, although there were some changes in the weightings of the investment holdings which resulted in some partial divestments. This accords with the Company's stated investment approach of being a long term-investor in its chosen shares. One of the acquisitions, Fortinet, and the outright divestment of Check Point were made in the second half of the year.
In our Interim Report, we noted that the Company's dividend income was lower than its operating expenditure resulting in a revenue loss, which was netted against the capital gains reported in the total returns. This has continued in the second half such that there is a deficit on the revenue reserve for the year. The revenue loss arose because 100% of the Company's management fees and other indirect operating expenses are charged to revenue, rather than a percentage being allocated to the capital reserve. This accords with 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. There is no current intention to change this policy, even if losses continue to be reported in revenue reserves.
Share issuance and premium to NAV
With the exception of a few days when financial markets were in turmoil from the initial impact of the COVID-19 pandemic, the Company has continued to trade at a premium to NAV and closed the year at a 3.7% premium with an average premium over the year of 1.9%. The Board monitors the level of premium to NAV at which the Company's shares trade and has a regular share issuance programme to manage the premium.
During the year, and in response to continuing strong demand for the Company's shares (as evidenced by the share price premium to NAV), the Company raised
As explained in greater detail in the Investment Manager's Review, the new share proceeds have been predominantly invested in the same securities as were held at the start of the year.
Since the year end and up to
In view of the continuing strong demand for the Company's shares, shareholders will be asked, at the forthcoming Annual General Meeting, to grant the Company authorities to issue up to a further 20% of the issued share capital as at the latest practicable date before publication of the Annual Report. This will enable the Directors to continue to create further shareholder value and help manage the level of any share price premium. Any such issues will be on a non pre-emptive basis.
Results and dividends
The Company's total return after tax for the year was
This position will be kept under review. 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, but the Board intends to declare such annual dividends as are necessary to maintain the Company's
Operations
As we reported at the interim stage, as part of the Board's response to the potential operational risks presented by the COVID-19 pandemic, our key outsourced service providers were asked to provide reports on their actions and responses, all of which were entirely satisfactory. The situation since the first lockdown has continued to be monitored and I am pleased to report that there has been no noticeable change in any of the services provided to the Company during the year or since the year end, a testament to our suppliers' operational resilience.
Environmental, social and governance ("ESG") matters
In response to the increased interest in reporting on ESG matters, the Investment Manager's Review includes an overview of how the Investment Manager considers ESG and other sustainability issues when implementing its investment strategy. It also provides an overview of how the Company has discharged its governance duties in respect of investee companies. Commentary on the Company's engagement with investee companies as well as its voting at investee company shareholder meetings is set out in the Investment Manager's Review and on page 27.
Furthermore, the
Board performance evaluation
As the Company approached its second anniversary, the Board decided that it was an appropriate time to commission an independent evaluation of the Board's performance, effectiveness, processes and governance compared to best practice as well as a review of the Directors' remuneration. Periodic use of external advisers to undertake these exercises is one of the recommendations of the
Annual General Meeting ("AGM")
As shareholders will recall, the first lockdown came into force after we had convened the 2020 AGM but before the meeting had taken place and as a result we wrote to shareholders asking them not to attend the meeting. The Board had hoped that an additional ad-hoc meeting with shareholders could be held later in the year but this was again not possible due to the ongoing COVID-19 restrictions on gatherings and movement of people. At the date of this report, there continues to be uncertainty as to what social distancing rules might apply at the date of the Company's AGM on
Although we are restricting attendance at the AGM this year, a presentation by
Shareholder engagement
My fellow Directors and I remain keen to meet with shareholders once it becomes safe and practical to do so. In the meantime, I would like to remind shareholders that they are welcome, at any time, to submit any questions they may have either to the Board at smithsonchairman@fundsmith.co.uk or to the Investment Manager at smithson@fundsmith.co.uk. In addition, we would encourage shareholders to visit our website at www.smithson.co.uk where more information is available and which is regularly updated.
Outlook
Despite the ongoing impact of the COVID-19 pandemic on the global economy and continuing efforts to contain it, the Board is very pleased with the Company's performance to date and remains positive on the outlook for global small and mid-cap equities in the medium to long term.
The Board intends to continue to issue new shares so as to generate additional value for shareholders net of all issue costs and to enable the Investment Manager to continue to seek attractive investment opportunities for any further capital raised. The increase in scale of the Company since the IPO has allowed the Board to negotiate some lower percentage charges for services provided and these cost reductions will benefit the Company in the next financial year and beyond.
I would also like to thank all of our advisers and service providers who have supported the Company admirably during the last year. I am pleased to report that, despite the difficulties presented by the COVID-19 pandemic, there was no noticeable change in any of the services provided to the Company, and the Board has confidence that our suppliers' operational resilience will ensure this continues to be the case until normal operations are restored.
Finally, I wish all of our shareholders good health and prosperity as we gradually move beyond the current phase of the pandemic.
Chairman
Business Review
This 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, which is to provide shareholders with long-term growth in value through exposure to a diversified portfolio of shares issued by listed or traded companies.
The Company is an alternative investment fund ("AIF") under the
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.
Investment Objective and Policy
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 investment) of between
(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.
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.
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.
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 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. Please refer to the APM section and Glossary in the Annual Report 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
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
Premium/discount of share price to net asset value per share
The Board undertakes a regular review of the level of premium/discount. During the year, with the exception of a few days when markets were in turmoil from the initial impact of the COVID-19 pandemic, the Company's shares have consistently traded at a premium to net asset value. The Board seeks to generate value for shareholders through the issuance of shares at a premium to net asset value. To this end, during the year to
As at
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
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 1.0% (2019: 1.0%). The Board seeks to manage and where possible to improve the ongoing charges ratio and to this end the Management Engagement Committee, through its review of service provider fee rates, has secured cost savings which will benefit the ongoing charges ratio in the 2021 financial year and beyond.
Investment Portfolio
Investments held as at
|
Security |
Country of |
Fair value |
% |
|
Fevertree Drinks |
|
129,839 |
5.7 |
|
Sabre |
|
115,486 |
5.1 |
|
Rightmove |
|
109,198 |
4.8 |
|
IPG Photonics |
|
98,694 |
4.3 |
|
Domino's Pizza Enterprises |
|
92,017 |
4.0 |
|
ANSYS |
|
91,436 |
4.0 |
|
Equifax |
|
91,400 |
4.0 |
|
Cognex |
|
90,753 |
4.0 |
|
Verisk Analytics |
|
88,865 |
3.9 |
|
Domino's Pizza Group |
|
82,316 |
3.6 |
|
Top 10 Investments |
|
990,004 |
43.4 |
|
Recordati |
|
81,745 |
3.6 |
|
Temenos |
|
81,744 |
3.6 |
|
Masimo |
|
81,137 |
3.6 |
|
Rational |
|
80,762 |
3.5 |
|
Qualys |
|
80,218 |
3.5 |
|
Fortinet |
|
77,865 |
3.4 |
|
Verisign |
|
75,915 |
3.3 |
|
Simcorp |
|
72,703 |
3.2 |
|
Halma |
|
69,838 |
3.1 |
|
Paycom Software |
|
68,507 |
3.0 |
|
Top 20 Investments |
|
1,760,438 |
77.2 |
|
MSCI |
|
65,330 |
2.9 |
|
Technology One |
|
63,919 |
2.8 |
|
Geberit |
|
61,292 |
2.7 |
|
AO Smith |
|
57,512 |
2.5 |
|
Nemetschek |
|
50,615 |
2.2 |
|
Diploma |
|
44,498 |
2.0 |
|
Spirax-Sarco Engineering |
|
43,076 |
1.9 |
|
Fisher & Paykel Healthcare |
|
42,145 |
1.8 |
|
Ambu |
|
41,701 |
1.8 |
|
Abcam |
|
25,551 |
1.2 |
|
Chr. Hansen Holding |
|
23,861 |
1.0 |
|
Total Investments |
|
2,279,938 |
100.0 |
Investment Manager's Review
Dear Fellow Shareholder,
The performance of Smithson, along with comparators, is laid out below. In 2020 the Net Asset Value per share (NAV) of the Company increased by 31.4% and the share price increased by 31.7%. Over the same period, the MSCI World Small and Mid Cap Index ('Index'), our reference index, increased by 12.2%, leading to an outperformance for the fund share price of 19.5%. To our minds this is a very large outperformance relative to the market, clearly driven by highly unusual events and so it is not something we would expect to occur very often. We also provide below the performance of
