A year on from Brexit it is hard to quantify and isolate the impact from that of COVID, however most agree that so far it has been negative:  The UK's GDP continues to under-perform the Euro zone which may be partly due to a loss of EU nationals previously employed in the UK, increased controls at the border reducing trade, and the long term effects of the uncertainty created by the referendum result in 2016.  The next few years need to produce clearer benefits to evidence a net gain; in the meantime UK stocks continue to be under-valued as investors prefer alternatives and continue to present us, your company with investment opportunities.

The impact of the new Omicron variant added to the list of uncertainties in the last quarter of 2021 including how much more interventionist European governments will become, for example on mandating vaccinations or on when and how quickly the 'free money' and easy lending from central bank intervention will end, or monetary policy tightens to combat rising interest rates.

I am delighted therefore to report that your company's NAV outperformed both the FTSE 100 and 250 markets over the year by 7.2 and 6.9 percentage points respectively. We are seeing the benefit that Manny Pohl brings in the three years since he became fund manager with greater conviction, focus and efficiency resulting in a smaller portfolio that is outperforming comparators.  The Board is very grateful for his concentrated efforts to identify the right investments and timing to invest or divest, and to continue to provide returns for shareholders against the backdrop of greater than usual uncertainties.

As 2021 drew to a close, Apple continued its relentless rise, tripling its share price since early 2020 when Covid first struck.  On the first day of trading in 2022, it became the first company to realise $3 trillion market capitalisation, reflecting the importance of technology for work, education, entertainment and staying connected.

In the wider market a concerted lift to global markets began in April, benefiting stocks to cryptocurrencies, with a rush into US equities by retail investors at the heart of that lift.  All three major US indices set record highs in October.  As the Federal Reserve retreated from its stimulus program, however, the bubble burst for Spacs and cryptos, the newest, frothiest assets.

By the end of the year some assets had lost a third to one half of their value in just over a month.

Meanwhile your company continues to invest for the long term in the UK market which has de-rated strongly since 2016 and is now trading at the lowest price to earnings level against global peers for 30 years: Its value is attractive on a relative and absolute basis.  The UK market continues to offer the highest dividend yield globally, with high levels of dividend cover.

In the UK, expectations were that dividends would grow just 8% in 2021, best case (Link Group), however actual underlying growth (excluding special dividends) was much better at nearly 22% with most sectors contributing, especially banking (restoring distributions) and industrials.  Mid-caps (+40.1%) rebounded and grew faster than the top 100 on an underlying basis.

Dividend growth amongst smaller companies was faster still and this is one of the reasons we focus on small companies; resilience from the right companies and their management team in times of adversity.  However despite this growth, mid-cap dividends only ended the year at the same level as 2007/2008.  The headlines were taken in 2021 by mining companies delivering a record £16.9bn of special dividends, three quarters of this from Rio Tinto and BHP alone. 

Your company's revenue return improved by 19% to 7p per share (2020: 5.9p) still below the 9.1p of 2019.  NAV total return was a very healthy 25.2% (2020: -0.2%) improving on the pre-Covid figure of 22.2%.

Against this backdrop I am pleased to tell you that your Board recommends a final dividend payment of 7.5p (total 9.5p).  This reflects the better performance and total return for the year, subject to approval at the AGM.  At a share price of 310p on 31 December, this represents a dividend yield of 3.1%, better than the average 2021 yield from FTSE 250 companies of 1.91% (and comparable to the FTSE All-Share yield of 3.07%).

Non-executive Director's fees remain at £10,500 each and your board continues to exercise a tight grip on costs. Our ongoing charges figure has fallen again, from 2.45% last year to 2.38%.  Your board understands that while we remain a small fund, reducing this will continue to be a challenge, however every effort is made to do this, while maintaining appropriate attention on controls and governance.

Outlook

There are a number of ongoing uncertainties that may slow the return to foreign investment in UK stocks, starting with the obvious potential for another Covid variant prolonging the progress towards endemicity.  Being able to 'live with the virus' depends on social norms for what is 'acceptable', the possible occurrence of a more severe variant and the effectiveness of global vaccinations.

Secondly the risk of conflict or at least lower levels of cooperation and trade between major nations is higher at the moment, in the case of Russia, Ukraine and NATO countries, and also between China, Taiwan and America.  Globalisation and trade between major countries and regions means that local shocks now have a much larger impact on national economies and in some cases global outlook than perhaps ever before. 

Covid has not encouraged the wider country-country cooperation or action that was hoped; in fact we see more of the opposite as politicians act 'in the national interest', and countries have to look after themselves.

Thirdly there will be unrest as we experience an uncomfortable financial squeeze.  Interest rates will rise to combat inflation. In the case of the Fed, which many commentators feel has lost its direction in this matter and dithered too long, it appears likely there will be an abrupt tightening in response to 7% inflation and a 5% increase in wages and salaries in America over 2021.  Globally, inflation is running at 6% and here in Europe, central banks are preparing the markets for two or more interest rate rises in 2022.  In the short term, the UK is going to see a rapid rise in household bills, mostly driven by huge energy price rises; this has already resulted in calls from the Governor of the Bank of England for wage restraint to avoid entrenchment of inflation longer term.  To make the challenge bigger, the jobs market is "extraordinarily tight" according to Governor Andrew Bailey.

At the same time, uncertainty grows for Boris Johnson's premiership, as 'Partygate' gains momentum with a possible fixed penalty notice for him and senior No 10 staff a possible result.  This would certainly trigger a no-confidence vote by his Tory MPs and a damaging pause to any possible progress after Brexit while a new leader is selected.  All await the outcome of the Metropolitan Police investigations and the Sue Grey report.

Together these elements raise concern:  History tells us the fight against inflation normally results in a recession and short term, the UK

is apparently short of governmental leadership that inspires trust and confidence through challenging times.

In the UK, record mining special dividends of 2021 are likely to not be repeated in 2022. However B&M and Next already have distributed such dividends to provide a catch-up and to reflect extra revenue from lockdown, online pent-up demand and little competition for the wallet from international travel.  There is also some optimism that underlying dividends for the top 100 will grow by about 5% overall this year (Link Group): This is likely to be a stronger number for smaller companies than for the Top 100.

Good companies at fair prices are still overlooked by house analysts. Those with commitment to a proven system, prepared to analyse fully and act on conviction, will come out on top in the long run. Our Managing Director and Fund Manager has many years' experience relevant to operating successfully in the conditions of 2021 - this continues to bode well for your Trust as we recently passed his 3 year anniversary in taking on the Fund Management role.

Our AGM in 2021 was again held virtually, with no shareholders present, as movement restrictions and the safety of our investors and colleagues were uppermost in our minds. We plan to hold a meeting in person for the AGM this year on 5 April 2022 at 12.00 noon. Shareholder engagement and opinion is very important to us, so there are plans in place to give you the opportunity to engage with the Board. Details of the proposed AGM can be found in the separate Notice to the AGM publication.

       Manny Pohl, as Fund Manager, will provide a short presentation on his investment approach for all attendees of the AGM.

I and my colleagues on the board look forward to the chance of meeting you in person once more.  We wish you well in the meantime.

Frank Ashton

Non-Executive Chairman

23 February 2022