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Black Rock investment trust

BlackRock Smaller Companies Trust outperforms its benchmark, NAV increased by 11.7%

BlackRock Smaller Companies Trust plc (LON:BRSC) has provided annual results announcement for the year ended 29 February 2020

PERFORMANCE RECORD

29 February 2020 28 February 2019 Change % 
Performance
Net asset value per share (debt at par value)1,41,572.55p 1,407.88p +11.7 
Net asset value per share (debt at par value, capital only)1,41,548.57p 1,386.21p +11.7 
Net asset value per share (debt at fair value)1,2,41,556.41p 1,400.57p +11.1 
Numis Smaller Companies plus AIM (excluding Investment Companies) Index15,159.73 5,231.98 -1.4 
Ordinary share price1,484.00p 1,330.00p +11.6 
Year ended 
29 February 2020 
Year ended 
28 February 2019 
Change 
Revenue and dividends
Revenue return per share37.13p 33.67p +10.3 
First interim / Interim dividend per share12.80p 12.00p +6.7 
Second interim / Final dividend per share19.70p 19.20p +2.6 
————— ————— ————— 
Total dividends paid and payable32.50p31.20p +4.2 
======== ======== ======== 
Assets
Total assets less current liabilities (£’000)847,423 716,287 +18.3 
Equity shareholders’ funds (£’000)767,873 674,089 +13.9 
Ongoing charges ratio3,40.7% 0.7% – 
Dividend yield42.2% 2.3% 
Gearing45.7% 4.9% 

1     Without income reinvested.
2     The basis of calculation for the fair value of the debt is disclosed in note 13 of the financial statements and in the Glossary (both contained within the Company’s Annual Report for the year ended 29 February 2020).
3     Ongoing charges ratio calculated as a percentage of average shareholders’ funds and using operating expenses, finance costs, transaction costs and taxation, in accordance with AIC guidelines.
4     Alternative performance measures, see Glossary contained within the Annual Report and Financial Statements.

Sources: BlackRock and Datastream.

CHAIRMAN’S STATEMENT

No Chairman would take satisfaction in writing their first letter to Shareholders under the circumstances that we all face today as the world fights a pandemic. Since our 29 February year end, we have moved into a period of unprecedented global economic and social upheaval caused by COVID-19. As this crisis has escalated, your Board and the Manager have concentrated on protecting shareholder interests and maintaining operational resilience. It is good to report that these robust efforts have helped ensure smooth operations despite the sharp market volatility that has plagued investors in markets around the world. Our key areas of focus are noted below.

OPERATIONAL SECURITY AND WELL BEING
The Board has been working closely with BlackRock and the Company’s key suppliers to minimise the risk the virus poses to the health and wellbeing of all those working on the management and administration of the Company. We have received regular updates to ensure that the Company’s operations are not affected and that established business continuity plans are effective.

GEARING
The Board has reviewed our current range of borrowings and debt facilities (details of which are set out in the paragraph headed ‘gearing and sources of finance’ below) and note that despite recent market falls, the Company has remained compliant with all financial covenants and still maintains ample headroom above the relevant thresholds. The Company’s borrowings are well within the range of gearing limits set by the Company’s investment guidelines. More detail is provided below.

INVESTMENT PORTFOLIO CONSTRUCTION
Board members have maintained a regular dialogue with our portfolio manager to monitor the resilience of the portfolio in these extraordinary times and the actions that have been taken since the outbreak of the pandemic. A detailed update by the portfolio manager is provided in the Investment Manager’s report below.

FOCUS ON WELL GOVERNED COMPANIES
Your Company’s investment team is very experienced and has available a wide range of resources dedicated to the UK smaller companies universe. Their history of investing in this sector has shown that one of the best strategies to deal with adverse economic and market conditions is to populate the portfolio with well capitalised companies that have strong balance sheets and experienced, effective management teams. The Company’s portfolio is well diversified by sector and geography, with around half of the revenues from portfolio companies being generated from overseas.

THE YEAR UNDER REVIEW
While it is understandable that we should be focused on recent market events, it is also important to look back over the year just passed. Your Company’s remarkable record continued last year as it outperformed the benchmark for over fifteen years. Over that period, the net asset value (NAV) per share has increased by over 600%, greatly outdistancing the benchmark increase of just over 145% (all calculations with income reinvested). The Company has also increased its dividends every year for over fifteen years; the compound annual increase in dividends paid over the last fifteen years has been 14% per annum.

PERFORMANCE
In the year under review the Company’s Net Asset Value per share increased by 11.7%1,2,3, outperforming its benchmark, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index, which decreased by 1.4%1. Over the same period your Company’s share price increased by 11.6%1 to 1,484.00p per share compared with the FTSE AIM All Share Index which fell by 5.8%1, the FTSE 250 Index which rose by 0.8%1 and the FTSE 100 Index which fell by 7.0%1.

The first half of the Company’s financial year was challenging for UK equity markets, which underperformed many other equity markets as the uncertainties surrounding Brexit, together with global concerns over elevated levels of geopolitical risk made investors cautious. The UK market later experienced a resurgence through to the end of 2019 however, responding positively to signs of progress on US/China trade discussions and the outcome of the UK General Election. Sterling strengthened on the back of the election result and UK small & mid-cap companies outperformed. This improving picture was abruptly curtailed as measures to contain the fast-spreading COVID-19 virus started to hit markets globally.

The table below demonstrates your Company’s consistent outperformance over its benchmark during the last fifteen years.

In addition to capital returns, the Company has also provided impressive income growth.

The chart on page 7 of the Annual Report and Financial Statements (which can be found on the Company’s website at www.blackrock.com/uk/brsc) illustrates how long-term investors have had an opportunity to build up an attractive annual income from an investment in the Company. Even if the initial dividend yield at the point of purchase has been unremarkable, the strong underlying growth in dividends over the years has resulted in a competitive yield on cost when compared with equity income funds in general.

Specifically, this chart shows that £1,000 invested in the Company on 31 March 2006 would have increased in value by 418% in NAV terms to 29 February 2020, whereas £1,000 invested in the median open-ended UK Income Fund would have increased by just 102%. The chart also demonstrates that while the yield on the Company’s shares was much lower at the beginning of the period, over time the Company’s dividend has grown at a much faster rate than open-ended UK income fund competitors. As a result, the yield on the purchase cost of an investment in the Company would now be more than that on the median UK Income Fund.



Performance to 29 February 2020
1 Year 
change 
3 Years 
change 
5 Years 
change 
10 Years 
change 
15 Years 
change 
NAV per share1, 2,311.7 26.1 66.1 317.7 458.4 
Benchmark1-1.4 -2.0 12.8 79.0 67.5 
Share price111.6 40.0 82.8 405.2 548.0 
NAV per share2,3 (with income reinvested)14.1 33.3 81.4 389.7 605.1 
Benchmark (with income reinvested)1.4 6.2 29.1 131.4 145.2 
Share price3 (with income reinvested)14.0 48.6 101.6 504.5 748.3 

1.    Percentages in Sterling terms without income reinvested.
2.    Debt at par.
3.    Alternative Performance Measures – See Glossary contained within the Annual Report and Financial Statements.

RETURNS AND DIVIDENDS
The Company’s revenue return per share for the year ended 29 February 2020 increased by 10.3% to 37.13p per share compared with 33.67p per share for the previous year.

Regular dividends from portfolio companies rose by 11.0%, while special dividends received were 4.2% higher than in the previous year.

In November 2019 the Board declared an interim dividend of 12.80p per share (November 2018: 12.00p per share). In normal operating circumstances, the Board would declare a final dividend in respect of the year ended 29 February 2020.  However as announced in the Company’s trading update published on 3 June 2020, the Company’s annual results (normally released in May) were delayed due to a historic technical issue that was identified in respect of the Company’s Articles of Association (the ‘Articles’) (see note 12 below for more details). Given the later release date for the Company’s annual results and the consequent delay to the Company’s AGM which will now be held on 28 July 2020, the Board decided to declare a second interim dividend in lieu of a final dividend. This was to ensure that the payment timetable anticipated by shareholders could be met despite the later AGM date. Accordingly, on 3 June 2020, the Directors announced the payment of a second interim dividend of 19.70p per share (2019: 19.20p per share), making a total for the year of 32.50p per share, an increase of 4.2% over the total dividends of 31.20p per share paid in the previous year. In determining the level of dividend, the Board was mindful of ensuring that the Company retains a buffer of revenue reserves for future years.

Your Company has now increased its annual dividends every year since 2003.

GEARING AND SOURCES OF FINANCE
The Company has traditionally maintained a range of borrowings and facilities to provide balance between longer-term and short-term maturities and between fixed and floating rates of interest. On 3 December 2019, this range was expanded when the Company issued £20 million in senior unsecured fixed rate private placement notes at a coupon of 2.41% maturing in 2044. The net proceeds from the issuance, as well as being in place to provide refinancing for the £15 million debenture which is due to expire in 2022, will also be used for additional investment in the market within the Company’s existing gearing limits and will give the Investment Manager more scope to take advantage of suitable investment opportunities. The Board considers that obtaining such Sterling denominated financing on an unsecured basis at this price level and at a 25-year term to be highly attractive.

The Company now has in place fixed rate funding consisting of the Company’s existing £15 million debenture, £25 million senior unsecured fixed rate private placement notes issued in May 2017 at a coupon of 2.74% maturing in 2037 and the new notes maturing in 2044 as described above. Shorter-term variable rate funding consists of a £35 million three-year revolving loan facility with Sumitomo Mitsui Banking Corporation Europe Limited and an uncommitted overdraft facility of £10 million with Bank Of New York Mellon (International) Limited.

It continues to be the Board’s intention that net gearing will not exceed 15% of the net assets of the Company at the time of the drawdown of the relevant borrowings. Under normal operating conditions it is envisaged that gearing will be within a range of 0%-15% of net assets. The Company’s net gearing stands at 7.6% of net assets as at 22 June 2020. At the year end, the Company’s net gearing was 5.7% of net assets (2019: 4.9%).

DISCOUNT
The Board monitors the Company’s share rating closely, and recognises the importance to shareholders that the price of the Company’s shares in the stock market does not trade at either a significant premium or discount to the underlying NAV.  During the year the Company’s discount narrowed steadily, moving to trade at a premium for significant periods of time, and trading at an average discount of 2.9% to NAV (with debt at fair value) over the full year (compared to an average discount of 7.9% for the year to 28 February 2019). As markets descended into turmoil following the outbreak of COVID-19, the Company’s shares again moved to trade at a discount which was 3.7% as at 22 June 2020.

SHARE ISSUANCE
During the financial year ended 29 February 2020, the Company issued 950,000 ordinary shares at an average price of 1,686.84p per share for a total consideration of £16 million. The shares were issued at a premium to NAV with the objective of maintaining the Company’s share rating within a sensible range, and providing ongoing market liquidity in a manner that was accretive to shareholders. More details are set out on page 111 of the Annual Report and Financial Statements. Since 29 February 2020, and up to the close of business on 22 June 2020 no additional shares have been issued.

At the forthcoming Annual General Meeting (AGM) the Company will be seeking the authority to allot new ordinary shares or sell from treasury ordinary shares representing up to 10% of the Company’s issued ordinary share capital. 

BOARD COMPOSITION AND POLICY ON TENURE
Mr Robertson, who has served on the Board for more than twelve years, has informed the Board of his intention to retire in the forthcoming year, subject to a suitable replacement being recruited. The Board has commenced the recruitment process and a further announcement will be made in due course. The Board wishes to thank Mr Robertson for his wise counsel and invaluable contribution to the Company over his tenure as a Director and since June 2016 as Senior Independent Director. Mr Robertson will step down from his role as the Company’s Senior Independent Director at the Company’s next Annual General Meeting. Ms Platts-Martin will become the Senior Independent Director of the Company with effect from this date.

Mindful of the desirability of a combination of continuity and renewal, the Board has decided to combine this, over time, with a policy of limiting directors’ tenure to nine years. Subject to the constraints of effective succession planning, it is the Board’s aim that no Director will serve on the Board for more than nine years, or twelve years in the case of the Chairman. The longer time limit for the Chairman’s tenure is to allow for continuity of leadership in circumstances where a Chairman is appointed from the ranks of existing Board members after having already served on the Board for a period of time.

In setting this policy, the Board is mindful that several Board members have exceeded or are close to exceeding the proposed nine year limit. To ensure an orderly Board refreshment process, the implementation of the new policy on tenure will be phased in over a period of time. As well as Mr Robertson, the tenure of both Mr Peacock and Mrs Burton will exceed nine years by July 2021, and it is envisaged that they will retire in due course as the new policy is implemented.

ANNUAL GENERAL MEETING
In light of the current situation with COVID-19, the Board considers the well-being of shareholders and attendees as its top priority. On 26 March 2020, the Stay at Home Measures were passed into law in England and Wales, with immediate effect, in statutory instruments (2020/350 in England and 2020/353 in Wales) made pursuant to the Public Health (Control of Disease) Act 1984. Under these restrictions, public gatherings of more than two people are not permitted. Accordingly, it may not be possible for shareholders to attend Annual General Meetings in person and they are therefore advised to submit their votes by proxy. The AGM of the Company will be held at the offices of BlackRock at 12 Throgmorton Avenue, London EC2N 2DL on 28 July 2020 at 2:30pm. If the current restrictions remain in force, the only attendees who will be permitted entry to the meeting will be those who will need to be present to form the quorum to allow the business to be conducted. Further information will be provided in due course by way of a regulatory news announcement and through the Company’s website at www.blackrock.com/uk/brsc.

CHANGES TO ARTICLES
Hybrid general meetings
The COVID-19 pandemic has resulted in unprecedented social and economic damage. One consequence (as noted above) is that shareholders are unable to attend physical general meetings under current legislation. The current crisis has highlighted the need for companies to be flexible in their approach to general meetings and to take advantage of available technology to maximise shareholders’ ability to participate in such meetings. The Board is therefore proposing to make amendments to the Company’s Articles to enable the Company to hold hybrid general meetings such that shareholders may attend by electronic means as well as in person and to give additional powers in respect of postponing or adjourning meetings in appropriate circumstances. Whilst these changes may come too late to be of any benefit to shareholders in respect of the Company’s 2020 AGM, the Board’s aim in introducing them is to make it easier for shareholders to participate in general meetings in future through the introduction of electronic access where appropriate, and also to ensure relevant security measures are in place for the protection and wellbeing of shareholders.

Distribution of capital reserves
The Company’s Articles do not currently permit the distribution of capital reserves.  This restriction dates back to earlier times when legislation prohibited the distribution of realised capital profits by way of dividends or share buy backs.