|
|
Total Return |
Launch to |
|
|
Cumulative |
Annualised |
||
|
Smithson NAV1 |
+31.4 |
+64.9 |
+25.5 |
|
Smithson Share Price |
+31.7 |
+71.0 |
+27.6 |
|
|
+12.2 |
+25.4 |
+10.8 |
|
|
+4.6 |
+10.9 |
+4.8 |
|
Cash4 |
+0.3 |
+1.3 |
+0.6 |
1 Source: Bloomberg, starting NAV 1000.
2 MSCI World SMID Index, £ Net source: www.msci.com.
3 Bloomberg/Barclays Bond Indices
4 Month £ LIBOR Interest Rate source: Bloomberg.
Smithson shares traded at an average premium of 1.9% during the period and briefly traded at a discount for the first time since inception, reaching a maximum discount of 19.6% on the 18 March. During the year, a total of 26.9 million new shares in the Company were issued, for proceeds of
The Ongoing Charge Figure was 1.0% (including the annual Management Fee of 0.9%). All dealing, voluntary trading costs and taxes amounted to 0.03% (3 basis points) of NAV in the period so that the Total Cost of Investment (TCI) incurred by shareholders was 1.03%.
Despite the market volatility caused by COVID-19 during the year, we continued with the strategy of only buying good companies, not overpaying for those companies, and then trying our best to do nothing. In fact, the tumultuous events of the year created opportunities to add to existing positions as well as buy new ones, which means we were able to do even more of the first two points, although clearly to the detriment of the third. We discuss later how well we did against each of these aspects in 2020.
It is also worth noting the great benefit that the investment trust structure brought to our activity during the market volatility, and the subsequent performance of the fund. The closed-end nature of
The initial decline of the market induced by the pandemic in late
As the market turmoil continued into March, the share prices of those companies likely to be significantly negatively impacted by the crisis, such as travel and leisure, accelerated their decline, while those that stood to benefit from the pandemic started to increase in price. We therefore found ourselves with increasingly large positions in several healthcare names including Ambu, Masimo and Fisher & Paykel Healthcare, with valuations far less attractive after their sharp price appreciation. It was at this time, around the middle of March, that we started trimming our positions in healthcare, which released capital to allow us to acquire more shares in our existing travel, leisure and industrial names, as well as to start three new positions.
These included a position in Rational, a producer of automated professional ovens for restaurants and mass catering venues. Based in
Due to the impact of social distancing measures on the restaurant and catering trade, the shares of the company declined 44% between the start of the year and when we began buying. However, given its competitive advantage of having the best technology and most focused research and development capabilities, with the resulting high returns on capital and strong cash flow, as well as plenty of cash available on its balance sheet, we believe the company will be able to exit the crisis in a good position. Indeed, the share price eventually ended the year above the prior peak achieved just before the pandemic.
We also bought two companies within the cybersecurity industry. Qualys was founded in 1999 and sells to more than 15,000 customers in over 130 countries, from small companies up to multinational enterprises such as Microsoft. Qualys is one of a small number of companies to provide identification, security and vulnerability management across remote devices attached to a corporate network. This was already gaining in importance before the pandemic but with the combination of the proliferation of networked devices, the growing adoption of the cloud and the seemingly inexorable increase in sophistication of cybersecurity attacks, demand for its security services are likely to continue to expand at a healthy rate. The company grew its free cash flow by 30% in 2019, and will stand to benefit strongly from any permanent shift towards remote working brought on by the pandemic. With the subscription nature of its business promoting strong cash generation, we were able to invest at a free cash flow yield which is better than the portfolio average despite the attractive growth prospects.
Although within the same subsector as Qualys, Fortinet focuses on slightly different aspects of cybersecurity. Founded in 2000, it sells security appliances such as firewalls to corporate and home users, as well as security software. Fortinet is actually in exactly the same business as another of our holdings, Check Point Software Technologies. We were originally attracted to Check Point because of the size of its established client base (like many types of software, once security software and systems are in place within an organisation it becomes very expensive and disruptive to change) and its industry‑leading operating margin of almost 50%. However, we had become increasingly concerned that the growth of the company, previously a very acceptable high single-digit rate, had recently slowed to around 4%. This is somewhat below the rate we expect from our companies. Not even a higher sales and marketing expense, leading to a depletion of that aforementioned margin, was having a positive effect on growth. At the same time, Fortinet was experiencing quite the opposite dynamic, with annual revenue growth of over 20% during the last five years and a steadily improving operating margin. It was becoming increasingly clear that, likely due to better value products, Fortinet (among others) was consistently taking market share from Check Point, a scenario that, given enough time, wasn't going to end well for Check Point. We therefore decided that we would switch allegiances and Check Point was sold to fund the position in Fortinet.
The result of these trading actions 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, while the average is 1960, skewed by some particularly early starters.
Sector
|
Information Technology |
44% |
|
Industrials |
20% |
|
Healthcare |
12% |
|
Consumer Discretionary |
7% |
|
Communication Staples |
6% |
|
Consumer Services |
5% |
|
Financials |
3% |
|
Materials |
1% |
|
Cash |
2% |
Country of Listing
|
US |
46% |
|
|
22% |
|
|
7% |
|
|
6% |
|
|
6% |
|
|
6% |
|
|
3% |
|
|
2% |
|
Cash |
2% |
Over the course of the year the weighting in Information Technology increased by 5% on account of adding the new cybersecurity companies as well as increasing the position size of several software companies that had underperformed during the second half of the year. The reason for the apparently large allocation to Information Technology remains the same as outlined in previous reports, simply that this broad MSCI-designated sector actually encompasses a large number of diverse businesses and end markets. We certainly don't think of ourselves as running a 'tech' fund.
The Industrials weight is similar to last year, the net result of adding Rational to the portfolio while other industrial positions have become smaller in size as they lagged the performance of the overall portfolio. The Healthcare weight has declined from over 16% as we reduced position sizes at the peak of the first COVID-19 wave, as described earlier.
The US remains the largest country weighting by listing. However, throughout the year the portfolio also had a sizeable weight of 22% in the
Source of Revenue
|
|
39% |
|
|
35% |
|
|
19% |
|
Eurasia, |
4% |
|
|
3% |
But what we believe matters most in terms of regional exposure is where the revenue our companies generate actually comes from. This appears much more evenly distributed, with
The top five contributors to fund performance were:
|
|
Country |
Contribution % |
|
Ambu |
|
3.4 |
|
Masimo |
|
2.9 |
|
Fevertree Drinks |
|
2.6 |
|
Domino's Pizza Enterprises |
|
2.6 |
|
IPG Photonics |
|
2.0 |
The first two names are both healthcare companies and this will come as no surprise given the sudden surge in demand for healthcare products during the pandemic. Fevertree Drinks is perhaps more surprising, given the sharp share price decline at the start of the crisis due to the expectation that the closure of bars and restaurants would lead to a sudden reduction in revenue, as these venues account for around 50% of sales. However, we increased the position meaningfully in March, which proved to be fortunate, as revenue didn't turn out to be nearly as bad as commentators were expecting, given supermarket sales of
Domino's Pizza Enterprises, based in
The five worst detractors to performance were:
|
|
Country |
Contribution % |
|
Sabre |
|
-1.7 |
|
Temenos |
|
-0.3 |
|
Rightmove |
|
-0.1 |
|
Domino's Pizza Group |
|
0.1 |
|
Diploma |
|
0.1 |
Sabre was by far the largest detractor in the first half and was the only company that gave us any real concern during the COVID-19 crisis. This is because the company provides software which connects travel suppliers, such as airlines and hotels, to travel buyers such as travel agents and travel websites. Its revenue is directly linked to the number of passengers travelling, so as these fell 90% in the worst hit weeks, so did its revenue. Combined with this, the company has a level of debt which, although reasonable under normal circumstances, was subject to covenants that were unlikely to be met during the crisis. However, management were able to rapidly cut costs, temporarily suspend the debt covenants and raise additional debt to give them enough cash to meet liabilities for almost two years assuming a 90% reduction in revenue. Our necessary decision therefore progressed from having to calculate the probability of survival during the first three months of the crisis, something we were not comfortable with, to deciding whether the crisis would last more than two years, an outcome with a probability low enough for us to feel more confident in maintaining our holding. We reached this decision on 23 March and started buying more shares in the company that day, which has turned out to be - so far - fortuitous timing, with the shares up 263% from that point to the end of December. However, with infections ongoing, we are clearly not out of the woods yet.
