Annual Short Report 7 March 2018 Fund Manager s Report James Thorne Performance of Class 1 Income shares* Over the twelve months to 7 March 2018, the published share price of Class 1 Income shares in the Threadneedle UK Smaller Companies Fund has risen from 284.51p to 346.52p. Looking at performance within its peer group, the total return on the fund for the twelve months ending 28 February 2018, including net reinvested income, is +23.65% as compared to a sector median return of +19.16% over the same period. (For information the Numis Smaller Companies (ex Investment Trusts) Index returned +8.74% over the same period). Market Overview and Portfolio Activity UK small-caps outperformed the broader market over the review period. The Numis Small Companies excluding Investment Companies index gained 8.7% while the FTSE All-Share index returned 4.4%. The small-cap rally was led by stocks of companies exposed to new markets or technologies and by firms with very strong business models that enable them to increase market share. Politics took centre-stage during the period. The prime minister s unexpected call in April for a snap general election fuelled hopes that this would lead to an increased parliamentary majority for the Conservatives, which would strengthen the government s hand in the Brexit negotiations. In the event, these hopes were dashed as June s election resulted in the Conservatives losing their overall majority. Markets subsequently suffered amid fears about the implications for Brexit. However, UK equities recovered over the summer led by small-caps, due to generally consensus-beating earnings updates from companies in this area of the market. The end of 2017 saw UK and European officials conclude the first stage of the Brexit negotiations, with agreement on some key sticking points, including the so-called divorce settlement. However, investors remained anxious about the next stage of the negotiations and the border between Northern Ireland and the Republic post-brexit. On the economic front, high inflation prompted a quarter-point rate hike from the Bank of England in November. The rise in inflation, along with sluggish wage growth, has weighed on consumer spending; this contributed to the slowdown in the UK s growth in 2017. However, wage growth improved in the fourth quarter. On another positive note, productivity growth was resilient; indeed, the second half of 2017 constituted the best six months for productivity growth since the financial crisis. We made several new additions to the portfolio over the review period, notably Coats, Just Group and Quiz. Thread-manufacturer Coats is *In pound Sterling and against UK peer group. Ongoing Charges Figure an industry leader; we are positive about its expansion into technical fibres this segment has high margins and high barriers to entry. Just Group provides annuities and lifetime mortgages to allow retirees to release equity value or pay their outstanding mortgages. In our view, the stock price is not reflecting the improving market in annuities and pension transfers, and the business can grow without the need for more capital. Women s apparel business Quiz has an established retail store base in the UK and a rapidly growing, global, online fast-fashion platform that can challenge the likes of Asos and Boohoo, albeit with different target customers. Over the review period, we also added to some existing holdings, such as Ascential. The media company is continuing to develop exhibitions globally, such as Money 20/20, and is further increasing its operational leverage by creating data products to help its clients gain further insight into the changing world of online retail. We also topped up our holdings in speciality pharmaceutical firms Clinigen and Vectura. Clinigen s shares have recently been under pressure amid concerns about a slowdown in its clinical trials business. However, we believe this to be a timing issue and expect the firm to have a much stronger second half. We took some profits in Blue Prism which was one of several software companies to have a stellar run over the review period. Nevertheless, we are still positive on the stock; we feel that the business will continue to grow rapidly as the partner channel grows and supports customers who are seeing very high paybacks on investments in Blue Prism s software. We profitably closed several positions, including Victrex, Fevertree, Countryside Properties and Paysafe. Other holdings that were sold during the period included GB Group on valuation grounds. We are still positive about the outlook for UK small-cap names. As we expected, productivity growth rose at the end of 2017. Continued improvement should ease some of the markets concerns about inflation picking up and itself keep inflationary pressure under