Herald Investment Trust PLC — Annual Report 2017

Dec 31, 2017

Herald Investment Trust plc

Annual report & financial statements 31 December 2017

Herald's objective is to achieve capital appreciation through investments in smaller quoted companies in the areas of technology, media and telecoms.

Investments will be made throughout 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.

Introductory Highlights

• 01 Highlights
• 02 Company Summary
• 03 Year's Summary

Investment Report

• 06 Company Overview
• 07 Geographic Analysis
• 08 Chairman's Statement
• 10 Investment Manager's Report
• 15 Classification of Investments
• 16 Top 20 Holdings
• 20 Detailed List of Investments
• 26 Long Term Performance

Governance

• 30 Strategic Report
• 33 Directors' Biographies
• 34 Corporate Governance Report
• 37 Audit Committee Report
• 38 Directors' Report
• 40 Directors' Remuneration Report
• 43 Statement of Directors' Responsibilities
• 44 Independent Auditor's Report

Financial Statements

• 50 Income Statement
• 51 Balance Sheet
• 52 Statement of Changes in Equity
• 53 Cash Flow Statement
• 54 Notes to the Financial Statements
• 67 Notice of Annual General Meeting
• 69 Further Shareholder Information

HIGHLIGHTS

TOTAL RETURN SINCE INCEPTION (FIGURES HAVE BEEN REBASED TO 100 AT 16 FEBRUARY 1994)

• Fully diluted NAV
• Share price
• Numis Smaller Companies Index plus AIM (excluding investment companies) Russell 2000 (small cap) Technology
• Index (in sterling terms)

TOP FIVE WINNERS TOTAL GAIN IN 2017 IN STERLING TERMS (MILLIONS)

COMPANY SUMMARY

Company data at 31 December 2017

SHAREHOLDERS' FUNDS	MARKET CAPITALISATION
£967m	£823m

POLICY AND OBJECTIVE	Herald's objective is to achieve capital appreciation through investments in smaller quoted companies in the areas of telecommunications, multimedia 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. The Company's investment policy is contained within the strategic report on page 30.
COMPARATIVE INDICES	The portfolio comparative indices are the Numis Smaller Companies Index plus AIM (ex. investment companies) and the Russell 2000 (small cap) Technology Index (in sterling terms). Though we consider these indices to provide reasonable bases for measuring the Company's performance, the portfolio is not modelled on them and outcomes may diverge widely.
MANAGEMENT DETAILS	Herald Investment Management Limited ('HIML') is the appointed investment manager to the Company. The management contract can be terminated at 12 months' notice. Administration of the Company and its investments is delegated to The Bank of New York Mellon and company secretarial duties to Law Debenture Corporate Services Limited.
CAPITAL STRUCTURE	The Company's share capital consisted at 31 December 2017 of 70,307,785 ordinary shares of 25p each which are issued and fully paid.
	The Company has been granted authority to buy back a limited number of its own ordinary shares for cancellation. During the year 2,754,016 ordinary shares were bought back and cancelled. The directors are seeking to renew this authority at the forthcoming annual general meeting.
MANAGEMENT FEE	HIML's annual remuneration is 1.0% of the Company's net asset value based on middle market prices, calculated on a monthly basis payable in arrears.
CONTINUATION VOTE	At the annual general meeting of the Company held in April 2016, shareholders voted in favour of the Company's continuing to operate as an investment trust. The next continuation vote will be at the annual general meeting in April 2019 and every third year thereafter.
AIC	The Company is a member of the Association of Investment Companies.
LEGAL ENTITY IDENTIFIER ("LEI")	An LEI is a 20-digit code which allows entities involved in financial transactions to be identified. This is a global transparency measure endorsed by the G20.
	The Company's LEI is: 213800U7G1ROCTJYRR70

None of the views expressed in this document should be construed as advice to buy or sell a particular investment. Investment trusts are UK public listed companies and as such are required to comply with the listing rules of the UK Listing Authority, which is a division of the Financial Conduct Authority.

YEAR'S SUMMARY

		31 December 2017	31 December 2016	% change
Total assets (before deduction of bank loans)		£966.7m	£816.4m
Bank loans		–	£25.0m
Shareholders' funds		£966.7m	£791.4m
Net asset value per share		1374.9p	1083.2p	26.9
Share price		1171.0p	882.5p	32.7
Numis Smaller Companies Index plus AIM (ex. investment companies)		6,001.8	5,049.8	18.9
Russell 2000 (small cap) Technology Index (in sterling terms)		2,480.2	2,311.0	7.3
Dividend per ordinary share		–	–
Profit per ordinary share (revenue)		0.68p	0.58p
Ongoing charges*		1.08%	1.09%
Discount to NAV		14.8%	18.5%
Year to 31 December	2017	2017	2016	2016
Year's high and low	High	Low	High	Low
Share price	1200.0p	881.5p	882.5p	617.0p
Net asset value	1376.5p	1082.8p	1083.3p	793.3p
Discount	22.1%	11.2%	25.2%	15.2%
At 31 December		2017		2016
Profit per ordinary share
Revenue		0.68p		0.58p
Capital		283.44p		191.75p
Total		284.12p		192.33p

* Ongoing charges calculated in accordance with AIC guidelines: annualised charges, excluding interest, incurred by the Company, expressed as a percentage of the average net asset value.

1 YEAR CHART OF NAV, SHARE PRICE AND COMPARATIVE INDICES (FIGURES HAVE BEEN REBASED TO 100 AT 31 DECEMBER 2016)

Share Price Fully diluted NAV Numis Smaller Companies Index plus AIM (excluding investment companies) Russell 2000 (small cap) Technology Index (in sterling terms)

31 Dec 16 Jan 17 Feb 17 Mar 17 Apr 17 May 17 Jun 17 Jul 17 Aug 17 Sep 17 Oct 17 Nov 17 Dec 17 Source: Thomson Reuters

Investment report

• Company Overview Geographic Analysis Chairman's Statement Investment Manager's Report Classification of Investments Top 20 Holdings Detailed List of Investments
• Long Term Performance

2017 has seemed to be the strongest year for the technology sector this century. This has been reflected in net asset value per share growth of 26.9%.

KATIE POTTS

COMPANY OVERVIEW

Achieving capital growth

Herald invests, generally on a long term basis, using fundamental analysis. The technology, media and telecommunications sector globally comprises over 5,000 quoted companies, and many more unquoted.

The manager, Herald Investment Management Limited (HIML), focuses on investment within the technology, media and telecoms sector.

Focus on the sector enables a significant degree of cross-referencing across competitors, customers and suppliers globally. Using this

mosaic of information and industry knowledge combined with strong financial analysis, we endeavour to add value. The evolving nature of technology means there is a wide divergence of performance between winners and losers, but the winners can be spectacular.

WHAT WE DO

Analysis entails a prolific number of meetings with companies, either at Herald's offices, site visits or at conferences globally, as well as broker hosted meetings. In addition, Herald relies on independent industry research and published company filings, statements, presentations, web sites and broker research.

The trust has consistently invested in early stage companies, often providing primary development capital, then

HISTORY OF FUND

The fund was established in 1994 raising £65m to invest in UK and European smaller TMT companies. In 1996 a further £30m was raised to globalise the fund with the recognition that TMT is a global sector and cross-referencing across geographies is a prerequisite for investing intelligently within the sector. Since 1996 no further capital has been raised, but share repurchases totalling £100m have been made.

holding investments for long periods, regularly providing further capital when needed.

Many of these holdings have a high stock specific risk and the fund aims to offer investors a low risk way to gain exposure to these exciting opportunities through broad diversification in the number of holdings and the maturity of the businesses.

Over the history of the fund the NAV per share, on a total return basis, has compounded at an annualised rate of 11.9%.

HISTORY OF FUND

WHAT WE DO

GEOGRAPHICAL ANALYSIS

GEOGRAPHIC RETURNS

TIME WEIGHTED RETURN BY GEOGRAPHY YEAR ENDING 31 DECEMBER 2017* (STERLING, PERCENT)

* Costs are accounted for at the Company level.

CONTRIBUTION TO EQUITY INVESTMENT APPRECIATION YEAR ENDING 31 DECEMBER 2017* (STERLING, MILLIONS)

* Costs are accounted for at the Company level.

GEOGRAPHIC SPREAD OF INVESTMENTS FOR THE YEAR ENDING 31 DECEMBER 2017

All regions contributed positively in 2017. While the returns in the EMEA portion of the trust were attractive on a % basis, the outperformance in the UK is particularly pleasing given the weighting of this region.

Herald Investment Trust plc

07

CHAIRMAN'S STATEMENT

Strong results

JULIAN CAZALET CHAIRMAN

Much of the performance was delivered by a small number of holdings. It is pleasing to see that the overall portfolio has generally appreciated in line with profits and has not been rerated.

I am delighted to report that Herald's net asset value per share appreciated 26.9% during 2017. This equates to a total return of £203m. During the year, £27.6m was spent on share buy-backs; this equates to 3.8% of the outstanding shares at the start of 2017.

The share price appreciated by 32.7%, more than the 26.9% appreciation in the net assets, reflecting a narrower discount to the net asset value per share. The discount was 14.8% at the year-end.

2017 was an exciting year for the technology sector with a new phase of internet disruption emerging, and concepts that had previously caused excitement now coming through in positive financial results. In particular, the quality of the internet network has improved sufficiently to enable a mass migration to centralised processing in the data centre. New demand has led to capacity shortages in hardware including ASICs as well as NAND and DRAM memory. This has satisfactorily benefited a number of small companies.

The UK portion of the portfolio performed strongly in 2017 with a 35.2% (IRR) total return compared with 21.9% in the Numis Smaller Companies Index (including AIM and ex investment companies). The smaller European portion performed even better, returning 52.1% (IRR, in sterling terms); while Asia appreciated by 24.3% (IRR, in sterling terms). The North American part of the portfolio lagged somewhat, appreciating only 18.2% (IRR, in sterling terms), although this significantly exceeded the sterling total return of the Russell 2000 Technology Index of 7.6%. There was a drag on the portfolio from net cash and cash equivalents held mainly in US dollars (including short dated US treasuries).

A significant proportion of the positive performance was derived from a small number of our holdings, 24 of which appreciated in value by more than 100%. Between them, they accounted for only 8.2% of the Company at the start of the year, but they contributed 63% of the aggregate return. IQE was the star performer by value, appreciating by nearly £30m.

In previous years, we have commented on the high level of takeover activity. In 2017, takeovers and bid approaches have continued – 13 in total with an aggregate value of £52m, the largest of which was SQS (c.£18m). Six of these were in the UK, six in North America and one in Asia. But unlike previous years, 2017 has also seen a much healthier level of IPOs and secondary offerings. There have been a few US IPOs, but there have been more takeovers, so in the US the number of listed technology companies continues to shrink. The AIM market in the UK, on the other hand, has been relatively vibrant. The manager has participated in IPOs and follow-on fundraisings to an aggregate value of £55.6m. Out of a total of 67 of these fund raising events, six were IPOs, and 50 were in the UK. AIM has proved to be a healthy market for development capital, but when companies become cash generative they are often taken over by private equity houses or trade buyers.