Temenos sells software to banks to help run core banking operations more efficiently and to enable them to offer digital banking products and services. More recently it has become a favourite of start-up online-only banks. The company is likely to see around an 8% decline in revenue for 2020 - which is not a disaster - as banks have focused internally on their operations and loan losses during the crisis rather than upgrading software. Further, those that have, chose to take the software on a subscription basis (or software as a service), rather than a perpetual licence, which also held back revenue in the near term, but is ultimately a benefit to Temenos in the long term. We expect things to get back on track once the economy returns to growth.
Rightmove shares began to suffer when the
Domino's Pizza Group owns the
Diploma is a
Back to the fund strategy, and to demonstrate that we only buy good businesses, we include a table below which shows the average operating metrics of the companies in the portfolio compared to those in the reference index.
|
LTM Figures |
|
MSCI SMID |
|
ROCE |
31%# |
6% |
|
Gross Margin |
65% |
34% |
|
Operating Profit Margin |
28% |
2% |
|
Cash Conversion |
126% |
80% |
|
Interest Cover |
31x |
5x |
Data for the MSCI World SMID Cap Index is shown ex-financials, with weightings as at 31.12.2020.
Data for MSCI World SMID Cap Index is on a weighted average basis, using last available reported financial year figures as at 31.12.20.
Data for Smithson is on a weighted average basis, ex-cash, using last available reported financial year figures as at 31.12.20.
Interest cover (EBIT ÷ net interest) data for Smithson and MSCI SMID is done on a median average basis.
# LTM ROCE for Smithson excludes Rightmove, which had a return of >700%. Including Rightmove, the weighted average ROCE would be 66%.
As you can see, the return on capital employed, our best shorthand measure of quality, is significantly higher than the reference index at 31% vs 6%. It is a similar story as you progress down the table, with a gross margin twice as high and significantly better operating margin. I would caution that the 2% operating margin for the benchmark looks a little low to us, and might prove to be higher once all 2020 data is available, but nonetheless it will be far inferior to that of the companies in our portfolio. Our companies also have much better free cash flow conversion, the amount of cash relative to profits that the companies produce. You may well ask how it is possible for companies to produce more than 100% of their profits in cash. This is because several of our companies are able to get their customers to pay up before suppliers have to be paid, creating a pool of cash on the balance sheet that doesn't technically belong to the company, but it is able to use whilst it sits there. As the company grows, so too does this cash balance, because even more customers are now paying before suppliers are paid. It is this combined dynamic (cash flow timing plus growth) that allows the company to produce more cash than profits. Free cash flow conversion is then boosted further in our portfolio by several companies, mostly in the technology industry, paying their employees with stock options rather than cash. This is not actually something we are particularly fond of because it can lead to dilution of our holding through new equity issuance, while the company employees in question stand to make outsized gains depending on future share price performance. It therefore generally proves to be an expensive exercise from a shareholder perspective.
We provide net interest cover to demonstrate the strength of the balance sheets of the companies because a leverage measure would prove meaningless, given the companies on average have a surplus of cash and no debt. We hope this table helps to demonstrate how much higher quality the companies owned in the portfolio are compared to the Index.
The second part of our strategy is to buy these great companies at reasonable valuations. Focusing on our preferred valuation metric of free cash flow yield (the cash flow generated by the companies after paying for everything except dividends and growth capital, divided by their market value), we can see that the portfolio trades on a yield of 2.9% using the last reported company results, compared to a yield of 3.2% at this time last year. This means the companies in the portfolio became more highly rated over the course of the year, which contributed to the performance of the fund. Of course, this is not the best source of share price performance, as the re-rating of companies can only ever be limited and is always reversible. More sustainable is the performance which comes from the underlying growth in free cash flow generated by the companies, the average of which amounted to 10% (with a median of 10.7%) in 2020, a figure we are more than satisfied with given what a difficult operating environment it turned out to be for so many.
The sharp-eyed amongst you may notice that a 10% re-rating of the companies plus a 10% growth in free cash flow does not tally with the 31.4% performance of the fund. While we would ordinarily expect there to be a close correlation between these figures, 2020 was no ordinary year, and our purchases, which took advantage of the short-term extreme moves in share prices, were a significant additional factor to performance.
In terms of doing nothing, discretionary portfolio turnover, excluding the investment of proceeds from new shares issued, was 21.6% for the year. This is clearly not much more than the turnover of 20% reported at the half-year, and indicates the concentration of trading activity that occurred during the market lows of March and April, with very little occurring subsequently. While this feels like a frenzy of activity to us, certainly in comparison to the 6.1% turnover of 2019, it is perhaps worth remembering that the average for the asset management industry is above 80%.
There were a few actions that we took during the year with regards to Environmental, Social and Governance (ESG) considerations. In general, such issues are taken into account during our initial research process, and as such, our focus on sustainable growth and returns on capital employed mean that the fund will never contain any companies that do significant harm to the environment or to society.
However, the companies we own are not perfect, especially in terms of corporate governance. We engaged with several companies over remuneration policies, as well as voting against 36% of compensation proposals, and Board composition in 2020. To provide a couple of examples, early in the year we held a number of discussions with Board members of Domino's Pizza Group regarding the succession of both the Chairman and the executive management team, and are pleased that this was resolved to our satisfaction by the late spring. Having spoken at length with the new Chairman, Chief Executive Officer and Chief Financial Officer we are optimistic that they will be able to successfully address certain issues within the business, including franchisee disagreements and the long-term growth strategy.
In May, we backed a shareholder proposal for a report to be prepared on management team diversity at IPG Photonics. We shared concerns that there was a lack of diversity represented on both the Executive and Supervisory Boards of the company and, although the vote did not pass at the Annual General Meeting, it was close to doing so, and we suspect it therefore prompted the appointment of the two female directors to the Supervisory Board in January 2021. Although not entirely satisfactory, it was a step in the right direction.
There has been intensifying discussion lately (I say intensifying, because the discussion itself has now been ongoing for some years) regarding the relative performance and valuation between 'growth' companies and 'value' companies and the potential for the market to 'rotate' from growth into value investments. For the purpose of this discussion, I refer to value investments as those companies trading on a low price to earnings or price to book value multiple (although not necessarily 'cheap' because of it) but I won't lament here the potential flaws in value investing as
The first of these is known as the McNamara fallacy. This is named after
Today, this problem of an over-reliance on quantifiable metrics to solve complex problems can be identified in many areas of decision making, from the selection of university students to even choosing where to live. But the reason I bring it to your attention here, is because an almost exclusive focus on the valuation of companies, to the detriment of difficult to quantify factors such as brand value, distribution reach, R&D innovation, intellectual property, market dominance or network effects, will cause you to miss out on many wonderful investments over the course of your lifetime. Further, the irony is that the quantifiable company valuation metrics that are so easy to calculate and compare could be completely misleading, based as they often are on unknowable earnings forecasts, whereas it is with much greater confidence that one can determine a company as being of a high quality once you know it well (or as the philosopher
The second aspect of the debate that I wanted to bring to your attention is that of time. The length of holding period has a much greater impact on the expected risk and return of an investment than most people realise. Let me give you an example. If you were to hold an index fund tracking the S&P 500 for 1 day, you'd only have slightly more than a 50/50 chance of making money because of the daily volatility. On the other hand, if you were to hold it for 15 years, you'd be extremely likely to make money. This is based on the fact that, since the inception of the S&P 500 in 1957, there has been no 15-year period when you would have lost money.