Changes introduced by the Companies Act in 1999 made it permissible for investment companies to make distributions by way of share buy backs from realised capital profits, and the Company amended its Articles in May 2000 to add a provision to permit this type of distribution from the Company’s capital reserves.  However when the Company’s Articles were updated in June 2008 to reflect changes to the rules on distributions applicable to investment companies under the Companies Act 2006, this provision was inadvertently deleted. The Board is now proposing to reinstate it such that the Company will be permitted to distribute realised capital profits by way of share buy backs.  

Revised investment trust company tax rules introduced in 2012 made it possible for companies to distribute realised capital profits by way of dividends. The Board is also proposing to remove restrictions on the use of the Company’s capital reserves to allow realised capital profits to be distributed by way of dividends.  While the Board has no present intention of making dividend distributions from capital, and the Company has a comfortable surplus of revenue reserves, the Board believes that as a matter of good housekeeping it is prudent to provide the Company with this additional flexibility in respect of how the capital reserve may be distributed should this ever be required in the future.

Retirement and re-election of Directors
The Company’s Articles currently provide that one third of Directors retire by rotation each year; however, the UK Code of Corporate Governance requires all Directors to stand for re-election annually. Consequently, the Board is proposing a change to the Articles to introduce the requirement for annual re-election of Directors.

Other
Some additional minor amendments are being made to bring the Articles in line with changes to legislation and for administrative purposes.

The changes proposed to be introduced in the Articles, and their effect, are set out in more detail in the Directors’ report contained within the Annual Report and Financial Statements.

OUTLOOK
Since the financial year end the Company’s NAV (as at 22 June 2020) has decreased by 10.7%1, against a decrease in the benchmark of 7.7%1, and the share price has fallen by 10.1%1.

The COVID-19 outbreak and its rapid spread beyond China has caused mounting concerns over the impact on global growth, leading to significant volatility in stock markets around the world. The market falls in March and April as the crisis developed were savage and indiscriminate, only to be followed by a dramatic rally.  This extreme volatility is likely to continue for some time and has created dislocations in market valuations that are not consistent with the long-term fundamentals of the stocks in which we invest; our portfolio management team remain attuned to the investment opportunities that may be presented by these dislocations in pricing.

These are unprecedented times. The impact of COVID-19 is unpredictable and it is impossible at this stage to estimate its scale and duration. However, things will improve in time.

The Investment Manager’s focus on financially strong businesses with robust balance sheets provides us with confidence that the Company’s portfolio is well placed to weather the storm. The Company’s investment strategy remains focused on quality growth investment opportunities in smaller companies, a style that has demonstrably worked for the long-term, and historically periods of sudden underperformance, such as this, have proven to be excellent investment opportunities.

If shareholders would like to contact me, please write to BlackRock Smaller Companies Trust plc, Exchange Place One, 1 Semple Street, Edinburgh EH3 8BL marked for the attention of the Chairman.

RONALD GOULD
Chairman
24 June 2020

1Percentages in Sterling terms without income reinvested.

INVESTMENT MANAGER’S REPORT

MARKET REVIEW AND OVERALL INVESTMENT PERFORMANCE
The Company’s strong NAV performance masked a significant increase in market volatility during the year under review, with multiple factors at play. Equity markets rallied through the first half of the financial year, as the headwinds created by global trade uncertainties were offset by central bank easing in both the US and Europe. The shifting sands of the UK political outlook proved a never ending source of drama throughout the year, with the developments around Brexit (which now seems like a distant memory) a key driver of investor sentiment and Sterling weakness. However with Boris Johnson leading the Conservative Party to a convincing majority in the December General Election there was an immediate and dramatic change in sentiment towards the UK economy, boosting small and mid-cap companies. The final day of January marked the UK’s last day as a member of the EU, but there continue to be many hurdles to overcome as the UK seeks to renegotiate trading relationships.

2020 started on an optimistic tone; however this was overshadowed by the outbreak of COVID-19, which sparked one of the most rapid contractions in equity markets ever witnessed, as investors became concerned over the potential impact of the virus on the global economy. Country by country steps have been taken to contain the virus, which has subsequently developed into a global pandemic, but these necessary steps come with extreme economic consequences which we will cover in the outlook.

PERFORMANCE REVIEW
The Company’s NAV per share (debt at par) rose by 11.7% during the year, outperforming our benchmark which fell by 1.4%, and the FTSE 100 Index which fell by 7.0% (all percentages stated without income reinvested).

This has been a challenging period for UK smaller companies given the ongoing headwinds discussed above. However our focus on bottom-up fundamental analysis has resulted in the Company delivering another strong year of outperformance over our benchmark. In particular our focus on differentiated well-capitalised quality growth companies, that have been able to generate strong sustainable earnings growth and cashflow has been key to the Company’s performance. Key contributors this year have been Avon RubberLiontrust Asset ManagementTeam174imprint Group and YouGov.

Shares in Avon Rubber rallied after the company acquired the ballistic-protection business from US conglomerate 3M. The division manufactures bulletproof vests and helmets for the US army, and the acquisition should increase the pace of the company’s expansion into global military and law enforcement markets. The company continued to report strong trading at the beginning of 2020, while increasing global tensions provide a further fillip to the defence sector. Liontrust Asset Management has continued to see positive fund flows, particularly in the retail market. The acquisition of Neptune Investment Management provided further diversification to the business and added £2.7 billion in assets under management, while the sustainable products have been in demand as investors’ appetite for ESG related investment continues to build momentum. Shares in Team17 rallied throughout the period, as the video game developer reported multiple upgrades to profit guidance. In fact, the company provided five upgrades to forecasts in the last 12 months, and the future continues to look promising, with a number of new titles scheduled to be launched in the coming year, further adding to the group’s growing portfolio. 4imprint Group, a long-term core holding which we have mentioned in many previous reports, remained a top contributor for the full year as the business continued to deliver organic top-line growth with upgrades to forward guidance. Another repeat contributor to performance is YouGov, which continued to trade well during the second half of the year. Many people still think of YouGov as a UK political polling business, but if investors take the time to look beneath the bonnet, they will find a company that has been repositioning itself, pushing the valuable consumer data they have generated through their internal analysis system (the ‘Cube’) to produce actionable insights for their clients in the marketing industry.

Unsurprisingly given the strong performance during the period, detractors were limited. The largest was Zotefoams, the global manufacturer of specialty foams. Whilst still seeing demand for high performance products like those supplied to Nike, the challenging economic environment has resulted in a slowdown in sales in its more competitive industrial division. Eco Animal Health Group fell after the company issued a profit warning in November in response to a sharp slowdown in sales in China where demand has fallen further on the back of the African Swine Fever epidemic than we had anticipated. The company’s decision to maintain the cost base in order to benefit from the recovery once the outbreak is contained meant the reduction in revenues had a disproportionate impact on profitability. We have subsequently reduced the position but maintain a holding as we see its long-term competitive position unchanged and expect demand to improve as the Chinese pig herd recovers.

ACTIVITY
The portfolio currently holds 127 positions, reflecting both the number of opportunities we see within our universe, and the high levels of uncertainty that we are currently facing. We took part in the IPO of Watches of Switzerland and continued to add to the luxury watch retailer throughout the year. The company has built a strong position in both the UK and US markets, in an industry where there is little competition from online. Strong relationships with key brands allows the business to offer an unrivalled product range, which has ensured they have historically been able to grow sales despite the structural headwinds facing many other retailers. We purchased a new holding in Serco Group, a business we have carefully monitored over recent years as the management has unpicked a raft of legacy loss-making contracts. It had identified the US Navy as an attractive client to grow given future spending patterns, so we were not surprised to see the announcement of a deal to acquire NSBU, a leading supplier of ship design and engineering services to that sector. We took part in the IPO of The Pebble Group, a global designer and manufacturer of bespoke branded promotional goods, an attractive and growing market where they have a broad and loyal global client base. These repeat customers bring a large proportion of recurring revenues, while their subscription-based offering provides a high level of earnings visibility. Following the result of the general election, we also took steps to add to our UK exposure by purchasing new holdings in Pets at Home, and adding to Breedon, Joules, IntegraFin and Ibstock. Each of these holdings were added to the portfolio for stock specific reasons and the secular drivers they face, with the pessimism towards the UK during the year providing attractive entry points in our opinion.

PORTFOLIO POSITIONING
Portfolio positioning is very much a result of stock selection and therefore, reflecting the conviction we have in our core holdings, sector exposure remains broadly unchanged from previous reports. Relative to our benchmark we are overweight media companies, financial services companies, and the support services sector. Our media companies include 4imprint GroupYouGov and Team174imprint Group operates in a highly fragmented industry where despite having less than a 4% share, they are the undisputed market leader, and will benefit from any recovery in US corporate spending. YouGov, as discussed above, is adapting its business to changing customer demands opening up future channels for growth. Team17 operates in the fast-growing video games market, benefitting from the lengthening product cycle of the industry which has been driven by the rise of downloadable content. Within the financial services sector our holdings have more of a focus on equities, alternatives, sustainable investing or outsourcing services. Holdings include IntegraFinImpax Asset Management, Liontrust Asset ManagementAJ Bell and Polar Capital Holdings. Support services is an extremely diverse sector. Our largest holdings include recruiter Robert Walters and workwear and linen rental business Johnson Service Group. Robert Walters is well diversified globally, generating more than three quarters of its profits from outside of the UK. We remain underweight travel & leisure companies, food producers and general retailers; all sectors where we have structural concerns. We are also underweight software and computer services as ongoing uncertainty could continue to impact business investment decisions and IT spending. Where we do have exposure in these areas, it is through specific investment cases such as our holdings in Fuller Smith & Turner and GB Group.

Our investment universe remains well diversified by sector and geography, allowing us to build a portfolio of market leading globally exposed businesses. We have maintained a high exposure to international companies, with over half of the revenues of our portfolio originating from overseas. Our UK exposure is very deliberate, either exposed to more defensive businesses or to those benefiting from positive structural or cyclical trends such as Big YellowWorkspace Group and Johnson Service Group.

OUTLOOK
As shareholders will be aware, the recent COVID-19 outbreak and its spread beyond China has caused mounting concerns over the impact on global growth, resulting in a dramatic and significant market sell-off, which has been immediately followed by an equally dramatic rally. These are unprecedented times.  Never have we faced such an unknown quantity, and never have we seen these levels of government support or central bank stimulus. Given the uncertainty regarding the scope, scale, effect or implications of the virus at this stage, we have not materially changed positioning. Our unwavering focus on financially strong businesses gives us confidence in the holdings in our portfolio. The impact of COVID-19 is unpredictable, unavoidable and unprecedented, but it will get better. Our immediate outlook is for volatility to remain high as COVID-19 continues to dominate global events, but we must not allow the focus on the virus to let us overlook some of the other issues that can and will drive volatility. Brexit, US/China relations, and the US election will all take center stage at some point in the months to come, fighting a battle for market dominance with central bank policy, fiscal stimulus, and asset flows. The Company’s investment strategy remains focused on the identification of quality growth opportunities in smaller companies, a style that has demonstrably worked.

ROLAND ARNOLD
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED

24 June 2020

TEN LARGEST INVESTMENTS as at 29 February 2020

1 IntegraFin
Financial Services
Portfolio value                                    £20,838,000

Percentage of portfolio                     2.6%

Provider of a leading investment platform, called Transact, to UK financial advisers and their clients. The platform runs off proprietary technology, facilitating the smooth operation of client portfolios.

2 YouGov
Data analytics
Portfolio value                                    £19,835,000
Percentage of portfolio                     2.4%

An international provider of specialist data analytics and marketing information. The company was recently named one of the world’s top 25 research companies.

3 4imprint Group
Marketing
Portfolio value                                    £17,838,000
Percentage of portfolio                     2.2%

A leading supplier of promotional products operating almost wholly in the US market. It sells an extensive range of products to businesses and organisations of all sizes, typically personalised with the customers’ brand or logo. The leader in a highly fragmented market, its growth is underpinned by data-driven traditional and online marketing initiatives.

4 Avon Rubber
Aerospace and defence
Portfolio value                                    £17,598,000
Percentage of portfolio                     2.2%

An innovative technology group which designs and produces specialist Chemical, Biological, Radiological and Nuclear (‘CBRN’) respiratory protection systems. The company has two businesses: Avon Protection (the recognised global leader in CBRN respiratory protection systems for the world’s Military, Law Enforcement and Fire markets) and Milkrite, a global leader providing complete milking point solutions to dairy farmers across the world.

5 IG Design Group
Consumer goods
Portfolio value                                    £15,897,000
Percentage of portfolio                     2.0%

A leading manufacturer and supplier of gift packaging, greetings cards, stationery and creative play products serving the requirements of some of the largest global retailers.

6 Johnson Service Group
General industrials
Portfolio value                                    £14,177,000
Percentage of portfolio                     1.7%

A business providing textile rental high volume linen services and premium linen services for the hotel, catering and hospitality market throughout the UK and the leading supplier of work wear and protective wear in the UK.

7 Watches of Switzerland
Personal goods
Portfolio value                                    £13,556,000
Percentage of portfolio                     1.7%

The UK’s leading luxury watch specialist with a growing US presence. The group is comprised of four prestigious retail brands; Watches of Switzerland, Mappin & Webb, Goldsmiths and Mayors and has been transformed over the last 5 years into a modern, technologically advanced, multi-channel retailer. The group has an invested showroom network including flagships in London, two flagship showrooms in New York, and increasing presence of mono-brand boutiques along with an industry leading E-commerce platform.

8 Breedon
Construction and materials
Portfolio value                                    £13,327,000
Percentage of portfolio                     1.6%

A leading construction materials group in Great Britain and Ireland producing cement, aggregates, asphalt, ready-mixed concrete, specialist concrete and clay products.

9 Team17
Leisure goods
Portfolio value                                    £12,187,000
Percentage of portfolio                     1.5%

An independent developer and games label. The company collaborates with fellow developers around the globe sharing expertise from creation to launch across PC, console and mobile devices.

10 Impax Asset Management
Financial Services
Portfolio value                                    £11,725,000
Percentage of portfolio                     1.4%

A niche asset management company offering a range of listed equity, fixed income, smart beta and real asset strategies with a focus on environmental investing, a niche that is rapidly becoming more popular in today’s market place.

