Chairman's Statement

The investment policy of the Company is to exploit growth opportunities in the field of multi-media; this includes media, IT, computing and communications in the belief that this area of the economy will perform relatively well. This strategy is justified by the growth in net assets in 1997 which, based on independent tables, exceeded the return of other smaller companies investment trusts. This is the more pleasing becasue it is the second time that this has been achieved in three years. It also means that the asset growth, since inception in February 1994, exceeds other small company investment trusts, in spite of the dilutive effects of the warrants in issue, and the abscence of financial gearing. However, two adverse effects have marred this success in 1997. Firstly, small companies have significantly underperformed large capitalisation stocks, particularly in the Company's two most important markets, so although the Company has out-performed the two most relevant indices by 7.3% (HGSCI) and 7.7% (Russell 2000 small cap Technology Index) it has lagged the FTSE by 11.7% and the Russell 1000 large cap Technology Index by 14.4% (currency adjusted). Secondly the discount between the share price and NAV has widened by the same amount as the growth in assets. It so stood at an all time high of 19.4% (fully-diluted) at the year end.

The Company did acquire 1,477,620 of its own warrants for an aggregate consideration of about £900,000 in September and October, as a reflection of the discount, and the stated returns on the fund are net of this amount.

In 1996 the remit of the fund broadened geographically following the issue of the 'C' share. At least 50% of the portfolio will remain in the UK with up to 50% in the rest of the world. It is satisfactory to be able to report that this strategic move has been rewarded by better performance, in both the US and, the limited exposure in the Far East, than the UK.

The earnings performance in 1997 has been tempered by the increased investment in the US, where generally growth stocks do not pay a dividend. Shareholders should note that future earnings will be affected by the Company no longer being able to offset excess management expenses against tax suffered on UK dividends received.

Although the year end started well, it is difficult to determine what knock-on effects events in the Far East will have to the world economy as a whole, and demand for technology in particular. However, the manager believes that generally earnings growth of the companies in which the fund invests exceeded 20% in 1997. This, combined with expectations for continued economic growth in the UK and the US, as well as technical developments, the year 2000 bug, and the implications of a single currency in Europe will spur further IT investment, so that the Herald portfolio should perform relatively well in 1998.

The information on this page is taken from the Report & Accounts 1997