The Company has today, in accordance with DTR 6.3.5, released its Half-yearly Condensed Report (unaudited) for the six months ended 30 June 2021.The Report will shortly be available via the Investment Manager’s website https://www.premierfunds.co.uk/investors/investments/investment-trusts/acorn-income-fund and will also be available for inspection online at www.morningstar.co.uk/uk/NSM website.
Investment Objectives and Policy
Investment Objectives
The investment objective and policy of Acorn Income Fund Limited (the “Company” or “Acorn”) is to provide shareholders with high income and the opportunity for capital growth.
The Company's assets predominantly comprise investments in equities and fixed interest securities in order to achieve its investment objective. The Company’s investments are held in two portfolios. Approximately 70% to 80% of the Company’s assets are invested in smaller capitalised United Kingdom companies, admitted to the Official List of the Financial Conduct Authority (the “FCA”) and traded on the main market of the London Stock Exchange (the “LSE”) or traded on the Alternative Investment Market (“AIM”) at the time of investment (the “Smaller Companies Portfolio”). The Company also aims to enhance income for Ordinary Shareholders by investing approximately 20% to 30% of the Company’s assets in high yielding instruments which are predominantly fixed interest securities but may include up to 15% of the Company’s overall portfolio (measured at the time of acquisition) in high yielding investment company shares (the “Income Portfolio”).
The proportion of the overall portfolio held in the Smaller Companies Portfolio and the Income Portfolio varies from day to day as the market prices of investments move. The Directors retain discretion to transfer funds from one portfolio to the other and generally expect between 70% to 80% of the investments to be held in the Smaller Companies Portfolio.
While the Company’s investment policy is to spread risk by maintaining diversified portfolios, there are no restrictions on the proportions of either of the portfolios which may be invested in any one geographical area, asset class or industry sector. However, not more than 7.5% of the Company’s gross assets may be invested in securities issued by any one company as at the time of investment, save that (i) in respect of the Income Portfolio only, investments may be made in other investment funds subject only to the restriction set out in paragraph (c) of the section headed “Investment Restrictions” below; and (ii) in respect of the Smaller Companies Portfolio only, provided that not more than 10% of the Company’s gross assets are invested in securities issued by any one company at any time, with Board approval the 7.5% limit may be exceeded on a short term basis where a company whose securities form part of the Smaller Companies Portfolio issues new securities (for example by way of a rights issue).
The Company’s capital structure is such that the underlying value of assets attributable to the Ordinary Shares is geared relative to the rising capital entitlements of the Preference Shares (“ZDP Shares”). The Company’s gearing policy is not to employ any further gearing through long-term bank borrowing. Save with the prior sanction of ZDP Shareholders, the Company will incur no indebtedness other than short term borrowings in the normal course of business, such as to settle share trades or borrowings to finance the redemption of the ZDP Shares.
Investment Restrictions
For so long as required by the LSE Listing Rules in relation to closed-ended investment companies, the Company has adopted the following investment and other restrictions:
a) the Company will at all times invest and manage its assets in a way which is consistent with its objective of spreading investment risk and in accordance with its published investment policy;
b) the Company will not conduct any significant trading activity; and
c) not more than 10% in aggregate of the value of the total assets of the Company at the time the investment is made will be invested in other listed closed-ended investment funds. The Listing Rules provide an exception to this restriction to the extent that those investment funds which have stated investment policies to invest no more than 15% of their total assets in other listed closed-ended investment companies.
Derivatives
The Company may invest in derivatives, money market instruments and currency instruments including contracts for difference, futures, forwards and options. These investments may be used for hedging positions against movements in, for example, equity markets, currencies and interest rates, for investment purposes and for efficient portfolio management. The Company’s use of such instruments for investment purposes is limited to 5 per cent of the total assets of the Company. The Company will not use such instruments to engage in any significant trading activity. The Company will not maintain derivative positions should the total underlying exposure of these positions (excluding any currency hedges) exceed one times adjusted total capital and reserves.
