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Acorn Income benefits from being geared as its gross assets were rising

Acorn Income Fund has released its annual results for the year ended 31 December 2015. During the year, the company’s gross asset portfolio performance (adjusted for share issuance and buybacks) provided a total return of 17% outperforming the small cap indices. The Ordinary Share net asset value total return was 22.1%. The company says that this shows the benefit of the gearing on the Ordinary Shares in a period when gross assets were rising. The discount on the company’s ordinary shares also narrowed during the year so that the share price total return was 36.1%. This compares against the FTSE Small cap (ex Investment Companies) Total Return Index, which increased by 13.0% and the Numis Smaller Companies Index (ex Investment Companies) total return index, which rose by 10.6%.

The first two dividends in 2015 were paid at 3.25p per share. The quarterly distribution was increased by 7.7% to 3.5p for the September and December payments. For the full year the dividend totalled 13.75p, a 7.84% increase on the 12.75p for 2014. The company says that its revenue account remains healthy. Revenue earnings per share for the year were 18.49p (16.22p in 2014). Revenue reserves stood at £996,144 at the start of the year and had increased to £1,735,911 at the year end, equivalent to a reserve of 11.0p per ordinary share.

In terms of performance, the managers comment that the year was a challenging one for equity investors as concerns around slowing emerging market growth weighed heavily on larger capitalised companies. They say that weaker demand for commodities combined with continuing high levels of output caused natural resource prices to fall sharply in the second half of the year and that the impact of this was most significant at the larger end of the market cap scale, which has an international and commodity bias. In contrast, they say that UK quoted smaller companies, which tend to be more domestically focussed, enjoyed a relatively strong period of performance during 2015. The general election in May marked a clear turning point in investor sentiment towards smaller UK quoted companies. The managers say that their focus, at the smaller end of the market cap scale, with no direct exposure to commodity based stocks, saw the portfolio enjoy a strong year in 2015. The combination of low interest rates, low inflation and falling unemployment continued to support our positive stance on the UK Consumer.

In terms of portfolio acftivity, the number of holdings within the portfolio increased to 45 during the period following the addition of 14 new holdings and disposal of 10 existing positions. Two of the new additions to the portfolio were through Initial Public Offerings (IPOs). The new additions to the portfolio were: FDM Group, an international provider of trained IT personnel; Pendragon, the car retailer; Palace Capital, a real estate investment company focussed on UK assets outside of London; Sprue Aegis, a developer of smoke and carbon monoxide alarms; Jarvis Securities, a retail stockbroking service provider; Braemar Shipping Services, a provider of ship broking, technical and logistical services to the marine and energy industries; Hostelworld, the global online booking platform for hostels; Photo-Me International, the operator of photo booths and mobile laundry units; Quarto, the illustrated book publisher; Gateley Holdings, a national commercial law firm; Headlam Group, a floor covering distributor; Amino Technologies, a manufacture of internet enabled set top boxes and Lavendon, a European focused powered access rental company.

Positions in Lookers, Electrocomponents, Premier Farnell, Interserve, Berendsen, Air Partner, John Menzies, Cineworld and James Cropper were all exited in full. The managers say that thte net effect of these disposals lowered the average market capitalisation of the portfolio to just over £300m. In addition to the transactions outlined above a small position in Kainos, the provider of IT, consulting and software solutions, was bought and sold during the period. The managers say that its share price performed strongly immediately following IPO and they decided not to increase our initial allocation into a full position at the higher level.

The strongest contributor to performance was Conviviality (55%), the Group completed the reverse takeover of Matthew Clark, an independent drinks wholesaler, which the managers say will create a major UK drinks distributor, serving both the ‘on’ and ‘off’-trade markets. Clipper Logisitics (73%), also continued to perform strongly, winning a number of significant contracts during the period. These contracts included the provision of an innovative ‘click and collect’ service for John Lewis through the Waitrose store network. Other notable contributors to performance were Macfarlane (56%), Safestyle (47%) and James Halstead (50%).

The main detractor from performance was DX Group (-78%); which announced that lower volumes in the DX Exchange business would have a significant impact on profits for the full year. UK Mail (-48%) also endured a difficult year as the company experienced operational issues as it transitioned to a new automated parcel distribution hub.

In terms of outlook, the company says that the forthcoming referendum on whether or not the UK should remain within the EU presents the greatest near term uncertainty for the UK stock market. They say that an exit from the EU might well trigger further sterling weakness, however Acorn’s Smaller Companies Portfolio is invested in UK companies which are generally focused towards the domestic economy so the impact of currency volatility is diminished. The Investment Adviser for the Smaller Companies Portfolio remains confident that the investee companies can prosper whether the UK is in or out of the EU. In addition, whilst the overwhelming expectation for interest rates is that they will remain low over the next year or more an unexpected rise would impact on fixed interest valuations and for this reason the Investment Adviser for the Income Portfolio intends to keep duration relatively short and hence less exposed to a surprise rate increase.

Acorn Income benefits from being geared as its gross assets were rising : AIF

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