The Company has again generated a small amount of net revenue, but we are not proposing to pay a dividend. While the board acknowledges that dividend income is welcome for some shareholders, our strategy and our strength has been to deliver capital appreciation. The Company repaid its £25 million sterling term loan on maturity at the end of December and now has no outstanding debt, although we have retained a £25 million multi-currency facility (currently undrawn, term expiring in December 2019), in case opportunities arise.

The board has decided to increase the target size limit of investee companies from below \$2bn to below \$3bn market capitalisation. It has always been the policy to make investments below the size limit, but the manager has continued to hold some positions that rise above the threshold. Following strong performances, 15 companies had a market capitalisation exceeding \$2bn with an aggregate value of £79.5m, which is higher than previous years. This limit has not been changed for a number of years, and a higher limit offers more flexibility as the size of the Company grows. The board has also reviewed the performance comparator that we have used historically, which has been expressed as a blend of 2/3rd the Numis Smaller Companies Index plus AIM (ex. investment companies) and 1/3rd the Russell 2000 (small cap) Technology Index (in sterling terms). We believe that it is now more meaningful to describe them as two comparative indices rather than an artificial blend benchmark, and will do so in the future.

The Company is an Alternative Investment Fund. Its manager, HIML, has to comply with MIFID II rules governing access to research. The manager has been concerned about the ramifications of this fundamental legislation for our remit focused on smaller companies globally. The manager is paying for research out of the management fee, and is paying significantly more than has ever been paid by the Company in commissions. Over 70 brokers have been signed up, which accounts for a significant proportion of research historically consumed. However, although the coverage from global players is a little improved, there is likely to be access to far fewer brokers, who cover small companies, than has been available in the past. The challenge is that in the small company world our competition is largely from investors local to the companies, who are in turn dealing with numerous smaller regional brokers. The second concern is that commission levels seem to have been cut to uneconomically low levels for transactions in smaller companies where orders may take days or weeks to execute, and often require active endeavours by brokers to generate the other side of the bargain. This may further diminish liquidity. I hope the market will adjust in the medium to long term, but the short-term uncertainty this has caused is extremely unwelcome.

2017 proved a remarkably good year for the Company. While the TMT market continues to be exciting, the financial markets are in less rude health. We are optimistic that this may prove a time for more market inefficiencies, and hence an opportunity for profitable investing.

JULIAN CAZALET CHAIRMAN 20 February 2018

NET ASSET VALUE PER SHARE

The share price appreciated by 32.7%, which was more than the 26.9% appreciation in the net assets, reflecting a narrower discount to the net asset value per share.

JULIAN CAZALET, CHAIRMAN

INVESTMENT MANAGER'S REPORT

The technology sector remains exciting

KATIE POTTS FUND MANAGER

2017 has felt as if it has been the strongest year for technology this century. We are pleased that this has been reflected in satisfactory progress in many of our holdings.

TAKEOVERS

PLACINGS AND IPOs (STERLING, MILLIONS)

AIM HOLDINGS

There have been positive returns in all regions of the portfolio in 2017. The UK market continued to be quite robust throughout 2017 with a healthy supply of new issues and secondary offerings. There have been a handful of companies that have been anomalously strong, but on the whole, in spite of the returns of recent years, it is not a frothy irrational market. Europe has been even stronger, and some new issues remind me of the Neuer Markt in 2000. The US market has been more measured, but there have been some new issues in the second half. The Asian market has continued to grow.

For the first time we have included the book cost of our top 20 holdings. We focus on investing, and MIFID II has focused our minds on the fact that our mandate and the way we operate is unusual. Few professional investors invest in microcaps for the long term. It is what we do. The book cost of the top 20 holdings is £63.5m and the market value is £299.9m so the average return is 370%, which demonstrates the value of our long-term approach. In addition we have realised gains of £58.9m from these 20 holdings. We are grateful to the efforts of the management teams that have delivered such good returns, and we aspire to be supportive long-term shareholders.

Less positively, the scale of withdrawal of institutional money from quoted markets in the UK and North America, which has led to takeovers persistently outnumbering new issues, is of concern. These takeovers have often been made by private equity investors backed by large institutions. The scale of the issue is illustrated in the following table, which also shows how many investment opportunities there are for the Company's defined remit. The number of North American quoted TMT stocks (in certain ICB sectors) has fallen by 18% over five years, in the UK by 9%, and Europe by 10%. Only in Asia has the number grown (by 18%). (The list is not the entire remit, but the core sectors are useful for illustrative purposes.)

NUMBER OF QUOTED COMPANIES IN TARGET TMT REMIT

Region of listing	2012	2013	2014	2015	2016	2017	1 year % change	5 year % change
All
North America	2,499	2,428	2,351	2,281	2,115	2,038	-4%	-18%
UK	295	290	293	282	271	267	-1%	-9%
Europe	1,450	1,419	1,394	1,319	1,298	1,303	0%	-10%
Asia	4,131	4,157	4,295	4,499	4,644	4,864	5%	18%
World	8,631	8,538	8,595	8,601	8,541	8,689	2%	1%
>\$20m and <\$3bn market cap
North America	791	820	812	753	698	677	-3%	-14%
UK	164	179	187	170	164	172	5%	5%
Europe	569	593	563	556	562	598	6%	5%
Asia	2,910	3,016	3,148	3,220	3,394	3,697	9%	27%
World	4,548	4,731	4,846	4,805	4,916	5,244	7%	15%

Sectors include: Consumer Electronics, Media, Electronic and Electrical Equipment, Technology but exclude Telecommunications. Source: Bloomberg/FTSE Russell Industry Classification Benchmark.

It is not clear whether this is a cyclical, or a structural change. Regulation has a heavy cost in quoted markets. In the US, Sarbanes Oxley legislation has virtually killed the market for smaller companies, and Europe is catching up. I have, however, been suspicious that there is the potential for a great deal of value to be lost in the so called "Unicorns", which are private companies with a value in excess of \$1bn. Companies such as Uber suggest no regulation could be worse than too much, but Softbank has funded Uber for now. A perceived negative for public markets is managements' frustration that investors expect steady growth in profits, and make it difficult to invest for the long term. We have first-hand experience of many management teams who saw their venture capital/private equity owners as far from utopia as well. Institutions used to be patient long-term public market investors, but they have reallocated capital. Will this reverse? Will institutional investors return to valuing the liquidity of public markets? One of the challenges to public markets, and tailwinds to private equity, has been balance sheet structures. There

has been a significant financial incentive to own companies with debt, because interest is tax deductible and dividends are not. For pension funds in the UK this was only relevant from 1997 when they could no longer recover tax paid on dividends, which significantly changed allocations from public markets to private equity. This disadvantage is being reduced by lowering corporation tax rates in the UK; and the recently announced US tax changes including lower corporation tax and limiting the tax deductibility of interest to 30% of profits is very significant. For economic stability, it has to be a sound measure to encourage ownership of corporations through equity rather than debt. Common sense says that this measure will be followed elsewhere while interest rates are so low. Private equity has further leveraged returns with cheap bank debt, albeit with higher risk. This US tax change may mark a significant turning point for asset allocation between public and private equity, with the attractions of leveraged buyouts diminishing. Whilst this could reduce the number of takeovers, it should also be healthier for public markets in the long run.

REGIONAL ALLOCATION CHANGES

(STERLING, MILLIONS)	Valuation at 31 December 2016	Net acquisitions/ (disposals)	Appreciation/ (depreciation)	Valuation at 31 December 2017
Equities*
UK	454,512	(19,850)	147,970	582,632
EMEA	34,481	2,573	18,562	55,616
North America	177,350	(1,647)	31,772	207,475
Asia Pacific	38,585	3,395	8,393	50,373
Total Equities	704,928	(15,529)	206,697	896,096
Government bonds	8,041	22,966	(1,562)	29,445
Total Investments	712,969	7,437	205,135	925,541
Net liquid assets	103,445	(59,164)	(3,172)	41,109
Total assets	816,414	(51,727)	201,963	966,650

* Equities includes convertibles and warrants.

The total assets figure comprises assets less current liabilities before deduction of bank loan.

INVESTMENT MANAGER'S REPORT CONTINUED

The bottom line is not complicated. Companies will be funded by those that pay the highest price. For now, private equity and venture capitalists in North America have the money. There is allegedly a trillion dollars in uninvested cash in private equity hands, so a reversal will take time. I prefer investing in the cheaper asset class, and unsurprisingly performance in the quoted world has been better in the shrinking markets.

The UK has not shrunk at the small end by number of companies. In practice larger companies have gone and smaller companies emerged, so it has shrunk by value. AIM is vibrant. There is a surprising level of entrepreneurialism in the UK relative to other countries, as well as skills. In a world awash with cash the area of conspicuous value is small companies that need cash, because debt funding is not available. That is part of the reason why the UK continues to be a surprisingly large element of this global fund.

Against the gloom of fiscal deficits, trade deficits and politics, there is one area of the economy conspicuously growing. The technology sector has been strong globally in 2017, and it has been remarkable how much growth there has been in London. In part this reflects a bubble in San Francisco and Silicon Valley, which has led to the big internet companies expanding elsewhere, and London has emerged as a hub that has attracted leading-edge talent, and in consequence companies. Google, for example, has received planning permission for a new 1m square foot office at Kings Cross following a submission in June 2017, and Facebook is allegedly negotiating to take a further 400,000 square foot nearby. These have followed announcements from Apple, who are building a new 500,000 square foot UK HQ in Battersea, and Amazon who have taken 514,000 square feet in Shoreditch. In addition London has become an important technical centre for the traditional financial sector, and is a hub for start-ups. A concern that we have had for a number of years is that the evaporation of larger technology companies in the UK would leave the UK with a diminishing skill base. I am therefore excited by the scale of investment into the UK by these vast US technology companies who are training people in leading edge skills.

MIFID II

HIML is now having to pay directly for research. Through portals, it has historically received research from hundreds of brokers, and received research on at least one of our holdings from amongst our 125 brokers. However, HIML has received research from only one broker (or none at all) on 62 of our holdings. This reflects how fragmented the smaller companies market is. It is tempting to be dismissive and say we do not need research, but I see it as irresponsible not to seek as much information as reasonably possible. Research is also needed to encourage a healthy secondary market in stocks. We are still finding our way under the new regime, but have currently agreed deals with over 70 brokers to receive various levels of research services. We now have access to research from most of the global players. Although we have hardly dealt with them

historically, we did receive written research from most of them and they accounted for a high proportion of the research we actually read. Much of this might be industry background rather than company specific. It was perhaps anomalous that we did not pay for this input, and the charges we have now agreed seem relatively reasonable. The problem is that the brokers providing the research do not make markets in smaller companies and do not provide liquidity in them – it is smaller brokers that do that. I sincerely hope that the multitude of smaller brokers will have a viable business model going forward. This exercise has focused our minds on how few investors attempt to invest globally in small companies as we do. In overseas markets, we are often the only foreign investor to visit individual companies. One outcome of the changes that I had not fully thought through is that salesmen and even sales traders can be considered part of research. Nobody would entertain paying a retainer to a car salesman for educating them as to whether they might at some stage want to buy a car, and in the smaller company world it seems that that is what we are being expected to do. We are eager to see how the marketplace evolves over the next year or two. Experience says that if stocks get overlooked by the market they will get taken over, which provides reassurance, but in the long run the primary capital raising market will disappear if the secondary market falters.

