Legal Entity Identifier:

213800ON67TJC7F4DL05

NON- STATUTORY ACCOUNTS

The financial information set out below does not constitute the Company's statutory accounts for the years ended 31 December 2018 and 2017 but is derived from those accounts. Statutory accounts for 2017 have been delivered to the Registrar of Companies, and those for 2018 will be delivered in due course. The auditors have reported on those accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006. The text of the Auditor's report can be found in the Company's full Annual Report and Accounts on the Company website: www.athelneytrust.co.uk

Athelney Trust plc, the investor in small companies and junior markets announces its final results   for the 12 months ended 31 December 2018.

Chairman's Statement

Stabilise the Company in readiness for Growth

Overview

Given the challenging markets and various Board developments within Athelney Trust plc (the 'Company' or the 'Trust') over the past months, it is perhaps not surprising to have to report mixed results for the Company in the year ended 31 December 2018.  The key points are as follows:

·    Investment performance as measured by Net Asset Value (NAV) total return, which is the change in NAV plus the dividend paid, was minus 17.6% (2017: plus 16.8%)

·    Audited NAV was 225.9p per share (2017: 284.8p) - a decline of 20.7%

·    Revenue return per ordinary share was 9.9p (2017: 9.6p), an increase of 3.1%

·    Board/major shareholder disagreements led to approximately £90,000 extra cost (£40,000 pre year end and £50,000 post year end), ongoing distraction for the Board and general shareholder uncertainty - more of this would be unsustainable, especially for a fund of this size

·    Recommended final dividend of 9.1p per share (2017: 8.9p) an increase of 2.2%

·    The Fund Manager (and then Managing Director), Dr Manny Pohl volunteered in December 2018 to reduce his salary by 0.25% to 0.75% starting from January 2019

·    Long term performance represented by the 10 year Total Shareholder Return lags both FTSE SmallCap Index and AIM All-Share Index (see graph on page 37)

Board and Governance

The Board places significant importance on corporate governance and compliance with the AIC and UK Corporate Governance Codes.  Full details are set out in the Corporate Governance section of our Annual Report and Accounts on pages 20 to 29.

An Independent Board - Update

There were a lot of movements including five directors who came off the Board, another five who came on and two reshuffles over the last six months.  Details of the various Board changes are on page 31. The directors in place at the time of signing these accounts are:

·    Myself, Frank Ashton - Executive Chairman

·    Helen Sachdev - Non-Executive Director, Chair of Audit Committee

·    David Lawman - Non-Executive Director

We now have three directors who together make up an independent Board.  On 8 February 2019 I took over the role of Chairman from David Lawman.  To the best of my knowledge, like Helen Sachdev, I have no current or prior connection with any major shareholder of the Company and maintain I am an independent Chairman. 

I am also Executive Chairman.  Both roles being undertaken by one person is not compliant with the UK Corporate Governance Code. However after full consideration by the Board it is deemed appropriate at this critical time for the Company. A detailed explanation of the non-compliant position is available in the Corporate Governance section.

I believe the Board has created and is now implementing a plan that reflects Robin Boyle's long-held vision and ambition for the Company, which he founded 24 years ago.  Further details can be found on pages 6 to 8.

Results

Capital Gains

During the year the Company realised capital profits before expenses arising on the sale of investments in the sum of £98,840 (31 December 2017: £296,629).

Portfolio Review

Holdings of Belvoir Lettings, Clarke T, Dairy Crest, Hansteen Holdings, Paypoint, Real Estate Investors and Rightmove were all purchased for the first time.  Additional holdings of Braemar Shipping, Cineworld, Epwin, Ibstock, Jarvis Securities, Marstons, VP and XP Power were also acquired. Connect Group, Debenhams, DX Group, Countrywide, GVC, Juridica, Low & Bonar, Safestyle, Slingsby, Sprue Aegis, Standard Life and UK Commercial were sold. Nine holdings were top-sliced to provide capital for the new purchases.

Corporate Activity

The holding of Communisis was taken over at a capital profit of 152.8%.

Dividend

The Board is pleased to recommend an increased annual dividend of 9.1p per ordinary share (2017: 8.9p). This represents an increase of 2.2 %over the previous year. Subject to shareholder approval at the Annual General Meeting on 3 April 2019, the dividend will be paid on 18 April 2019 to shareholders on the register on 21 March 2019.

