Chairman's Review

The trading background for most of the stocks in the Herald portfolio has been reasonably strong but the stock market environment has been difficult. It is disappointing to report that four out of five core Herald sectors have also been four of the five worst performing sectors in the UK market. The sector weighting of the portfolio is as follows:-

To compound the difficulty, smaller companies have conspicuously underperformed larger companies with the Hoare Govett Smaller Companies Index rising only 0.3% versus the FT-SE 100 Index rising 11.8%. Even the smaller companies Russell 2000 Technology Index declined 0.5% providing no easy escape route. Against this background, the manager is relieved to be able to report a rise in assets of 3.4% (undiluted), which compares favourably with the most relevant smaller companies indices in the UK and the US in spite of the difficulties within the target sectors. The three broad strategic moves to reduce exposure to the UK media sector, radio in particular, to retain a major exposure to UK support services, although reduced recently, and to increase exposure to value oriented technology stocks overseas have proved highly beneficial. It is particularly satisfactory to report a sterling return of 25.0% in the US portfolio and an identical return from the Far East, whilst the small exposures to France, Holland and Switzerland have also all delivered growth, albeit reduced by currency, offset by a decline in Norway. The UK return also showed a small decline. In this reporting period the strategic benefits of the geographic diversification associated with last year’s ‘C’ share issue are clear to see.

In spite of the short term stock market difficulties, the argument that over the long term above average opportunities exist for capital gains in smaller companies in the chosen field remains firmly intact. Although there have been certain obvious adverse effects from currency movements, the manager believes that the essentially flat performance over the last year largely reflects a period of consolidation after the very strong share price performances in the 12 months to May 1996.

SUMMARY OF PERFORMANCE

Herald’s current policy is to pay annual dividends only, reflecting the emphasis on capital growth. The dividend in respect of the current year is expected to be paid in April 1998. No corporation tax liability is incurred by the Trust due to management expenses exceeding unfranked investment income. The extent of this excess was recoverable in previous years against franked investment income. This relief amounted to £126,000 in 1996. Following the Budget this relief will no longer be available, and will adversely affect the tax charge, and hence distributable profits. However, the Trust has hitherto not used financial gearing, and has no current plans to do so. This implies that the Trust will not suffer from being unable to recover tax against interest expense, and it does benefit from certain overseas investments which further reduces the adverse effect on the Trust.

Although stock market conditions continue to be uncertain, the underlying growth in the industries in which the Trust invests still present opportunities to achieve above average long term growth. In particular growth rates in the US are very high, and contrary to the perception of some, valuations are not always as demanding as those in Europe. Nevertheless, the remit of the fund remains to invest at least 50% of the portfolio in the UK.

The information on this page is taken from the Interim Report for the six months ended 30^th June 1997