Chairman's Statement

The chosen remit of the Company, including media, information technology and communications has continued to prove an interesting area for investment opportunities in 1999. In 1998 we were able to show that the performance had topped the smaller companies investment trust tables in three of the last four years. This year we can only claim second place - however in various tables the Trust has emerged as the second best performing investment trust in all sectors over five years in NAV terms. Of much more importance, the percentage increase in both net assets, and the share price, has far exceeded the returns in any previous year. The basic NAV per share grew by 151% in capital, which falls to 145% on a fully diluted basis. However, the fully diluted growth would have been some 8.5% less had we not spent some £5.5m in previous years repurchasing 7.5 million warrants. The repurchases in September 1998 now look to have been particularly timely. In contrast the most relevant indices, the Hoare Govett Smaller Companies Index in the UK and the Russell 2000 Technology Index in the US, grew by 51.9% and 104.8% respectively. This implies outperformance far exceeding any previously, and reflects a wider interest in the sector that we have advocated. Even smaller companies have outperformed after several years in the doldrums, and the performance is the more satisfactory when compared with the FTSE-100, which only grew by 17.8%.The share price has additionally benefited from the evaporation of the discount, which stood at 19.2% at the start of the year.

The dividend income has declined by 3.3%. This reflects a sharp decline in the average yield on the portfolio. At the end of 1997 the portfolio yielded 2.32%, at the end of 1998 it yielded 2.16% and at the end of 1999 it yielded only 1%. The move into lower yielding growth stocks has benefited the capital return but the income has declined and the management fee has risen, this unfortunately means that we are unable to maintain the dividend this year. We have decided that retained reserves will not be used to maintain the dividend, and next year, if as seems probable, the income from the portfolio does not sufficiently exceed the costs the dividend is likely to be cut further. We have hitherto managed, unlike the specialist technology funds, to have a progressive dividend, and regret that one of the costs of this year's strong capital performance may well be next year's dividend. However, we believe that the objective of the fund is capital appreciation, and the management approach should continue to aim for this. The income has additionally been affected by the decision to support the AITC campaign to promote Investment Trusts. This reflects the belief that a closed end vehicle is a particularly appropriate vehicle for investing in smaller companies where liquidity is an issue. The Trust benefited from being able to buy stocks (and its own warrants) in the extremely nervous market of September and October 1998, and did not have to fund redemptions. Equally it has not had to invest incoming cash in the illiquid and tight rising market of November and December.

The board has seriously considered the issue of liquidity, now that the Trust's assets exceed £400m, with a focused small companies' remit. At least 50% of the assets will be invested in the Europe (previously >50% UK). In view of the increasing number of larger companies, and higher valuations it has been decided to increase the threshold above which investments will not be made to £750m, similar to the HGSCI. As previously the manager is not compelled to sell as holdings grow above this size.

Although the growth prospects are strong for the underlying businesses in the portfolio, the remarkable rerating that occurred in November and December will make progress this year more challenging.

The information on this page is taken from the Report & Accounts 1999