Summary

·    As Chairman, I am pleased that we now have an independent board in place to set up and oversee the transition to growth - creating shareholder value for all, managing costs and risk.  We are now in a period of stability, which is essential as a precursor to growth

·    We believe the optimum size for the fund will be between £50m and £150m.  At this size we will have:

-     Sufficient fund management capacity and skills to uncover and maximise potential opportunities

-     The ability to consistently deliver superior performance, driven by the right targets and measures

-     Reduced risk of breaching the Chapter 3 regulation (five shareholders owning more than 50% of the Company) that would result in temporarily losing Investment Trust and tax exempt status

-     An opportunity to reduce the Ongoing Charge percentage to match or better our peer group

·    We are in the process of confirming a Fund Management team that in our judgement, will have the necessary skills and processes in place to identify and realise value-enhancing investment opportunities, at lower relative risk

·    We will continue to balance the need to manage costs and also ensure the Company and fund are supported with appropriate resources now and in the longer term

Outlook

The world and UK markets have recovered since the start of 2019 (FTSE 100 Index rose over 6% from 31 December 2018 to 1 March 2019).  I am very pleased to report that along with this improvement, and with the active support of Dr Manny Pohl the Fund Manager, the Company's NAV has also recovered from 225.9p per share at 31 December 2018 to 235.9p per share (unaudited) at 28 February 2019, an increase of 4.4%.

The February change in NAV was 1.07%, the second monthly increase in a row, outperforming the SmallCap Index (0.90%) as well as the AIM All-share Index (-0.88%). The share price on 28 February 2019 was 225p, trading at a discount of 4.84%, a substantial improvement on the position just after the shareholder requisitioned General Meeting (GM) when the discount briefly increased to more than 20%.  This is the point I joined the board.  Ever since the GM, we appear and are more stable; this report will address a number of basic shareholder questions about the near and medium-term future stability, including recommended dividend and management plan, that should reduce uncertainty.

Externally, uncertainties continue for a UK small-cap fund. 

Brexit rumbles on, struggling between the need for a political outcome that reflects the balanced voting 52:48 in the referendum, and the realities of negotiation between two sides with a lot to lose, economically and politically - the UK government and remaining 27 member states of the EU.  How or even when this will end is still uncertain.  The manner of Brexit, whatever it is, and also developments on the global stage will impact the economy and sterling in the short term; we invest for the longer term in quality stocks and are mindful of opportunities that arise as a result in the shorter term.

The US economy is unlikely to repeat its 2018 outperformance and Washington's more hostile approach to trade is a driver of convergence of larger developed economies' growth and a thorn for the UK's trade negotiators post Brexit.  More protectionism and continued uncertainty has already translated to companies deferring investment or freezing recruitment, and there are signs global companies will move capacity away from the UK over time.

We are watching these market trends closely to see which Company plans, if any, need to change as the market cycle continues - there will be turbulence, but we are here for the long term.

We are excited to see the prospect of a new-look Athelney Trust on the horizon.  We must continue to deliver to all shareholders a period of stability and solid performance as well as listen to their feedback and needs, then using that information, build an even stronger future.

So far our listening and analysis has produced the following common ground:  The Trust has a history of good results, but recent events also show it is vulnerable, because of its size and pattern of shareholding.  Many would like to see it grow, and at least some see the advantage of external Fund Management in that regard.  Dividends are progressive but some criticise total shareholder returns over the long term and also the fund's size.

The conditions need to be right - right to convince existing shareholders that growth is possible (because the Company is once again stable over a period of months at least) and then right to attract new shareholders over time.  The benefits from our plan to Stabilise and Grow are set out in Figure 1 below.

 Figure 1 - The Board's Plan to Stabilise and Grow the Company and Fund

I believe we now have the right elements in place, and a process and plan to unite them, so that the foundations for 'Readiness to Grow' are in place.  Shareholder support for continuation with this plan will be sought at the AGM.

The plan's foundations are:

1.   A carefully reviewed and confirmed mandate, with continued focus in the small/mid-cap territory

2.   A Fund Management team capable of delivering significant benefits realised from an optimal size (around £100m total assets)

3.   A fund which is large enough to attract further investors and reduce the risks of accidentally losing investment trust status

4.   Realising a larger fund allows us to reduce the Ongoing Charge percentage as well as attract, retain the best resources

We appreciate the hard-working contribution of Dr Manny Pohl, the current Fund Manager and second largest shareholder (17.6%) and continue to discuss his role.

We are grateful for the support and interest shown by Gresham House Asset Management (Gresham House).  Since December 2018 Gresham House has worked hard with Robin Boyle, the largest shareholder (20.8%) to set up an 'externally-managed Fund' option for the Company.  Robin founded the Company 24 years ago and until last September was Managing Director and Fund Manager.  Now, as he considers the future, he wants to help realise the most attractive, sustainable future possible for Athelney Trust.  Those of Robin's friends and family who are also shareholders and have been contacted, agree with our initial assessment that Gresham House appears to be a very attractive route to preserve and grow shareholder value.

