HERALD INVESTMENT TRUST plc ANNUAL REPORT ...

DIRECTORS’ REPORT
The Directors present their Report together with the financial statements of the Company for the year to 31
December 2010.
Business Review
Business and Status
The Company is an investment company within the meaning of Section 833 of the Companies Act 2006.
The Company carries on business as an investment trust. It was approved by HM Revenue & Customs as
an investment trust under Section 842 of the Income and Corporation Taxes Act 1988 for the year ended 31
December 2009, subject to matters that may arise from any subsequent enquiry by HM Revenue & Customs
into the Company’s tax return. In the opinion of the Directors the Company has conducted its affairs so as to
enable it to continue to obtain such approval and it will continue to seek approval under Section 1158 of the
Corporation Tax Act 2010 (formerly Section 842 ICTA 1988) each year.
Objective
Herald’s objective is to achieve capital appreciation through investments in smaller quoted companies, in the
areas of telecommunications, multi-media and technology (TMT). Investments may be made across the world.
The business activities of investee companies will include information technology, broadcasting, printing and
publishing and the supply of equipment and services to these companies.
Investment Policy
While the policy is global investment in the above target areas the approach is to construct a diversified portfolio
through the identification of individual companies which offer long term growth potential, typically over a five
year horizon or more. The portfolio is actively managed and does not seek to track any comparative index.
With a remit to invest in smaller companies with market capitalisation generally below £1bn, there tends to be
a correlation with the performance of smaller companies, as well as those of the technology sector. A degree
of volatility relative to the overall market should be expected.
The risk associated with the illiquidity of smaller companies is reduced by generally restricting the stake
in any one company to less than 10% of the shares in issue. A number of investments are in early stage
companies, which have a higher stock specific risk but the potential for above average growth. Stock specific
risk is reduced by having a diversified portfolio of over 200 holdings. In addition, to contain the risk of any
one holding, the Manager generally takes profits when a holding reaches more than 5% of the portfolio. The
Manager actively manages the exposure within the constraint that illiquid positions cannot be traded for short
term movements.
The Company has a policy not to invest more than 15% of gross assets in other UK listed investment companies.
From time to time, fixed interest holdings, non equity or unlisted investments may be held on an opportunistic
basis.
The Company recognises the long term advantages of gearing and has a maximum gearing limit of 50% of
net assets. Borrowings are invested primarily in equity markets but the Manager is entitled to invest in other
securities in the companies in the target areas when it is considered that the investment grounds merit the
Company taking a geared position. The Board’s intention is to gear the portfolio when appropriate with
borrowings to around 30% of net assets. Gearing levels are monitored closely by the Manager and reviewed
by Directors at each Board Meeting.
The Company may use derivatives which will be principally, but not exclusively, for the purpose of efficient
portfolio management (i.e. for the purpose of reducing, transferring or eliminating investment risk in its
investments, including protection against currency risk).
A detailed analysis of the Company’s investment portfolio is set out on pages 16 to 20 and in the Investment
Manager’s Report.
Performance
At each Board meeting, the Directors consider a number of performance measures to assess the Company’s
success in achieving its objectives.
The key performance indicators (KPIs) used to measure the progress and performance of the Company over
time are established industry measures and are as follows:
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the movement in net asset value per ordinary share compared to the comparative index;
the movement in the share price;
the discount; and
the total expense ratio.
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