Dividend Policy
The Company’s policy is to provide Ordinary Shareholders with a high income relative to the average dividend yield of the UK Smaller Companies comprised in the Numis Smaller Companies Index ex Investment Companies. The Company aims to pay a regular quarterly dividend in March, June, September and December. It is intended to distribute substantially all of the Company’s net income after expenses and taxation; however, the Company may retain a proportion of the Company’s income in each year as a revenue reserve to assist in providing long term stability in dividend distributions. Dividends may be paid to holders of Ordinary Shares whenever the financial position of the Company, in the opinion of the Directors, justifies such payment, subject to the Company being able to satisfy the solvency test, as defined under The Companies (Guernsey) Law, 2008. The Board is alert to the potential for new share issuance to dilute earnings and accordingly will have regard to the size and timing of new share issues. The ZDP Shares do not carry a right to a dividend.
Proposed Restructure
On 1 September 2021 the Board announced a scheme of reconstruction offering a rollover into the Unicorn UK Income Fund or a cash exit. These proposals, which will involve putting the Company into voluntary liquidation and the early redemption of the ZDP shares, will be put to shareholders at General Meetings in or around October 2021.
Performance Summary
for the period ended 30 June 2021
| 30/06/2021 | 31/12/2020 | % change/return | |
| Total Return Performance* | |||
| Total Return on Gross Assets* | 14.45% | ||
| Numis Smaller Companies (Ex Investment Companies) Index | 27,143.31 | 23,117.10 | 17.42% |
| FTSE All Share Index | 7,852.35 | 7,068.59 | 11.09% |
| FTSE Small Cap (Ex Investment Companies) Index | 10,424.11 | 8,108.86 | 28.55% |
| Share Price and NAV Returns | |||
| Ordinary Shares | |||
| Share Price | 352.00p | 322.50p | 9.15% |
| NAV** | 426.32p | 360.21p | 18.35% |
| IFRS NAV# | 426.30p | 360.17p | 18.36% |
| Total Return on Net Assets** | 22.04% | ||
| Ordinary Share Price Total Return* | 12.82% | ||
| Discount (-) to NAV on Ordinary Shares** | -17.43% | -10.47% | |
| ZDP Shares | |||
| Share Price | 161.50p | 157.00p | 2.87% |
| NAV** | 163.05p | 160.02p | 1.89% |
| IFRS NAV# | 163.06p | 160.05p | 1.88% |
| Discount (-) Premium (+) to NAV on ZDP Shares** | -0.96% | -1.89% | |
| Package Discount (-) to | |||
| NAV Combined Ordinary and ZDP Shares | -11.84% | -7.26% | |
| 6 months to 30/6/2021 | 6 months to 30/6/2020 | % change | |
| Dividends and Earnings | |||
| Revenue Return per Ordinary Share | 7.74p | 4.57p | 69.37% |
| Dividends Declared per Ordinary Share | 11.50p | 11.50p | 0.00% |
* assumes dividends reinvested
** calculated in accordance with the Articles
# calculated in accordance with International Financial Reporting Standards
Sources: Index data: Bloomberg, Total return on gross and net assets, PFM, JP Morgan Cazenove
Company Summary
History
The Company was incorporated on 5 January 1999 and commenced its activities on 11 February 1999. The portfolio is divided into two sub portfolios, a Smaller Companies Portfolio representing approximately 70% to 80% of the total with the balance invested in an Income Portfolio investing in fixed income securities, investment company shares and structured investments. The Company has always been leveraged, initially through bank debt and now through Zero Dividend Preference (“ZDP”) Shares. In December 2016, shareholders approved the extension of the ZDP Shares setting a new redemption date of 28 February 2022.
Capital Structure
Zero Dividend Preference Share (1p each)
21,230,989 (excluding treasury shares)
The ZDP Shares will have a final capital entitlement of 167.2 pence per ZDP Share on 28 February 2022 following the extension of the life of the existing shares from 31 January 2017, subject to there being sufficient capital in the Company. The ZDP Shares are not entitled to any dividends. ZDP Shareholders rank ahead of the Ordinary Shareholders in regards to rights as to capital. The ZDP Shareholders have the right to receive notice of all General Meetings of the Company, but do not have the right to attend or vote unless the business of the meeting involves an alteration of the rights attached to the ZDP Shares, in which case the holders of ZDP Shares can attend and vote.
Ordinary Shares (1p each)
15,816,687 (excluding treasury shares)
The Ordinary Shares, excluding treasury shares, are entitled to participate in all dividends and distributions of the Company. On a winding-up, holders of Ordinary Shares are entitled to participate in the distribution and the holders of Ordinary Shares are entitled to receive notice of and attend and vote at all General Meetings of the Company.