UK

In the UK performance has been sparkling this year with a total return of 35.2% (IRR). 17 UK holdings have returned more than 100%, as shown in the table below. Collectively these companies delivered a total return of £104m, and only one, IQE, was a top 20 holding at the start of the year. Arguably the performance of the smaller holdings reflects the fact that we are in the later stages of the bull market.

Industry pioneer eg Solutions was acquired by a NASDAQ listed company. Although a small company it had an interesting customer in Facebook. AIM listed stocks in aggregate delivered a total return of £123.9m.

IQE's HQ is in South Wales, but they have operations in North America and Asia, and are now the market leader globally for manufacturing compound semiconductor wafers. Historically, the largest market has been the RF component from power amplifiers in mobile phones with Skyworks the biggest customer, but this year Lumentum and others have emerged as customers for VCSELs, which are semiconductor based laser diodes. These are being used in the latest mobile phones for 3D sensing, and for connectors in datacentres as well as other applications. In percentage terms, Zoo Digital appreciated the most (by 550%). The patient support that we gave to the company during a technical transition has been rewarded. In the darkest period, only Zoo's chief executive and Herald supported the company with cash to enable the company to survive. Although still a small company, based in Sheffield, it has an impressive customer list with Netflix adding to long standing customers such as Disney and Warner. Other significant contributors to performance were Bango, BE Semiconductor Industries, Frontier Developments, Microgen, Isra Vision, Blue Prism, LoopUp and Versarien.

SECTOR PERFORMANCE (STERLING, MILLIONS)

	Market value equity portfolio 31 Dec 2017	% of equity portfolio 31 Dec 2017	Total return equity portfolio 2017	Total return equity portfolio 2016
Software	220.0	24.6	45.2	39.6
Semiconductors	130.8	14.6	56.9	41.1
Computer Services	117.3	13.1	38.8	11.3
Media Agencies	85.8	9.6	20.3	8.4
Internet	66.9	7.5	24.2	3.0
Telecommunications Equipment	38.7	4.3	-0.4	7.4
Publishing	34.9	3.9	3.7	5.3
Electrical Components & Equipment	28.8	3.2	4.5	2.6
Fixed Line Telecommunications	18.5	2.1	0.7	0.1
Business Support Services	17.1	1.9	-4.1	-1.1
Computer Hardware	15.4	1.7	0.3	1.2
Other	121.9	13.6	27.1	24.0
Total	896.1	100%	217.3	143.0

UK companies returning more than 100%	2017 total return (%)
Zoo Digital	550
Versarien	442
Frontier Developments	342
Bango	286
IQE	261
Spectra Systems	246
LoopUp	195
Wandisco	186
Blue Prism	183
eg Solutions	177
Taptica	173
Microgen	157
XLMedia	123
Sophos	119
Cloudcall	115
Frontier Smart Technologies	107
XP Power	103

Imagination Technologies has been taken over. It is a rather sad end for a highly innovative company because the loss of the Apple contract led to a sale from a position of weakness. Nevertheless, over the history of Herald, Imagination is one of the most profitable holdings with realised profits of £32.9m, and marginally exceeded only by IQE and Diploma. Imagination provided graphics and video technology to the iPhone and iPad, but is being designed out. I have enormous respect for Hossein Yossaie, who led the business for many years, and would like to thank him very much for his efforts, and I know how highly he

was regarded on the West coast. Unfortunately I do not think that the Imagination board optimised the outcome, and were not helped by frustrated shareholders. I am interested to hear that the chief technology officer now runs R&D for Apple in the UK. The other significant takeover is SQS. We first owned the shares buying 425,000 at IPO in 2005, and have increased the holding with 17 subsequent purchases to hold 2.19m shares now. On completion the value will be c.£18m. While I am disappointed to see it go, it was a worthwhile takeover premium.

The p/e of the portfolio at 23 does not seem expensive relative to bonds and other sectors with lower growth prospects.

KATIE POTTS, FUND MANAGER

INVESTMENT MANAGER'S REPORT CONTINUED

NORTH AMERICA

The US portfolio returned 18.2% (IRR, in sterling terms), which was usefully ahead of the Russell 2000 Technology Index which rose 7.6% (in sterling terms). However returns were mixed. The gains of £45.7m were offset by losses of £13.5m. The best performer was Boingo Wireless, which supplies internet to the US military, and its Distributed Antenna Service (DAS) offers Wi-Fi handoff to mobile phone carriers in populated areas like airports and stadiums. Five9 (VOIP call centres), Hortonworks (Hadoop database) and Mellanox Technologies (InfiniBand and Ethernet connectivity) also contributed usefully. In addition Adesto Technologies (low power nonvolatile memory), Hydrogenics (electricity to hydrogen), RingCentral (VOIP telephony) and Pixelworks (system on a chip display solutions) all appreciated more than 100%. Partially offsetting these gains, fibre companies, Inphi Corporation and Fabrinet, ceded some of 2016's gains, and Radisys and Amber Road have disappointed. The price earnings ratio (p/e) of 33 on the North American portfolio is 45% higher than the UK, but the US has traditionally been more highly rated.

EMEA

The EMEA return of 52.1% (IRR, in sterling terms) reflected outstanding returns from BE Semiconductor Industries (+138%), which supplies leading semiconductor packaging equipment, and Isra Vision (+120%). We acquired Isra Vision in 2004 at €13. It has recently caught the robotics craze, and ended the year at €212.6.

ASIA

The Asian portfolio returned 24.3% (IRR, in sterling terms). In comparison, the Kosdaq IT index in Korea returned 24.3% and the TWSE Electronics index in Taiwan rose 23.3%.

Nine Asian holdings rose more than 50% in the year, with these investments spread across a range of countries and sectors. The semiconductor industry had a cyclically strong year and a couple of semiconductor capital equipment suppliers in Korea performed particularly well, for example; Hanmi Semiconductor was up 101% and PSK was up 95%. Two Chinese internet businesses also contributed usefully: 51Job addresses the HR and recruitment sector and BitAuto is a leading automotive website. The worst performer in Asia was PChome Online, which fell 47.8%. This was due to an aggressive price competitor called Shopee raising money at the group level via the IPO of SEA in the United States – the funds raised are financing a price war in Taiwan to the detriment of PChome. The forecast p/e of the Asian portfolio is around 15, lower than some other areas of the portfolio, a discount that reflects additional risks of investing in the region and the relative scarcity of recurring revenue cash generative business models.

OUTLOOK

The UK continued to benefit in 2017 from sterling weakness in 2016, and there is likely to be a relative headwind this year. Nevertheless the p/e of the portfolio at 23 does not seem expensive relative to bonds and other sectors with lower growth prospects. The sector remains exciting.

KATIE POTTS 20 February 2018

CLASSIFICATION OF INVESTMENTS

Classification*	UK %	EMEA %	North America %	Japan & Asia Pacific %	2017 Total %	2016 Total %
OIL & GAS	0.7	–	0.5	–	1.2	0.9
Alternative Energy	0.7	–	0.5	–	1.2	0.9
BASIC MATERIALS	0.8	–	–	0.3	1.1	0.5
Chemicals	0.8	–	–	0.3	1.1	0.5
INDUSTRIALS	7.3	0.1	1.7	1.0	10.1	10.8
Construction & Materials	0.1	–	–	–	0.1	0.1
Aerospace & Defence	0.6	–	–	–	0.6	0.7
Electronic & Electrical Equipment	2.5	0.1	1.2	0.3	4.1	3.3
Industrial Engineering	–	–	–	0.1	0.1	0.1
Support Services	4.1	–	0.5	0.6	5.2	6.6
CONSUMER GOODS	1.2	0.2	0.3	–	1.7	1.1
Household Goods & Home Construction	–	0.2	–	–	0.2	0.2
Leisure Goods	1.2	–	0.3	–	1.5	0.9
HEALTH CARE	0.9	0.1	–	–	1.0	1.1
Health Care Equipment & Services	0.7	0.1	–	–	0.8	1.1
Pharmaceuticals & Biotechnology	0.2	–	–	–	0.2	–
CONSUMER SERVICES	12.6	–	0.3	0.7	13.6	13.0
General Retailers	0.1	–	–	0.3	0.4	0.4
Media	12.3	–	0.3	0.2	12.8	12.6
Travel & Leisure	0.2	–	–	0.2	0.4	–
TELECOMMUNICATIONS	2.0	0.1	0.2	–	2.3	2.7
Fixed Line Telecommunications	1.9	–	–	–	1.9	2.6
Mobile Telecommunications	0.1	0.1	0.2	–	0.4	0.1
FINANCIALS	0.8	–	0.1	–	0.9	0.9
Financial Services	0.2	–	0.1	–	0.3	0.2
Equity Investment Instruments	0.5	–	–	–	0.5	0.6
Nonequity Investment Instruments	0.1	–	–	–	0.1	0.1
TECHNOLOGY	34.0	5.2	18.4	3.2	60.8	55.3
Software & Computer Services	27.2	2.5	11.1	0.9	41.7	36.4
Technology Hardware & Equipment	6.8	2.7	7.3	2.3	19.1	18.9
TOTAL EQUITIES (including convertibles and warrants)	60.3	5.7	21.5	5.2	92.7	–
Total equities – 2016 (including convertibles and warrants)	55.7	4.2	21.7	4.7	–	86.3
BONDS	–	–	3.0	–	3.0	1.0
NET LIQUID ASSETS**	1.5	0.5	2.2	0.1	4.3	12.7
TOTAL ASSETS (before deduction of bank loans)	61.8	6.2	26.7	5.3	100.0	–
Total assets – 2016	68.4	5.2	21.7	4.7	–	100.0
BANK LOANS	–	–	–	–	–	(3.1)
SHAREHOLDERS' FUNDS	61.8	6.2	26.7	5.3	100.0
Shareholders' Funds – 2016	65.3	5.2	21.7	4.7	–	96.9
Number of equity investments (including convertibles and warrants)	148	18	65	40	271	252

* FTSE Russell Industry Classification Benchmark.