Using the S&P Composite Index we can extend the period back further to encompass the Great Depression. Even then, we find that there were only 3% of days* when you could have bought the Composite and it traded at a lower price 15 years later, with none since 1931. So, by changing only one element, the holding period, the probability of making money in the same investment has improved from around 50% to 97%.
Of course, the US-focused S&P Composite Index has done better over time than many other regional indices. But that simply serves to highlight the second important part of the argument: this only works if you invest in assets that tend to increase in value over time. This again promotes the benefit of buying high-quality companies which sustain strong margins and returns and grow free cash flow over the long term, even at a seemingly high price, compared with low-quality 'value' companies which don't. It is ultimately why quality companies suit a buy and hold strategy, which by the way is a very good strategy, if you observe how some of the wealthiest families and individuals in the world have made their money.
In terms of the future progress of the market, it is, as always, impossible for us or anyone else to know. We can at least identify two factors though which are likely to have an effect on equity prices over the coming months (and there will be many others that no one can yet see). First is the effect of policy shifts from central banks and governments. As we have commented several times previously, market prices have been significantly impacted by the ultra-loose monetary policy that has been experienced over the last few years, and especially in 2020. It is probably no coincidence that markets started to recover on the same day that the Fed announced it was "committed to using its full range of tools" to support the market and economy, and so any change in this policy will be a primary factor in asset price movements. It also appears that at time of writing, governments continue to expand fiscal stimulus measures, a good example being that of the US government stimulus package currently being debated. This could also have an effect on the stock market, although of a second order nature, if the stimulus leads to faster economic recovery than is currently expected.
Second, and linked to the last point, is the progression of COVID-19 vaccination programmes across the globe. This will be another second order effect if it allows for the relaxation of population movement restrictions and recovery in economic activity. However, any signs that vaccination is going slower than people hoped, which is quite possible given the logistical and social challenges of vaccination on such a scale, will have an immediate effect on market sentiment.
*Since the inception of the daily S&P Composite in 1927 there have been 733 days out of a total 23,353 days where the S&P Composite was lower 15 years later.
As an aside, it is interesting to note, especially for those who fear that this COVID-19 vaccine development and approval may have taken short cuts, and suggest it will therefore not be fully safe or efficacious, that the 11 months it took to develop the vaccines is not completely unheard of. In fact, vaccines for three pandemics during the last 100 years (Asian Flu, Hong Kong Flu and Swine Flu) were developed within 6 months of the outbreak. We can therefore conclude that a short development time for a safe COVID-19 vaccine is very fortunate, but not impossible, and therefore we may well have a credible solution to the pandemic at hand.
Finally, we wanted to end with a thought on investing through these uncertain events and volatile markets: we suggest that your ambition as an investor at all times should not be profit maximisation but rather regret minimisation. Bear with us.
There are three simple reasons for this:
1) Profit maximisation (by timing the market perfectly) is impossible;
2) Regret minimisation is possible and is also a very profitable long term strategy; and
3) Getting market timing wrong can bring both a substantial loss in profit and enormous regret.
So how do you put a regret minimisation strategy into practice? One way is to automatically buy the same amount of your investment every week or month, whether it looks cheap or expensive, uncertain or rosy. The automated nature of the strategy means you can never feel regret, because the timing is never in your hands. It also means that your consistent participation in the market will allow you to benefit from the compounding nature of equity returns without the self-inflicted damage of poor timing (the worst of which is selling and never getting back in). And finally, you will be happier, because you will achieve good returns over time and never feel bad about making a wrong decision. After all, if we don't feel content with wealth and investments, what's the point in them?
This has not been an easy year for anyone, but we hope that you and your families are safe and well. Despite the challenges, Smithson has had a successful year and we thank you for your continued support.
Investment Manager
15 March 2021
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.
During the year, the COVID-19 pandemic emerged as a new risk to the Company, which was evaluated by the Board as soon as it was identified. The market and outsourcing risks associated with the COVID-19 pandemic, and the ongoing economic impact of measures introduced to combat its spread were discussed and continue to be monitored by the Board. The Investment Manager and other key service providers gave updates throughout the year on operational resilience and the Board was satisfied that they have the ability to operate effectively in a remote working environment.
The impact of general market risks such as the US election result and the
· 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 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) affecting the investment market negatively impact the price at which the Company is able to buy or dispose of its assets, this may have a material adverse effect on the Company's business and results of operations.
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 returns to investors.
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.
In respect of Brexit, as the portfolio is invested in global equities, the effect of the
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. 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. 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 Board continues to monitor the Company's key service providers to ensure there is no negative impact on the Company from the ongoing COVID-19 pandemic control measures.
The procedures of the AIFM, depositary and custodian are reviewed by their external auditors and such reports made available to clients. These reports are also reviewed by the Management Engagement Committee.
4. Inadequate investment analysis risk
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. Such risks include cyber risk management by investee companies.
Mitigation
The Investment Manager employs qualified and experienced employees who perform the investment analysis and obtain information from quality sources.
5. Key individuals risk
The Investment Manager relies on key individuals to identify and select investment opportunities and to manage the day-to-day affairs of the Company. There can be no assurance as to the continued service of these key individuals at the Investment Manager, and the departure of any of these from the Investment Manager without adequate replacement may have a material adverse effect on the Company's business prospects and results of operations.
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, 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.
6. Regulatory risks
A failure to maintain HMRC approval as an investment trust could result in the Company not being able to benefit from the current exemption for investment trusts from
Mitigation
The Investment Manager and the company secretary monitor adherence to section 1158 of the Corporation Tax Act 2010 and report to the Board thereon.
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 issues arising from the COVID-19 pandemic, and its present and expected financial position. The Company is a closed end fund which invests in listed or traded global securities which are inherently liquid. It does not intend to borrow (except in short term circumstances to manage a discount) nor will it use derivatives in any hedging operation. It receives dividend income from its investment portfolio with which it settles its operating expenses. Any shortfall in income available to settle expenses could be met by the Company's cash balances or by realising investments; the Board receives regular reports from the Investment Manager to confirm the average time to liquidate any investment position. The Board therefore has substantial options to manage the Company's ongoing solvency.
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.
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 performance of the Company will continue to be satisfactory such that the shareholders will want the Company to continue in existence. (The Board will consider putting a continuation vote to shareholders if in any year after 2022 the Company's share price trades at an average discount of 10% or more to net asset value); 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
During the period under review, the Board discharged its duty per section 172 of the Companies Act 2006, to promote the success of the Company for the benefit of its members as a whole and having regard to the interests of stakeholders. 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 identified in the map below. This schedule is available for inspection at the registered office of the Company and on the Company's website at www.smithson.co.uk.
Company values
The Board has adopted a policy of fostering high standards of corporate governance in all its activities. This principle is the cornerstone of creating and preserving shareholder value. It is the Company's policy to conduct all of its business in an honest and ethical manner. The Board seeks always to act and communicate in an open and transparent manner.
Company sustainability and stakeholders
As part of its work to evaluate its principal risks, the Board identified its key stakeholders which can be summarised as follows: investors, Investment Manager, other key service providers and investee companies.
The Board is cognisant of the need to foster the Company's business relationships with investors, suppliers and other key stakeholders through its stakeholder management activities as described below.