FIFTY LARGEST INVESTMENTS as at 29 February 2020


Company

Business activity
Market value 
£’000 
% of Total 
portfolio 
IntegraFinInvestment platform for financial advisers20,838 2.6 
YouGovSurvey data and specialist data analytics19,835 2.4 
4imprint GroupPromotional merchandise in the US17,838 2.2 
Avon RubberSafety masks and dairy related products17,598 2.2 
IG Design GroupDesign and supply of greetings products15,897 2.0 
Johnson Service GroupTextile rental and related services14,177 1.7 
Watches of SwitzerlandRetailer of luxury watches13,556 1.7 
BreedonConstruction materials13,327 1.6 
Team17Video game developer and publisher12,187 1.5 
Impax Asset ManagementAsset management services11,725 1.4 
Workspace GroupFlexible workspace to businesses in London11,459 1.4 
Robert WaltersRecruitment services11,198 1.4 
Morgan SindallOffice fit out, construction and urban regeneration services10,983 1.4 
Games WorkshopDeveloper, publisher and manufacturer of miniature war games10,745 1.3 
DiscoverIESpecialist components for electronics applications10,455 1.3 
The Pebble GroupDesign and manufacturing of promotional goods10,319 1.3 
Stock Spirits GroupBranded spirits mainly in Eastern Europe10,198 1.3 
Central Asia MetalsMining operations in Kazakhstan and North Macedonia10,151 1.3 
IbstockManufacture of clay bricks and concrete products10,120 1.2 
Alliance PharmaPharmaceutical and healthcare products9,853 1.2 
TreattDevelopment and manufacture of ingredients for the flavour and fragrance industry9,829 1.2 
Liontrust Asset ManagementAsset management9,720  1.2 
Learning TechnologiesE-learning services9,498 1.2 
Fuller Smith & Turner -A SharesPubs in the London area and South East England9,468 1.2 
Oxford InstrumentsDesign and manufacture of tools and systems for industry and research9,409 1.2 
Pets at HomePet supplies retailer9,032 1.1 
GB GroupIdentity verification software and solutions8,868 1.1 
St. Modwen PropertiesInvestment in, and development of property8,848 1.1 
Sirius Real EstateOwner and operator of business parks, offices and industrial complexes in Germany8,697 1.1 
GraftonBuilders merchants in the UK, Ireland and Netherlands8,564 1.0 
Next Fifteen CommunicationsDigital communication products and services8,511 1.0 
RenewEngineering services group supporting UK infrastructure8,314 1.0 
CVS GroupOperator of veterinary surgeries8,206 1.0 
Polar Capital HoldingsAsset management7,910 1.0 
Mattioli WoodsWealth management services7,865 1.0 
James Fisher and SonsInnovative marine solutions and specialised engineering services7,858 1.0 
Qinetiq GroupBritish multi-national defence technology company7,854 1.0 
Chemring GroupAdvanced technology products and services for the aerospace, defence and security markets7,792 1.0 
IMImobileCloud communications software provider7,655 0.9 
QuartixVehicle telematics services for the fleet and insurance sectors7,633 0.9 
Volution GroupVentilation products for the residential and commercial construction markets7,594 0.9 
OneSavings BankFinancial services7,591 0.9 
Serco GroupPublic services across health, transport, immigration, defence, justice and citizen services.7,572 0.9 
CalisenLeading owner and manager of essential energy infrastructure assets7,487 0.9 
Sumo GroupCreative and development services to the video games and entertainment industries7,435 0.9 
RMEducational software company7,150 0.9 
Vistry GroupUK housebuilder7,139 0.9 
Hyve GroupInternational exhibitions company7,026 0.9 
ClarksonShipping services6,820 0.8 
Tatton Asset ManagementOn-platform discretionary fund manager and IFA support service business6,794 0.8 
———— ———— 
50 largest investments506,598 62.4 
———— ———— 
Remaining investments305,418 37.6 
———— ———— 
Total812,016 100.0 
======= ======= 

Details of the full portfolio are available on the Company’s website at blackrock.com/uk/brsc.

Portfolio holdings in excess of 3% of issued share capital

At 29 February 2020, the Company did not hold any equity investments comprising more than 3% of any Company’s share capital other than as disclosed in the table below:

Security% of shares held 
Longboat Energy4.90 
Filta Group Holdings4.64 
Angling Direct4.64 
Capital Drilling4.56 
Tatton Asset Management4.50 
Tekmar Group4.32 
WLL London4.32 
Everyman Media Group4.31 
Quartix Holdings4.30 
City of London Investment Group4.23 
Cello Health4.09 
The Pebble Group4.08 
RBG Holdings4.04 
Ten Entertainment Group3.69 
Treatt3.68 
Anpario3.61 
Mattioli Woods3.46 
Fuller Smith and Turner3.45 
Maxcyte3.35 
Ergomed3.34 
RM3.30 
Duke Royalty3.19 
Curtis Banks Group3.18 
Lok’n Store Group3.16 
Bloomsbury Publishing3.15 
Joules Group3.14 
Central Asia Metals3.13 
Mind Gym3.10 
===== 

Distribution of investments as at 29 February 2020

Sector% of portfolio
Oil & Gas Producers0.8
Alternative Energy0.5
——– 
Oil & Gas1.3
——– 
Chemicals1.4
Mining2.0
——– 
Basic Materials3.4
——– 
Construction & Materials7.8
Aerospace & Defence4.1
Electronic & Electrical Equipment3.8
General Industrials1.6
Industrial Engineering1.8
Industrial Transportation1.8
Support Services11.4
——– 
Industrials32.3
——– 
Beverages1.3
Household Goods & Home Construction4.1
Personal Goods2.0
Leisure Goods3.7
——– 
Consumer Goods11.1
——– 
Health Care Equipment & Services2.2
Pharmaceuticals & Biotechnology3.6
——– 
Health Care5.8
——– 
Food & Drug Retailers0.7
General Retailers2.8
Media9.6
Travel & Leisure4.8
——– 
Consumer Services17.9
——– 
Mobile Telecommunications0.7
——– 
Telecommunications0.7
——– 
Financial Services15.8
Real Estate Investment & Services3.6
Real Estate Investment Trusts2.2
——– 
Financials21.6
——– 
Software & Computer Services5.9
Technology5.9
——– 
Total100.0
===== 

PORTFOLIO ANALYSIS as at 29 February 2020

INVESTMENT SIZE AS AT 29 FEBRUARY 2020
 


Number of
investments
Market value of investments as % of portfolio
£0m to £1m40.3
£1m to £2m61.2
£2m to £3m134.2
£3m to £4m125.3
£4m to £5m126.7
£5m to £6m1812.2
£6m to £7m129.5
£7m to £8m1514.0
£8m to £9m77.4
£9m to £10m78.2
£10m to £11m79.0
£11m to £12m34.2
£12m to £13m11.4
£13m to £14m23.3
£14m to £15m11.7
£15m to £16m12.0
£17m to £18m24.4
£19m to £20m12.4
£20m to £21m12.6

Source: BlackRock.

MARKET CAPITALISATION OF OUR PORTFOLIO COMPANIES AS AT 29 FEBRUARY 2020
 

% of portfolio
£0m to £200m15.4
£200m to £600m30.4
£600m to £1500m41.7
£1500m+12.5

Source: BlackRock.

ANALYSIS OF PORTFOLIO VALUE BY SECTOR
 





Company
%
Benchmark
(Numis Smaller Companies, plus AIM
(ex Investment Companies) Index)
%
Oil & Gas1.36.2
Basic Materials3.45.9
Industrials32.322.6
Consumer Goods11.110.2
Health Care5.85.3
Consumer Services17.917.1
Telecommunications0.72.5
Financials21.620.4
Technology5.98.6
Utilities0.01.2

Source: BlackRock and Datastream.

STRATEGIC REPORT

The Directors present the Strategic Report of the Company for the year ended 29 February 2020. The aim of the Strategic Report is to provide shareholders with the information to assess how the Directors have performed their duty to promote the success of the Company for the collective benefit of shareholders.

The Chairman’s Statement together with the Investment Manager’s Report and the Directors’ Statement setting out how they promote the success of the Company form part of the Strategic Report. The Strategic Report was approved by the Board at its meeting on 24 June 2020.

PRINCIPAL ACTIVITY
The Company is a public company limited by shares and carries on business as an investment trust and its principal activity is portfolio investment. Investment trusts, like unit trusts and OEICs, are pooled investment vehicles which allow exposure to a diversified range of assets through a single investment, thus spreading, although not eliminating investment risk.

OBJECTIVE
The Company’s prime objective is to achieve long-term capital growth for shareholders through investment mainly in smaller UK quoted companies.

No material change will be made to the Company’s investment objective without shareholder approval.

STRATEGY, BUSINESS MODEL AND INVESTMENT POLICY
To achieve its investment objective the Company invests predominantly in UK Smaller Companies which are listed on the London Stock Exchange or on the Alternative Investment Market (AIM), with a limit on the level of AIM investments that may be held within the portfolio of 50% of the portfolio by value. The Company may also invest in securities which are listed overseas but have a secondary UK quotation. Although investments are primarily in companies listed on recognised stock exchanges, the Investment Manager may also invest in less liquid unquoted securities with the prior approval of the Board. At 29 February 2020 the Company did not hold any illiquid unquoted investments in its portfolio.

BUSINESS MODEL
The Company’s business model follows that of an externally managed investment trust. Therefore, the Company does not have any employees and outsources its activities to third party service providers including the Manager, who is the principal service provider. The management of the investment portfolio and the administration of the Company have been contractually delegated to the Manager who in turn (with the permission of the Company) has delegated certain investment management and other ancillary services to the Investment Manager. The Manager, operating under guidelines determined by the Board, has direct responsibility for the decisions relating to the day-to-day running of the Company and is accountable to the Board for the investment, financial and operating performance of the Company.

The Company delegates fund accounting services to BlackRock Investment Management (UK) Limited (“BIM (UK)”), which in turn sub-delegates these services to The Bank of New York Mellon (International) Limited (“BNYM”). Other service providers include the Depositary (also BNYM) and the Registrar, Computershare Investor Services PLC. The Depositary has sub-delegated the provision of custody services to the Asset Servicing division of BNYM. Details of the contractual terms with the Manager and the Depositary and more details of the sub-delegation arrangements in place governing custody services are set out in the Directors’ Report.

INVESTMENT POLICY
The Manager has adopted a consistent investment process, focusing on good quality growth companies that are trading well; stock selection is the primary focus but consideration is also given to sector weightings and underlying themes. Whilst there are no set limits on individual sector exposures against the Company’s benchmark, a schedule of sector weightings is presented at each Board meeting for review. In applying the investment objective, the Investment Manager expects the Company to be fully invested and to borrow as and when appropriate. The Company seeks to achieve an appropriate spread of investment risk by investing in a number of holdings across a range of sectors.

The Company may not hold more than 6% of the share capital of any company in which it has an investment. In addition, while the Company may hold shares in other listed investment companies (including investment trusts) the Board has agreed that the Company will not invest more than 15% of its total assets in other UK listed investment companies. The Investment Manager will not deal in derivatives without the prior approval of the Board and derivative instruments, such as options and futures contracts, have not been used during the year.

Performance is measured against an appropriate benchmark, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index.

INVESTMENT PHILOSOPHY
The Investment Manager seeks to identify companies which it believes have superior long-term growth prospects and the management in place to take advantage of these prospects. This is done through monitoring market newsflow carefully, looking for signs of outperformance, and by working closely with BlackRock’s network of brokers. Initially, if the Investment Manager is sufficiently impressed with a company’s prospects, it will look to take a small position, usually 0.25% to 0.50% of the Company’s net assets, in a new holding. These holdings will be closely monitored, and members of the portfolio management team will meet with management on a regular basis. If these companies continue to prosper and make the most of opportunities, the Investment Manager will gradually add to the portfolio holding. Where initial expectations are disappointed, the holding will be sold. The anticipation is that each holding will develop into a core holding over time; one that meets the Investment Manager’s criteria for high quality growth companies.

Valuation is a key consideration; it is important not to overpay for new holdings. However, investment fundamentals are also important and the Investment Manager may be prepared to pay what seems like a high price if it believes that long-term growth prospects are very strong. Generally, a company will be held within the portfolio if it meets the criteria for core holdings; in respect of recent investments, the Investment Manager will consider whether they have the potential to meet these criteria. Holdings will be sold if there are concerns that the investment case has changed in a negative way. Holdings will be reduced where the position size becomes too large and raises concerns about risk and diversification. The general aim is for portfolio holdings not to exceed 3% of the Company’s net assets (excluding cash fund investments held for cash management purposes). As the investments within the portfolio become larger over time, the Portfolio Manager will continue to assess growth prospects in comparison to smaller businesses operating within similar markets. New holdings must have a market cap beneath £2 billion, however holdings that move above that level will be maintained providing the investment adheres to the original thesis, and remains the most attractive opportunity that can be found amongst a comparable peer group. In accordance with the guidelines, the Portfolio Manager will sell any stock that enters the FTSE 100 within thirty days of entry.

The Investment Manager believes that consistent outperformance can be achieved by employing a combination of bottom-up and top-down analysis, based upon strong fundamental research.

In building a robust portfolio the Investment Manager will also consider the macro-economic background, working with strategists, economists and other teams internally and externally to understand this better. It also works closely with BlackRock’s risk team to assess the risks in the structure of the portfolio. Any necessary adjustments will be made to the portfolio to ensure that it is structured in an appropriate way from a macro and risk point of view.

GEARING POLICY
Details of the Company’s gearing policy and borrowing arrangements are set out in detail in the Chairman’s statement above.

PORTFOLIO ANALYSIS
A detailed analysis of the portfolio has been provided above.

PERFORMANCE
Details of the Company’s performance including the dividend are set out in the Chairman’s Statement. The Chairman’s Statement and the Investment Manager’s Report form part of this Strategic Report and include a review of the main developments during the year, together with information on investment activity within the Company’s portfolio.

RESULTS AND DIVIDENDS
The results for the Company are set out in the Income Statement below. The total net profit for the year, after taxation, was £93,080,000 (2019: loss of £33,946,000) of which the revenue return amounted to £17,837,000 (2019: profit of £16,123,000), and the capital profit amounted to £75,243,000 (2019: loss of £50,069,000).

The Company’s revenue return amounted to 37.13p per share (2019: 33.67p). The Directors have declared a second interim dividend of 19.70p per share as set out in the Chairman’s Statement.

FUTURE PROSPECTS
The Board’s main focus is to achieve long-term capital growth. The future performance of the Company is dependent upon the success of the investment strategy and, to a large extent, on the performance of financial markets. The outlook for the Company in the next twelve months is discussed in the Chairman’s Statement and the Investment Manager’s Report above.

SOCIAL, COMMUNITY AND HUMAN RIGHTS ISSUES
As an investment trust, the Company has no direct social or community responsibilities. However, the Directors believe that it is in shareholders’ interests to consider human rights issues, environmental, social and governance matters when selecting and retaining investments. Details of the Company’s policy on socially responsible investment are set out on pages 44 and 45 of the Annual Report and Financial Statements.

MODERN SLAVERY ACT
As an investment vehicle the Company does not provide goods or services in the normal course of business, and does not have customers. Accordingly, the Directors consider that the Company is not required to make any slavery or human trafficking statement under the Modern Slavery Act 2015. In any event, the Board considers the Company’s supply chain, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.