I believe, along with my colleagues, that although Dr Manny Pohl has investment success through ECP Asset Management, when it comes to maximising shareholder value, the Gresham House option represents a strong alternative as it has the following features;

·    More investment management capacity from existing, proven skills and experience in UK small- and mid-cap companies - not just from Robin Boyle who would be a consultant to Gresham House but also Investment Manager Laurence Hulse, his manager Ken Wotton and the wider team of Gresham House.  These UK-based segments are where the undervalued companies are and this team has the capacity to find and realise value for shareholders, now and in the future when the fund has grown

·    More due diligence face-face with the management team - which often produces invaluable insights otherwise not available at any price.  In my own experience of due diligence and work with management teams of all sizes, personal visits always give a clearer view of management, their processes, culture and aspirations that aids making better investment management decisions.  'In person due diligence' has always been central to Robin Boyle's process and this is also true of Gresham House

·    A route for Robin Boyle's knowledge, insights and investment process to be teamed with Gresham House's compatible value-based structure and conviction scoring.  This teamwork and parallel working can be co-located in Gresham House's London office, allowing the most effective transition and succession plan for Robin Boyle's knowledge over time.  Robin would work closely with Laurence Hulse, Investment Manager at Gresham House, from the start; they already speak highly of each other from their work to date

·    A great opportunity to use Gresham House's proven ability to grow in the UK market, as well as select from a choice of mandates, used successfully by them - the existing Gresham House culture, management style and portfolio structure fits well with our Company

Finally we believe a move to a 'Gresham House with Robin Boyle' Fund Management option, could happen quickly after the AGM, with low risk and limited cost to Athelney and its shareholders, so that free cash flows over time can be quickly optimised.  At the moment, given Dr Manny Pohl's resolutions that, if carried, would re-shuffle the Board once again, we are blocked from committing the Company to further contracts, and therefore unable to proceed more quickly.

We will use the time up to the AGM to complete our review of the options available to the Company, and to determine the best option for shareholders.

We have a particularly important AGM this year.  Given the resolutions presented, shareholders have a clear choice to determine the future direction and prospects for the Company.

Some resolutions are the usual and expected ones, including those to re-elect myself and Helen Sachdev (new directors appointed since the last AGM, not voted on to the Board by shareholders). 

Others, requisitioned by Dr Manny Pohl, if carried, return himself and Simon Moore to the Board and vote David Lawman off, almost perfectly reversing the result of the GM held a month ago.  We believe this returns shareholders to the conditions of late 2018, and will introduce further uncertainty and delay.

We, the current Board of Directors, have quickly created an effective and proactive working relationship.  We are in the process of stabilising the Company by doing what all directors must: Listen to the needs of all shareholders, explore all options to create shareholder value and carry out our fiduciary duties in a collaborative way that embodies the AIC Code of Governance. 

Compared to our plan we believe the implied direction from the Dr Manny Pohl resolutions represents less shareholder value, and carry the prospect of continued instability and we therefore recommend you vote against his resolutions.

We believe the current Board has understood the current position quickly and selected the plan that we are confident is best for shareholders and the future of the Company.

We look forward to a good relationship with existing and future shareholders, and with the right management team in place, are confident in the prospects for Athelney Trust PLC.

Frank Ashton

Executive Chairman

4 March 2019

Fund Manager's Report

2018 in Review

The 2018 calendar year began with strong growth across many global economies, however, the wheels began to fall off quickly, with growth trajectories diverging. After two years of steady growth in asset prices, the 13.7% fall in the MSCI World Index in the last three months of 2018 means global stocks produced their worst quarterly performance in seven years leading to a decline of 10.4% for the full year. In comparison, the FTSE performed slightly better during the quarter, declining by only 10.4% to close 12.5% down for the full financial year.

Since the Global Financial Crisis (GFC), equities have been a major beneficiary of the low-interest rate and loose monetary policy environment. Companies have been able to borrow money cheaply to strengthen their balance sheets while also benefiting from a pick-up in demand as the global economy recovered. Low-interest rates have driven down the yield on other asset classes such as bonds, with UK government bonds yielding around 1.3% compared with the FTSE All Share Index which yields approximately 4.0%.  Now that UK and US interest rates have each risen by 0.25% in late 2018, markets have recovered well.

The year of 2018 saw disappointing market returns and higher correlation between asset classes. For many, the geopolitical risks around the global have presented investors with an uncertain future with a poor growth outlook.

Investment Philosophy

As a survivor of the stock market crash in 1987 and the GFC in 2008, I have learned the importance of having the courage to stand true to core values when approaching investments and be willing to source conviction from within. When times get tough, the delineation between facts and feelings is blurred and having a high conviction, based on a core philosophy, helps us move through these turbulent and traumatic snapshots in time. I have found that when the dust settles, and we look back on these events, there is quite a thrilling tale; but only for those who stood by their convictions.