Stakeholder Management
Investors
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. Since IPO the Company has raised a further £925 million net proceeds from new ordinary share issues including £398 million in the year to 31 December 2020 and a further £150.6 million since the year end. The net premium above net asset value raised from the ordinary share issues, which is effectively incremental value to the Company and shareholders, was £16.5 million. During the year, the Company's share price has continued to grow, from £12.98 to £17.10 at 31 December 2020, a share price total return of 31.7%. At the same time the Company's shares have continued to attract strong investor demand and the share price has predominantly (barring a few days when market values were adversely impacted by the COVID-19 pandemic) traded at a premium to net asset value with an average premium of 1.9% and a premium at the period end of 3.7%. As a result, under the Company's share issuance programme during the year, the approximate net premium to NAV on share issues was £5.4 million (£16.5 million since IPO). The Board is seeking to renew its authority to issue shares at the Company's AGM (for further details, please see the Annual Report) 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.
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 it would normally encourage shareholders to attend the Annual General Meeting. The Chair of the Board's committees would also normally attend the AGM, to engage with shareholders on significant matters related to their areas of responsibility. However due to the restrictions on public gatherings at the time of the Company's AGM in May 2020, shareholders were not able to attend. Instead, the Board wrote to shareholders directly in March, and again through the Chairman's Statement in the interim report, inviting questions from shareholders directly to the Chairman and Investment Manager. Presentations and press articles with the investment manager were made available through the Company's website.
Unfortunately as Government restrictions due to the COVID-19 pandemic remain in force, shareholders will again not be able to attend in person the forthcoming 2021 AGM. In order for shareholders to participate in future general meetings should physical restrictions be in place, the Board will propose at the forthcoming AGM, a resolution to amend the Company's Articles of Association to allow shareholders to participate and engage with the Board and Investment Manager through virtual technology.
The Investment Manager's presentation will be recorded separately and will be available through the Company's website (www.smithson.co.uk). A dedicated email address (SmithsonAGM@fundsmith.co.uk) is available for shareholders to submit any questions they may have been planning to raise at the AGM. To the extent questions are not covered in
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 anytime by writing to the company secretary. Alternatively, the Chairman can be emailed at the following address: smithsonchairman@fundsmith.co.uk.
Shareholder feedback is discussed extensively in Board meetings with the broker and Investment Manager and the Board is pleased that the feedback received remained positive throughout the period. The Company's shareholder engagement strategy and details of shareholder communications can be found in the Annual Report.
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 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 at which the Board and Investment Manager discussed in detail each constituent of the Company's portfolio of investments along with a review of the portfolio construction and risk mitigation and its economic exposure and duration. The Board and Investment Manager along with the broker also discussed at the strategy session global equity markets and the macro-economic backdrop in the context of the Company. 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 has paid costs of £5.1 million in respect of the Company's IPO and the Placing Programme prospectus issued during the year. This means that shareholder's investment was not discounted by the cost of the IPO and that the Company only gains from its ordinary share issues during the year, 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.
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 work of the Management Engagement Committee in the Annual Report) and maintains regular contact through direct reports at Board meetings or through the company secretary and by hosting annual service provider presentations where the Board meets directly with service providers to ensure there is open dialogue and a good relationship management at the board level. This year the Board met directly with the administrator, depositary and registrar. Additionally, in view of the operational challenges and restrictions caused by the COVID-19 pandemic, the Board received (and 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 there was no significant impact to the Company and 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 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, 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 approaches Environmental, Social and Governance ('ESG') matters in the widest possible sense, taking into account all of the factors that may impact a business's potential to generate sustainably high returns for the long term. Assessing ESG factors is an integral part of the Investment Manager's investment approach as it is key to identifying whether an investment will generate value in the longer term. The Investment Manager's Review gives examples of the Investment Manager's engagement with investee companies and consideration of ESG matters, which are discussed with the Board at its quarterly meetings.
The Investment Manager is a signatory of the United Nations Principles for Responsible Investment. In the absence of explicit instructions from the Board, the Investment Manager has the right to exercise discretion in the use of the Company's voting rights. All shareholdings are voted at all listed company meetings worldwide where practicable in accordance with the Investment Manager's own corporate governance policies.
Conclusion
The Board is mindful of the directors' duties as described by section 172 of the Companies Act 2006 in considering the interests of stakeholders when deliberating all important decisions.
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, but does not expect significant income from the shares in which it invests.
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
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, nor does it have responsibility for any other sources of emissions under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013 or the Companies (Directors' Report) and Limited Liability Partnership (Energy and Carbon Report) Regulations 2018. The Investment Manager evaluates environmental matters concerning investee companies as summarised in the Investment Manager's Review.
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 31 December 2020 the Company had three Directors, of whom two are male and one is female. The Board's policy on diversity is contained in the Corporate Governance Report of the Annual Report.
Strategic Report
The Strategic Report set out in the Annual Report was approved by the Board of Directors on the 15 March 2021.
On behalf of the Board
Chairman
15 March 2021
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 (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 2020; 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
15 March 2021
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 2020 and of its profit for the period then ended; · have been properly prepared in accordance international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRSs as issued by the · 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 and international accounting standards in conformity with the requirements of the Companies Act 2006 and IFRS as issued by the IASB.
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 listed 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 period was £23.3m, which was determined as 1% of net assets as at 31 December 2020. |
|
Scoping |
Audit work to respond to the risks of material misstatement was performed directly by the audit engagement team. |
|
Significant changes in our approach |
There were no significant changes in our approach. We have assessed that the level of risk of valuation and ownership of listed investments remains consistent with the prior 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:
· Obtaining an understanding of relevant controls in place in preparing the revenue projections;
· Assessing liquidity and the ability of the Managers to trade in the investment portfolio (within the normal spreads) in order to cover operational expenditure as it falls due;
· Assessing management's revenue account projections for the subsequent 12 month period (from March 2021) for reasonableness;
· Assessing any other market altering factors such as Covid-19 by looking at the operational impact and business continuity plans; and
· Assessing the going concern disclosures included within the financial statements
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 listed investments
|
Key audit matter description |
As an investment entity, the company holds investments of £2,280m as at 31 December 2020 (2019: £1,407m) which has increased by 38% from the prior year-end. These represent the most quantitatively significant financial statement line on the statement of financial position. There is a risk that listed 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 also the fair value hierarchy for investments disclosures. Given the nature and size of the balance and its importance to the entity, we have considered that there is a potential risk of fraud in this area. Investments are valued by a fund administrator on behalf of the company. 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 investment risk is included within the Audit Committee report 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 investments key audit matter: · We obtained an understanding over the controls at the funds administrator relating to valuation and ownership of investments by reviewing an assurance report over the fund administrator's controls, and obtained reconfirmation from the fund administrator that these controls were in effect during the year. We assessed the professional competence and independence of the auditor who provided the assurance report; · We agreed 100% of the last traded prices of quoted investments on the schedule of investments at year-end to closing bid prices published by an independent pricing source and investigated total portfolio difference that is above the reporting threshold; and · We confirmed the ownership of 100% of investments at the year-end date by obtaining independent third party confirmations directly from the custodian and investigated any differences in the holdings. 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 identified investments that were not actively traded and considered indicators of impairment; · We monitored the post year-end volume of trade data, the number of 'zero trade' days and also the bid-ask spreads on investment holdings that were not traded out within 10 business days from the year end; and · We reviewed the completeness and appropriateness of disclosures in relation to fair value measurements and liquidity risk. |
|
Key observations |
Based on the work performed we concluded that the valuation of listed investments is appropriate and we did not identify differences in the investment holdings when agreeing the company's investment portfolio to the confirmation received directly from the custodian. |
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 |
£23.3m (2019: £14.4m) |
|
Basis for determining materiality |
1% (2019: 1%) of net assets |
|
Rationale for the benchmark applied |
Net assets has been chosen as a benchmark as it shows the most relevant benchmark for investors and is a key driver of shareholder value. The increase in materiality year on year arose principally from the increase 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 65% of materiality for the 2020 audit (2019: 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. in view of the uncertainty and volatility brought about by the Covid-19 pandemic, we maintained performance materiality at 65% even though this is now the second year of our appointment as auditor.