DIRECTORS, GENDER REPRESENTATION AND EMPLOYEES
The Directors of the Company on 29 February 2020 are set out in the Directors’ biographies contained within the Annual Report and Financial Statements. With effect from 4 June 2019, the Board consists of three male Directors and two female Directors. The Company’s policy on diversity is set out on page 60 of the Annual Report and Financial Statements. The Company does not have any executive employees.

KEY PERFORMANCE INDICATORS
At each Board meeting, the Directors consider a number of performance measures to assess the Company’s success in achieving its objectives. The key performance indicators (KPIs) used to measure the progress and performance of the Company over time and which are comparable to those reported by other investment trusts are set out below. As indicated in footnote 3 to the table, some of these KPIs fall within the definition of ‘Alternative Performance Measures’ (APMs) under guidance issued by the European Securities and Markets Authority (ESMA) and additional information explaining how these are calculated is set out in the Glossary in the Annual Report and Financial Statements.

Additionally, the Board regularly reviews many indices and ratios to understand the impact on the Company’s relative performance of the various components such as asset allocation and stock selection. The Board also reviews the performance and ongoing charges of the Company against a peer group of UK smaller companies trusts and open-ended funds.



Key Performance Indicators
Year ended 
29 February 
2020 
Year ended 
28 February 
2019 
NAV per share (debt at par value)1,211.7% -6.6% 
NAV per share (debt at fair value)1,211.1% -6.6% 
NAV per share (debt at par value, capital only)1,211.7% -6.8% 
NAV per share total return performance (debt at fair value)213.5% -4.9% 
Share price1,211.6% 0.4% 
Benchmark return1-1.4% -8.2% 
Average discount to NAV with debt at fair value22.9% 7.9% 
Revenue return per share37.13p 33.67p 
Ongoing charges ratio2,30.7% 0.7% 
Retail ownership64.9% 62.3% 
====== ====== 

1     Without income reinvested.
2     Alternative performance measures, see Glossary in the Annual Report and Financial Statements.
3     Calculated as a percentage of average shareholders’ funds and using operating expenses, finance costs, transaction costs and taxation in accordance with AIC guidelines.

Sources: BlackRock and Datastream.

PRINCIPAL RISKS
The Company is exposed to a variety of risks and uncertainties. As required by the UK Code, the Board has in place a robust ongoing process to identify, assess and monitor the principle risks and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. A core element of this process is the Company’s risk register which identifies the risks facing the Company and assesses the likelihood and potential impact of each risk and the quality of the controls operating to mitigate it. A residual risk rating is then calculated for each risk based on the outcome of the assessment.

The risk register, its method of preparation and the operation of key controls in BlackRock’s and third-party service providers’ systems of internal control are reviewed on a regular basis by the Audit Committee. In order to gain a more comprehensive understanding of BlackRock’s and other third-party service providers’ risk management processes and how these apply to the Company’s business, BlackRock’s internal audit department provides an annual presentation to the Audit Committee Chairman setting out the results of testing performed in relation to BlackRock’s internal control processes. The Audit Committee also periodically receives presentations from BlackRock’s Risk & Quantitative Analysis team and reviews Service Organisation Control (SOC 1) reports from the Company’s service providers. The current risk register categorises the Company’s main areas of risk as follows:

  • Investment performance risk;
  • Market risk;
  • Income/dividend risk;
  • Legal & compliance risk;
  • Operational risk;
  • Financial risk; and
  • Marketing risk.

The Board has undertaken a robust assessment of both the principal and emerging risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity. Since the year end, the COVID-19 pandemic has given rise to unprecedented challenges for businesses across the globe and the Board has taken into consideration the risks posed to the Company by the crisis and incorporated these into the Company’s risk register. The risks identified by the Board have been described in the table that follows, together with an explanation of how they are managed and mitigated. Emerging risks are considered by the Board as they come into view and are incorporated into the existing review of the Company’s risk register. They were also considered as part of the annual evaluation process.

Additionally, the Manager considers emerging risks in numerous forums and the Risk and Quantitative Analysis team produces an annual risk survey. Any material risks of relevance to the Company identified through the annual risk survey will be communicated to the Board.

The Board will continue to assess these risks on an ongoing basis. In relation to the UK Code, the Board is confident that the procedures that the Company has put in place are sufficient to ensure that the necessary monitoring of risks and controls has been carried out throughout the reporting period.

Principal riskMitigation/Control
Investment performance
Returns achieved are reliant primarily upon the performance of the portfolio.
The Board is responsible for:deciding the investment strategy to fulfil the Company’s objective; andmonitoring the performance of the Investment Manager and the implementation of the investment strategy.An inappropriate investment strategy may lead to:poor performance compared to the Benchmark Index and the Company’s peer group;a loss of capital; anddissatisfied shareholders.
To manage this risk the Board:regularly reviews the Company’s investment mandate and long-term strategy;has set investment restrictions and guidelines which the Investment Manager monitors and regularly reports on;receives from the Investment Manager a regular explanation of stock selection decisions, portfolio exposure, gearing and any changes in gearing and the rationale for the composition of the investment portfolio;monitors the maintenance of an adequate spread of investments in order to minimise the risks associated with factors specific to particular sectors, based on the diversification requirements inherent in the investment policy; andreceives reports showing the Company’s performance against the benchmark.
Market risk
Market risk arises from volatility in the prices of the Company’s investments influenced by currency, interest rate or other price movements. It represents the potential loss the Company might suffer through holding market positions in financial instruments in the face of market movements.

Market risk includes the potential impact of events which are outside the Company’s control, such as the COVID-19 pandemic.
The Board considers asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by the Investment Manager.

The Board monitors the implementation and results of the investment process with the Investment Manager.

The Board also recognises the benefits of a closed end fund structure in extremely volatile markets such as those experienced as the COVID-19 pandemic escalates. Unlike open-ended counterparts, closed end funds are not obliged to sell down portfolio holdings at low valuations to meet liquidity requirements for redemptions. During times of elevated volatility and market stress, the ability of a closed end fund structure to remain invested for the long-term enables the portfolio manager to adhere to disciplined fundamental analysis from a bottom-up perspective and be ready to respond to dislocations in the market as opportunities present themselves.
Income/dividend risk
The amount of dividends and future dividend growth will depend on the performance of the Company’s underlying portfolio. In addition, any change in the tax treatment of the dividends or interest received by the Company may reduce the level of dividends received by shareholders.
The Board monitors this risk through the receipt of detailed income forecasts and considers the level of income at each Board meeting.

The Company has substantial revenue reserves which can be utilised.
Legal & Compliance risk
The Company has been approved by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant eligibility conditions and operates as an investment trust in accordance with Chapter 4 of Part 24 of the Corporation Tax Act 2010. As such, the Company is exempt from capital gains tax on the profits realised from the sale of its investments.

Any breach of the relevant eligibility conditions could lead to the Company losing investment trust status and being subject to corporation tax on capital gains realised within the Company’s portfolio. In such event the investment returns of the Company may be adversely affected.

Any serious breach could result in the Company and/or the Directors being fined or the subject of criminal proceedings or the suspension of the Company’s shares which would in turn lead to a breach of the Corporation Tax Act 2010.

Amongst other relevant laws and regulations, the Company is required to comply with the provisions of the Companies Act 2006, the Alternative Investment Fund Managers’ Directive, the UK Listing Rules and Disclosure Guidance and Transparency Rules and the Market Abuse Regulation.
The Investment Manager monitors investment movements and the amount of proposed dividends to ensure that the provisions of Chapter 4 of Part 24 of the Corporation Tax Act 2010 are not breached. The results are reported to the Board at each meeting.

Compliance with the accounting rules affecting investment trusts is also carefully and regularly monitored.

The Company Secretary and the Company’s professional advisers provide regular reports to the Board in respect of compliance with all applicable rules and regulations.
Operational risk
In common with most other investment trust companies, the Company has no employees. The Company therefore relies on the services provided by third parties. Accordingly, it is dependent on the control systems of the Manager, the Depositary and the Fund Accountant who maintain the Company’s assets, dealing procedures and accounting records.

The security of the Company’s assets, dealing procedures, accounting records and adherence to regulatory and legal requirements and the prevention of fraud depend on the effective operation of the systems of these other third party service providers. There is a risk that a major disaster, such as floods, fire, a global pandemic, or terrorist activity, renders the Company’s service providers unable to conduct business at normal operating capacity and effectiveness.
Failure by any service provider to carry out its obligations to the Company could have a material adverse effect on the Company’s performance. Disruption to the accounting, payment systems or custody records could prevent the accurate reporting and monitoring of the Company’s financial position.
Due diligence is undertaken before contracts are entered into with third party service providers. Thereafter, the performance of the provider is subject to regular review and reported to the Board.

The Board reviews on a regular basis an assessment of the fraud risks that the Company could potentially be exposed to, and also a summary of the controls put in place by the Manager, the Depositary, the Custodian, the Fund Accountant and the Registrar designed specifically to mitigate these risks.

Most third-party service providers produce Service Organisation Control (SOC 1) reports to provide assurance regarding the effective operation of internal controls as reported on by their reporting accountants. These reports are provided to the Audit Committee. The Company’s assets are subject to a strict liability regime and in the event of a loss of financial assets held in custody, the Depositary must return assets of an identical type or the corresponding amount, unless able to demonstrate the loss was a result of an event beyond its reasonable control.

The Board reviews the overall performance of the Manager, Investment Manager and all other third-party service providers and compliance with the Investment Management Agreement on a regular basis. The Board also considers the business continuity arrangements of the Company’s key service providers on an ongoing basis and reviews these as part of their review of the Company’s risk register. In respect of the unprecedented and emerging risks posed by the COVID-19 pandemic in terms of the ability of service providers to function effectively, the Board have received reports from key service providers (the Manager, the Depositary, the Custodian, the Fund Administrator, the Broker, the Registrar and the printers) setting out the measures that they have put in place to address the crisis in addition to their existing business continuity framework. Having considered these arrangements and reviewed service levels since the crisis has evolved, the Board are confident that a good level of service will be maintained.
Financial risk
The Company’s investment activities expose it to a variety of financial risks that include interest rate, credit and liquidity risk.
Details of these risks are disclosed in note 17 to the Annual Report and Financial Statements, together with a summary of the policies for managing these risks.
Marketing risk
Marketing efforts are inadequate, do not comply with relevant regulatory requirements, and fail to communicate adequately with shareholders or reach out to potential new shareholders resulting in reduced demand for the Company’s shares and a widening discount.
The Board focuses significant time on communications with shareholders and reviewing marketing strategy and initiatives. All investment trust marketing documents are subject to appropriate review and authorisation.

VIABILITY STATEMENT
In accordance with provision 31 of the 2018 UK Corporate Governance Code, the Directors have assessed the prospects of the Company over a longer period than the 12 months referred to by the ‘Going Concern’ guidelines.

The Board is cognisant of the uncertainty surrounding the potential duration of the COVID-19 pandemic, its impact on the global economy and the prospects for many of the Company’s portfolio holdings. Notwithstanding this crisis, and given the factors stated below, the Board expects the Company to continue for the foreseeable future and has therefore conducted this review for the period up to the AGM in 2025 being a five-year period from the date that this Annual Report will be approved by shareholders. This assessment term has been chosen as it represents a medium-term performance period over which investors in the smaller companies sector generally refer to when making investment decisions.

In making this assessment the Board has considered the following factors:

  • The Company’s principal risks as set out above;
  • The impact of a significant fall in UK equity markets on the value of the Company’s investment portfolio, factoring in the impact of recent market volatility related to the COVID-19 pandemic;
  • The ongoing relevance of the Company’s investment objective in the current environment; and
  • The level of demand for the Company’s ordinary shares.

The Board has also considered a number of financial metrics and other factors, including:

  • The Board has reviewed portfolio liquidity as at 31 May 2020 in light of the impact of the COVID-19 pandemic on global market liquidity. As at 31 May 2020, 62% of the portfolio was estimated as being capable of being liquidated within 30 days.
  • The Board has reviewed the Company’s revenue and expense forecasts in light of the COVID-19 pandemic and its anticipated impact on dividend income and market valuations. The Board is confident that the Company’s business model remains viable and that the Company has sufficient resources to meet all liabilities as they fall due for the period under review;
  • The Board has reviewed the Company’s borrowing and debt facilities and considers that despite recent market falls the Company continues to meet its financial covenants in respect of these facilities and has a wide margin before any relevant thresholds are reached;
  • The Board keeps the Company’s principal risks and uncertainties as set out above under review, and is confident that the Company has appropriate controls and processes in place to manage these and to maintain its operating model, even given the challenges posed by COVID-19;
  • The operational resilience of the Company and its key service providers (the Manager, Depositary, Custodian, Fund Administrator, Registrar and Broker) and their ability to continue to provide a good level of service for the foreseeable future;
  • The effectiveness of business continuity plans in place for the Company and key service providers in particular in respect to COVID-19;
  • The level of current and historic ongoing charges incurred by the Company;
  • The discount to NAV;
  • The level of income generated by the Company; and
  • Future income forecasts.

The Company is an investment company with a relatively liquid portfolio. As at 29 February 2020, the Company held no illiquid unquoted investments and 67% of the Company’s portfolio investments were readily realisable and listed on the London Stock Exchange. The remaining 33% that were listed on the Alternative Investment Market are also considered to be readily realisable. The Company has largely fixed overheads which comprise a very small percentage of net assets. Therefore, the Board has concluded that, even in exceptionally stressed operating conditions, including the challenges presented by the COVID-19 pandemic, the Company would comfortably be able to meet its ongoing operating costs as they fall due.

Based on the results of their analysis, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment.

SECTION 172 STATEMENT: PROMOTING THE SUCCESS OF THE COMPANY
New regulations (The Companies (Miscellaneous Reporting) Regulations 2018) require directors to explain in greater detail how they have discharged their duties under section 172(1) of the Companies Act 2006 in promoting the success of their companies for the benefit of members as a whole. This enhanced disclosure is required under the Companies Act 2006 and the AIC Code of Corporate Governance and covers how the Board has engaged with and understands the views of stakeholders and how stakeholders’ needs have been taken into account, the outcome of this engagement and the impact that it has had on the Board’s decisions.

As the Company is an externally managed investment company and does not have any employees or customers, the Board consider the main stakeholders in the Company to be the shareholders, key service providers (being the Manager and Investment Manager, the Custodian, Depositary, Registrar and Broker) and investee companies. The reasons for this determination, and the Board’s overarching approach to engagement, are set out in the table below.

