THE INVESTMENT COMPANY PLC
Annual Results Announcement for the year ended 30 June 2023
LEI: 2138004PBWN5WM2XST62
SUMMARY OF RESULTS
| At 30 June 2023 | At 30 June 2022 | Change % | |
| Equity Shareholders’ funds (£) | 16,270,804 | 16,048,191 | 1.39 |
| Number of ordinary shares in issue | 4,772,049 | 4,772,049 | – |
| Net asset value (“NAV”) per ordinary share | 340.96p | 336.30p | 1.39 |
| Ordinary share price (mid) | 340.00p | 294.00p | 15.65 |
| Discount to NAV | 0.28% | 12.58% | 12.30 |
| At 30 June 2023 | At 30 June 2022 | ||
| Total return per ordinary share* | 15.49p | (5.21)p | |
| Dividends paid per ordinary share | – | – |
* The total return per ordinary share is based on total income after taxation as detailed in the Consolidated Income Statement and in note 6.
CHAIRMAN’S STATEMENT
For the year ended 30 June 2023 the Company was self-managed and the trust’s objective until July 2023 was primarily to protect the purchasing power of capital. The details of that historic investment policy are set out below for reference purposes. Over its history, the Company has undergone a number of changes of investment policy and operational structure to most appropriately reflect the interests of its Shareholders, with the most recent change in November 2020.
Whilst the Board was satisfied with the Company’s performance since 2020, it has been mindful for some time of the size of the Company, together with the illiquid nature of the ordinary shares, and the impact of these factors on the discount to NAV at which the ordinary shares trade. This discount persisted despite the strong NAV performance. Accordingly, the Board announced in February 2023 that it was actively considering credible opportunities to grow the size and increase the liquidity of the Company, while also providing an immediate complete liquidity option for all Shareholders who wished to realise their shareholding.
This process culminated in a number of proposals being put to Shareholders and these were approved at a General Meeting held on 26 June 2023, with over 99.99% of votes cast in favour of the proposals. In July 2023 a tender offer was carried out to allow those Shareholders who wished to realise their shareholding to exit and Chelverton Asset Management (“Chelverton”) were appointed as the Company’s Investment Manager to oversee all aspects of the management of the Company’s assets, with a new investment policy.
The Company’s new investment objective is to maximise capital growth for Shareholders over the long term by investing in high quality quoted UK small and mid-cap companies. Details of this objective and the consequent investment policies are elaborated in detail elsewhere in the Report and Accounts.
Following the change of investment policy, it is expected the majority, if not all, of the Company’s return will be derived from capital appreciation and any dividend will be modest in the context of total long-term returns. The Board is not proposing a dividend is paid for the year ended 30 June 2023 given the opportunity provided to Shareholders, for those who wished to, to realise their holding in the Company post the year end.
Performance in the year to 30 June 2023
During the twelve months the net asset value (“NAV”) increased by 1.39% to 340.96p and the share price increased by 15.65% to 340.00p. At the year-end the Company was in transition following the general meeting held on 26 June 2023 and 36.7% of net assets were invested in 11 different businesses, a further 15.9% invested in gold bullion held through two ETFs, and 47.4% was in cash net of other liabilities, together with a small number of other legacy assets. The holdings as at 30 June 2023 are set out below. As part of the process of changing to an investment manager the portfolio was substantially converted into cash in July 2023 and has subsequently been invested in a number of small and mid-cap companies in line with the new investment policy.
Income and expenses
Total expenses, including those that fell to be accounted for directly through reserves, included considerable one-off costs in relation to the proposals put to Shareholders at the General Meeting on 26 June 2023. The proposals were structured in a manner which apportioned these costs fairly across both new incoming Shareholders and those who redeemed their shares pursuant to those proposals.
Board
As mentioned in my statement last year, Tom Cleverly stood down as a Director at the Company’s Annual General Meeting in October 2022. Subsequent to the reorganisation of the shares and the appointment of Chelverton Asset Management as Investment Manager to the Company on 26 July 2023, Michael Weeks stood down from the Board. The Board wishes to record their deep appreciation of both Tom and Michael’s significant contribution to the Company since their appointment
in November 2020 and wishes them both well in their future endeavours.
On 26 July 2023, we were delighted to welcome David Horner to the Board. His deep knowledge and experience will be highly accretive as we serve to increase the value of the Company.
Outlook
Whilst we start the Company’s next chapter still as a modest sized investment trust, the Company’s assets are now being managed by an award-winning asset manager in Chelverton, with a strong track record of creating value for investors, whilst increasing the Company’s’ size. I look forward to working with the Chelverton team as we look to maximise capital growth over the long term by investing in high quality small and mid-cap companies.