** Cash, current assets and liabilities, excluding bank loans.

TOP 20 HOLDINGS AS AT 31 DECEMBER 2017

£26.1m	VALUATION
2.7%	OF TOTAL ASSETS
2.5%	OF ISSUED SHARE CAPITAL HELD
£6.1m	BOOK COST

IQE is the leading global supplier of advanced compound semiconductor wafers. These wafers are atomically engineered to provide IQE's customers with the materials from which they produce high performance wireless, photonic and electronic devices or "chips". It is IQE's epitaxial layer processes that enable chips to operate at the high frequencies (radio frequencies or RF) that are used for all forms of wireless communications. IQE's "epi" processes also manufacture materials that enable the conversion of energy to light or light to energy for sensing, lighting and power generation technologies. IQE's products cover a diverse range of applications, supported by an innovative outsourced foundry services portfolio that allows the group to meet the wafer manufacturing needs of the world's leading semiconductor manufacturers.

£26.0m	VALUATION
2.7%	OF TOTAL ASSETS
3.9%	OF ISSUED SHARE CAPITAL HELD
£1.7m	BOOK COST

GB Group is a global specialist in Identity Data Intelligence. This is the data that reveals who a person really is. GB Group helps organisations realise the full value of their customer base by recognising and verifying all elements of a consumer's identity at every interaction. GB Group combines trillions of data records, relating to the identities of over 4.4 billion people, from over 200 data providers all over the world. This intelligence helps GB Group's clients make the right decisions about the customers they serve and the people they employ. GB Group protects, predicts and provides information that is used to maximise customer value for some of the largest companies in the UK. The company provides an integrated and comprehensive range of data services to clients allowing them to interact effectively with their customers, improve long term profitability and reduce fraud. Headquartered in Chester (UK), GB Group provides solutions to many of the world's biggest organisations, including established brands like Nike, Ford and HSBC.

£23.1m	VALUATION
2.4%	OF TOTAL ASSETS
1.6%	OF ISSUED SHARE CAPITAL HELD
£1.3m	BOOK COST

Diploma is a group of specialised distribution businesses serving industries with long term growth potential and with the opportunity for sustainable superior margins through the quality of customer service, depth of technical support and value-adding activities. The three sectors the company focuses on are life sciences, seals and controls.

£20.7m	VALUATION
2.1%	OF TOTAL ASSETS
12.1%	OF ISSUED SHARE CAPITAL HELD
£6.8m	BOOK COST

Founded in 1999 Bango's vision is to make a frictionless payment experience available to every mobile device user in the world. The Bango Platform is deployed with the world's leading mobile app stores. Global leaders plugging into Bango include Amazon, Google, Samsung and Microsoft. Reaching a larger share of people than ever, Bango has an addressable base of over 1.7bn mobile phone customers. As more customers and partners adopt the Bango Platform and as more transactions are analysed by Bango technology, the platform becomes increasingly powerful, providing unique insights that drive revenue growth. This in turn drives more customers to use the Bango Platform, fuelling a virtuous circle of success for the Bango Platform and the internet industry.

£18.7m	VALUATION
1.9%	OF TOTAL ASSETS
0.8%	OF ISSUED SHARE CAPITAL HELD
£1.5m	BOOK COST

BE Semiconductor Industries is a leading supplier of semiconductor assembly equipment for the global semiconductor and electronics industries offering high levels of accuracy, productivity and reliability at a low cost of ownership. Besi develops leading edge assembly processes and equipment for leadframe, substrate and wafer level packaging applications in a wide range of end-user markets including electronics, mobile internet, computer, automotive, industrial, LED and solar energy. Customers are primarily leading semiconductor manufacturers, assembly subcontractors and electronics and industrial companies.

£18.2m	VALUATION
1.9%	OF TOTAL ASSETS
5.5%	OF ISSUED SHARE CAPITAL HELD
£2.6m	BOOK COST

Next 15 Communications aims to become the world's largest and most respected specialist communications group. To do this, the group continues to build a portfolio of businesses that cater to the subtly different needs of the various market sectors and geographies in which it operates. Next 15 employs over 1,610 people across 39 offices in 14 countries. The group incorporates 18 subsidiary agencies, spanning digital content, marketing, PR, consumer, technology, marketing software, market research, public affairs and policy communications.

£17.7m	VALUATION
1.8%	OF TOTAL ASSETS
6.8%	OF ISSUED SHARE CAPITAL HELD
£5.5m	BOOK COST

Software Quality Systems is the leading global provider of quality assurance services for digital business processes. This position stems from over 30 years of successful consultancy operations. SQS consultants provide solutions for all aspects of quality throughout the whole software product lifecycle driven by a standardised methodology, industrialised automation processes and deep domain knowledge in various industries. Headquartered in Cologne, Germany, the company now employs approximately 4,400 staff. With over 10,000 completed projects under its belt, SQS has a strong client base, including half of the DAX 30, nearly a third of the EURO STOXX 50 and 20% of the FTSE 100 companies.

* On 15 December 2017 it was announced that SQS would be taken over by Assystem Technologies.

£15.0m	VALUATION
1.6%	OF TOTAL ASSETS
1.1%	OF ISSUED SHARE CAPITAL HELD
£1.8m	BOOK COST

Silicon Motion Technology is a global leader and pioneer in developing NAND flash controller ICs for solid-state storage devices and specialty RF ICs for mobile devices. Silicon Motion has a broad portfolio of controller technologies and solutions and has shipped over five billion NAND controllers, more than any other company in the world. Key products are controllers used in embedded storage products such as SSDs and eMMCs, as well as in expandable storage products such as memory cards and USB flash drives. Products are widely used in consumer devices and for industrial, enterprise, commercial and other applications. Customers include most of the NAND flash makers, leading technology OEMs, and the majority of storage device module makers. More NAND flash products–especially next-generation flash–produced by Intel, Micron, Samsung, SanDisk, SK Hynix and Toshiba are supported by Silicon Motion controllers than any other company.

£14.3m	VALUATION
1.5%	OF TOTAL ASSETS
4.8%	OF ISSUED SHARE CAPITAL HELD
£3.6m	BOOK COST

M&C Saatchi is a global marketing services business working for clients across a wide variety of industry sectors. The Company was founded in 1995. Starting with a strong base in the UK and Australia, M & C Saatchi have added new agencies and disciplines in Asia, USA and Europe.

£11.3m	VALUATION
1.2%	OF TOTAL ASSETS
3.7%	OF ISSUED SHARE CAPITAL HELD
£1.7m	BOOK COST

Dotdigital is the leading provider of intuitive software as a service ("SaaS") and managed services to digital marketing professionals, through the 'dotmailer' platform. dotmailer is a marketing automation platform with email at its core. Since 1999 Dotdigital has been empowering global marketers with the tools and services that make it easy to get outstanding results from marketing campaigns.

Herald Investment Trust plc

Annual report & financial statements 2017

TOP 20 HOLDINGS AS AT 31 DECEMBER 2017 CONTINUED

£11.3m	VALUATION
1.2%	OF TOTAL ASSETS
7.5%	OF ISSUED SHARE CAPITAL HELD
£4.9m	BOOK COST

Idox is the leading applications provider to UK local government for core functions relating to land, people and property, such as its market leading planning systems and election management software. Over 90% of UK local authorities are now customers. Idox provides public sector organisations with tools to manage information and knowledge, documents, content, business processes and workflow as well as connecting directly with the citizen via the web, and providing election management solutions. Idox delivers engineering document control, project collaboration and facility management applications to many leading companies in industries such as oil & gas, and construction.

£11.3m	VALUATION
1.2%	OF TOTAL ASSETS
4.0%	OF ISSUED SHARE CAPITAL HELD
£2.9m	BOOK COST

Listed on the London Stock Exchange since 1974, Microgen is a financially strong group providing innovative software solutions. Microgen is the owner of two leading software businesses, Aptitude Software and Microgen Financial Systems. Aptitude Software serves enterprise CFOs in a range of industries, helping them to streamline finance operations, address regulatory requirements and deliver strategic insights to their business leaders. Microgen Financial Systems offers a range of financial services technology systems focused on the global wealth management sector and the UK payments market, and also provides application management services.

£11.1m	VALUATION
1.1%	OF TOTAL ASSETS
0.4%	OF ISSUED SHARE CAPITAL HELD
£1.6m	BOOK COST

Pegasystems' adaptive, cloud-architected software – built on the unified Pegasystems Platform – empowers people to rapidly deploy, and easily extend applications to meet strategic business needs. Over its 30-year history, Pegasystems has delivered award-winning capabilities in CRM and BPM, powered by advanced artificial intelligence and robotic automation, to help the world's leading brands optimise customer experience and automate operations. Globally over 3,000 customers rely on Pegasystems' dynamic solutions and strategic applications to drive excellence in their sales, marketing, customer service, and operations.

£11.0m	VALUATION
1.1%	OF TOTAL ASSETS
1.6%	OF ISSUED SHARE CAPITAL HELD
£3.2m	BOOK COST

Boingo Wireless' footprint of distributed antenna systems (DAS), Wi-Fi and small cells reaches more than a billion people annually, making Boingo one of the largest providers of indoor wireless networks. Boingo connects people at airports, stadiums, military bases, convention centers, and commercial properties.

£11.0m	VALUATION
1.1%	OF TOTAL ASSETS
1.0%	OF ISSUED SHARE CAPITAL HELD
£1.4m	BOOK COST

Incorporated in 1996, First Derivatives is a leading provider of products and consulting services to some of the world's largest finance, technology and energy institutions. FD is the developer of the worldleading database technology kdb+. Focused on financial institutions that work cross-asset, often with multi-system and/or high volume trading activities the Company's software is also used in a range of industries including telecoms, digital marketing, pharma and utilities to help organisations solve their most demanding data management and analytics challenges. The Company is headquartered in Newry, Northern Ireland where it has established its research and development centre. FD now employs over 2,000 people worldwide.

£11.0m	VALUATION
1.1%	OF TOTAL ASSETS
0.8%	OF ISSUED SHARE CAPITAL HELD
£1.6m	BOOK COST

Euromoney magazine was founded in 1969. Euromoney Institutional Investor has since developed into an international business-to-business information and events group. Euromoney's primary sectors include asset management, banking and capital markets, specialist finance, metals, mining, energy and commodities. On 10 January 2018 Euromoney sold its Institutional Investor journals to Pageant Media. The transaction is in line with Euromoney's strategy to recycle capital towards ever-higher-quality businesses. Euromoney is now mostly what they describe as a 2.0 information business, focused on customer-centric, digital, subscription businesses and networking events. These types of business will continue to be important but Euromoney are also looking to invest in B2B 3.0 businesses which are defined as operating at the centre of a customer's industry, offering products deeply embedded in its customers' workflow and helping customers to become more efficient and to find solutions to opportunities and threats they face.