Stakeholders
ShareholdersManager and Investment ManagerOther key service providersInvestee companies
Continued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy. The Board is focused on fostering good working relationships with shareholders and on understanding the views of shareholders in order to incorporate them into the Board’s strategy and objectives in delivering long- term growth and income.The Board’s main working relationship is with the Manager, who is responsible for the Company’s portfolio management (including asset allocation, stock and sector selection) and risk management, as well as ancillary functions such as administration, secretarial, accounting and marketing services. The Manager has sub-delegated portfolio management to the Investment Manager. Successful management of shareholders’ assets by the Investment Manager is critical for the Company to successfully deliver its investment strategy and meet its objective. The Company is also reliant on the Manager as AIFM to provide support in meeting relevant regulatory obligations under the AIFMD and other relevant legislation.In order for the Company to function as an investment trust with a listing on the premium segment of the official list of the FCA and trade on the London Stock Exchange’s (LSE) main market for listed securities, the Board relies on a diverse range of advisors for support in meeting relevant obligations and safeguarding the Company’s assets. For this reason the Board consider the Company’s Custodian, Depositary, Registrar and Broker to be stakeholders. The Board maintains regular contact with its key external service providers and receives regular reporting from them through the Board and committee meetings, as well as outside of the regular meeting cycle.Portfolio holdings are ultimately shareholders’ assets, and the Board recognise the importance of good stewardship and communication with investee companies in meeting the Company’s investment objective and strategy. The Board monitors the Manager’s stewardship arrangements and receives regular feedback from the Manager in respect of meetings with the management of portfolio companies.

A summary of the key areas of engagement undertaken by the Board with its key stakeholders in the year under review and how Directors have acted upon this to promote the long-term success of the Company are set out in the table below.

Area of EngagementIssueEngagementImpact
Management of share ratingThe Board recognises that it is in the long-term interests of shareholders that shares do not trade at a significant discount or premium to their prevailing net asset value.The Board monitors the Company’s share rating on an ongoing basis and receives regular updates from the Company’s brokers and Manager regarding the level of discount and the drivers behind this. The Manager provides regular performance updates and detailed performance attribution.

The Board believes that the best way of maintaining the share rating at an optimal level over the long-term is to create demand for the shares in the secondary market. To this end the Investment Manager is devoting considerable effort to broadening the awareness of the Company, particularly to wealth managers and to the wider retail shareholder market. The Company contributes to a focused investment trust sales and marketing initiative operated by BlackRock on behalf of the investment trusts under its management.

The Company’s contribution to the consortium element of the initiative, which enables the trusts to achieve efficiencies by combining certain sales and marketing activities was a fixed amount of £66,000 and this contribution is matched by the Investment Manager for the year ended 31 December 2019. In addition, a budget of £42,000 was allocated for Company specific sales and marketing activity also for the year to 31 December 2019. The purpose of the programme overall is to ensure effective communication with existing shareholders and to attract new shareholders to the Company to improve liquidity in the Company’s shares and to sustain the stock market rating of the Company.
Over the last four years, the Company’s discount has narrowed steadily, from an average discount of 15.4% for the year to 28 February 2017 to 2.9% for the year ended 29 February 2020; in the year under review the Company’s shares moved to trade at a premium for significant periods of time. Market demand for the Company’s shares has been strong and between December 2019 and the date of this report the Company has issued 950,000 shares for proceeds of £16 million, improving the Company’s liquidity and resulting in a lower operating charges ratio.
Over the last nine years, the number of shares held by retail shareholders has increased from 29.5% (as at 28 February 2011) to 64.9% at 29 February 2020.
Investment mandate and objectiveThe Board has the responsibility to shareholders to ensure that the Company’s portfolio of assets is invested in line with the stated investment objective and in a way that ensures an appropriate balance between spread of risk and portfolio returns.The Board works closely with the Investment Manager throughout the year in further developing our investment strategy and underlying policies, not simply for the purpose of achieving the Company’s investment objective but in the interests of shareholders and future investors.The portfolio activities undertaken by the Investment Manager can be found in the Investment Manager’s Report. Details regarding the Company’s NAV and share price performance can be found in the Chairman’s Statement and in the Strategic Report above.
Responsible investingMore than ever, good governance and consideration of sustainable investment is a key factor in making investment decisions. Climate change is becoming a defining factor in companies’ long-term prospects across the investment spectrum, with significant and lasting implications for economic growth and prosperity.The Board believes that responsible investment and sustainability are integral to the longer-term delivery of the Company’s success. The Board works closely with the Investment Manager to regularly review the Company’s performance, investment strategy and underlying policies to ensure that the Company’s investment objective continues to be met in an effective, responsible and sustainable way in the interests of shareholders and future investors.
The Investment Manager’s approach to the consideration of Environmental, Social and Governance (‘ESG’) factors in respect of the Company’s portfolio, as well as the Investment Manager’s engagement with investee companies to encourage the adoption of sustainable business practices which support long-term value creation are kept under review by the Board.
The Investment Manager reports to the Board in respect of its ESG policies and how these are integrated into the investment process; a summary of BlackRock’s approach to ESG and sustainability is set out on page 44 the Company’s Annual Report and Financial Statements. The Investment Manager’s engagement and voting policy is detailed on pages 44 to 45 and page 48 of the Company’s Annual Report and Financial Statements and on the BlackRock website.
The Board and the Investment Manager believe there is a positive correlation between strong ESG practices and investment performance. Details of the Company’s performance in the year are given in the Chairman’s Statement and the Performance Record above.
Gearing and sources of financeThe Board believes that it is important for the Company to have an appropriate range of borrowings and facilities in place to provide a balance between longer-term and short-term maturities and between fixed and floating rates of interest.Gearing levels and sources of funding are reviewed regularly by the Board with a view to ensuring that the Company has a suitable mix of financing at competitive market rates.

The Board moved the Company’s existing £35 million Revolving Credit Facility (RCF) from Scotiabank (Ireland) Limited to Sumitomo Bank Limited in November 2019 in order to benefit from lower finance costs.

Mindful of the fact that the Company’s £15 million debenture will need refinancing in 2022, the Board decided in November 2019 to borrow an additional £20 million at a rate of 2.41% per annum through issuing additional unsecured, fixed rate, private placement notes. The notes have a 25 year maturity, and will be repaid in November 2044.

As at 29 February 2020, the Company had the following borrowing facilities in place: long-term fixed rate funding in the form of a £15 million debenture with a coupon of 7.75% maturing in 2022, £25 million senior unsecured fixed rate private placement notes issued in May 2017 at a coupon of 2.74% with a 20 year maturity and £20 million senior unsecured fixed rate private placement notes issued in December 2019 at a coupon of 2.41% with a 25 year maturity. Shorter term variable rate funding consisted of a £35 million three-year revolving loan facility with Sumitomo Bank Limited with interest charge at Libor plus 75 basis points and an uncommitted overdraft facility of £10 million with Bank of New York (Europe) Limited with interest charged at Libor plus 100 basis points.

It is the Board’s intention that gearing will not exceed 15% of the net assets of the Company at the time of the drawdown of the relevant borrowings. Under normal operating conditions it is envisaged that gearing will be within a range of 0%-15% of net assets.
The transfer of the RCF from Scotiabank to Sumitomo will result in significant savings for the Company by way of reduced finance charges. By way of example, if the RCF were fully utilised, the reduction in interest over the three year RCF term equates to £210,000.

The Board believes that the issue of the £20 million private placement notes in December 2019 locks in fixed rate, long dated, Sterling denominated financing at a highly competitive pricing level.

The net proceeds of the additional debt issue, as well as being in place to provide refinancing for the £15 million debenture when it expires in 2022, will also be used for additional investment in the market within the Company’s existing gearing limits and will give the Investment Manager significantly more scope to take advantage of suitable investment opportunities. The Board is optimistic that the Investment Manager will be able to find investments in the future which will provide returns comfortably in excess of the interest rate on the additional tranche of debt.

At the year end, the Company’s gearing was 5.7% of net assets.
Service levels of third party providersThe Board acknowledges the importance of ensuring that the Company’s principal suppliers are providing a suitable level of service: including the Manager in respect of investment performance and delivering on the Company’s investment mandate; the Custodian and Depositary in respect of their duties towards safeguarding the Company’s assets; the Registrar in its maintenance of the Company’s share register and dealing with investor queries and the Company’s Brokers in respect of the provision of advice and acting as a market maker for the Company’s shares.The Manager reports to the Board on the Company’s performance on a regular basis. The Board carries out a robust annual evaluation of the Manager’s performance, their commitment and available resources.

The Board performs an annual review of the service levels of all third party service providers and concludes on their suitability to continue in their role.

The Board receives regular updates from the AIFM, Depositary, Registrar and Brokers on an ongoing basis. Since the year end, in light of the challenges presented by the COVID-19 pandemic to the operation of business across the globe, the Board has worked closely with the Manager to gain comfort that relevant business continuity plans are operating effectively for all of the Company’s service providers.
All performance evaluations were performed on a timely basis and the Board concluded that all third party service providers, including the Manager were operating effectively and providing a good level of service.

The Board has received updates in respect of business continuity planning from the Company’s Manager, Custodian, Depositary, Fund Administrator, Brokers, Registrar and printers, and is confident that arrangements are in place to ensure that a good level of service will continue to be provided despite the impact of the COVID-19 pandemic.
Board compositionThe Board is committed to ensuring that its own composition brings an appropriate balance of knowledge, experience and skills, and that it is compliant with best corporate governance practice under the new UK Code, including guidance on tenure and the composition of the Board’s committees.During the 2019 financial year Mr Nick Fry advised of his desire to retire at the 2019 AGM, creating the need to select a new director and chairman.

The Nomination Committee agreed the selection criteria and the method of selection, recruitment and appointment. Board diversity, including gender, was taken into account when establishing the criteria. The services of an external search consultant, were used to identify potential candidates.

All Directors are subject to a formal evaluation process on an annual basis (more details and the conclusions in respect of the 2020 evaluation process are given in the Annual Report and Financial Statements). All Directors stand for re-election by shareholders annually.

Notwithstanding the issues posed by the COVID-19 pandemic, in normal operating conditions, shareholders may attend the AGM and raise any queries in respect of Board composition or individual Directors in person, or may contact the Company Secretary or the Chairman using the details provided in the Annual Report and Financial Statements with any issues.
As a result of the recruitment process, Mr Ronald Gould was appointed as a Director of the Company with effect from 1 April 2019. Mr Nick Fry retired as a Director and Chairman of the Company on 4 June 2019, with Mr Gould taking on the role of Chairman with effect from this date.

One Director, Mr Robertson, has served for more than nine years. He has given notice of his intention to retire as soon as a replacement is found. The recruitment process is underway.

Details of each Directors’ contribution to the success and promotion of the Company are set out in the Directors’ report in the Annual Report and Financial Statements and details of Directors’ biographies can be found in the Annual Report and Financial Statements. The Directors are not aware of any issues that have been raised directly by shareholders in respect of Board composition in the year under review. Details for the proxy voting results in favour and against individual Directors’ re-election at the 2019 AGM are given on the Company’s website at www. blackrock.com/uk/brsc.
ShareholdersContinued shareholder support and engagement are critical to the continued existence of the Company and the successful delivery of its long-term strategy.The Board is committed to maintaining open channels of communication and to engage with shareholders. Under normal operating circumstances, the Board welcomes and encourages attendance and participation from shareholders at its Annual General Meetings. Given the COVID-19 crisis and restrictions on public meetings, this may not be possible for the 2020 AGM, however the Board look forward to offering opportunities for shareholders to meet the portfolio manager and the Board at some safer stage in the future. If shareholders wish to raise issues or concerns with the Board outside of the AGM, they are welcome to do so at any time. The Chairman is available to meet directly with shareholders periodically to understand their views on governance and the Company’s performance where they wish to do so. He may be contacted via the Company Secretary whose details are given on page 109 of the Company’s Annual Report and Financial Statements.

The Annual Report and Half Yearly Financial Report are available on the Company’s website and are also circulated to shareholders either in printed copy or via electronic communications. In addition, regular updates on performance, monthly factsheets, the daily NAV and other information are also published on the website at blackrock.com/uk/brsc.

The Board also works closely with the Manager to develop the Company’s marketing strategy, with the aim of ensuring effective communication with shareholders in respect of the investment mandate and objective. Unlike trading companies, one-to-one shareholder meetings usually take the form of a meeting with the portfolio manager as opposed to members of the Board. As well as attending regular investor meetings the portfolio managers hold regular discussions with wealth management desks and offices to build on the case for, and understanding of, long-term investment opportunities in the UK smaller companies sector.

The Manager also coordinates public relations activity, including meetings between the portfolio managers and relevant industry publications to set out their vision for the portfolio strategy and outlook for the region. The Manager releases monthly portfolio updates to the market to ensure that investors are kept up to date in respect of performance and other portfolio developments, and maintains a website on behalf of the Company that contains relevant information in respect of the Company’s investment mandate and objective.
The Board values any feedback and questions from shareholders ahead of and during Annual General Meetings in order to gain an understanding of their views and will take action when and as appropriate. Feedback and questions will also help the Company evolve its reporting, aiming to make reports more transparent and understandable.

Feedback from all substantive meetings between the Investment Manager and shareholders will be shared with the Board. The Directors will also receive updates from the Company’s broker on any feedback from shareholders, as well as share trading activity, share price performance and an update from the Investment Manager.

The portfolio management team attended a number of professional investor meetings, and held discussions with many different wealth management desks and offices in respect of the Company during the year under review.

Investors gave positive feedback in respect of the portfolio manager and how well the handover process had been executed following the retirement of Mr Prentis as manager in June 2019 and succession of Mr Arnold. Investors also commented that they liked the investment process, the positioning of the portfolio and its track record, the level of diversity in the portfolio and the approach to risk management, as well as the impressive dividend growth.

Investors expressed concerns over the impact of Brexit on the UK Smaller Companies sector.

SUSTAINABILITY AND OUR ESG POLICIES
The Board’s approach

Environmental, social and governance (ESG) issues can present both opportunities and threats to long-term investment performance. These ethical and sustainability issues cannot be ignored, and your Board is committed to ensuring that we have appointed a manager that applies the highest standards of ESG practice. The Board believes effective engagement with management is, in most cases, the most effective way of driving meaningful change in the behaviour of investee company management. This is particularly true for the Manager given the extent of BlackRock’s shareholder engagement (BlackRock held 2,050 engagements with 1,458 companies based in 42 markets for the year to 30 June 2019). As well as the influence afforded by its sheer scale, the Board believes that BlackRock is well placed as Manager to fulfil these requirements due to the integration of ESG into its investment processes, the emphasis it places on sustainability, its collaborative approach in its investment stewardship activities and its position in the industry as one of the largest suppliers of sustainable investment products in the global market. More information on BlackRock’s approach to sustainability is set out below.