6.3 Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £0.47m (2019: £0.29m), 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
As part of our risk assessment, we assessed the control environment in place at the fund administrator, to the extent relevant to 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 internal controls 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 and any potential indicators of fraud.
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 area of valuation and ownership of listed investments. In common with all audits under ISAs (
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
· 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. These included the company's qualification as an Investment Trust under
11.2. Audit response to risks identified
As a result of performing the above, we identified valuation and ownership of listed 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 that 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, the Audit Committee and external legal counsel 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
· in addressing the 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:
· the information 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
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 on in the Annual Report;
· the directors' statement on fair, balanced and understandable set out on 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 Directors on 24 July 2019 to audit the financial statements for the period ending 31 December 2019 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 2 years, covering the years ending 31 December 2019 and 31 December 2020.
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 (
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
Statutory Auditor
15 March 2021
Statement of Comprehensive Income
|
|
|
For the year ended |
For the period from incorporation on 14 August 2018 to |
||||
|
|
|
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 |
16,054 |
- |
16,054 |
15,547 |
- |
15,547 |
|
Gains on investments held at fair value through profit or loss |
9 |
- |
500,734 |
500,734 |
- |
239,338 |
239,338 |
|
Foreign exchange gains/(losses) |
|
15 |
(785) |
(770) |
- |
(18) |
(18) |
|
Investment management fees |
4 |
(16,148) |
- |
(16,148) |
(12,509) |
- |
(12,509) |
|
Other expenses and transaction costs |
5 |
(1,402) |
(584) |
(1,986) |
(1,389) |
(1,431) |
(2,820) |
|
Profit/(loss) before tax |
|
(1,481) |
499,365 |
497,884 |
1,649 |
237,889 |
239,538 |
|
Tax |
6 |
(1,388) |
- |
(1,388) |
(1,392) |
- |
(1,392) |
|
Profit/(loss) for the period |
|
(2,869) |
499,365 |
496,496 |
257 |
237,889 |
238,146 |
|
Return/(loss) per share (basic and diluted) (p) |
7 |
(2.29) |
399.28 |
396.99 |
0.26 |
242.23 |
242.49 |
The Company does not have any income or expenses which are not included in the profit for the period.
All of the profit and total comprehensive income for the period 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
|
|
Notes |
As at |
As at |
|
Non-current assets |
|
|
|
|
Investments held at fair value through profit or loss |
9 |
2,279,938 |
1,405,671 |
|
Current assets |
|
|
|
|
Receivables |
10 |
6,432 |
1,653 |
|
Cash and cash equivalents |
|
50,046 |
31,558 |
|
|
|
56,478 |
33,211 |
|
Total assets |
|
2,336,416 |
1,438,882 |
|
Current liabilities |
|
|
|
|
Trade and other payables |
11 |
(4,466) |
(1,577) |
|
Total assets less current liabilities |
|
2,331,950 |
1,437,305 |
|
Equity attributable to equity shareholders |
|
|
|
|
Share capital |
12 |
1,414 |
1,145 |
|
Share premium |
13 |
1,595,894 |
1,198,014 |
|
Capital reserve |
|
737,254 |
237,889 |
|
Revenue reserve |
|
(2,612) |
257 |
|
Total equity |
|
2,331,950 |
1,437,305 |
|
Net asset value per share (p) |
14 |
1,648.9 |
1,255.2 |
The financial statements were approved by the Board on 15 March 2021 and were signed on its behalf by:
Mark Pacitti
Chairman
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 2020
|
|
Notes |
Share Capital £'000 |
Share Premium £'000 |
Capital* |
Revenue* Reserve £'000 |
Total |
|
Balance at 1 January 2020 |
|
1,145 |
1,198,014 |
237,889 |
257 |
1,437,305 |
|
Issue of new shares on secondary market |
|
269 |
399,880 |
- |
- |
400,149 |
|
Costs on new share issues on secondary market |
|
- |
(2,000) |
- |
- |
(2,000) |
|
Profit for the period |
|
- |
- |
499,365 |
(2,869) |
496,496 |
|
Balance at 31 December 2020 |
12 |
1,414 |
1,595,894 |
737,254 |
(2,612) |
2,331,950 |
For the period from incorporation on 14 August 2018 to 31 December 2019
|
|
Notes |
Share |
Share |
Capital* |
Revenue* |
Total |
|
Balance at 14 August 2018 |
|
- |
- |
- |
- |
- |
|
Issue of shares at IPO |
|
822 |
821,687 |
- |
- |
822,509 |
|
Issue of new shares on secondary market |
|
323 |
378,729 |
- |
- |
379,052 |
|
Costs on new share issues on secondary market |
|
- |
(2,402) |
- |
- |
(2,402) |
|
Profit for the period |
|
- |
- |
237,889 |
257 |
238,146 |
|
Balance at 31 December 2019 |
12 |
1,145 |
1,198,014 |
237,889 |
257 |
1,437,305 |
* Distributable reserve.
The accompanying notes are an integral part of these financial statements.
Statement of Cash Flows
|
|
Notes |
For the year to |
For the period from incorporation on |
|
Cash flows used in operating activities |
|
|
|
|
Profit before tax |
|
497,884 |
239,538 |
|
Adjustments for: |
|
|
|
|
Gain on investments |
9 |
(500,734) |
(239,338) |
|
Loss on foreign exchange |
|
770 |
18 |
|
Increase in receivables |
|
(345) |
(554) |
|
Increase in payables |
|
791 |
1,577 |
|
Overseas taxation paid |
6 |
(1,804) |
(1,707) |
|
Net cash flow used in operating activities |
|
(3,438) |
(466) |
|
Cash flows used in investing activities |
|
|
|
|
Purchases of investments |
9,11 |
(575,004) |
(1,205,635) |
|
Sale of investments |
9 |
203,569 |
39,302 |
|
Net cash flow used in investing activities |
|
(371,435) |
(1,166,333) |
|
Cash flows used in financing activities |
|
|
|
|
Proceeds from issue of new shares |
|
396,111 |
1,200,773 |
|
Issue costs relating to new shares |
|
(1,980) |
(2,398) |
|
Net cash flow used in financing activities |
|
394,131 |
1,198,375 |
|
Net increase in cash and cash equivalents |
|
19,258 |
31,576 |
|
Effect of foreign exchange rates |
|
(770) |
(18) |
|
Change in cash and cash equivalents |
|
18,488 |
31,558 |
|
Cash and cash equivalents at start of the year / period |
|
31,558 |
- |
|
Cash and cash equivalents at end of the year / period |
15 |
50,046 |
31,558 |
|
Comprised of: |
|
|
|
|
Cash at bank |
|
50,046 |
31,558 |
Dividends and interest received in cash during the year amounted to £13,982,000 and £nil (2019: £13,310,000 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 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 October 2019). 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. Income from underwriting commission is recognised as earned.
Interest receivable and payable, management fees, and other expenses are treated on an accruals basis.
(e) Expenses
The management fee is recognised as a revenue item in the Statement of Comprehensive Income. All other expenses are charged to revenue except expenses of a capital nature which are treated as capital.
(f) Investments
Investments have been designated upon initial recognition 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 prices. Gains and losses arising from changes in fair value are included in net profit or loss for the period as a capital item in the Statement of Comprehensive Income and are ultimately recognised in the capital reserve. For any unlisted investments, the fair value will be determined by using valuation techniques. These valuations will maximise the use of observable market data where it is available and with minimal reliance on entity specific estimates. For other investments which do not fit within this criteria the fair value will be determined by the Audit Committee with valuations recommended to the Board of the Company. The Audit Committee will consider the appropriateness of the valuations, models and inputs, using the various valuation methods in accordance with the Company's valuations policy.
Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the Statement of Comprehensive Income.
All the investments are defined by IFRS as investments held at fair value through profit or loss. All gains and losses are allocated to the capital return within the Statement of Comprehensive Income as "Gains or losses on investments held at fair value through profit or loss".
