Herald Investment Trust (HRI) has announced its final results for the year ended 31 December 2022. NAV fell 22.8% during the year, underperforming its benchmark index, the Numis Smaller Companies plus AIM (ex. investment companies), which fell 22.8%. However, the company did outperform the small cap Russell 2000 Technology Index (in sterling terms) which was down 28.4%.
The discount at year end was 15.1% compared to 7.9% in 2021
The share price fell 28.9% and as with last year, the directors did not recommend a dividend for the year.
Katie Potts, the investment manager, commented: “The factors behind the disappointing decline in the Company’s NAV per share of 22.8% are multiple. Clearly, the biggest negative that had not been factored into valuations at the start of the year was Russia’s invasion of Ukraine. It has been a catalyst to end the era of virtually free money and exposed the strains of the excess government debt associated with Covid, welfare, health and defense expenditure, and energy subsidies. The p/e compression witnessed is a direct and inevitable by-product of rising bond yields.”
Chairman, Tom Black, reflecting on the disappointing year noted that “Whilst we remain confident about the longer-term prospects for the majority of the investee companies, we have concerns about the state of financial markets particularly for smaller companies. The UK smaller quoted companies market is the most challenged with particularly poor liquidity. This is an existential threat.”
[Discounts have narrowed to be more inline with pre-covid averages which is likely a reflection of the faith investors have placed in the company’s track record which has been impressive over the past 5 years, with a NAV return over 50%. Valuations for many small caps are also at multi year lows providing plenty of opportunity for outperformance if economic conditions improve. That being said, rates are not guaranteed to return to their previous lows, and we should expect a period of elevated volatility as markets adjust to the possibility of higher rates. These pressures will likely be more acute in the small cap universe where funding pressures and access to capital are often elevated, as chairman Tom Black noted in his report.]
HRI : End of a tough year for Herald