Responsible ownership – BlackRock’s approach
As a fiduciary to its clients, BlackRock has built its business to protect and grow the value of clients’ assets. From BlackRock’s perspective, business-relevant sustainability issues can contribute to a company’s long-term financial performance, and thus further incorporating these considerations into the investment research, portfolio construction, and stewardship process can enhance long-term risk adjusted returns. By expanding access to data, insights and learning on material ESG risks and opportunities in investment processes across BlackRock’s diverse platform, BlackRock believes that the investment process is greatly enhanced. The Company’s portfolio managers work closely with BlackRock’s Investment Stewardship team to assess the governance quality of companies and investigate any potential issues, risks or opportunities. The portfolio managers use ESG information when conducting research and due diligence on new investments and again when monitoring investments in the portfolio.

BlackRock’s approach to sustainable investing
Considerations about sustainability have been at the center of BlackRock’s investment approach for many years and the firm offers more than 100 sustainable products and solutions. BlackRock believes that climate change is now a defining factor in companies’ long-term prospects, and that it will have a significant and lasting impact on economic growth and prosperity. BlackRock believes that climate risk now equates to investment risk, and this will drive a profound reassessment of risk and asset values as investors seek to react to the impact of climate policy changes. This in turn is likely to drive a significant reallocation of capital away from traditional carbon intensive industries over the next decade. In January 2020, with this transition in mind, BlackRock announced that it would accelerate its sustainable investing efforts and make a number of enhancements to its investment management and risk processes, including the following:

  • Heightening scrutiny on sectors and issuers with a high ESG risk, such as thermal coal producers, due to the investment risk they present to client portfolios;
  • Putting ESG analysis at the heart of Aladdin (BlackRock’s proprietary trading platform) and using proprietary tools to help analyse ESG risk; and
  • Placing oversight of ESG risk with BlackRock’s Risk and Quantitative Analysis group (RQA), to ensure that ESG risk is given increased weighting as a risk factor and is analysed with the same weight given to traditional measures such as credit or liquidity risk.

Investment Stewardship
BlackRock also places a strong emphasis on sustainability in its stewardship activities. BlackRock have engaged with companies on sustainability-related questions for a number of years, urging management teams to make progress while also deliberately giving companies time to enhance disclosure consistent with the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate related Financial Disclosures (TCFD). This includes each company’s plan for operating under a scenario where the Paris Agreement’s goal of limiting global warming to less than two degrees is fully realised, as expressed by the TCFD guidelines. To this end, BlackRock is now a member of Climate Action 100+, a group of investors that engages with companies to improve climate disclosure and align business strategy with the goals of the Paris Agreement. BlackRock will be aligning its engagement and stewardship priorities to UN Sustainable Development Goals (including Gender Equality and Affordable and Clean Energy). BlackRock is committed to voting against management to the extent that they have not demonstrated sufficient progress on sustainability issues.

BlackRock is committed to transparency in terms of disclosure on its engagement with companies and voting rationales. Last year BlackRock voted against or withheld votes from 4,800 directors at 2,700 different companies. More details about BlackRock’s investment stewardship process can be found on BlackRock’s website at https://www.blackrock.com/uk/individual/about-us/investment-stewardship.

BY ORDER OF THE BOARD
SARAH BEYNSBERGER
FOR AND ON BEHALF OF
BLACKROCK INVESTMENT MANAGEMENT (UK) LIMITED

Company Secretary
24 June 2020

RELATED PARTY TRANSACTIONS: TRANSACTIONS WITH THE MANAGER AND INVESTMENT MANAGER

The Manager was appointed as the Company’s Alternative Investment Fund Manager (AIFM) with effect from 2 July 2014. The Manager has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to the Investment Manager. Details of the fees payable to the Manager are set out in note 4.

The Manager provides management and administration services to the Company under a contract which is terminable on six months’ notice. The Manager has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BIM (UK). Further details of the investment management contract are disclosed in the Directors’ Report contained within the Annual Report and Financial Statements.

The investment management fee payable for the year ended 29 February 2020 amounted to £4,681,000 (2019: £4,590,000) as disclosed in note 4 to the Financial Statements. At the year end, £2,383,000 was outstanding in respect of the management fee (2019: £2,099,000).

In addition to the above services, BlackRock provided the Company with marketing services. The total fees paid or payable for these services for the year ended 29 February 2020 amounted to £153,000 including VAT (2019: £113,000). Marketing fees of £151,000 (2019: £152,000) were outstanding at the year end.

As of 29 February 2020, an amount of £190,000 (2019: £137,000) was payable to the Manager in respect of Directors’ fees.

The ultimate holding company of the Manager and the Investment Manager is BlackRock, Inc. a company incorporated in Delaware USA. During the period, PNC Financial Services Group, Inc. (“PNC”) was a substantial shareholder in BlackRock, Inc. PNC did not provide any services to the Company during the financial years ended 29 February 2020 and 28 February 2019.

RELATED PARTY DISCLOSURE: DIRECTORS’ EMOLUMENTS

The Board consists of five non-executive Directors, all of whom are considered to be independent by the Board. None of the Directors has a service contract with the Company. For the year ended 29 February 2020, the Chairman received an annual fee of £42,500, the Chairman of the Audit Committee received an annual fee of £32,500 and each other Director received an annual fee of £28,500.  The Directors’ fees for the year ended 28 February 2021 will remain unchanged.

As at 24 June 2020, with the exception of Ronald Gould, all members of the Board held shares in the Company. Michael Peacock held 1,000 ordinary shares, Robbie Robertson held 91,062 ordinary shares, Caroline Burton held 5,500 ordinary shares and Susan Platts-Martin held 2,800 ordinary shares.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND FINANCIAL STATEMENTS

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 they have elected to prepare the financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company as at the end of each financial year and of the profit or loss of the Company for that year.

In preparing those financial statements, the Directors are required to:

  • present fairly the financial position, financial performance and cash flows of the Company;
  • select suitable accounting policies and then apply them consistently;
  • present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
  • make judgements and estimates that are reasonable and prudent;
  • state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
  • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

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 that enable them to ensure that the Financial Statements and the Directors’ Remuneration Report 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 Directors are also responsible for preparing the Strategic Report, Directors’ Report, the Directors’ Remuneration Report, the Corporate Governance Statement and the Report of the Audit Committee in accordance with the Companies Act 2006 and applicable regulations, including the requirements of the Listing Rules and the Disclosure Guidance and Transparency Rules. The Directors have delegated responsibility to the Manager for the maintenance and integrity of the Company’s corporate and financial information included on BlackRock’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names are listed in the Company’s Annual Report and Financial Statements, confirms that, to the best of their knowledge:

  • the Financial Statements, prepared in accordance with applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
  • the Strategic Report contained in the Annual Report and Financial Statements 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.

The UK Code also requires Directors to ensure that the Annual Report and Financial Statements are fair, balanced and understandable. In order to reach a conclusion on this matter, the Board has requested that the Audit Committee advise on whether it considers that the Annual Report and Financial Statements fulfil these requirements. The process by which the Committee has reached these conclusions is set out in the Audit Committee’s report in the Annual Report and Financial Statements. As a result, the Board has concluded that the Annual Report and Financial Statements for the year ended 29 February 2020, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position, performance, business model and strategy.

FOR AND ON BEHALF OF THE BOARD
RONALD GOULD
Chairman

24 June 2020

INCOME STATEMENT FOR THE YEAR ENDED 29 FEBRUARY 2020


Notes 
2020
Revenue 
£’000 
2020
Capital 
£’000 
2020
Total 
£’000 
2019
Revenue 
£’000 
2019
Capital 
£’000 
2019
Total 
£’000 
Gains/(losses) on investments held at fair value through profit or loss– 80,423 80,423 – (44,856)(44,856)
(Losses)/gains on foreign exchange– (1)(1)– 16 16 
Income from investments held at fair value through profit or loss20,294 – 20,294 18,434 – 18,434 
Other income157 – 157 135 – 135 
———— ———— ———— ———— ———— ———— 
Total income/(expenses)20,451 80,422 100,873 18,569 (44,840)(26,271)
======= ======= ======= ======= ======= ======= 
Expenses
Investment management and performance fees(1,170)(3,511)(4,681)(1,147)(3,443)(4,590)
Operating expenses(839)(28)(867)(650)(29)(679)
———— ———— ———— ———— ———— ———— 
Total operating expenses(2,009)(3,539)(5,548)(1,797)(3,472)(5,269)
======= ======= ======= ======= ======= ======= 
Net profit/(loss) on ordinary activities before finance costs and taxation18,442 76,883 95,325 16,772 (48,312)(31,540)
Finance costs(547)(1,640)(2,187)(586)(1,757)(2,343)
———— ———— ———— ———— ———— ———— 
Net profit/(loss) on ordinary activities before taxation17,895 75,243 93,138 16,186 (50,069)(33,883)
======= ======= ======= ======= ======= ======= 
Taxation(58)– (58)(63)– (63)
———— ———— ———— ———— ———— ———— 
Net profit/(loss) on ordinary activities after taxation17,837 75,243 93,080 16,123 (50,069)(33,946)
======= ======= ======= ======= ======= ======= 
Revenue return/(loss) per ordinary share (pence)37.13 156.62 193.75 33.67 (104.57)(70.90)
======= ======= ======= ======= ======= ======= 

The total column of this statement represents the Company’s profit and loss account. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies (AIC). All items in the above statement derive from continuing operations. No operations were acquired or discontinued during the year. All income is attributable to the equity holders of the Company.

The net profit/(loss) for the year disclosed above represents the Company’s total comprehensive income/(loss).

STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 29 FEBRUARY 2020




 



Notes 
Called 
up share 
capital 
£’000  
Share 
Premium 
account 
£’000  
Capital 
redemption 
reserve 
£’000 

Capital 
reserves 
£’000 

Revenue 
reserve 
£’000 


Total 
£’000 
For the year ended 29 February 2020 (restated)1
At 28 February 201912,498 38,952 1,982 598,272 22,385 674,089 
Total comprehensive income:
Net profit for the year– – – 75,243 17,837 93,080 
Transactions with owners, recorded directly to equity:
Share issues11 – 13,028 – 3,029 – 16,057 
Share issue costs11 – – – (32)– (32)
Dividends paid2– – – – (15,321)(15,321)
———— ———— ———— ———— ———— ———— 
At 29 February 202012,498 51,980 1,982 676,512 24,901 767,873 
======= ======= ======= ======= ======= ======= 
For the year ended 28 February 2019 
At 28 February 2018 (as previously presented)12,498 38,952 1,982 646,791 21,219 721,442 
Restatement due to prior period error11,550(1,550)
Restated reserves as at 28 February 201812,49838,9521,982648,34119,669721,442
Total comprehensive (expenses)/income:
Net (loss)/profit for the year– – – (50,069)16,123 (33,946)
Transactions with owners, recorded directly to equity:
Dividends paid3– – – – (13,407)(13,407)
———— ———— ———— ———— ———— ———— 
At 28 February 2019 (restated)112,498 38,952 1,982 598,272 22,385 674,089 
======= ======= ======= ======= ======= ======= 

1             The prior year comparatives for the capital reserves balance and the revenue reserve balance have been restated to correct a prior period error by reallocating the cost of share buy backs undertaken in prior years (amounting to £1,549,811) from the capital reserves to the revenue reserve. More information is given in note 12 below.
2             Interim dividend paid in respect of the year ended 29 February 2020 of 12.80p was declared on 5 November 2019 and paid on 3 December 2019. Final dividend paid in respect of the year ended 28 February 2019 of 19.20p was declared on 5 May 2019 and paid on 12 June 2019.
3        Interim dividend paid in respect of the year ended 28 February 2019 of 12.00p was declared on 29 October 2018 and paid on 26 November 2018. Final dividend paid in respect of the year ended 28 February 2018 of 16.00p was declared on 27 April 2018 and paid on 15 June 2018.
 

BALANCE SHEET AS AT 29 FEBRUARY 2020


 

Notes 
2020 
£’000  
2019 
£’000 
Fixed assets
Investments held at fair value through profit or loss812,016 707,150 
Current assets
Debtors3,825 2,379 
Cash and cash equivalents39,250 11,719 
———— ———— 
43,075 14,098 
———— ———— 
Creditors – amounts falling due within one year(7,668)(4,961)
Net current assets35,407 9,137 
======= ======= 
Total assets less current liabilities847,423 716,287 
======= ======= 
Creditors – amounts falling due after more than one year10 (79,550)(42,198)
======= ======= 
Net assets767,873 674,089 
======= ======= 
Capital and reserves
Called up share capital11 12,498 12,498 
Share premium account51,980 38,952 
Capital redemption reserve1,982 1,982 
Capital reserves676,512 598,272* 
Revenue reserve24,901 22,385* 
———— ———— 
Total shareholders’ funds767,873 674,089 
======= ======= 
Net asset value per ordinary share (debt at par value) (pence)1,572.55 1,407.88 
======= ======= 
Net asset value per ordinary share (debt at fair value) (pence)1,556.41 1,400.57 
======= ======= 

*The prior year comparatives for the capital reserves balance and the revenue reserve balance have been restated to correct a prior period error by reallocating the cost of share buy backs undertaken in prior years (amounting to £1,549,811) from the capital reserves to the revenue reserve. More information is given in note 12 below.

STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 29 FEBRUARY 2020


 
2020 
£’000 
2019 
£’000 
Operating activities
Net profit/(loss) before taxation93,138 (33,883)
Add back finance costs2,187 2,343 
(Gains)/losses on investments held at fair value through profit or loss(80,423)44,856 
Net movement in foreign exchange(16)
Sales of investments held at fair value through profit or loss307,040 330,276 
Purchases of investments held at fair value through profit or loss(330,558)(295,132)
Increase in debtors(166)(584)
Increase/(decrease) in creditors375 (1,624)
Taxation on investment income(58)(63)
———— ———— 
Net cash (used in)/generated from operating activities(8,464)46,173 
======= ======= 
Financing activities
Proceeds from 2.41% loan note issue20,000 – 
Issue costs of loan note(179)– 
Drawdown of Sumitomo Mitsui Banking Corporation revolving credit facility20,000 – 
Net repayment of Scotia Bank revolving credit facility(2,500)(32,500)
Interest paid(2,029)(2,355)
Cash proceeds from ordinary shares reissued from treasury16,025 – 
Dividends paid(15,321)(13,407)
———— ———— 
Net cash generated from/(used in) financing activities35,996 (48,262)
======= ======= 
Increase/(decrease) in cash and cash equivalents27,532 (2,089)
Cash and cash equivalents at beginning of the year11,719 13,792 
Effect of foreign exchange rate changes(1)16 
———— ———— 
Cash and cash equivalents at end of year39,250 11,719 
======= ======= 
Comprised of:
Cash at bank12,584 1,535 
Cash Funds*26,666 10,184 
———— ———— 
39,250 11,719 
======= ======= 

*     Cash Funds represent funds held on deposit with the BlackRock Institutional Cash Series plc – Sterling Liquid Environmentally Aware Fund (2019: BlackRock Institutional Cash Series plc – Sterling Liquidity Fund).

NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 29 FEBRUARY 2020

1. PRINCIPAL ACTIVITY
The principal activity of the Company is that of an investment trust company within the meaning of section 1158 of the Corporation Tax Act 2010.

2. ACCOUNTING POLICIES
The principal accounting policies adopted by the Company are set out below.

(a) Basis of preparation
The Company presents its results and positions under FRS 102, ’The Financial Reporting Standard applicable in the UK and Republic of Ireland’ (FRS 102), which forms part of the revised Generally Accepted Accounting Practice (New UK GAAP) issued by the Financial Reporting Council (FRC) in 2013.

The financial statements have been prepared on a going concern basis in accordance with FRS 102 and the revised Statement of Recommended Practice – ’Financial Statements of Investment Trust Companies and Venture Capital Trusts’ (SORP) issued by the Association of Investment Companies (AIC) in November 2014 and updated in October 2019 and the provisions of the Companies Act 2006.

The revised SORP issued in October 2019 is applicable for accounting periods beginning on or after 1 January 2019. As a result, the gain arising from disposals of investments of £48,411,000 (2019: £73,210,000) and gain on revaluation of investments of £32,012,000 (2019: loss of £118,066,000) have now been combined, as shown in note 10 to the financial statements. The result of this change has no impact on the net asset value or total return for both the current year and prior year. No other accounting policies or disclosures have changed as a result of the revised SORP.

The principal accounting policies adopted by the Company are set out below. Unless specified otherwise, the policies have been applied consistently throughout the year and are consistent with those applied in the preceding year. All of the Company’s operations are of a continuing nature. The Company’s financial statements are presented in Sterling, which is the currency of the primary economic environment in which the Company operates. All values are rounded to the nearest thousand pounds (£’000) except where otherwise stated.

(b) Presentation of Income Statement
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 Income Statement between items of a revenue and a capital nature has been presented on the face of the Income Statement.

(c) Segmental reporting
The Directors are of the opinion that the Company is engaged in a single segment of business being investment business.

(d) Income
Dividends receivable on equity shares are treated as revenue for the year on an ex-dividend basis. Where no ex-dividend date is available, dividends receivable on or before the year end are treated as revenue for the year. Provisions are made for dividends not expected to be received. The return on a debt security is recognised on a time apportionment basis.

Special dividends are recognised on an ex-dividend basis and are treated as capital or revenue depending on the facts or circumstances of each dividend.

Dividends are accounted for in accordance with Section 29 of FRS 102 on the basis of income actually receivable. Dividends from overseas companies continue to be shown gross of withholding tax.

Deposit interest receivable is accounted for on an accruals basis.

Where the Company has elected to receive its dividends in the form of additional shares rather than in cash, the cash equivalent of the dividend foregone is recognised in the revenue column of the Income Statement. Any excess in the value of the shares over the amount of the cash dividend is recognised in capital reserves.

(e) Expenses
All expenses, including finance costs, are accounted for on an accruals basis. Expenses have been charged wholly to the revenue column of the Income Statement, except as follows:

  • expenses which are incidental to the acquisition or disposal of an investment are treated as capital. Details of transaction costs on the purchases and sales of investments are shown in Note 10 of the Annual Report and Financial Statements;
  • expenses are treated as capital where a connection with the maintenance of enhancement of the value of the investments can be demonstrated;
  • the investment management fee and finance costs have been allocated 75% to the capital column and 25% to the revenue column of the Income Statement in line with the Board’s expected long-term split of returns, in the form of capital gains and income respectively, from the investment portfolio.

(f) Taxation
The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Income Statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company’s liability for current tax is calculated using tax rates that were applicable at the balance sheet date.

Deferred taxation is recognised in respect of all timing differences at the financial reporting date, where transactions or events that result in an obligation to pay more taxation in the future or right to less taxation in the future have occurred at the balance sheet date. Deferred tax is measured on a non-discounted basis, at the average tax rates that are expected to apply in the periods in which the timing differences are expected to reverse based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. This is subject to deferred taxation 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 timing differences can be deducted.

(g) Investments held at fair value through profit or loss
The Company’s investments are classified as held at fair value through profit or loss in accordance with Section 11 and 12 of FRS 102 and are managed and evaluated on a fair value basis in accordance with its investment strategy.

All investments are designated upon initial recognition as held at fair value through profit or loss. Purchases of investments are recognised on a trade date basis. Sales of assets are recognised at the trade date of the disposal. Proceeds will be measured at fair value, which will be regarded as the proceeds of the sale less any transaction costs.

The fair value of the financial investments is based on their quoted bid price at the balance sheet date on the exchange on which the investment is quoted, without deduction for the estimated future selling costs.

Unquoted investments are valued by the Directors at fair value using International Private Equity and Venture Capital Valuation Guidelines. This policy applies to all current and non current asset investments of the Company.

Changes in the value of investments held at fair value through profit or loss and gains and losses on disposal are recognised in the Income Statement as ’Gains or losses on investments held at fair value through profit or loss’. Also included within this heading are transaction costs in relation to the purchase or sale of investments.

The fair value hierarchy consists of the following three levels:

Level 1 – Quoted market price for identical instruments in active markets
Level 2 – Valuation techniques using observable inputs
Level 3 – Valuation techniques using significant unobservable inputs

(h) Dividends payable
Under Section 32 of FRS 102 final dividends should not be accrued in the financial statements unless they have been approved by shareholders before the balance sheet date. Dividends payable to equity shareholders are recognised in the Statement of Changes in Equity when they have been approved by shareholders and have become a liability of the Company. Interim dividends are recognised in the financial statements in the period in which they are paid.

(i) Foreign currency translation
In accordance with Section 30 of FRS 102, the Company is required to nominate a functional currency, being the currency in which the Company predominately operates. The functional and reporting currency is Sterling, reflecting the primary economic environment in which the Company operates. Transactions in foreign currencies are translated into Sterling at the rates of exchange ruling on the date of the transaction. Foreign currency monetary assets and liabilities are translated into Sterling at the rates of exchange ruling at the Balance Sheet date. Profits and losses thereon are recognised in the capital column of the Income Statement and taken to the capital reserve.

(j) Share repurchases and re-issues
Shares repurchased and subsequently cancelled – share capital is reduced by the nominal value of the shares repurchased, and the capital redemption reserve is correspondingly increased in accordance with section 733 of the Companies Act 2006. The full cost of the repurchase is charged to an appropriate reserve.

Shares repurchased and held in treasury – the full cost of the repurchase is charged to an appropriate reserve.

Where treasury shares are subsequently reissued:

  • amounts received to the extent of the repurchase price are credited to an appropriate reserve; and
  • any surplus received in excess of the repurchase price is taken to the share premium account.

(k) Debtors
Debtors include sales for future settlement, other debtors and pre-payments and accrued income in the ordinary course of business. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current assets.

(l) Creditors
Creditors include purchases for future settlement, interest payable, share buyback costs and accruals in the ordinary course of business. Creditors, loans and debentures are classified as creditors – amounts due within one year if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as creditors – amounts falling due after more than one year.

(m) Cash and cash equivalents
Cash comprises cash in hand and on demand deposits and bank overdrafts repayable on demand. Cash equivalents include short-term, highly liquid investments, that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value.

(n) Critical accounting estimates and judgements
The Company makes estimates and assumptions concerning the future. The resulting accounting estimates and assumptions will, by definition, seldom equal the related actual results. Estimates and judgements are regularly evaluated and are based on historical experience and other factors, including expectations of future events and that are believed to be reasonable under the circumstances. The Directors do not believe that any accounting judgements or estimates have a significant risk of causing material adjustment to the carrying amount of assets and liabilities within the next financial year.

3. INCOME


 
2020 
£’000 
2019 
£’000 
Investment income:
UK listed dividends16,012 14,020 
UK listed scrip dividends– 54 
UK listed special dividends1,210 1,372 
Property income dividends809 777 
Overseas listed dividends1,878 2,053 
Overseas listed scrip dividends– – 
Overseas listed special dividends385 158 
———— ———— 
20,294 18,434 
======= ======= 
Other income:
Bank interest10 14 
Interest from Cash Funds147 121 
———— ———— 
157 135 
———— ———— 
Total20,451 18,569 
======= ======= 

No special dividends have been recognised in capital during the year (2019: £nil).

Dividends and interest received in cash in the period amounted to £20,020,000 and £153,000 (2019: £17,762,000 and £128,000).

4. INVESTMENT MANAGEMENT AND PERFORMANCE FEES



 
20202019
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Revenue 
£’000 
Capital 
£’000 
Total 
£’000 
Investment management fee1,170 3,511 4,681 1,147 3,443 4,590 
———— ———— ———— ———— ———— ———— 
Total1,170 3,511 4,681 1,147 3,443 4,590 
======= ======= ======= ======= ======= ======= 

The investment management fee is based on a rate of 0.6% of the first £750 million of total assets (excluding current year income) less the current liabilities of the Company (the “Fee Asset Amount”), reducing to 0.5% above this level. The fee is calculated at the rate of one quarter of 0.6% of the Fee Asset Amount up to the initial threshold of £750 million, and one quarter of 0.5% of the Fee Asset Amount in excess thereof, at the end of each quarter. The investment management fee is allocated 75% to the capital column and 25% to the revenue column of the Income Statement.

5. OPERATING EXPENSES


 
2020 
£’000 
2019 
£’000 
Allocated to revenue:
Custody fees
Depositary fees84 98 
Auditors’ remuneration:
– audit services27 27 
– non-audit services1
Registrar’s fee43 41 
Directors’ emoluments2172 155 
Director search fees24 
Marketing fees153 113 
AIC fees26 23 
Bank Charges87 18 
Broker fees46 36 
Stock exchange listings22 21 
Printing and Postage37 24 
Other administrative costs108 76 
———— ———— 
839 650 
======= ======= 
Allocated to capital:
Transaction charges28 29 
———— ———— 
867 679 
======= ======= 
2020 2019 
The Company’s ongoing charges3, calculated as a percentage of average net assets and using recurring expenses excluding finance costs, direct transaction costs, custody transaction charges and taxation were:0.7% 0.7% 
======= ======= 

1         Fees for non audit services relate to the debenture compliance work carried out by the Auditors (2019: Debenture compliance work and a review by the Auditors in respect of the impact of the new management fee arrangements (as set out in note 4)).
2         Further information on Directors’ emoluments can be found in the Directors’ Remuneration Report in the Annual Report and Financial Statements.
3         Alternative performance measure, see Glossary in the Annual Report and Financial Statements.

6. DIVIDENDS
Dividends paid on equity shares:


 
Record
date 
Payment
date 
2020 
£’000 
2019 
£’000 
2018 Final of 16.00p18 May 2018 15 June 2018 – 7,661 
2019 Interim of 12.00p09 November 2018 26 November 2018 – 5,746 
2019 Final of 19.20p17 May 2019 12 June 2019 9,193 – 
2020 First interim of 12.80p15 November 2019 03 December 2019 6,128 – 
———— ———— 
15,321 13,407 
======= ======= 

The Directors have proposed a second interim dividend of 19.70p per share in respect of the year ended 29 February 2020. The second interim dividend will be paid on 29 June 2020 to shareholders on the Company’s register on 12 June 2020. The second interim dividend has not been included as a liability in these financial statements, as such dividends are only recognised in the financial statements when they have been paid.

The total dividends payable in respect of the year which form the basis of determining retained income for the purposes of section 1158 of the Corporation Tax Act 2010 and section 833 of the Companies Act 2006, and the amount proposed for the year ended 29 February 2020 meet the relevant requirements as set out in this legislation.

Dividends paid or proposed on equity shares:


 
2020 
£’000 
2019 
£’000 
Interim dividend paid 12.80p (2019: 12.00p)6,128 5,746 
Second interim dividend payable of 19.70p per share* (final dividend proposed 2019: 19.20p)9,619 9,193 
———— ———— 
15,747 14,939 
======= ======= 

*     Based upon 48,829,792 ordinary shares (excluding treasury shares) in issue on 12 June 2020.

All dividends paid or payable are distributed from the Company’s distributable reserves.

7. RETURNS AND NET ASSET VALUE PER SHARE
Revenue and capital earnings/(loss) per share are shown below and have been calculated using the following:

Year ended 
29 February 2020 
Year ended 
28 February 2019 
Revenue return attributable to ordinary shareholders (£’000)17,837 16,123 
Capital return/(loss) attributable to ordinary shareholders (£’000)75,243 (50,069)
—————– —————– 
Total profit/(loss) attributable to ordinary shareholders (£’000)93,080 (33,946)
========== ========== 
Equity shareholders’ funds (£’000)767,873 674,089 
The weighted average number of ordinary shares in issue during the year on which the return per ordinary share was calculated was:48,040,516 47,879,792 
The actual number of ordinary shares in issue at the end of each year on which the undiluted net asset value was calculated was:48,829,792 47,879,792 
Earnings per share
Revenue return per share (pence)37.13 33.67 
Capital return/(loss) per share (pence)156.62 (104.57)
—————– —————– 
Total return/(loss) per share (pence)193.75 (70.90)
========== ========== 
As at 
29 February 2020 
As at 
28 February 2019 
Net asset value per ordinary share (debt at par value) (pence)1,572.55 1,407.88 
Net asset value per ordinary share (debt at fair value) (pence)1,556.41 1,400.57 
Net asset value per ordinary share (with debt at par value, capital only) (pence)1,548.57 1,386.21 
Ordinary share price (pence)1,484.00 1,330.00 
========== ========== 

8. DEBTORS


 
2020 
£’000 
2019 
£’000 
Sales for future settlement2,602 1,322 
Prepayments and accrued income1,132 982 
Taxation recoverable91 75 
—————– —————– 
3,825 2,379 
========== ========== 

9. CREDITORS – AMOUNTS FALLING DUE WITHIN ONE YEAR


 
2020 
£’000 
2019 
£’000 
Purchases for future settlement4,392 2,187 
Interest payable396 269 
Accrued expenditure2,880 2,505 
—————– —————– 
7,668 4,961 
========== ========== 

10. CREDITORS – AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR


 
2020 
£’000 
2019 
£’000 
7.75% debenture stock 202215,000 15,000 
Unamortised debenture stock issue expenses(34)(50)
—————– —————– 
14,966 14,950 
========== ========== 
2.74% loan note 203725,000 25,000 
Unamortised loan note issue expenses(238)(252)
—————– —————– 
24,762 24,748 
========== ========== 
2.41% loan note 204420,000 – 
Unamortised loan note issue expenses(178)– 
—————– —————– 
19,822 – 
========== ========== 
Revolving loan facility – Scotia Bank– 2,500 
Revolving loan facility – Sumitomo Mitsui Banking Corporation20,000 – 
—————– —————– 
Total79,550 42,198 
========== ========== 

The fair value of the 7.75% debenture stock using the last available quoted offer price from the London Stock Exchange as at 29 February 2020 was 121p per debenture (2019: 125p), a total of £18,150,000 (2019: £18,750,000). The fair value of the 2.74% loan note has been determined based on a comparative yield for UK Gilts for similar duration maturity and spreads, and as at 29 February 2020 equated to a valuation of 112.21p per note (2019: 97.78p), a total of £28,053,000 (2019: £24,445,000). The fair value of the 2.41% loan note has been determined based on a comparative yield for UK Gilts for similar duration maturity and spreads, and as at 29 February 2020 equated to a valuation of 106.14p per note (2019: nil), a total of £21,228,000 (2019: £nil).