I. R. Dighé
Chairman
4 October 2023
Investment Manager’s Report
With the new Manager in place, the Company’s new investment strategy is to generate long-term capital growth for its Shareholders by investing in a portfolio of small and mid-cap UK listed growth stocks, capturing the well-publicised small cap outperformance effect. The characteristics the new Manager looks for in their investments are companies that can grow faster than the market through the economic cycle, that self-fund their organic growth because they are cash generative and have high levels of revenue visibility.
The Manager has a 3-stage investment process. Firstly, deploying a quantitative screen to identify growing companies which generate cash, have low working capital intensity and have a sensible balance sheet. Secondly, reviewing screened companies to better understand the business model, predictability of sales, quality of management and sustainability of margins. Finally, once an investment universe is formed from stages 1 and 2, the Managers review a company’s valuation (against their growth rate, margin and sales visibility) to decide whether to include it in the portfolio.
The basic premise of the investment strategy is that if a company can grow faster than the rest of the market and fund its own growth through its own cashflow, then over time it should outperform the wider market. Chelverton has successfully deployed this approach in its open-ended Growth fund since it launched in 2014.
With small and mid-caps underperforming their large cap peers in the last 12-18 months, and UK equities trading at historic lows vs their global peers, the Manager believes this is an excellent time, as we near the point of maximum pain at the top of the interest rate cycle, to be deploying your capital in a portfolio of attractive small and mid-cap growth stocks on relatively low valuations to generate long-term capital growth for our Shareholders.
With the legacy portfolio largely realised, the Manager has started to invest in some of its favourite mid and small cap shares, which manifest the characteristics referred to above. The initial focus has been on the more liquid mid cap names, which the Manager feels are currently under-rated, with the intention being to build up the smaller cap weighting over time as opportunities present themselves at the right valuation.
Examples of new mid cap investments by the Company include:
1. Auction Technology Group (“ATG”) – a leading provider of online bidding services to auctioneers in the Art and Antiques and Industrial and Commercial products segments in the USA and UK. An exceptionally high margin business, ATG is benefitting from the trend of more bidding at auctions moving online, with auctioneers benefitting from much wider audiences that can be brought to them by accessing ATG’s customer list. This growth is being supplemented by a move into adjacent services for auctioneers and their customers such as payments and delivery, significantly increasing the value ATG can drive from its customer base of nearly 4,000 auctioneers.
2. Ascential – a media group, which owns an attractive group of high margin assets with excellent revenue visibility including: (i) two major trade shows, Cannes Lion, the leading global event for the marketing and advertising industry, and Money2020, a leading FinTech show held annually in the USA and Europe, (ii) WGSN, the leading subscription data provider for the fashion and beauty industry, and finally (iii) a collection of digital commerce businesses, which advise brands on how to position themselves on online retail platforms. Management have initiated a de-merger process, which the Manager feels should realise meaningful upside above its current undemanding valuation.
3. Globaldata – another media business, which provides what it regards as “gold standard” online data and analytics across a wide range of industry sectors from a single platform. An annual subscription business with high renewal rates gives Globaldata excellent cashflow and revenue visibility characteristics. Already a high margin business, Globaldata is highly operationally leveraged off a relatively fixed cost based and should continue to see margins expand as it adds more customers to its 5,000 subscriber base.
At the smaller cap end of the market, the Manager has, amongst others, added the following names:
1. Aquis Exchange – provides an equity trading exchange across most European equity markets in competition with the national exchanges and competitors like Turquoise. It has a disruptive “all you can eat” subscription pricing model, which makes its offering very competitive relative to its competition. It also sells its exchange software technology to non-competing exchanges in other geographies and across other asset classes. It has also acquired its own stock exchange – The Aquis Stock Exchange – for growth companies. In the Manager’s view Aquis has multiple opportunities for growth across its trading platform, proprietary data and technology base.
2. Severfield – the UK’s leading structural steel manufacturer (used in commercial buildings, infrastructure projects and leisure facilities like stadia) has an impeccable track record under its current management team. In the Manager’s view it is very lowly rated especially given the growth potential offered by its joint venture with a local steel producer in the large Indian construction market, which is just starting to shift from concrete frames to steel structures.
3. Ebiquity – audits the effectiveness of advertisers’ campaigns for many of the leading global brands. New management have been productising and automating many of the company’s data driven solutions to improve both its own operational and customers’ marketing efficiency. In the Manager’s view the low rating currently accorded to this business does not give credit to its market position with many of the world’s leading global brands nor to its profitability and growth prospects.