£10.9m	VALUATION
1.1%	OF TOTAL ASSETS
1.4%	OF ISSUED SHARE CAPITAL HELD
£2.0m	BOOK COST

CEVA is the leading licensor of digital signal processing platforms and artificial intelligence processors which enable a smarter, connected world. CEVA partners with semiconductor companies and OEMs worldwide to create power-efficient, intelligent and connected devices for a range of end markets, including mobile, consumer, automotive, industrial and IoT. CEVA's ultra-low-power IPs for vision, audio, communications and connectivity include comprehensive DSP-based platforms. For artificial intelligence, CEVA offers a family of AI processors capable of handling the complete gamut of neural network workloads, on-device. For connectivity, CEVA offers the industry's most widely adopted IPs for Bluetooth (low energy and dual mode) and Wi-Fi (802.11 a/b/g/n/ac up to 4x4). To date, more than 8 billion CEVA-powered chips have been shipped worldwide, for a wide range of diverse end markets.

£10.6m	VALUATION
1.1%	OF TOTAL ASSETS
11.5%	OF ISSUED SHARE CAPITAL HELD
£5.9m	BOOK COST

Statpro is a global provider of award winning portfolio analytics solutions for the investment community. The group's cloud-based platform provides vital analysis of portfolio performance, attribution, risk and compliance. This multi-asset class analytics platform helps Statpro's clients increase assets under management, improve client service, meet tough regulations and reduce costs. The group's integrated and global data coverage includes over 3.2 million securities such as equities, bonds, mutual funds, FX rates, futures, options, OTCs, sector classifications and much else besides. The group has operations in Europe, North America, South Africa, Asia and Australia, with hundreds of clients in 39 countries around the world. StatPro has grown its Annualised Recurring Revenue from less than £1 million in 1999 to around £53 million at end September 2017. Over 75% of recurring revenues are generated outside the UK.

£10.3m	VALUATION
1.1%	OF TOTAL ASSETS
1.6%	OF ISSUED SHARE CAPITAL HELD
£4.5m	BOOK COST

Radware is a global leader of application delivery and cyber security solutions for virtual, cloud and software defined data centres. Its award-winning solutions portfolio delivers service level assurance for business-critical applications, while maximizing IT efficiency. Radware's solutions empower more than 10,000 enterprise and carrier customers worldwide to adapt to market challenges quickly, maintain business continuity and achieve maximum productivity while keeping costs down.

£10.3m	VALUATION
1.1%	OF TOTAL ASSETS
3.2%	OF ISSUED SHARE CAPITAL HELD
£2.9m	BOOK COST

YouGov is an international data and analytics group. The core offering of opinion data is derived from a participative panel of 5 million people worldwide. This continuous stream of data is combined with deep research expertise and broad industry experience into a systematic research and marketing platform. The suite of syndicated, proprietary data products includes YouGov BrandIndex, the daily brand perception tracker, and YouGov Profiles, a planning and segmentation tool. YouGov Omnibus provides a fast and cost-effective service for obtaining answers to research questions from both national and selected samples. With 30 offices in 20 countries and panel members in 38 countries, YouGov has one of the world's top ten international market research networks.

DETAILED LIST OF INVESTMENTS

At 31 December 2017

Classification	Name	Value £'000	%
UNITED KINGDOM
Alternative Energy	● Atlantis Resources	2,026
	● Ilika	421
	● ITM Power	4,397
		6,844	0.7
Chemicals	● Applied Graphene Materials	2,517
	● Haydale Graphene Industries	405
	● Versarien	5,264
		8,186	0.8
Construction & Materials	● Accsys Technologies	772	0.1
Aerospace & Defence	● Cohort	4,504
	● Velocity Composites	969
		5,473	0.6
Electronic & Electrical Equipment	Discoverie	6,829
	● Elektron Technology	1,470
	● Gooch & Housego	3,924
	● Microsaic Systems Oxford Instruments	476 1,059
	● Prophotonix	362
	Volex	3,124
	Xaar	3,675
	XP Power	2,838
		23,757	2.5
Support Services	● BOKU	1,357
	Diploma	23,065
	● Freshwater UK	137
	● Harvey Nash	3,178
	● Maintel Holdings	4,906
	● Science Group	2,030
	● Spectra Systems	2,343
	● Synectics	716
	● Thruvision	2,338
		40,070	4.1
Household Goods & Home Construction	● Photonstar Led Group	128	0.0
Leisure Goods	● Focusrite	2,753
	● Frontier Developments	7,480
	● LightwaveRF	1,067
		11,300	1.2
Health Care Equipment & Services	● Deltex Medical	298
	● Kromek	3,540
	● LiDCO	1,167
	● Scientific Digital Imaging	1,822 6,827	0.7
Pharmaceuticals & Biotechnology	● C4X Discovery Holdings	1,170	0.2
General Retailers	● 7Digital	625	0.1
Media	● Audioboom	1,650
	● BE Heard Group	997
	Bloomsbury Publishing	2,782
	Centaur Media	1,602
	● Ebiquity	5,711
	Euromoney Institutional Investor	10,960
	Future	7,336
	● Gfinity	698
	● GlobalData	2,729
● denotes AIM stock
● denotes unlisted security

At 31 December 2017

Classification	Name	Value £'000	%
United Kingdom continued
	GoCompare	1,053
	● Jaywing	460
	● M&C Saatchi	14,252
	● Mirriad Advertising	952
	● Mission Marketing ●	2,369
	Next Fifteen Communications ● Porta Communications	18,208 96
	Quarto	2,501
	● Reach4entertainment Enterprises	2,747
	● Taptica	4,441
	● ULS Technology	6,835
	● Vitesse Media	295
	Wilmington	5,850
	● XLMedia	7,605
	● YouGov	10,318
	● Zinc Media	3,661
	● Zinc Media Convertible Preference Shares	747
		116,855	12.1
Travel & Leisure	● Ten Lifestyle Group	2,419	0.2
Fixed Line Telecommunications	● CityFibre Infrastructure	5,387
	● Manx Telecom Telecom Plus	3,333 9,770
		18,490	1.9
Mobile Telecommunications	● Gamma Communications	1,089	0.1
Real Estate Investment & Services	● Purplebricks	520	0.0
Financial Services	● Fairfx	718
	● Tungsten	900
		1,618	0.2
Equity Investment Instruments	● Herald Ventures II	1,245
	● HIML Holdings	3,482
Nonequity Investment Instruments	● Gloo Networks	4,727 792	0.5 0.1
Software & Computer Services	● Access Intelligence	400
	● Appscatter	1,019
	● Artilium	1,775
	● ATTRAQT	2,649
	● Bango	20,676
	● Blue Prism	3,101
	● Brady	4,791
	● Brave Bison	170
	● Business Control Solutions	943
	● Celoxica	168
	● Celoxica A Shares	50
	● CentralNic	3,675
	● Cloudcall	2,339
	● Corero Network Security	1,625
	● Craneware ●	9,216
	D4T4 Solutions ● Dillistone	2,466 1,131
	● Dotdigital	11,321
	● Eagle Eye Solutions Group	1,386
	● Earthport	802
	● Eckoh	8,017
	● EMIS	1,163
	● eServGlobal	2,128

Herald Investment Trust plc

Annual report & financial statements 2017

DETAILED LIST OF INVESTMENTS CONTINUED

At 31 December 2017

Classification	Name	Value £'000	%
United Kingdom continued
	● EU Supply	398
	FDM	3,910
	Fidessa	6,050
	● First Derivatives	10,985
	● Fusionex International	1,320
	● GB Group	26,044
	● Getbusy	857
	Gresham Technologies	6,049
	● Ideagen	4,485
	● IDOX	11,282
	● Intercede	533
	Kainos	2,945
	● Lombard Risk Management	1,456
	● LoopUp	7,584
	Microgen	11,265
	● Nasstar	1,859
	NCC	7,013
	● OMG	4,507
	● Oneview ●	624
	Osirium Technologies ●	490
	Parity ●	254
	Pelatro ●	1,024
	Redstoneconnect ● Sanderson	1,596 410
	● Satellite Solutions Worldwide	3,477
	● SciSys	2,761
	SDL	4,636
	Servelec	3,152
	● SimiGon	909
	Sophos	5,121
	● SQS Software Quality Systems	17,735
	● Statpro	10,581
	● Sysgroup	590
	● Tribal	3,957
	● Wandisco	7,303
	● Zoo Digital	6,329
		260,502	26.9
Technology Hardware & Equipment	● Amino Technologies	2,023
	BATM Advanced Communications	5,641
	CML Microsystems	5,336
	● Concurrent Technologies	632
	● CyanConnode Holdings	1,875
	● Ethernity Networks	446
	● Frontier Smart Technologies	7,102
	● Intechnology	257
	● IQE	26,061
	● MTI Wireless Edge	674
	● Northamber	855
	● Quixant	1,975
	● Seeing Machines Spirent Communications	5,085 4,060
	● Telit Communications	3,916
		65,938	6.8
	TOTAL UNITED KINGDOM EQUITIES	578,102	59.8
● denotes AIM stock

● denotes unlisted security

At 31 December 2017

Classification	Name		Value £'000	%
EUROPE, MIDDLE EAST AND AFRICA (EMEA)
Electronic & Electrical Equipment	Ekinops	France	687	0.1
Household Goods & Home Construction	Leclanche	Switzerland	1,499	0.2
Health Care Equipment & Services	EOS Imaging	France	827	0.1
Media	Roularta Media	Belgium	485	0.0
Mobile Telecommunications	Link Mobility	Norway	1,325	0.1
Software & Computer Services	Data Respons	Norway	3,119
	Datalex	Ireland	2,106
	Devoteam	France	2,848
	Esker	France	2,732
	Invision	Germany	514
	Isra Vision	Germany	8,500
	Opera Software	Norway	235
	Ordina	Netherlands	295
	Sword Group WALLIX	France France	2,912 1,532
			24,793	2.5
Technology Hardware & Equipment	ADVA Optical Networking	Germany	2,672
	BE Semiconductor Industries	Netherlands	18,744
	Nordic Semiconductor	Norway	4,584
			26,000	2.7
	TOTAL EMEA EQUITIES		55,616	5.7
NORTH AMERICA
Alternative Energy	Hydrogenics		4,522	0.5
Oil & Gas Producers	UrtheCast		229	0.0
Construction & Materials	Tecogen		412	0.0
Electronic & Electrical Equipment	Celestica		2,326
	Energous		1,440
	Fabrinet		3,527
	Orbotech		3,723
			11,016	1.2
Support Services	Aqua Metals		628
	Asure Software		732
	Imperva Kornit Digital		1,470 2,392
			5,222	0.5
Leisure Goods	Akoustis Technologies		2,674	0.3
Media	Yelp		2,486	0.3
Mobile Telecommunications	Iridium Communications		1,573	0.2
Financial Services	Safeguard Scientifics		921	0.1
Software & Computer Services	Alteryx		1,684
	Amber Road		4,954
	Attunity		5,125
	Barracuda Networks Boingo Wireless		4,683 10,999
	Bottomline Technologies		2,620
	Brightcove		2,477
	Callidus Software		7,626
	CyberArk Software		1,256
	Descartes Systems		10,055
	Digimarc		268
	FalconStor Software		45
	Five9		8,289