The £15 million debenture stock was issued on 8 July 1997. Interest on the stock is payable in equal half yearly instalments on 31 July and 31 January in each year. The stock is secured by a first floating charge over the whole of the assets of the Company and is redeemable at par on 31 July 2022.

The £25 million loan note was issued on 24 May 2017. Interest on the note is payable in equal half yearly instalments on 24 May and 24 November in each year. The loan note is unsecured and is redeemable at par on 24 May 2037.

The £20 million loan note was issued on 3 December 2019. Interest on the note is payable in equal half yearly instalments on 3 December and 3 June in each year. The loan note is unsecured and is redeemable at par on 3 December 2044.

The Company has in place a £35 million three year multi-currency revolving loan facility with Sumitomo Mitsui Banking Corporation Europe Limited. As at 29 February 2020, £20 million of the facility had been utilised. Under the agreement the termination date of this facility is the third anniversary of the effective date being November 2022. Interest on this facility is reset every three months and is currently charged at the rate of 1.43%.

As at 28 February 2019, the Company had in place a £35 million three year multi-currency revolving loan facility with Scotiabank (Ireland) Limited, of which £2.5 million had been utilised. Interest on this facility was reset every three months and the interest rate charged as at 28 February 2019 was 1.68%.

The Company also has available an uncommitted overdraft facility of £10 million with BNYM, of which £nil had been utilised at 29 February 2020 (2019: £nil).

11. CALLED UP SHARE CAPITAL



 
Ordinary shares 
in issue 
number 

Treasury 
shares 
number 

Total 
shares 
number 

Nominal 
Value 
£’000 
Allotted, called up and fully paid share capital comprised:
Ordinary shares of 25p each
At 28 February 201947,879,792 2,113,731 49,993,523 12,498 
Ordinary shares issued from Treasury950,000 (950,000)– – 
—————– —————– —————– —————– 
At 29 February 202048,829,792 1,163,731 49,993,523 12,498 
========== ========== ========== ========== 

During the year ended 29 February 2020, the Company issued 950,000 (2019: nil) shares from treasury for a total consideration of £16,025,000 (2019: £nil) including costs.

No shares have been issued since 29 February 2020 up to the date of this report.

The ordinary shares (excluding any shares held in treasury) carry the right to receive any dividends and have one voting right per ordinary share. There are no restrictions on the voting rights of the ordinary shares or on the transfer of ordinary shares.

12. RESERVES








 
 
 
 
 
Share 
premium 
account 
£’000 
 
 
 
 
Capital 
redemption 
reserve 
£’000 
 
 
Capital 
reserve 
(arising on 
investments 
sold) 
£’000 
Capital 
reserve 
(arising on 
revaluation 
of 
investments 
held) 
£’000 
 
 
 
 
 
Revenue 
reserve* 
£’000 
At 28 February 2019 (restated)38,952 1,982 452,869 145,403 22,385 
Movement during the year:
Share issues13,028 – 3,029 – – 
Share issue costs– – (32)– – 
Gains on realisation of investments– – 48,411 – – 
Change in investment holding gains– – – 32,012 – 
Gains on foreign currency transactions– – (4)– 
Finance costs and expenses charged to capital– – (5,179)– – 
Net profit for the year– – – – 17,837 
Dividends paid during the year– – – – (15,321)
—————– —————– —————– —————– —————– 
At 29 February 202051,980 1,982 499,094 177,418 24,901 
========== ========== ========== ========== ========== 

*     Represents the Company’s distributable reserves.

The share premium account and capital redemption reserve are not distributable profits under the Companies Act 2006. In addition, in accordance with the Company’s Articles, capital reserves may not be distributed by way of payment of dividends and may not be regarded or treated as profits of the Company available for distribution. The revenue reserve is distributable and may be used to pay dividends and for the repurchase of shares.

The prior year balances of the Company’s capital reserves and revenue reserve have been restated to reflect an increase of £1,549,811 to the capital reserves and a decrease of the same amount to the revenue reserve. The background to this prior year adjustment is set out below. With effect from 4 June 2008 when the Company’s Articles were updated to reflect changes to the rules on distributions applicable to investment companies under the Companies Act 2006, a provision of the Articles which permitted the Company to make distributions from realised capital profits by way of share buy backs was inadvertently deleted. Between 4 June 2008 and 5 February 2010, the Company bought back 629,916 shares at a total cost of £1,549,811 as part of the Board’s discount management programme. At the time each of the relevant buy backs was implemented, the Company had sufficient distributable revenue reserves to cover the cost of the transaction. However, the cost of the share buy backs was misallocated in the Company’s 2009 and 2010 accounts as a debit from the Company’s capital reserve. To correct this prior period error, the prior year adjustment has been made to reallocate the cost of these distributions by way of buy backs from the capital reserve to the revenue reserve. The impact of this adjustment on the relevant reserves is set out in the table below. There is no impact on the Company’s financial position or net asset value as a result of the reallocation.



 

Capital reserve 
(arising on 
investments sold) 
£’000 
Capital reserve 
(arising on 
revaluation of 
investments held) 
£’000 

Capital reserve
(Total)
£’000
 
 
 
Revenue reserve
£’000 
28 February 2018 (as previously presented)383,322 263,469 646,791 21,219 
Restatement1,550 – 1,550 (1,550) 
28 February 2018 (as restated)384,872 263,469 648,341 19,669 
28 February 2019 (as previously presented)451,319 145,403 596,722 23,935 
Restatement1,550 – 1,550 (1,550) 
28 February 2019 (as restated)452,869 145,403 598,272 22,385 

13. VALUATION OF FINANCIAL INSTRUMENTS

Financial assets and financial liabilities are either carried in the Balance Sheet at their fair value (investments) or at an amount which is a reasonable approximation of fair value (due from brokers, dividends and interest receivable, due to brokers, accruals, cash at bank and bank overdrafts). Section 11 of FRS 102 requires the Company to classify fair value measurements using a fair value hierarchy that reflects the significance of inputs used in making the measurements. The valuation techniques used by the Company are explained in the accounting policies note 2 of the Financial Statements.

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset.

The fair value hierarchy has the following levels:

Level 1 – Quoted market price for identical instruments in active markets
A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The Company does not adjust the quoted price for these instruments.

Level 2 – Valuation techniques using observable inputs
This category includes instruments valued using quoted prices for similar instruments in markets that are considered less active; or other valuation techniques where significant inputs are directly or indirectly observable from market data.

Level 3 – Valuation techniques using significant unobservable inputs
This category includes all instruments where the valuation technique includes inputs not based on market data and these inputs could have a significant impact on the instrument’s valuation.

This category also includes instruments that are valued based on quoted prices for similar instruments where significant entity determined adjustments or assumptions are required to reflect differences between the instruments and instruments for which there is no active market. The Investment Manager considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

The level in the fair value hierarchy within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement. For this purpose, the significance of an input is assessed against the fair value measurement in its entirety. If a fair value measurement uses observable inputs that require significant adjustment based on unobservable inputs, that measurement is a Level 3 measurement.

Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability.

The table below sets out fair value measurements using FRS 102 fair value hierarchy.

Financial assets at fair value through profit or loss
at 29 February 2020
Level 1 
£’000 
Level 2 
£’000 
Level 3 
£’000 
Total 
£’000 
Equity investments812,016 – – 812,016 
————– ————– ————– ————– 
Total812,016 – – 812,016 
======== ======== ======== ======== 
Financial assets at fair value through profit or loss
at 28 February 2019
Level 1 
£’000 
Level 2 
£’000 
Level 3 
£’000 
Total 
£’000 
Equity investments707,150 – – 707,150 
————– ————– ————– ————– 
Total707,150 – – 707,150 
======== ======== ======== ======== 

There were no transfers between levels for financial assets during the year recorded at fair value as at 29 February 2020 and 28 February 2019. The Company did not hold any Level 3 securities throughout the financial year or as at 29 February 2020 (2019: nil).

(e) Capital management policies and procedures
The Company’s capital management objectives are:

  • to ensure it will be able to continue as a going concern; and
  • secure long-term capital growth primarily through investing in smaller UK quoted companies.

This is to be achieved through an appropriate balance of equity capital and gearing. It is the Board’s intention that gearing should not exceed 15% of net assets. The Company’s objectives, policies and processes for managing capital remain unchanged from the preceding accounting period.

The Company’s total capital at 29 February 2020 was £847,423,000 (2019: £716,287,000) comprising £20,000,000 (2019: £2,500,000) of revolving credit facility, £14,966,000 (2019: £14,950,000) of debenture stock at par value, £24,762,000 (2019: £24,748,000) of 2.74% unsecured loan note, £19,822,000 (2019: £nil) of 2.41% unsecured loan note and £767,873,000 (2019: £674,089,000) of equity share capital and other reserves.

The Board with the assistance of the Investment Manager monitor and review the broad structure of the Company’s capital on an ongoing basis. This review includes:

  • the planned level of gearing, which takes into account the Investment Manager’s view on the market; and
  • the need to buyback equity shares, either for cancellation or to be held in treasury, which takes account of the difference between the NAV per share and the share price (i.e. the level of share price discount or premium).

The Company’s objectives, policies and processes for managing capital remain unchanged from the preceding accounting period.

The Company is subject to externally imposed capital requirements:

  • as a public company, the Company has a minimum share capital of £50,000; and
  • in order to be able to pay dividends out of profits available for distribution, the Company has to be able to meet one of the two capital restrictions tests imposed on investment companies by law.

During the year the Company complied with the externally imposed capital requirements to which it was subject including those imposed in respect of loan covenants.

14. TRANSACTIONS WITH THE MANAGER AND THE INVESTMENT MANAGER
The Manager was appointed as the Company’s Alternative Investment Fund Manager (AIFM) with effect from 2 July 2014. The Manager has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to the Investment Manager. Details of the fees payable to the Manager are set out in note 4.

The Manager provides management and administration services to the Company under a contract which is terminable on six months’ notice. The Manager has (with the Company’s consent) delegated certain portfolio and risk management services, and other ancillary services, to BIM (UK). Further details of the investment management contract are disclosed in the Directors’ Report.

The investment management fee payable for the year ended 29 February 2020 amounted to £4,681,000 (2019: £4,590,000) as disclosed in note 4 to the Financial Statements. At the year end, £2,383,000 was outstanding in respect of the management fee (2019: £2,099,000).

In addition to the above services, BlackRock provided the Company with marketing services. The total fees paid or payable for these services for the year ended 29 February 2020 amounted to £153,000 including VAT (2019: £113,000). Marketing fees of £151,000 (2019: £152,000) were outstanding at the year end.

As of 29 February 2020, an amount of £190,000 (2019: £137,000) was payable to the Manager in respect of Directors’ fees.

The ultimate holding company of the Manager and the Investment Manager is BlackRock, Inc. a company incorporated in Delaware USA. During the period, PNC Financial Services Group, Inc. (“PNC”) was a substantial shareholder in BlackRock, Inc. PNC did not provide any services to the Company during the financial years ended 29 February 2020 and 28 February 2019.

15. RELATED PARTY DISCLOSURE: DIRECTORS’ EMOLUMENTS
Disclosures of the Directors’ interests in the ordinary shares of the Company and fees and expenses payable to the Directors are set out in the Directors’ Remuneration Report contained with the Annual Report and Financial Statements. At 29 February 2020, an amount of £13,000 (2019: £13,000) was outstanding in respect of Directors’ fees.

16. CONTINGENT LIABILITIES
There were no contingent liabilities at 29 February 2020 (2019: nil).

17. POST BALANCE SHEET EVENTS
Subsequent to the year end, the net asset value per share of the Company (with debt at par) has decreased by 10.7% from 1,572.55p to 1,404.34p and the Company’s share price has decreased by 10.1% from 1,484.00p to 1,334.00p as at 22 June 2020. The Company’s benchmark has decreased by 7.7% from 5,159.73 to 4,760.41 (all calculations without income reinvested).

As noted in the Chairman’s Statement and the Investment Manager’s Report, since 29 February 2020, equity markets have fallen significantly due primarily to concerns around the scale of the impact of COVID-19 on the global economy. The Board and the Manager continue to monitor investment performance in line with the Company’s investment objectives.

On 11 May 2020, PNC announced its intent to sell its investment in BlackRock, Inc. through a registered offering and related buyback by BlackRock, Inc.

There were no other significant events affecting the Company since the financial year end.

18. PUBLICATION OF NON-STATUTORY ACCOUNTS

The financial information contained in this announcement does not constitute statutory accounts as defined in section 435 of the Companies Act 2006.

The figures set out above have been reported upon by the auditors. The comparative figures are extracts from the audited financial statements of BlackRock Smaller Companies Trust plc for the year ended 28 February 2019, which have been filed with the Registrar of Companies. The reports of the auditors for the years ended 28 February 2019 and 29 February 2020 contain no qualification or statement under section 498(2) or (3) of the Companies Act 2006. The 2020 Annual Report and Financial Statements will be filed with the Registrar of Companies after the Annual General Meeting.

19. ANNUAL REPORT AND FINANCIAL STATEMENTS

Copies of the Annual Report and Financial Statements will be sent to members shortly and will be available from The Company Secretary, BlackRock Smaller Companies Trust plc, 12 Throgmorton Avenue, London EC2N 2DL.

20. ANNUAL GENERAL MEETING

The Annual General Meeting of the Company will be held at 12 Throgmorton Avenue, London EC2N 2DL on 28 July 2020 at 2:30 p.m.

To learn more about the BlackRock Smaller Companies Trust plc please follow this link: blackrock.com/uk/brsc

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Disclaimer: Statements in this article should not be considered investment advice, which is best sought directly from a qualified professional.