4. Restore – the second largest records storage business in the UK, enjoying high levels of recurring revenues, has recently seen its share price slump on the back of profit warnings relating to some of its ancillary revenues, namely shredding, on the back of weaker paper recycling prices, and IT asset destruction, as companies are holding on to their IT hardware assets for longer as the economy slows. The subsequent de-rating in the Manager’s view materially undervalues the strength of the underlying records management business.
Whilst the list above is not exhaustive, the examples given are designed to give Shareholders an idea of the type of businesses the Manager is investing in. Many of the companies are market leaders in their own space and are generally high margin, have low capital intensity and above average prospects. Due to the current economic backdrop and interest rate environment, they are trading on depressed valuations, the like of which the Manager has not seen for several years, so representing in the Manager’s view an excellent time to build a portfolio to generate long-term capital growth for Shareholders.
Chelverton Asset Management
4 October 2023
Portfolio and Assets
At 30 June 2023
| Security | Country | Holding | Fairvalue£ | % of total net assets |
| Hal Trust | Netherlands | 13,024 | 1,309,776 | 8.0 |
| Imperial Oil | Canada | 20,000 | 805,803 | 5.0 |
| Lucas Bols | Netherlands | 65,000 | 582,847 | 3.6 |
| Emmi | Switzerland | 700 | 531,123 | 3.3 |
| Agnico Eagle Mines | Canada | 13,000 | 511,043 | 3.1 |
| Barrick Gold | Canada | 35,000 | 466,060 | 2.9 |
| Cembre | Italy | 16,000 | 420,112 | 2.6 |
| Bucher Industries | Switzerland | 1,200 | 416,740 | 2.6 |
| Tonnellerie François Frères Group | France | 10,003 | 351,916 | 2.1 |
| Nedap | Netherlands | 6,904 | 344,786 | 2.1 |
| Bakkafrost | Faroe Islands | 5,000 | 235,701 | 1.4 |
| Total equity participations | 5,975,907 | 36.7 | ||
| Invesco Physical Gold ETC | UK | 10,000 | 1,455,953 | 8.9 |
| WisdomTree Physical Gold ETC | UK | 8,000 | 1,132,610 | 7.0 |
| Total gold | 2,588,563 | 15.9 | ||
| Cash | 8,282,426 | 50.9 | ||
| Other liabilities net of other assets | (576,092) | (3.5) | ||
| Total cash less other net current liabilities | 7,706,334 | 47.4 | ||
| Total net assets | 16,270,804 | 100.0 |
CORPORATE SUMMARY
The Company’s purpose, values, strategy and culture
The Investment Company plc (the Company) is an investment trust company that has a premium listing on the London Stock Exchange, its principal activity is portfolio investment. The Company’s wholly owned subsidiaries are Abport Limited, an investment dealing company and New Centurion Trust Limited, an inactive investment company (together the “Group”).
The Company consists of the Board and its Shareholders and has no employees or customers in the traditional sense. The culture of the Company is embodied in the Board of Directors whose values are trust and fairness.
Investment Objective
At the Annual General Meeting on 4 November 2020, Shareholders voted to amend the Company’s Investment Objective and Policy to that shown below.
The Company’s investment objective during the year was to protect the purchasing power of its capital in real terms, and to participate in enduring economic activities which lend themselves to genuine capital accumulation and wealth creation.
At a General Meeting held on 26 June 2023, the members voted to amend the Investment Objective to: maximise capital growth for Shareholders over the long-term by investing in high-quality, quoted, UK small and mid-cap companies.
Investment Policy
The Company’s investment policy to 26 June 2023 was that the Company would seek to acquire and hold, with no predetermined investment time horizon, a collection of assets which, in the Directors’ judgement, are well-suited to the avoidance of a permanent loss of capital. These assets will be comprised of minority participations in the equity, debt or convertible securities of quoted businesses which the Directors believe are led by responsible and like-minded managers and suitable for the long-term compounding of earnings. In addition, to protect its capital as well as to maintain liquidity for future investments, the Company will keep reserves in (a) liquid debt instruments such as cash in banks or securities issued by governments and/or (b) liquid, non-debt, tangible assets such as gold bullion, whether held indirectly or in physical form.
The Company has no predetermined maximum or minimum levels of exposure to asset classes, currencies or geographies, and has the ability to invest globally. These exposures will be monitored by the Board in order to ensure an adequate spreading of risks. No holding in an individual company or debt instrument will represent more than 15% by value of the Company’s total assets at the time of acquisition (such restriction does not, however, apply to gold bullion or cash balances). The Company’s holdings of gold bullion may be as high as 35% of total assets at the time of investment.