control. In the UK, we should see inflation rolling over as we move towards the second half of the year; this, combined with high employment, should lead to real wage growth. However, most of the resulting increase in disposable income will be invested into pensions through auto enrolment. We anticipate continued weakness in some areas of consumer demand, such as in car sales. The weaker pound continues to benefit some businesses, with continued strong indications from purchasing managers indices. In spite of the strong performance of small caps over the review period, the asset class still trades at a small discount to the overall market. As the headwinds to the UK economy slow, we expect to see opportunities both from the strong global economy and the UK market. We believe the asset class should enjoy another good year of performance. Fund Facts Fund Accounting and Distribution Dates Accounting Dates Payment Dates 7 March 7 May 7 September 7 November The Ongoing Charges Figure (OCF) is the European standard method of disclosing the charges of a share class of a fund based on the financial year s expenses and may vary from year to year. It includes charges such as the fund s annual management charge, registration fee, custody fees and distribution cost but ordinarily excludes the costs of buying or selling assets for the fund (unless these assets are shares of another fund). Where published, the Key Investor Information Document (KIID) contains the current OCF. For a more detailed breakdown please visit columbiathreadneedle.com/fees. Share class 7 March 2018 7 March 2017 Class 1 Income shares 1.68% 1.67% Class 2 Income shares 1.07% 1.06% Class X Income shares 0.07% 0.07% Class Z Income shares 0.89% 0.88% Class Z Accumulation shares 0.89% 0.88%
Summary of Fund Performance Performance History (%) Share class 2018 1 2017 2016 2015 2014 2013 Class 1 Income shares -4.30 +35.67 +7.08 +23.28 +2.83 +33.21 Class 2 Income shares -4.20 +36.50 +7.74 +24.04 +3.47 +34.05 Class X Income shares 2-4.04 +37.86 +8.83 +8.77 Class Z Income shares -4.18 +36.74 +7.93 +24.25 +3.64 +34.28 Class Z Accumulation shares 3-4.18 +36.74 +7.93 +24.25 +3.74 +11.37 1 To 28 February 2018. 2 Commenced 10 June 2015. 3 Commenced 26 September 2013. Source: Morningstar and Threadneedle. Bid to bid prices are quoted (i.e. not including any initial charge) with net income reinvested for a UK basic rate tax payer and gross income reinvested for a non-uk resident. Performance data is quoted in sterling apart from hedged share classes, where applicable, which are in the hedged currency. Past performance is not a guide to future investment performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. Net Asset Value (NAV) As at Share class NAV ( ) NAV pence per share Number of shares in issue 7 March 2018 Class 1 Income shares 66,293,758 343.90 19,277,211 7 March 2017 Class 1 Income shares 51,808,343 282.40 18,345,720 7 March 2016 Class 1 Income shares 49,977,291 242.84 20,580,604 7 March 2018 Class 2 Income shares 91,964,281 349.17 26,338,001 7 March 2017 Class 2 Income shares 91,320,951 286.00 31,930,773 7 March 2016 Class 2 Income shares 93,994,494 245.52 38,283,583 7 March 2018 Class X Income shares 39,515 148.20 26,664 7 March 2017 Class X Income shares 32,357 121.35 26,664 7 March 2016 Class X Income shares 842,379 104.09 809,296 7 March 2018 Class Z Income shares 41,193,173 236.26 17,435,342 7 March 2017 Class Z Income shares 17,944,532 193.51 9,273,257 7 March 2016 Class Z Income shares 12,177,809 166.10 7,331,407 7 March 2018 Class Z Accumulation shares 13,066,241 200.80 6,506,994 7 March 2017 Class Z Accumulation shares 22,205,628 163.34 13,594,653 7 March 2016 Class Z Accumulation shares 17,979,794 138.91 12,943,507 Distribution History/Share Price Range Highest share price (pence) Lowest share price (pence) Year to Share class Pence per share 7 March 2018 Class 1 Income shares 0.5396 372.05 285.90 7 March 2017 Class 1 Income shares 0.8199 285.66 215.56 7 March 2016 Class 1 Income shares 0.9774 251.33 214.33 7 March 2018 Class 2 Income shares 1.7874 377.64 289.55 7 March 2017 Class 2 Income shares 2.0457 289.70 218.39 7 March 2016 Class 2 Income shares 2.2744 254.40 216.53 7 March 2018 Class X Income shares 2.2036 160.83 122.86 7 March 2017 Class X Income shares 1.9478 123.44 92.91 7 March 2016 Class X Income shares 1 1.3024 108.18 98.64 7 March 2018 Class Z Income shares 1.6123 255.68 195.91 7 March 2017 Class Z Income shares 1.6876 196.16 147.84 7 March 2016 Class Z Income shares 1.8228 172.20 146.49 7 March 2018 Class Z Accumulation shares 1.3619 216.97 165.37 7 March 2017 Class Z Accumulation shares 1.4139 165.18 123.63 7 March 2016 Class Z Accumulation shares 1.5110 143.55 121.14 1 Commenced 10 June 2015. Past performance is not a guide to future performance.
