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Herald Investment Trust Plc - Annual Financial Report

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Herald Investment Trust Plc

Results and dividend

The net asset value (NAV) of the Company at 31 December 2019 was 1,668.1p per ordinary share (2018 - 1,307.9p). This represented an increase of 27.5% during the year. The discount was 11.3% (2018: 17.8%) and the share price increased by 37.7% to 1,480.0p.

The Company made a revenue profit of £31,000 (2018: £58,000) giving net earnings of 0.05p per share (2018: 0.08p) per share. The directors do not recommend a dividend (2018 - nil) for the year ended 31 December 2019.

The financial information set out in this Annual Financial Report does not constitute the Company's statutory accounts for 2018 or 2019. Statutory accounts for the years ended 31 December 2018 and 31 December 2019 have been reported on by the Independent Auditor. The Independent Auditors' Reports on the annual report and financial statements for 2018 and 2019 were unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006. The Company's statutory accounts for the year ended 31 December 2018 have been filed with the Registrar of Companies. The Company's statutory accounts for the year ended 31 December 2019 will be delivered to the Registrar in due course.

The financial information in this Annual Financial Report has been prepared using 'FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland' (FRS102), which forms part of Generally Accepted Accounting Practice ('UK GAAP') issued by the Financial Reporting Council. The financial statements have also been prepared in accordance with The Companies Act 2006 and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued by the Association of Investment Companies ('AIC') in October 2019




31 December 2019

31 December 2018

% change

Total net assets





Shareholders' funds





Net asset value per ordinary share*





Share price*





Numis Smaller Companies Index plus AIM (ex. investment  companies) (capital only)





Russell 2000 (small cap) Technology Index (in sterling terms) (capital only)+





Dividend per ordinary share





Profit per ordinary share (revenue)





Ongoing charges*





Discount to NAV*






The following table indicates how an investment in the Company has performed relative to its comparative index (applied retrospectively) and its underlying fully diluted net asset value over the period since inception of the Company.


31 December



16 February


% change

Net asset value per ordinary share (including current year income)*




Net asset value per ordinary share (excluding current year income)*




Share price




Numis Smaller Companies Index plus AIM (ex. investment companies)




Russell 2000 (small cap) Technology Index (in sterling terms)+




* Alternative Performance Measure - see pages 78 - 79 of the annual report and financial statements.

+ Investments and indices valued at USD / GBP exchange rate of 1.325 at 31 December 2019 (2018: 1.275).  The Russell 2000 (small cap) Technology Index was rebased during 2009 following some minor adjustments to its

constituents. The rebased index is used from 31 December 2008 onwards.

At 9 April 1996 being the date funds were first available for international investment.



At the mid-year, we reported that the net asset value per share ("NAV") had grown 17.2%. By the year end, the Company's NAV per share growth had reached 27.5%. The growth in NAV for the year, which compares favourably with wider indices, reflected strong equity markets globally and good stock selection.

Of note was an unusually sharp divergence in performance between larger and smaller companies within our overall smaller companies remit: larger companies performed materially better than smaller ones. To illustrate this, the Company's investments with a market capitalisation in excess of $1bn at the year end had delivered a total return of 56.5%, with the investments with a market capitalisation below $1bn returning the lower but still good figure of 19.1%.

There is degree to which this divergence reflects success, because the good performers have grown; but the more significant factor this year is a much greater re-rating in the valuation basis. A crude measure of some relevance is the Bloomberg forecast of Enterprise Value to Sales: it is 5.0x on average for the holdings above $1bn, whereas the average for companies below $1bn is 2.8x.

The most significant effect on performance is provided by the UK, which accounts for 52.2% of the Company's total assets and has a much lower average market capitalisation. The total return from our UK portfolio was 30.2% which compares favourably with the Numis Smaller Companies Index plus AIM (ex investment companies) which returned 22.2%. Nevertheless, this market has not felt like a bull market at all because liquidity has been so poor. Indeed, volumes in AIM technology stocks across the market have fallen 70% over the last year. In a normal market cycle, we would expect the performance to filter down to much smaller companies in 2020 and 2019 should have been a good year for new issues, however it was not. The UK market had a double headwind; firstly political uncertainty which was significantly alleviated by the election because the UK portfolio appreciated 7.8% in December; secondly a withdrawal from illiquid assets, or at least avoidance of smaller companies, partly due to the regulatory shock of MiFID II and other issues. The latter may have an ongoing effect, which we have to monitor closely. However, the performance figures should reassure investors that shrinking markets can still be rewarding.

The North American region has delivered the strongest overall return reflecting a greater skew to the larger end of the remit. The total return from the North American portfolio was 39.5% versus the Russell 2000 (Small Cap) Technology Index (in sterling terms) returning 29.7%. It is interesting to observe that the large capitalisation Russell 1000 Technology Index returned 41.5%, so again smaller companies have materially underperformed their bigger brethren, but it is pleasing to have performed nearly as well as that latter index which is dominated by Apple and Microsoft, when they have performed so well. It is also pleasing that the UK performance, in spite of the microcap challenges has exceeded that of the US Russell 2000 Technology Index. Remarkably there were £62m in takeovers in the Company's North America portfolio, some of which have not completed, which is extraordinary versus a market value of £218m at the start of the year.

The Company's total return in Europe was 38.9% with three-quarters of the region's return by value coming from the three biggest holdings, BE Semiconductor, Data Respons and Nordic Semiconductor. The Asian total return was 29.3% with a particularly strong performance from Taiwan of 51.5%.

Cash has been a drag on the overall return. Cash levels were higher than planned at the start of 2019 reflecting a spate of takeovers, and a further £106m of takeovers have been announced during 2019. In both the UK and North America portfolios, sales exceeded purchases, and modest net cash was invested in EMEA and Asia. There were no completed takeovers in those regions, though by the year end one significant holding, Data Respons, agreed a takeover, which has not yet completed. Reinvestment has been measured and the Manager has taken profits in a number of holdings reflecting full valuations.

During the year share buyback transactions amounted to £20.3m or 2.3% of the equity outstanding at an average price (including costs) of £12.79 per share.


As anticipated at this time last year, Julian Cazalet retired from the board of the Company at the conclusion of the annual general meeting in April 2019 having chaired the board for ten years. We are very grateful for his leadership and his very substantial contribution to the Company's success.

Henrietta Marsh joined the board in September, bringing investment management background, with a particular focus on smaller companies, to further strengthen the board's expertise.

The Company undertook an audit tender process in 2019 and is pleased to report that PricewaterhouseCoopers LLP were appointed as auditor to the Company and have undertaken the 2019 audit.


Valuations are not as attractive as they have been, but the sector is still dynamic, and we believe continues to offer better opportunities than the wider market. The microcap end of the market offers conspicuously more interesting valuations. The closed-end nature of an investment trust makes it an ideal vehicle to access the Company's target market.