Given the Company’s investment objective, asset mix and time horizon, the portfolio will not seek to track any benchmark or index. The Company will not invest more than 10% of its total assets in other listed closed-ended investment funds. The Company will not use derivative instruments for speculative purposes, nor will it use currency hedges to manage returns in any currency.
The Company’s gearing will not exceed 20% of net assets at the time of drawdown.
With effect from 26 June 2023, the Company’s investment policy will be as follows: The Company intends to fulfil its investment objective through investing in cash-generative quoted UK small and mid-cap companies that are expected to grow faster than the UK stock market as a whole over the long term and which can finance their own organic growth. The Company will primarily invest in equity securities of companies with shares admitted to listing on the Main Market, the AQSE or to trading on AIM with a market capitalisation of less than £250 million at the time of investment. The Company may also invest in companies with shares admitted to listing on the Main Market, the AQSE or to trading on AIM with a market capitalisation of £250 million or more at the time of investment for liquidity purposes. The Company will identify prospective companies through a formal quantitative and qualitative screening process which focuses on criteria such as the ability to convert a high proportion of profit into cash, sustainable margins, limited working capital intensity and a strong management team. Companies that successfully pass the screening process will form part of the Company’s ‘investable universe’ of prospective companies.
The Company has not set any limits on sector weightings within the portfolio but its exposures to sectors and stocks will be reported to, and monitored by, the Board in order to ensure that adequate diversification is achieved. The Company will maintain a diversified portfolio of a minimum of 60 holdings in UK small and mid-cap companies.
The Company may also invest in cash, cash equivalents, near cash instruments and money market instruments.
The Company will apply the following restrictions on its investments:
• not more than 10% of the Company’s Gross Assets at the time of investment will be invested in the securities of a single issuer;
• no investment will be made in companies that are not listed or traded on the Main Market, the AQSE or AIM at the time of investment, nor in any companies which have not applied for their shares to be admitted to listing or trading on these markets;
• no investment will be made in other listed or unlisted closed-ended investment funds or in any open-ended investment funds; and
• the Company will not invest directly in FTSE 100 companies (preference shares, loan stocks or notes, convertible securities or fixed interest securities or any similar securities convertible into shares), nor will it invest in the securities of other investment trusts or in unquoted companies. The Company may, on some occasions, hold such investments as a result of corporate actions by investee companies. If the Company holds shares in a company which enters the FTSE 100, it may not immediately divest of those shares but will do so when it considers appropriate, subject to market conditions.
The Company may hold assets acquired by the Company prior to the adoption of its investment policy for which there is no market and whose value the Company has written down to zero. The Company shall dispose of such assets as soon as is reasonably practicable.
No material change will be made to the investment policy without the approval of Shareholders by ordinary resolution.
Principal Risks and Uncertainties
The management of the business and the execution of the Company’s strategy are subject to a number of risks. A robust assessment of the principal risks to the Group and Company has been carried out, including those that would threaten its business model, future performance, solvency and liquidity.
The current economic environment including the level of inflation, rising interest rates and the conflict in Ukraine continue to have an effect on both global and domestic economies. These events are all being closely monitored by the Board as is the potential impact on the Company.
The Group’s principal risks are set out below. An explanation of how these have been mitigated or managed is also provided, where appropriate.
The key business risks affecting the Group are:
| Risk | Mitigation | |
| Business risk | The profitability, market positioning and outlook for companies in which the Company is invested may decline or fail to make expected progress. This may be because of internal factors at the investee company or external factors such as competitive pressures, economic downturns or political events. | The Company looks to invest in businesses that can demonstrate resilient characteristics and a shared philosophy around long term creation of value. |
| Concentration risk | The Company has too much exposure to one stock of sector. | Under the new investment policy, from 26 July 2023 investments in any one company shall not exceed 10% of the Company’s gross assets at the time of acquisition. |
| Monetary risk | The widespread implications of quantitative easing and other monetary policies, which include mounting inflationary pressure, pose a risk to the real value of the Company’s assets. | The Company looks to own a portfolio of assets that possess an enduring real value whether from the value of the underlying assets in an investment, or in the investee’s ability to create an enduring profit stream. |
| Operational risk | The Company is reliant on service providers including, ISCA Administration Services Limited as Administrator and Company Secretary, and Fiske plc as Custodian. Failure of the internal control systems of these parties could result in losses to the Company. | The Board formally reviews the Company’s service providers on an annual basis. |
There are other risks that are becoming more prominent but are not yet considered key risks.