At the core of my values is the belief that the underlying economics of a business drives its long-term returns. Companies who are growing their economic footprint (profitably) are generally better investment opportunities than those that aren't.  I would rather invest in a smaller number of companies which I understand well than a large number of companies of which I have only a cursory understanding. As a custodian of other people's money, I owe it to those who have invested alongside us to allocate their capital to opportunities that I believe will produce the best return for shareholders. 

As a high-conviction, quality-growth manager that invests for the long-term, my promise ensures that: 1 - I will never speculate to generate returns; 2- I buy for the long-term and do not see myself as a trader; and, 3 - I do not diversify to cover up for poor due diligence. 

Our Task

My task begins with the mandate of Athelney Trust - to provide shareholders with prospects of long-term capital growth in quality small-cap companies, while maintaining a progressive dividend record. With this in mind, the first task when taking over the portfolio was to consolidate the holdings and divest of poor-quality companies, without jeopardising the progressive annual dividend. My portfolio review identified several investments with lacklustre long-term growth prospects, with some investments where the business model is under serious threat.

The request for a GM presented some uncertainty for our Company and meant I ceased making further wholesale changes to the portfolio in the event that fund management would revert back to Robin Boyle.

With the GM behind us, I will continue to deliver superior returns for shareholders. Note, I will remain mindful that our investment turnover should remain low while aiming to have no more than fifty companies in the portfolio. Further, I am pleased to report that the Company realised capital profits before expenses arising from the sale of investments in the sum of £98,840 (31 December 2017: £296,629).

Redefining Active Investing

While the active versus passive debate continues, and while the focus of the industry has been on the fees paid rather than on the returns generated, the more compelling issue which needs to be addressed is, in fact, manager skill in picking quality investments rather than having a broad portfolio and replicating an index.  In all of this, the acid test is longer-term investment performance and the only way to grow sustainable wealth that is resilient through time is to invest money in a careful, considered and committed way.  I adhere to an Active Investing approach and believe that it requires:

I.    Forensic Research: Considerable factors need to line up before I invest in a business.  For example, a sound business strategy that is contextually relevant to the markets they operate.  A durable business model with a Sustainable Competitive Advantage (SCA) that management has previously demonstrated a strong competency of execution.

II.  Understanding Potential, not just Performance: I believe it's important to understand both the narrative of an investment and the numbers that support it. Investing on the narrative alone ignores reality; and investing in numbers alone, ignores potential.  I marry the two together so that we can best capture the long-term potential while ensuring that we pay a fair price.

III. Being Highly Engaged with Portfolio Companies: To make high conviction investment decisions and to maintain these over the long-term requires deep understanding and a lot of time and attention.  It means I need to think about investing as an owner, and not a share trader. 

IV. As a result, I only have time for our best ideas, and we continue to monitor and assess these through collaborative and discursive practices.

Environmental, Social and Governance Considerations

In more recent times, investment management is more than merely generating performance in excess of a benchmark.  While that is a core part of a mandate, there are other very important qualitative issues that are central to what should be done.  For example, one should recognise that capital allocation is a vehicle through which to drive change.  I have the opportunity to demand specific standards of corporate governance, decide whether specific social and ethical issues are acceptable and, if they are not, I vote with my feet. 

For me, the integrity and credibility of any management team is a founding principle to our investment process.  I need to trust that management have the best interests for all stakeholders, and I have faith that they will make sound strategic decisions and have strong experience and capabilities in their chosen field.  As custodians of shareholders' capital, we have an obligation to ensure that we are doing whatever we can to preserve capital and grow it over time.  I allocate capital to investments which are sustainable in the long-term, and finding trustworthy, values-based management that align with my core values and beliefs that will ensure above-average economic portfolio returns.

Recent Additions

Since taking over the management of the portfolio I added only one position: Rightmove Plc (LSE: RMV). Rightmove has been able to ride the paradigm shift from papers to online. Its principal business is their website (www.rightmove.co.uk) where its customers - estate agents, rental agents and new home developers - pay fees to have their properties displayed on the website, which provides home hunters with property details to search. The business competes for classified property advertising and has seen impressive growth. Rightmove's success means it is now a household name; and its opportunity ahead remains large, particularly compared to the other online pure-plays.

Update

The unaudited NAV on 28 February 2019 was 235.9p per share - up 1.07%, the second monthly increase in a row and beating the SmallCap Index (0.90%) as well as AIM All-share Index (-0.88%). The share price on the same day was 225p (trading at a discount of 4.84%).  Further updates can be found at www.rns.com.