At 31 December 2017

Classification	Name		Value £'000	%
North America continued
	Gridsum		678
	Hortonworks		6,102
	Kinaxis		1,625
	LivePerson		4,259
	Materialise		356
	Meet Group		940
	Mimecast		4,247
	Pegasystems		11,081
	Qualys		3,826
	Rapid7		1,071
	SPS Commerce		1,799
	Support.com		464
	TOP Image Systems		422
	Varonis Sysytems		3,776
	VASCO Data Security International		2,059
	Veritone		687
	Web.com		4,037
			107,510	11.1
Technology Hardware & Equipment	ACM Research		572
	Adesto Technologies		2,059
	Aehr Test Systems		398
	AXT		967
	Ceva		10,871
	Chipmos Technologies		1,284
	Everspin Technologies		554
	Inphi Corporation		4,393
	Intellicheck Lantronix		595 1,026
	Mellanox Technologies		8,542
	MoSys		258
	Neophotonics		683
	Pixelworks		936
	Quantenna Communications		1,626
	Radisys		448
	Radware		10,340
	Silicom		2,596
	Silicon Motion Technology		15,023
	Tower Semiconductor		2,195
	ViaSat		5,544
			70,910	7.3
	TOTAL NORTH AMERICA EQUITIES		207,475	21.5
ASIA PACIFIC
Chemicals	SK Materials	South Korea	834
	Soulbrain	South Korea	1,653
			2,487	0.3
Electronic & Electrical Equipment	CyberPower Systems	Taiwan	743
	Tripod Technology	Taiwan	1,524
	Uju Electronics	South Korea	1,007
			3,274	0.3
Industrial Engineering	Tera Semicon	South Korea	1,089	0.1
Support Services	51job	China	4,230
	Praemium	Australia	1,214
			5,444	0.6
General Retailers	China Distance Education	China	1,419

Momo Taiwan 595 PChome Online Taiwan 892

2,906 0.3

At 31 December 2017

			Value
Classification	Name		£'000	%
Asia Pacific continued
Media	BitAuto Hong Kong Economic Times	China Hong Kong	824 400
	LOEN Entertainment	South Korea	906
			2,130	0.2
Travel & Leisure	Webjet	Australia	1,850	0.2
Software & Computer Services	Audinate	Australia	84
	Bravura Solutions	Australia	997
	Gabia	South Korea	926
	Kakao	South Korea	995
	Kingdee International Software	China	3,657
	Kinx	South Korea	858
	Melbourne IT	Australia	956
	Pacific Online	China	659
			9,132	0.9
Technology Hardware & Equipment	Advantech	Taiwan	1,265
	All Ring Tech	Taiwan	1,760
	Ardentec	Taiwan	1,305
	Chicony Electronics	Taiwan	743
	Eugene Technology	South Korea	864
	Hanmi Semiconductor	South Korea	820
	Himax Technologies	Taiwan	1,476
	Innox Advanced Materials	South Korea	1,644
	King Yuan Electronics	Taiwan	1,749
	Kinsus Interconnect Technology	Taiwan	351
	Parade Technologies	Taiwan	1,788
	PAX Global Technology	Hong Kong	928
	PSK	South Korea	2,223
	Realtek Semiconductor	Taiwan	2,484
	RichWave Technology	Taiwan	1,501
	Sercomm Wonik IPS	Taiwan South Korea	474 686
			22,061	2.3
	TOTAL ASIA PACIFIC EQUITIES		50,373	5.2
CONVERTIBLE LOAN STOCKS HAVING AN
ELEMENT OF EQUITY
	● BE Heard Group 8% Convertible 29 Nov 2023 ● Constellation Healthcare Technology Promissory Note 5% 31 Jan 2024		160 233
	●
	EU Supply 10% Convertible 31 Dec 2020 ●		250
	Intercede 8% Convertible 31 Dec 2021		375
	● Zinc Media Variable Rate Loan 31 Dec 2020		1,000
	● Zinc Media Variable Rate Loan 31 Dec 2020		292
	● Zinc Media 8% Loan 31 Dec 2020		600
	● Zoo Digital 7.5% Unsecured Convertible Loan Stock 31 Oct 2020 TOTAL CONVERTIBLE LOAN STOCKS		1,620
	HAVING AN ELEMENT OF EQUITY		4,530	0.5
Total Equity Investments			896,096	92.7
Fixed Interest	US Treasury Stock 1% 15 Aug 2018		22,130
	US Treasury Stock 0.875% 15 Apr 2019		7,315
	TOTAL FIXED INTEREST		29,445	3.0
Total Investments			925,541	95.7

Net Liquid Assets* 41,109 4.3 Total Assets At Market Value 966,650 100.0

* Cash, current assets and liabilities

LONG TERM PERFORMANCE

Steady and sustainable growth

The Company, founded in 1994 by Katie Potts, raised an initial £65m to invest in the UK and continental European TMT sector. Warrants were issued to initial investors on a 1 for 5 basis. In 1996 a further £30m was raised to globalise the fund, thus bringing the total outside capital to £95m. Since 1996 no new capital has been raised, and the warrants have been repurchased or converted into ordinary shares.

The Company has operated an opportunistic buyback policy, which has offered large holders liquidity and helped to create value for existing shareholders. Since inception, the Company has completed buybacks to the value of £100m bringing the net outside capital to negative £5m. Over the history of the fund, net asset value per share on a total return basis has grown by 1,380.8% in capital terms or 11.9% on an annualised basis.

CAPITAL SINCE INCEPTION

NAV PER SHARE TOTAL RETURN SINCE INCEPTION

+1,380.8%

ANNUALISED NAV PER SHARE TOTAL RETURN SINCE INCEPTION

+11.9%

At 31 December	Total assets £'000	Bank loans £'000	Shareholders' funds £'000	Number of shares in issue m	Diluted net asset value per share* p	Share price p	(Discount)/ premium † %
≠ Inception	64,107	–	64,107	65,000	98.72	90.90◊	(7.9)
1994	60,823	–	60,823	65,000	93.57	94.60	(2.7)
±1995	89,689	–	89,689	65,000	132.36§	127.00	(4.0)
1996	130,055	–	130,055	82,894	150.88§	136.00	(9.9)
1997	147,424	–	147,424	82,896	171.8	136.15	(20.8)
1998	170,982	–	170,982	82,901	201.7	161.50	(19.9)
1999	432,620	(3,343)	429,277	82,961	494.22	511.10	3.4
2000	378,607	(3,233)	375,374	83,874	431.43	491.00	13.8
2001	275,624	(2,892)	272,732	84,454	314.53	306.00	(2.7)
2002	199,900	(22,310)	177,590	84,475	206.68	177.00	(14.4)
2003	350,209	(29,325)	320,884	87,807	365.44	325.25	(11.0)
# 2004	356,874	(24,663)	332,211	87,556	379.43	322.75	(14.9)
2005	358,293	–	358,293	87,556	409.22	379.75	(7.2)
2006	401,228	(20,000)	381,228	86,556	435.41	383.50	(11.9)
2007	343,497	–	343,497	86,971	394.96	312.00	(21.0)
2008	275,789	(65,079)‡	210,710	83,408	252.63	184.00	(27.2)
2009	397,194	(56,298)‡	340,896	81,053	420.58	337.75	(19.7)
2010	533,499	(58,937)‡	474,562	79,913	593.85	483.00	(18.7)
2011	519,656	(70,357)‡	449,299	79,698	563.75	455.00	(19.3)
2012	572,243	(70,297)‡	501,946	79,323	632.78	513.00	(18.9)
2013	662,538	(38,935)‡	623,603	77,680	802.79	685.00	(14.7)
2014	667,450	(38,534)‡	628,917	77,340	813.19	659.00	(19.0)
2015	709,139	(38,002)‡	671,137	76,112	881.78	745.25	(15.5)
2016	816,414	(25,000)	791,414	73,062	1083.21	882.50	(18.5)
2017	966,650	–	966,650	70,308	1374.88	1171.00	(14.8)

* The diluted net asset value per ordinary share figures have been calculated in accordance with FRS102 (2015-2017), FRS22 (2008-2014), FRS14 (1995-2007).

† (Discount)/premium is the difference between Herald's quoted share price and its underlying diluted net asset value.

≠ Inception date 16 February 1994, 100p was shareholders' subscription price before launch costs of 1.3p. ◊ 90.9p is the capital gains tax (CGT) base subscription price for shareholders adjusting for warrants which were issued on a 1 for 5 basis. The CGT base for the warrant is 45.5p.

± Restated for change in accounting policy to account for income on an xd basis.

§ The diluted net asset values at 31 December 1995 and 1996 have been restated with the adoption of FRS 14.

The previously reported fully diluted net asset values were 131.65p and 149.45p respectively.

The figures prior to 2004 have not been restated for the changes in accounting policies implemented in 2005.

‡ Includes derivative financial instruments.

NET LIQUID ASSETS AND FIXED INTEREST AS PERCENT OF NAV 31 DECEMBER 2017

5 YEAR COMPOUND ANNUAL GROWTH IN NAV PER SHARE

+16.8%

10 YEAR COMPOUND ANNUAL GROWTH IN NAV PER SHARE

+13.3%

REVENUE
Year to 31 December	Income £'000	Available for ordinary shareholders £'000	Earnings per ordinary share net¶ p	Dividends per ordinary share net p	Ongoing charges§ %	Actual gearing^	Potential gearing**
2007	5,167	(1,370)	(1.57)	0.50	1.25	93	100
2008	7,629	4,742	5.59	1.55††	1.13	101	131
2009	6,077	324	0.39	0.30	1.12	105	117
2010	7,277	42	0.05	–	1.05	101	112
2011	9,171	947	1.19	1.00	1.10	105	116
2012	9,164	750	0.94	1.00	1.08	104	114
2013	8,987	(307)	(0.39)	–	1.04	100	106
2014	8,245	(1,464)	(1.89)	–	1.07	101	106
2015	9,136	(36)	(0.05)	–	1.08	95	106
2016	9,541	430	0.58	–	1.09	92	103
2017	10,799	486	0.68	–	1.08	93	100

¶ The calculation of earnings per ordinary share is based on the revenue from ordinary activities after taxation and the weighted average number of ordinary shares in issue (see note 8, page 57).

§ From 2012, calculated by dividing total operating costs by average net asset value (with debt at fair value) in accordance with AIC guidelines. Prior years have not been recalculated as the change in methodology is not considered to result in a materially different figure.

^ Total assets (including all debt used for investment purposes) less all cash and fixed interest securities (excluding convertibles and corporate bonds) divided by shareholders' funds.

** Total assets (including all debt used for investment purposes) divided by shareholders' funds.

†† The 2008 dividend excludes the special dividend of 3.45p.