Global conflict
The continuing war between Russia and Ukraine has had a significant impact, inter alia, on inflation and, in conjunction with affairs in China, an impact on supply chains and globalisation. Investee companies will vary as to the impact on them and their ability to adapt.
Inflationary pressure
Inflation has escalated sharply in the last 12 months and the Bank of England has raised interest rates on several occasions in an attempt to reduce the level of inflation. Not all investee companies are well-placed to pass on cost pressures to their customers. In addition, for the Company, it is expected that operating costs will rise more than dividend income.
In addition, there are other risks that may materially impact the Company; however the likelihood thereof is considered small.
Foreign currency risk
Under the investment policy in operation during the year the Company was invested in stocks in overseas markets dominated in foreign currencies thus increasing the foreign currency risk. However, as discussed under Post Balance Sheet Events in Note 19, the policy approved at the General Meeting on 26 June 2023 means that, going forward, the Company will only invest in UK stocks.
Regulatory risk
The Company operates in an evolving regulatory environment and faces a number of regulatory risks. A breach of sections 1158/1159 of the Corporation Tax Act 2010 would result in the Company being subject to capital gains tax on portfolio investments. Breaches of other regulations, including the Companies Act 2006, the United Kingdom Listing Authority (“UKLA”) Listing Rules, the UKLA Disclosure Guidance and Transparency Rules, or the Alternative Investment Fund Managers’ Directive, could lead to a detrimental outcome. Breaches of controls by service providers to the Company could also lead to reputational damage or loss. The Board monitors compliance with regulations, with reports from the Administrator.
Discount volatility
The Company’s shares may trade at a price which represents a discount to its underlying NAV.
Market price risk
The Board monitors the prices of financial instruments held by the Company on a regular basis. In addition, it is the Board’s policy to hold an appropriate spread of investments in the portfolio in order to reduce risks arising from investment decisions and investment valuations. The Board actively monitors market prices throughout the year and meets regularly in order to review investment strategy. Most of the equity investments held by the Company are listed on a recognised Stock Exchange.
Liquidity risk
The Company’s assets mainly comprise readily realisable quoted securities that can be sold to meet funding commitments if necessary.
Credit risk
The failure of a counterparty to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss. Normal delivery versus payment practice and review of counterparties and custodians by the Board mean that this is not a significant risk.
Interest rate risk
Given the changes in the portfolio in November 2020 this is not considered a significant risk other than through its effect on investee companies.
Performance
Details of the Company’s performance during the financial year are provided in the Chairman’s Statement and in the financial statements below
.
Key Performance Indicators (“KPIs”)
The Board reviews performance by reference to a number of KPIs and considers that the most relevant KPIs are those that communicate the financial performance and strength of the Group as a whole. The Board and Investment Manager monitor the following KPIs:
– NAV performance
The NAV per ordinary share at 30 June 2023 was 340.96p per share (2022: 336.30p). The total return of the NAV was 1.39% (2022: -1.43)%.
– Discount of share price in relation to NAV
Over the year to 30 June 2023, the Company’s share price moved from trading at a discount of 12.58% to a discount of 0.28%.
– Ongoing Charges Ratio
The Ongoing Charges Ratio for the year to 30 June 2023 amounted to 2.39% (2022: 2.17%).
Going Concern
In accordance with the Financial Reporting Council’s guidance on going concern, the Directors have undertaken a review of the Company’s ability to continue as a going concern.
The Directors believe that the Company is well placed to manage its business risks and that the assets of the Company consist mainly of securities which are readily realisable. The Directors are of the opinion that the Group has adequate resources to continue in operational existence for the foreseeable future and that it is therefore appropriate to adopt the going concern basis in preparing the financial statements. In arriving at this conclusion, the Directors have considered the liquidity of the portfolio and reviewed cash flow forecasts showing the ability of the Company to meet obligations as they fall due for a period of at least 12 months from the date that these financial statements were approved.
In addition, the Directors have regard to ongoing investor interest in the sustainability of the Company’s business model and in the continuation of the Company, specifically being interested in feedback from meetings and conversations with Shareholders.
In addition to considering the principal risks shown above and the financial position of the Company as described above, the Board has also considered the following further factors:
• the Board continues to adopt a long-term view when making investments;
• regulation will not increase to a level that makes the running of the Company uneconomical; and
• the performance of the Company will be satisfactory and should performance be less than the Board deem acceptable it has the powers to take appropriate action.