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 on 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 or, where forward foreign currency contracts have been taken out, at contractual rates and included as an exchange gain or loss in the capital reserve or the revenue account depending on whether the gain or loss 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 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 column of the Statement of Comprehensive Income; and
· expenses which 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 column of the Statement of Comprehensive Income and is distributable by way of dividend.
(l) Taxation
The charge for taxation is based upon the revenue for the period and is allocated according to the marginal basis between revenue and capital using the Company's effective rate of corporation tax for the accounting period.
Deferred taxation is recognised in respect of all timing differences that have originated, but not reversed at the Statement of Financial Position date where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the Statement of Financial Position date 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 not yet effective.
IFRS 17, 'Insurance contracts' (effective for accounting periods beginning on or after 1 January 2023).
IFRS 9, IAS 39, IFRS 7, IFRS 16 and IFRS 4: Interest Rate Benchmark Reform - phase 2 (amended) (effective for accounting periods beginning on or after 1 January 2021).
Amendments to IAS1 'Classification of liabilities as current or non-current' (effective for accounting periods beginning 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.
In the current financial year the Company has applied the following amendments to standards:
Amendments to IFRS 3 'Definition of Business' (effective for accounting periods beginning on or after 1 January 2020).
Amendments to IAS 1 & IAS 8 'Definition of Material' (effective for accounting periods beginning on or after 1 January 2020).
Amendments to IFRS 9, IAS 39 and IFRS 7 'Interest Rate Benchmark Reform' (effective for accounting periods beginning on or after 1 January 2020)
There is no material impact on the financial statements or the amounts reported from the adoption of these amendments to the standards.
2. Dividend income
|
|
2020 |
2019 |
|
UK dividends |
3,544 |
4,077 |
|
Overseas dividends |
12,510 |
11,470 |
|
Total |
16,054 |
15,547 |
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 a core 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 Investment Manager's Review.
4. Investment management fee
|
|
2020 |
2019 |
|
Investment management fee |
16,148 |
12,509 |
As at 31 December 2020, an amount of £1,768,000 (2019: £1,124,000) was payable to the Investment Manager. Details of the terms of the Investment Management Agreement are provided in the Annual Report.
5. Other expenses
|
|
2020 |
2019 |
||||
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Transaction costs on fair value through |
|
|
|
|
|
|
|
profit or loss investments |
- |
584 |
584 |
- |
1,431 |
1,431 |
|
Directors' fees |
84 |
- |
84 |
109 |
- |
109 |
|
Employer national insurance contributions |
8 |
- |
8 |
3 |
- |
3 |
|
Auditor fees in relation to audit |
36 |
- |
36 |
35 |
- |
35 |
|
Tax compliance fee |
23 |
- |
23 |
14 |
- |
14 |
|
Registrar fees |
40 |
- |
40 |
37 |
- |
37 |
|
Broker fees |
34 |
- |
34 |
48 |
- |
48 |
|
Company secretarial fees |
132 |
- |
132 |
137 |
- |
137 |
|
Custody fees |
205 |
- |
205 |
72 |
- |
72 |
|
Depositary fees |
280 |
- |
280 |
212 |
- |
212 |
|
Postage and printing |
59 |
- |
59 |
22 |
- |
22 |
|
Legal fees |
39 |
- |
39 |
31 |
- |
31 |
|
Fund administration fees |
411 |
- |
411 |
336 |
- |
336 |
|
Other expenses* |
51 |
- |
51 |
333 |
- |
333 |
|
Total Expenses |
1,402 |
584 |
1,986 |
1,389 |
1,431 |
2,820 |
* Other expenses include VAT of £80,000 as a net credit amount, due to £109,000 of VAT being recovered in relation to 2019 (2019: £222,000 of VAT expense included at 100% irrecoverable).
Transaction costs on fair value through profit or loss investments represent such costs incurred on both purchases and sales of those investments. Transaction costs on purchases amounted to £509,000 (2019: £1,417,000) and on sales amounted to £75,000 (2019: £14,000).
No non-audit fees were paid during the year to Deloitte LLP by the Company.
For the period ended 31 December 2019, in addition to the audit fees paid by the Company disclosed above, fees of £131,700 were paid to Deloitte LLP by the Investment Manager on behalf of the Company for IPO and reporting accounting assistance. Total remuneration paid to Deloitte LLP amounted to £166,700.
6. Taxation
(a) Analysis of tax charge in the period
|
|
2020 |
2019 |
||||
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
Taxation on ordinary activities |
|
|
|
|
|
|
|
Irrecoverable overseas withholding tax |
1,388 |
- |
1,388 |
1,392 |
- |
1,392 |
|
Total tax |
1,388 |
- |
1,388 |
1,392 |
- |
1,392 |
(b) The tax charge for the period is lower than the standard rate of corporation tax in the UK of 19%. The differences are explained below:
|
|
2020 |
2019 |
||||
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
Profit/(loss) before tax |
(1,481) |
499,365 |
497,884 |
1,649 |
237,889 |
239,538 |
|
Corporation tax at standard rate of 19% |
(281) |
94,879 |
94,598 |
313 |
45,199 |
45,512 |
|
Effects of: |
|
|
|
|
|
|
|
Non-taxable UK dividends |
(673) |
- |
(673) |
(775) |
- |
(775) |
|
Non-taxable overseas dividends |
(2,377) |
- |
(2,377) |
(2,179) |
- |
(2,179) |
|
Net gains on investments |
- |
(95,139) |
(95,139) |
- |
(45,474) |
(45,474) |
|
Expenses not deductible for tax purposes |
- |
110 |
110 |
- |
272 |
272 |
|
Net losses on foreign exchange |
(4) |
150 |
146 |
- |
3 |
3 |
|
Unrelieved expenses and charges |
3,335 |
- |
3,335 |
2,641 |
- |
2,641 |
|
Overseas withholding tax |
1,388 |
- |
1,388 |
1,392 |
- |
1,392 |
|
Total tax |
1,388 |
- |
1,388 |
1,392 |
- |
1,392 |
As at 31 December 2020, the Company had unrelieved expenses and charges of £31.4 million carried forward (2019: £13.9 million). Due to the Company's status as an investment trust and the intention to continue to meet the conditions required to maintain 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:
|
|
2020 |
2019 |
||||
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
Profit / (loss) for the period (£'000) |
(2,869) |
499,365 |
496,496 |
257 |
237,889 |
238,146 |
|
Return / (loss) per ordinary share (p) |
(2.29) |
399.28 |
396.99 |
0.26 |
242.23 |
242.49 |
Return per share is calculated based on returns for the year and the weighted average number of 125,066,574 ordinary shares in issue from 1 January 2020 to 31 December 2020. (2019: 98,209,751)
8.Dividends
There are no dividends proposed, declared or payable for the year (2019: 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.
|
As at 31 December |
2020 £'000 |
2019 £'000 |
|
Opening book cost |
1,158,602 |
- |
|
Opening investment holding gains |
247,069 |
- |
|
Opening fair value at 1 January (2019: at incorporation date) |
1,405,671 |
- |
|
Purchases at cost |
577,102 |
1,205,635 |
|
Sales - proceeds |
(203,569) |
(39,302) |
|
Gains on investments |
500,734 |
239,338 |
|
Closing fair value at 31 December |
2,279,938 |
1,405,671 |
|
Closing book cost at 31 December |
1,581,420 |
1,158,602 |
|
Closing unrealised gain at 31 December |
698,518 |
247,069 |
|
Valuation at 31 December |
2,279,938 |
1,405,671 |
The Company received £203,569,000 (2019: £39,302,000) excluding transaction costs from investments sold in the year. The book cost of the investments when they were purchased was £154,868,000 (2019: £48,464,000) 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. As at 31 December 2020, £2,279,938,000 of the investment portfolio was classified as level 1.
· Level 2 - other significant observable inputs (including quoted prices for similar investments, interest rates, prepayments, credit risk, etc.). There are no level 2 investments.