Treasury Shares
As at 30 June 2021, there were 1,325,972 Ordinary and 1,779,873 ZDP Shares held in treasury.
Shareholder Funds
£67.43 million as at 30 June 2021 (calculated in accordance with IFRS)
£67.43 million as at 30 June 2021 (calculated in accordance with the articles)
Market Capitalisation of the Ordinary Shares
£56 million as at 30 June 2021
Company Details
The Board
The Board consists of three independent non-executive directors (the “Directors”), Nigel Ward (Chairman), David Warr and Sharon Parr. Nigel Sidebottom is not considered independent by virtue of his recent employment with the Premier Miton Group PLC (the parent company of the Investment Manager).
Investment Manager
Premier Asset Management (Guernsey) Limited (“PAMG”), is a subsidiary of Premier Miton Group PLC (“PMG”). PMG had approximately £13.6bn of funds under management as at 30 June 2021. PAMG is licensed under the provisions of the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, by the Guernsey Financial Services Commission to carry on controlled investment business.
Investment Advisers
Premier Fund Managers Limited (“PFM”) – the Company’s Income Portfolio is managed by Chun Lee and Robin Willis.
Unicorn Asset Management Limited (“Unicorn”) – the Company’s Smaller Companies Portfolio is managed by Simon Moon and Fraser Mackersie.
Secretary/Administrator
Northern Trust International Fund Administration Services (Guernsey) Limited.
Corporate Broker
Singer Capital Markets.
Management Fee
0.7% per annum (Total Assets) charged 75% to capital and 25% to revenue. Minimum annual management fee £100,000.
In addition, a performance fee is payable at the year-end if the target set out on Note 4 is achieved. This is charged 100% to capital.
Registrar
JTC Registrars Limited
Financial Calendar
Company’s year end 31 December
Annual results announced April
Company’s half year end 30 June
Annual General Meeting October 2021
Half-year results announced September
Dividend payments At the end of March, June, September and December
Company website
Chairman’s Statement and Interim Management Report
30 June 2021
Dear Shareholder
The Company’s Investment Advisers have reported at length elsewhere in this Report and as I would like to spend some time commenting on the Strategic Review I will restrict my comments about performance simply to the headlines numbers, as follows:
Over the past six months, Acorn shareholders have seen a total return on gross assets, which measures the return on the portfolio including all income and costs, of 14.5%, and a total return on net assets of 22.0%, the gearing effect of the Zero Dividend Preference Shares having worked in favour of the ordinary shareholders during the period. These moves compare to a total return from the Numis Smaller Companies (ex-Investment Companies) Index, of 17.4% and from the FTSE All Share Index, of 11.1%. I commend our Investment Advisers for their contribution.
However, despite a robust performance from the underlying portfolio, the ordinary share discount has not tightened as the Board would have hoped, widening from 10.5% at 31st December 2020 to 17.6% as at 30th June 2021. Since the period-end the discount has remained becalmed in the high teens. This highlights the hurdles that the Company has faced over the past few years and it is right that I should address the matter in detail.
Almost twelve months ago the challenges faced by the Company, including sub-scale size, limited liquidity, split-cap and dual portfolio structure, and likely future cut in dividends, led the Board to conclude that the Company could not viably continue in its present form. With a discontinuation vote scheduled for August 2021, and no obvious prospect of growing assets under management, there was a need to bring about change. After an extensive process, and after consultation with some shareholders, the Board ultimately concluded that the optimum outcome was to recommend a scheme of reconstruction offering a rollover into the Unicorn UK Income Fund or a cash exit. These proposals, which will involve placing the Company into voluntary liquidation, and early redemption of ZDP shares, were announced on 1 September and will likely be put to shareholders at General Meetings during October.
Having served on the Acorn board since 2011, the last two years as Chairman, I cannot help but feel a degree of sadness that a Trust with over twenty years history is reaching the end of its life. However, at the start of the strategic review the Board recognised that allowing the Company to limp along for another five years was unacceptable. We have constantly reminded ourselves that every decision had to be in shareholders’ best interests and I believe this outcome will achieve that aim.
Thank you for your support as an investor in our Company over the years and I trust you will approve the measures proposed at the forthcoming meetings.
Nigel Ward
Chairman