CUMULATIVE PERFORMANCE (TAKING 2007 AS 100)

At 31 December	Diluted net asset value per share	Share price p	Numis Smaller Cos plus AIM Index	Russell 2000 Technology Index§§	Earnings per ordinary share	Dividend per ordinary share net	Retail price index
2007	100	100	100	100	100	100	100
2008	64	59	51	80	(356)	310	101
2009	106	108	80	114	(25)	60	103
2010	150	155	102	161	(3)	–	108
2011	143	146	87	148	(76)	200	114
2012	160	164	104	155	(60)	200	117
2013	203	220	133	214	25	–	120
2014	206	211	123	244	120	–	122
2015	223	239	130	259	3	–	124
2016	274	283	142	389	(37)	–	127
2017	348	375	168	417	(43)	–	132

COMPOUND ANNUAL RETURNS

5 year	16.8%	18.0%	10.1%	21.9%	–	–	2.4%
10 year	13.3%	14.1%	5.3%	15.3%	–	–	2.8%

Past performance is not a guide to future performance.

§§ The Russell 2000 (small cap) Technology Index was rebased during 2009 following some minor adjustments to its constituents. The rebased index is used from 31 December 2008 onwards.

LONG TERM PERFORMANCE CONTINUED

DISCOUNT TO NAV 31 DECEMBER 2017

14.8%

CAPITAL RETURN SINCE INCEPTION

	31 December 2017	Inception 16 February 1994	% change
Net asset value per ordinary share (including current year income)	1374.88p	98.72p	1,292.71
Net asset value per ordinary share (excluding current year income)	1374.20p	98.72p	1,292.02
Share price	1171.00p	90.90p	1,188.23
Numis Smaller Companies Index plus AIM (ex. investment companies)	6001.77	1750.00	242.96
Russell 2000 (small cap) Technology Index (in sterling terms)†	2480.20	688.70*	260.13

* At 9 April 1996 being the date funds were first available for international investment.

† The Russell 2000 (small cap) Technology Index was rebased during 2009 following some minor adjustments to its constituents. The rebased index is used from 31 December 2008 onwards.

CAPITAL RETURNS SINCE INCEPTION

(FIGURES HAVE BEEN REBASED TO 100 AT 16 FEBRUARY 1994)

Source: Thomson Reuters

• Share price
• Russell 2000 (small cap) Technology Index (in sterling terms)
• Numis Smaller Companies Index plus AIM (excluding investment companies)

Governance

• Strategic Report
• Directors' Biographies
• Corporate Governance Report
• Audit Committee Report
• Directors' Report
• Directors' Remuneration Report
• Statement of Directors' Responsibilities
• Independent Auditor's Report

STRATEGIC REPORT

BUSINESS MODEL 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 1158 of the Corporation Tax Act 2010 for the year ended 31 December 2016, 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 subsequently conducted its affairs so as to enable it to continue to seek such approval.

OBJECTIVE

The Company's objective is described at page 2 (Policy and Objective).

INVESTMENT POLICY – STRATEGY

While the policy is global investment in smaller quoted companies in TMT, 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 \$3bn, 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 250 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. 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 20 to 25 and in the investment manager's report.

PERFORMANCE AND KEY PERFORMANCE INDICATORS ("KPIs")

At each board meeting, the directors consider a number of performance measures to assess the Company's success in achieving its objectives.

The KPIs used to measure the progress and performance of the Company over time are established industry measures and are as follows:

• the movement in net asset value per ordinary share compared to the comparative indices;
• the movement in the share price;
• the discount; and
• the ongoing charges.

A historical record of these measures is shown on pages 26 and 27.

SHARE CAPITAL

At 31 December 2017 the Company's capital structure consisted of 70,307,785 ordinary shares of 25p each (2016 – 73,061,801 ordinary shares). During the year 2,754,016 (2016 – 3,049,745) shares were bought back and cancelled. There are no restrictions concerning the holding or transfer of the Company's ordinary shares and there are no special rights attached to any of the shares. On a winding up, after meeting the liabilities of the Company, the surplus assets would be paid to ordinary shareholders in proportion to their shareholdings.

DERIVATIVE INSTRUMENTS

The Company does not currently have any exposure to derivative instruments. In 2008, the Company entered into a £50m, 30-year interest rate swap with RBS to hedge the cash flow risk to the Company arising from interest rate fluctuations. The swap was reduced to £25m in December 2014 and closed out in July 2016.

BORROWINGS (SEE NOTE 11 OF THE FINANCIAL STATEMENTS)

The Company has a multi-currency revolving loan facility with RBS up to £25m, maturing in December 2019, under which no drawdowns have been made to date. The Company had a sterling term loan facility with RBS of £25m which was drawn down in full for much of the year but repaid at the expiry of its term on 29 December 2017.

REVIEW OF THE YEAR AND FUTURE DEVELOPMENTS

A review of the year and the investment outlook is contained in the chairman's statement and the investment manager's report on pages 8 to 14.

BREXIT

The board believes that the UK's decision to leave the EU is the right decision for the future prosperity and well-being of the UK and that it will not present a threat to the Company's business model, its viability statement or its ability to continue producing accounts on a going concern basis. The UK is a world leader in the development and delivery of – in particular – innovative technological solutions and the board sees no reason why this should change once the UK has left the EU.

PRINCIPAL RISKS AND UNCERTAINTIES

The Company's assets consist mainly of listed securities and principal risks to the success of the business model are therefore market related and include market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. An explanation of those risks – which have been subject to robust assessment by the directors – and how they are managed is contained in note 18 to the accounts on pages 60 to 66, and a description of the internal controls operated by the Company is on pages 35 and 36.

Other risks to the Company's model, future performance, solvency or liquidity include the following:

Regulatory risk – failure to comply with applicable legal and regulatory requirements could lead to suspension of the Company's Stock Exchange listing, financial penalties by the UKLA or a qualified audit report. Breach of the Corporation Tax Act 2010 could lead to the Company being subject to tax on capital gains. The manager, depositary and administrator provide regular reports to the audit committee on their monitoring programmes. The manager monitors investment positions and the manager and company secretary monitor the level of forecast income and expenditure.

Major regulatory change could impose disproportionate compliance burdens on the Company. In such circumstances representation would be made to seek to ensure that special circumstances of investment trusts are recognised.

Operational/financial/custody risk – failure of the administrator's accounting systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. The manager, administrator and company secretary each have comprehensive business continuity plans which facilitate continued operation of the business in the event of a service disruption or major disruption. The audit committee receives the administrator's report on internal controls and the reports by other key third party providers are reviewed by the manager and company secretary on behalf of the audit committee. The depositary reports six monthly on custody matters, including the continued safe custody of the Company's assets by the custodian.

Discount volatility – the discount at which the Company's shares trade can widen. The board monitors the level of discount and the Company has authority to buy back its own shares.

Gearing risk – the Company may borrow money for investment purposes. If the investments fall in value, any borrowings will magnify the extent of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings.

All borrowings require the prior approval of the board and gearing levels are discussed by the board and manager at every meeting. The majority of the Company's investments are in quoted securities.

VIABILITY STATEMENT

The UK Corporate Governance Code and Listing Rules require that the Company should publish a longer-term statement on the viability of the Company. The directors consider that three years is an appropriate forward looking time period. This recognises the Company's current position, the investment strategy, which includes investment in smaller companies and start-ups where a three year horizon is a meaningful period over which to judge prospects, the board's assessment of the main risks that threaten the business model and the relatively fast moving nature of the sectors in which the Company invests.

The directors confirm that, based on reviews conducted as part of the detailed internal controls and risk management processes set out on pages 35 and 36, they have a reasonable expectation that the Company will continue to maintain its status as an investment trust, to implement its investment strategy and to operate and be able to meet its liabilities as they fall due for at least the next three financial years. Their consideration also takes into account the Company's gearing and financing arrangements and its projected income and expenditure.

There are no current plans to amend the investment strategy, which has delivered good investment performance for shareholders over many years and, the directors believe, should continue to do so. The investment strategy and its associated risks are kept under constant review by the board.

By definition, investment in smaller and start-up companies carries higher risks, both in terms of stock liquidity and longer-term business viability and this risk is accepted by the board. In addition, it should be noted that under the Company's articles of association, shareholders are required to vote triennially on whether the Company should continue as an investment trust, so the longer-term viability statement is contingent upon shareholders voting to support any continuation vote falling within the relevant three year period. The next continuation vote will be at the AGM in 2019.

EMPLOYEES, SOCIAL AND COMMUNITY ISSUES, GENDER

The Company has no employees. Its board is made up of four directors, all male.

As an investment trust, the Company has no direct social or community responsibilities. However, the Company believes that it is in the shareholders' interests to consider environmental, social and governance factors when selecting and retaining investments. Details of the Company's policy on socially responsible investment can be found under the section on stewardship later in this report.

STRATEGIC REPORT CONTINUED

INVESTMENT MANAGEMENT, STRATEGY IMPLEMENTATION AND ADMINISTRATION

The management of the Company and the implementation of its investment strategy is contracted to Herald Investment Management Limited ('HIML'). HIML is authorised and regulated by the Financial Conduct Authority both for investment management and as an Alternative Investment Fund Manager (see regulatory compliance in the directors' report).

The management contract is subject to 12 months' notice by either party. The senior director of HIML with prime responsibility for the management of the Company's portfolio is Katie Potts, who is also a substantial shareholder of HIML Holdings Limited, the parent company of HIML. HIML is remunerated at an annual rate of 1.0% of the Company's net asset value calculated using middle market prices. Compensation fees would only be payable in respect of this 12 month period if termination were to occur sooner. Careful consideration has been given by the board as to the basis on which the management fee is charged. The board considers that maintaining an appropriate level of ongoing charges for a specialist trust is in the best interest of all shareholders. The board is also of the view that calculating the fee with reference to performance would be unlikely to exert a positive influence over the long term performance. At 31 December 2017, Katie Potts held 447,817 of the Company's shares.

At 31 December 2017, the Company was the beneficial owner of 15.4% of the ordinary share capital of HIML Holdings Limited.

Administration of the Company and its investments has been delegated by HIML to The Bank of New York Mellon ("BNYM") and company secretarial duties have been delegated to Law Debenture Corporate Services Limited.

The board considers the investment management and secretarial arrangements for the Company on a continuing basis and a formal review is conducted annually. The board considers, amongst others, the following topics in its review: investment performance in relation to the investment policy and strategy; the continuity of personnel managing the assets and reporting to the board; the level of service provided in terms of the accuracy and timeliness of reports to the board and the frequency and quality of both verbal and written communications with shareholders. Following the most recent review the board is of the opinion that the continued appointment of HIML as investment manager, on the terms agreed, is in the interests of shareholders due to the experience of the manager and the quality of information provided to the board.

STEWARDSHIP – RESPONSIBILITIES AS AN INSTITUTIONAL SHAREHOLDER

The Company has given discretionary voting powers to the investment manager, HIML. The manager votes against resolutions it considers may damage shareholders' rights or economic interests. The Company believes that it is in the shareholders' interests to consider environmental, social and governance (ESG) factors when selecting and retaining investments and has asked the manager to take these issues into account as long as the investment objectives are not compromised. The manager does not exclude companies from its investment universe purely on the grounds of ESG issues but adopts a positive engagement approach whereby matters are discussed with management with the aim of improving the relevant policies and management systems and enabling the manager to consider how ESG factors could impact long term investment returns. The manager's statement of compliance with the UK Stewardship Code can be found on the manager's website at www.heralduk.com. The manager's policy has been reviewed and endorsed by the board.

