The trading background for most of the stocks in the Herald portfolio has continued to be reasonably strong.  In the UK generally strong share price movements have mirrored this.  However, the US and Far Eastern investments have been volatile.  The fourth quarter in these markets was difficult and the early part of 1998 saw some share price recovery as investors thought the Q4 Asian contagion correction was overdone.  However, more recently there has been some tangible slippage in growth expectations which partly relates to the knock-on effects of the evaporation of Far Eastern economic growth, but also reflects de-stocking in the PC market, which is clearly such an important driver to much of the technology sector.   This has led to a difficult second quarter.  1998 may well be a landmark year, being the first when the PC market declines in $ terms.  The Trust's exposure to both the Far East and PC related stocks is minimal, and the UK software product and service sector, which started the year as the biggest element of the portfolio at 30.33% and had risen to 32.1% at the end of June, in spite of reducing a number of positions following strength, is relatively immune from the adverse trends in both fundamental and trading terms.

Sector Weighting of the Herald Portfolio	31 December 1997	30 June 1998
Electrical & Electronic	17.4%	15.5%
Paper, Packaging & Printing	2.5%	1.6%
Distributors	7.1%	6.1%
Media	22.4%	22.3%
Support Services	39.0%	42.0%
Other	3.0%	4.7%
Cash/Gilts	8.6%	7.8%
Total	100.0%	100.0%

Summary of Performance

An additional bonus in the portfolio in the first half was the strong contribution to profits from bid situations.  Eleven bids have in aggregate realised c£21 million in cash, which has contributed to a slightly higher turnover in the portfolio than is our custom.  These bids have partly resulted from the divergence in valuations between small companies and large companies which was so apparent last year.  It also partly reflects the inevitable consolidation of maturing industries.  There has also been the expected stream of new issues which is a similar function of dynamic, evolving and often immature markets, which the Trust intended to expoit at the outset.

Last year 1.48 million warrants were bought in for an aggregate consideration of £904,000.  In the first half 2.0 million warrants have been bought in for £1.76 million.  It is the policy to buy in warrants on a gradual basis, when it can enhance the fully diluted net asset value per share.

Capital Performance of the Trust from 31 December 1997 to 30 June 1998.

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 1999.  No corporation tax liability is incurred by the Trust due to management expenses exceeding unfranked income.  In the first half year £77,000 of this recoverable, but following the changes to the budget last year the Trust is unable to recover tax this year, hence the increased tax charge.  In spite of this, and the absence of yield in the US portfolio we are pleased to be able to report a small increase in profit after tax of 10%.

Overall it is satisfactory to report that the Trust's growth in fully diluted net asset value equals the highest of its peer group - UK Smaller and International Smaller Company Investment Trusts, in the first half, and now tops various performance tables over both one and three years.  The manager is equally happy to be compared to the specialist technology investment trusts, and remains confident that the chosen field of investment can continue to perform over the longer term.  Although certain elements of the portfolio have become more expensive strong growth continues in these situations, while economic growth is slowing in the UK.  Some stocks in the orbit have, somewhat worryingly, been put on anomalous concept valuation multiples.   However, there are still plenty of attractive value investment opportunities.

Martin Boase

31 July 1998

The information on this page is taken from the Interim Report for the six months ended 30^th June 1998