Classification of Investments 7 March 2018 vs 7 March 2017 33% 26% Threadneedle UK Smaller Companies Fund 7 March 2018 7 March 2017 19% 12% 5% -2% Consumer services Industrials Consumer goods Technology Financials Basic materials Health care Telecommunications Oil & gas Net other assets/(liabilities) Portfolio Information Top Five Holdings as at 7 March 2018 % of Fund Ascential 5.20 Blue Prism Group 5.10 Victoria 4.36 Stock Spirits Group 4.10 Coats Group 3.81 Top Five Holdings as at 7 March 2017 % of Fund Blue Prism Group 3.86 Ascential 3.48 Scapa Group 2.96 Vectura Group 2.89 Paysafe Group 2.51
Investment Objective and Policy To achieve capital growth. The ACD s investment policy is to invest the assets of the Fund primarily in the equities of smaller companies that are domiciled in the UK or have significant UK operations. If the ACD considers it desirable it may further invest up to one third of the total assets of the Fund in other securities (including fixed interest securities,other equities and money market securities). For liquidity purposes it may invest in cash and near cash. Key Investor Information Document (KIID) Subscription requirements The KIID is a pre-contractual document and investors have to confirm that they have read the latest KIID before making a subscription. Threadneedle has the right to reject a subscription if the investor does not confirm that they have read the latest KIID at the time of application. Investors can obtain the latest KIID from columbiathreadneedle.com. Changes to the management of the ACD The following changes have been made to the directors of the ACD: Resignation of Mr Tim Gillbanks on 31 March 2017; Resignation of Mr Don Jordison on 1 May 2018; Appointment of Michelle Scrimgeour on 14 August 2017. Changes to the Prospectus During the period from 8 March 2017 to 7 March 2018 the following changes were made to the Prospectus of the Threadneedle Investment Funds ICVC (the Company): Introduction of co-management for the Japan Fund, and changes to the investment policy of the fund, effective from 1 November 2017; Introduction of a compulsory conversion clause effective from 1 February 2018; Change of the name of the transfer agent and the legal advisors for the Company; Reduction of fees for certain share classes from 1 February 2018; Inclusion of a definition of near cash ; Disclosures required as a result of changes to COLL as a result of the Markets in Financial Instruments Directive (MiFID II), including amendment to the description of Class 2 Shares and Class Z Shares; Disclosures relating to the UK s decision to leave the European Union ( Brexit ); Updates to include changes to the COLL rules (including PRN, changes regarding short reports, eligible markets); Updates to reflect changes being made to UK tax on distributions (gross vs net shares, as well as tax changes more generally); Updates to the list of funds managed by the ACD and the directors of the ACD; Enhanced disclosures regarding hedged share classes and performance fee calculations; Updates to performance, dilution adjustments and available share classes; Miscellaneous changes including address of the Financial Services Ombudsman, clarification on privacy statement, clarification of dividend payment dates, addresses of paying agents. Changes to the Instrument of Incorporation During the period from 8 March 2017 to 7 March 2018, the instrument of incorporation of the Company has been updated to include a compulsory conversion clause effective 1 February 2018. Brexit In June 2016 the United Kingdom voted to leave the European Union. While negotiations progress, there is significant uncertainty relating to the UK s withdrawal from the EU, the potential consequences and precise timeframe. It is expected that the UK will exit from the EU on 29 March 2019. Depending on the outcome of the UK s negotiations with the European Union, and the existence or otherwise of any formal implementation period, it is possible that the Funds may no longer be eligible to enjoy the rights set out in the UCITS Directive. Ceasing to be so eligible may affect the ability of non-uk domiciled investors to make new investments in the Company. The ACD is monitoring the situation and will keep shareholders informed. Key Risks Investment Risk: The value of investments can fall as well as rise and investors might not get back the sum originally invested. Currency Risk: Where investments are in assets that are denominated in multiple currencies, or currencies other than your own, changes in exchange rates may affect the value of the investments. Liquidity Risk: The fund holds assets which could prove difficult to sell. The fund may have to lower the selling price, sell other investments or forego more appealing investment opportunities. Derivatives for EPM/Hedging Risk: The investment policy of the fund allows it to invest in derivatives for the purposes of reducing risk or minimising the cost of transactions. Volatility Risk: The fund may exhibit significant price volatility. Further risks applicable to the fund can be found in the Prospectus. Risk and Reward Profile As at 7 March 2018 the figure for the risk and reward profile disclosed in the most recent KIID representing this fund is 5. The fund is in this specific category because historically it has shown a medium to high level of volatility (how much the value of the fund went up and down compared to other categories). It is based on past performance data in pound sterling. If your investment in the fund is not in pound sterling, please check the figure for the risk and reward profile disclosed on our website (columbiathreadneedle.com) according to the currency of your investment in the fund.