· Level 3 - significant unobservable inputs (including the Company's own assumptions in determining the fair value of investments). There are no level 3 investments.
Fair value measurements recognised in the Statement of Financial Position
|
|
2020 |
|||
|
As at 31 December |
Level 1 £'000 |
Level 2 £'000 |
Level 3 £'000 |
Total £'000 |
|
Investments held at fair value through profit or loss |
2,279,938 |
- |
- |
2,279,938 |
|
Total |
2,279,938 |
- |
- |
2,279,938 |
|
|
2019 |
|||
|
|
Level 1 £'000 |
Level 2 £'000 |
Level 3 £'000 |
Total £'000 |
|
Investments held at fair value through profit or loss |
1,405,671 |
- |
- |
1,405,671 |
|
Total |
1,405,671 |
- |
- |
1,405,671 |
10. Receivables
|
As at 31 December |
2020 £'000 |
2019 £'000 |
|
Accrued income |
806 |
529 |
|
Share issue proceeds |
4,802 |
784 |
|
Overseas tax recoverable |
731 |
315 |
|
Other receivables |
93 |
25 |
|
|
6,432 |
1,653 |
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
|
As at 31 December |
2020 £'000 |
2019 £'000 |
|
Securities purchased payable |
2,098 |
- |
|
Investment management fee payable |
1,768 |
1,124 |
|
Other payables |
600 |
453 |
|
|
4,466 |
1,577 |
12. Share capital
|
As at 31 December |
2020 |
2019 |
||
|
Issued, allotted and fully paid |
Number |
£'000 |
Number |
£'000 |
|
Ordinary shares of £0.01 each |
141,420,958 |
1,414 |
114,510,958 |
1,145 |
During the year ended 31 December 2020, the Company issued 26,910,000 (2019: 114,510,958) shares of £0.01 each for a net consideration of £398,149,000 (2019: £1,199,159,000). 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
|
As at 31 December |
2020 £'000 |
2019 £'000 |
|
Balance at 1 January (2019: at incorporation) |
1,198,014 |
- |
|
Issue of shares at IPO |
- |
821,687 |
|
Issue of new shares on secondary market |
399,880 |
378,729 |
|
Costs on new share issues on secondary market |
(2,000) |
(2,402) |
|
|
1,595,894 |
1,198,014 |
14. Net asset value per share
|
As at 31 December |
2020 |
2019 |
|
Net asset value |
£2,331,950,000 |
£1,437,305,000 |
|
Shares in issue |
141,420,958 |
114,510,958 |
|
Net asset value per share |
1,648.9p |
1,255.2p |
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. 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:
|
As at 31 December |
2020 £'000 |
2019 £'000 |
|
Cash and cash equivalents |
50,046 |
31,558 |
|
Receivables |
6,432 |
1,653 |
|
|
56,478 |
33,211 |
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 reporting 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 that would 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 period end.
|
|
31 December 2020 |
31 December 2019 |
||||||||
|
Investments £'000 |
Cash £'000 |
Receivables £'000 |
Payables £'000 |
Total £'000 |
Investments £'000 |
Cash £'000 |
Receivables £'000 |
Payables - |
Total £'000 |
|
|
Australian Dollar |
155,936 |
- |
2,098 |
(2,098) |
155,936 |
85,111 |
- |
- |
- |
85,111 |
|
Danish Krone |
138,264 |
- |
210 |
- |
138,474 |
108,591 |
- |
136 |
- |
108,727 |
|
Euro |
213,122 |
- |
96 |
- |
213,218 |
79,720 |
- |
12 |
- |
79,732 |
|
New Zealand |
|
|
|
|
|
|
|
|
|
|
|
Dollar |
42,145 |
- |
- |
- |
42,145 |
48,169 |
- |
- |
- |
48,169 |
|
Swiss Franc |
143,036 |
- |
425 |
- |
143,461 |
79,128 |
- |
167 |
- |
79,295 |
|
US Dollar |
1,083,119 |
98 |
- |
- |
1,083,217 |
666,260 |
463 |
- |
- |
666,723 |
|
|
1,775,622 |
98 |
2,829 |
(2,098) |
1,776,451 |
1,066,979 |
463 |
315 |
- |
1,067,757 |
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 2020, an exchange rate move of +/-5% against sterling which is a reasonable approximation of possible changes would have increased or decreased total net assets and total return by £88,823,000 (2019: £53,388,000).
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 £50,046,000 (2019: £31,558,000) 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 2020 the interest rate was 0% (2019: 0%).
If the base rate increased by 0.05%, the impact on the profit or loss and net assets would be expected to be a positive £25,023 (2019: £15,779). A decrease of 0.05% would have had an equivalent opposite effect. The calculations are based on the cash balances at the year end date and are not representative of the year as a whole.
All current liabilities have no interest rate and are payable within one year.
Other price risk exposure
If the investment valuation had fallen by 20% at 31 December 2020, the impact on profit or loss and net assets would have been negative £455,987,600 (2019: £281,134,200). An increase of 20% would have had an equivalent opposite effect. The calculations are based on the portfolio valuations as at the respective period end date and are not representative of the period 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.
|
As at 31 December |
2020 £'000 |
2019 £'000 |
|
Assets at fair value through profit or loss |
2,279,938 |
1,405,671 |
|
Cash |
50,046 |
31,558 |
|
Investment income receivable |
806 |
529 |
|
Share issue proceeds |
4,802 |
784 |
|
Overseas tax recoverable |
731 |
315 |
|
Other receivables |
93 |
25 |
|
Payables |
(4,466) |
(1,577) |
|
|
2,331,950 |
1,437,305 |
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 2020 held £50,046,000 (2019: £31,558,000) 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 £2,331,950,000 (2019: £1,437,305,000).
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, 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 2020 there were no contingent liabilities or capital commitments (2019: 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 £84,000 (2019: £108,553), is set out in the Directors' Remuneration Report in the Annual Report. There were no contracts subsisting during or at the end of the period 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 period 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 3,063,180 (2019: 2,987,897) shares in the Company amounting to 2.2% (2019: 2.6%) of the issued share capital of the Company as at 31 December 2020.
18.Events after the reporting period
Since the year end and up to 12 March 2021 (the latest practical date before publication of the Annual Report), the Company has issued 9,132,000 ordinary shares raising net proceeds of £150.6 million.
With the withdrawal period for the United Kingdom exiting the European Union ending on the 31December 2020, the Board continued to monitor any resulting impact to the Company and as negotiations between both parties continue. No significant impact has been observed to date and as the Company's invests in global equities, the Board expects this to have limited impact on the Company's portfolio taken as a whole.
19. Financial information
This announcement does not constitute the Company's statutory accounts. The financial information is derived from the statutory accounts, which will be delivered to the registrar of companies and will be put forward for approval at the Company's Annual General Meeting. The statutory accounts for the period ended 31 December 2020 will be delivered to the registrar of companies. The auditors have reported on the accounts for the period ended 31 December 2020, 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 2020 was approved on 15 March 2021. 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 28 April 2021 at Ketton House, Rectory Road, Kedington, Suffolk, CB9 7QL, UK. The Government's policy with regard to the lifting of lockdown restrictions is contingent upon several factors and subject to rapid change. This makes the planning of an AGM at the current time very difficult and for this reason the Board has reached the decision to restrict shareholder attendance at Company's second AGM. Arrangements will be made by the Company to ensure that a minimum number of shareholders required to form a quorum will attend the AGM in order that the meeting may proceed, however, physical attendance by any other shareholders at the meeting will not be possible. Details of the meeting are available in the Notice of Meeting published on the Company's website www.smithson.co.uk
15 March 2021
Secretary and registered office:
PraxisIFM Fund Services (UK) Limited
1st Floor, Senator House
85 Queen Victoria Street
London
EC4V 4AB
For further information contact:
PraxisIFM Fund Services (UK) Limited
Tel: 020 4513 9260
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