General Information The information in this report is designed to enable shareholders to make an informed judgement on the activities of the fund during the period it covers and the results of those activities at the end of the period. For further information, please contact Threadneedle Investment Services Limited. The Long Form Report and Financial Statements is available free of charge on request from the ACD and on our website. For more information about the activities and performance of the Company during the period and previous periods, please contact the ACD at the administration address noted below, or visit our website at columbiathreadneedle.com. Contacts: Registered Office Cannon Place 78 Cannon Street London EC4N 6AG Authorised Corporate Director (ACD) Threadneedle Investment Services Limited Cannon Place 78 Cannon Street London EC4N 6AG Registrar Threadneedle Investment Services Limited Delegated to: DST Financial Services Europe Limited** Authorised and regulated by the Financial Conduct Authority (FCA) St Nicholas Lane Basildon Essex SS15 5FS Investment Manager Threadneedle Asset Management Limited Cannon Place 78 Cannon Street London EC4N 6AG Authorised Corporate Director Client Services Details UK Investors Address: Threadneedle Investment Services Limited PO Box 10033 Chelmsford Essex CM99 2AL Telephone (dealing & customer enquiries): 0800 953 0134* Fax (dealing): 0845 113 0274 Email (enquiries): questions@service.columbiathreadneedle.co.uk Asian Investors Address: Threadneedle Investment Services Limited International Financial Data Services 47, avenue JF Kennedy L-1855 Luxembourg Telephone (dealing & customer enquiries): +352 2452 9817* Fax (dealing): +352 2452 9807 Email (enquiries): threadneedleenquiries@statestreet.com All Other Investors Address: Threadneedle Investment Services Limited International Financial Data Services 47, avenue JF Kennedy L-1855 Luxembourg Telephone (dealing & customer enquiries): +352 464 010 7020* Fax (dealing): +352 2452 9807 Email (enquiries): questions@service.columbiathreadneedle.co.uk Website: columbiathreadneedle.com Depositary Citibank Europe plc, UK branch (Authorised by the Prudential Regulatory Authority (PRA) and regulated by the FCA and PRA) Citigroup Centre 33 Canada Square Canary Wharf London E14 5LB Legal Advisers Eversheds Sutherland (International) LLP One Wood Street London EC2V 7WS Baum Financial Services Law Team Grosser Burstah 42 20457 Hamburg Germany Independent Auditor PricewaterhouseCoopers LLP Atria One 144 Morrison Street Edinburgh EH3 8EX Paying and Information Agent in Belgium CACEIS Belgium S.A Avenue du Port 86C B320 1000 Brussels Belgium Representative and Paying Agent in Switzerland BNP Paribas Securities Services, Paris, Succursale de Zurich Selnaustrasse 16 8002 Zurich Switzerland * Calls will be recorded. ** International Financial Data Services (UK) Limited changed its name to DST Financial Services Europe Limited on 15 August 2017.
To find out more visit columbiathreadneedle.com Threadneedle Investment Services Limited, ISA Manager, Authorised Corporate Director and Unit Trust Manager. Registered No. 3701768. Registered in England and Wales. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated by the Financial Conduct Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. columbiathreadneedle.com 227385