DIVIDENDS

The ordinary shares carry a right to receive dividends. Interim dividends are determined by the directors and final dividends are subject to shareholder approval. The directors do not recommend a dividend for the period under review.

By order of the board

Julian Cazalet Chairman 20 February 2018

DIRECTORS' BIOGRAPHIES

JULIAN CAZALET

Julian Cazalet was appointed to the board in 2008 and became chairman in 2009. He was managing director – corporate finance at JPMorgan Cazenove until his retirement in December 2007. A chartered accountant, he joined Cazenove in 1973 and was made a partner in 1978. From 1989 he worked in corporate finance and advised investment trusts in addition to his work with industrial and commercial companies. He is chairman of The Lindsell Train Investment Trust plc and a director of Deltex Medical Group plc and a number of charitable trusts.

TOM BLACK

Tom Black was appointed to the board in 2013. He is chairman of Thruvision Group plc (formerly Digital Barriers plc), and is a non-executive director of Adept4 plc. He also has advisory roles with a number of smaller unlisted businesses and sits on the strategy advisory group of Wolfson College Oxford. He is chairman and trustee of the Black Family Charitable Trust, which is focused on supporting disadvantaged young people with their educational needs. He was previously chief executive of Detica Plc, a leading company in the field of large-scale information collection and analysis for intelligence and counter fraud applications. Tom is the senior independent director.

KARL STERNBERG

Karl Sternberg was appointed to the board in 2015. He was a founding partner of Oxford Investment Partners Limited from 2006 until 2013, when it was acquired by Towers Watson. Much of his earlier career was spent at Morgan Grenfell (which became Deutsche Asset Manager), where he rose to become chief investment officer, Europe & Asia Pacific. Karl is a non-executive director of Clipstone Logistics REIT plc, Monks Investment Trust plc, Lowland Investment Company plc, Alliance Trust plc, JP Morgan Elect plc, Island House Investment LLP, Jupiter Fund Management plc and Railpen Investments.

JAMES WILL

James Will was appointed to the board in 2015. He was until 2014 chairman and a senior corporate finance partner of law firm Shepherd and Wedderburn LLP. He also headed the law firm's financial sector practice. Over the last 20 years he has been involved in advising smaller quoted technology companies on a range of corporate transactions, including flotations, secondary fundraisings and mergers and acquisitions. James is chairman of The Scottish Investment Trust PLC. James is chairman of the audit committee.

CORPORATE GOVERNANCE REPORT

COMPLIANCE

The board is committed to achieving and demonstrating high standards of corporate governance. This statement outlines how the principles of the April 2016 UK Corporate Governance Code (the "Code"), which can be found at www.frc.org.uk, were applied throughout the financial year. The board confirms that the Company has complied throughout the year under review with the relevant provisions of the Code, except where indicated below. The Company was admitted to the FTSE250 on 19 October 2017. It reports as a "smaller company" for Code purposes for the year ending 31 December 2017 but will not be able to report on that basis for the year ending 31 December 2018.

The Association of Investment Companies has published its own Code of Corporate Governance which provides a framework of best practice for investment companies which can be found at www.theaic.co.uk. The board is of the opinion that the Company has complied with the recommendations of the AIC Code.

THE BOARD

The board has overall responsibility for the Company's affairs. It has a number of matters reserved for its approval including strategy, approval of the financial statements, investment policy, borrowings, gearing, treasury matters, dividend and corporate governance policy. The board also reviews the financial statements, investment transactions, revenue budgets and performance. Full and timely information is provided to the board to enable it to function effectively and to allow directors to discharge their responsibilities.

The chairman is responsible for organising the business of the board, ensuring its effectiveness and setting its agenda. He reviews channels for the provision of information with the company secretary at least once a year. The executive responsibilities for investment management and administration have been delegated to HIML and BNYM respectively, and in the context of a board comprising entirely non-executive directors, there is no chief executive officer. Tom Black is the senior independent director.

The directors believe that the board has a balance of skills and experience which enable it to provide effective leadership and proper governance of the Company. Information about the directors, including their relevant experience, can be found on page 33.

The board comprises four directors, all of whom are non-executive. All directors will retire at the AGM and offer themselves for re-election.

The board has reviewed the performance of all directors. In each case, their performance continues to be effective and they remain committed to the Company. Their contribution to the board is valued highly and the board recommends their re-election to shareholders.

There is an agreed procedure for directors to seek independent professional advice if necessary at the Company's expense.

TERMS OF APPOINTMENT

The terms and conditions of directors' appointments are set out in formal letters of appointment which are available for inspection on request.

Under the provisions of the Company's articles of association, a director appointed during the year is required to retire and seek election by shareholders at the next AGM. All directors retire annually and if appropriate, offer themselves for re-election.

INDEPENDENCE OF DIRECTORS

All the directors are considered by the board to be independent of the manager and free of any business or other relationship which could interfere with the exercise of their independent judgement.

MEETINGS

There is an annual cycle of board meetings which is designed to address, in a systematic way, overall strategy, review of investment policy, investment performance, revenue budgets, dividend policy and communication with shareholders. The board considers that it meets sufficiently regularly to discharge its duties effectively. The table below shows the attendance record for the board and committee meetings held during the year. All the directors attended the AGM. In addition, the board held an offsite "strategic awayday" in December 2017, which was attended by all of the directors and the investment manager.

Number of meetings	Board 4	Audit 2	Nomination 1
Julian Cazalet	4	2	1
Tom Black	4	2	1
Karl Sternberg	4	2	1
James Will	4	2	1

NOMINATION COMMITTEE

The nomination committee consists of all the directors and the chairman of the board is chairman of the committee. The committee meets on an annual basis and at such other times as may be required. The committee has written terms of reference which include reviewing the board, identifying and nominating new candidates for appointment to the board, board appraisal, succession planning and training. The committee also considers whether directors should be recommended for re-election by shareholders. The committee is responsible for considering directors' potential conflicts of interest and for making recommendations to the board on whether or not the potential conflicts should be authorised. The terms of reference are available on request and at www.heralduk.com.

Appointments are made on merit irrespective of race, colour, religion, age, educational/professional background and gender. While the committee does not consider it appropriate to set diversity targets, it will operate in accordance with the following standards:

• when seeking to recruit a new director(s), the nomination committee will evaluate the skills, experience, independence, knowledge and diversity of the board and prepare a description of the role and capabilities required to fulfil the appointment and will normally appoint an independent agency to assist in the recruitment process;
• it will ensure that a diverse group of candidates is considered; and
• candidates will be considered on merit and against objective criteria having regard to the benefits of diversity, including gender.

Annual report & financial statements 2017

PERFORMANCE EVALUATION

The nomination committee met to assess the performance of the chairman, each director, the board as a whole and its committees, after inviting each director and the chairman to consider and respond to a set of questions. The appraisal of the chairman was led by Tom Black. The appraisals and evaluations considered, amongst other criteria, the balance of skills of the board, training and development requirements, the contribution of individual directors and the overall effectiveness of the board and its committees. Following this process it was concluded that the performance of each director, the chairman, the board and its committees continues to be effective and each director and the chairman remain committed to the Company.

A review of the chairman's and other directors' commitments was carried out and the nomination committee is satisfied that they are capable of devoting sufficient time to the Company.

INDUCTION AND TRAINING

Training for new directors is tailored to the particular circumstances of the individual appointee. Regular briefings are provided on changes in regulatory requirements that could affect the Company and the directors. Directors receive other relevant training as necessary.

REMUNERATION

As all the directors are non-executive there is no requirement for a separate remuneration committee. Directors' fees are considered by the board as a whole within the remuneration policy limits approved by shareholders, set out on page 40.

INTERNAL CONTROLS, RISK MANAGEMENT AND INTERNAL AUDIT

The directors acknowledge their responsibility for the Company's risk management and internal controls systems and for reviewing their effectiveness. The systems are designed to manage rather than eliminate the risk of failure to achieve business objectives and can only provide reasonable but not absolute assurance against material misstatement or loss.

The board confirms that there is a continuing process for identifying, evaluating and managing the significant risks faced by the Company, in accordance with the guidance on risk management, internal control and related financial and business reporting, published by the FRC.

The directors confirm that they have reviewed the effectiveness of the Company's risk management and internal control systems and they have procedures in place to review their effectiveness on a regular basis. No significant weaknesses were identified in the year under review and in the period up to and including the date of this report.

The practical measures to ensure compliance with regulation and company law, and to provide effective and efficient operations and investment management, have been delegated to HIML, the company secretary and BNYM. The audit committee and board monitor performance of the functions performed by HIML, the company secretary and BNYM through regular review. Since July 2014, when HIML became the Company's AIFM under the Alternative Investment Fund Managers Directive ("AIFMD"), the audit committee and board also monitor the controls managed by the AIFM.

The AIFM has a risk policy covering the risks associated with its management of the portfolio and it has in place its own risk management procedures, which are periodically reviewed. Risk limits are set by the AIFM and approved by the audit committee taking into account several factors, including investment strategy and risk appetite. The investment policy limits are described in the strategic report and are monitored at each board meeting, taking account of appropriate sensitivity analysis.

HIML has a compliance function in accordance with FCA regulations. The compliance function provides the audit committee and board with a report on its monitoring procedures on a regular basis. Compliance monitoring by HIML includes risk based internal monitoring as well as external monitoring of services that have been delegated to third parties – principally fund accounting and company secretarial services. For fund accounting, monitoring includes reviewing the monthly net asset value produced by BNYM versus HIML's own system, reviewing BNYM's client accounting compliance reports and internal audit confirmations and reviewing KMPG's annual Service Organisation Control (SOC1) report on BNYM. The audit committee also receives regular compliance reports from BNYM, including performance against service level standards.

Under AIFMD, the Company has appointed a depositary, BNY Mellon Trust & Depositary (UK) Limited, whose responsibilities include cash monitoring and safe keeping of the Company's assets. The depositary has delegated custody services to The Bank of New York Mellon SA/NV, London Branch and is responsible for monitoring the sub-custodian in detail, the results of that monitoring being reported to HIML (and the audit committee) through periodic depositary reports. The scope of the fund accounting services includes reconciliations to custody records. Provision of custody services by BNYM is covered by a SOC1 report, a copy of which is provided to audit committee members. Finally, a detailed risk map is prepared by the company secretary for the audit committee, identifying the significant risks faced by the Company (summarised on page 31) and the key controls employed to manage those risks.

These procedures ensure that consideration is given regularly to the nature and extent of the risks facing the Company and that they are being actively monitored. Where changes in risk are identified during the year, these procedures also provide a mechanism to assess whether further action is required to manage the changes identified. The board confirms that these procedures have been in place throughout the year under review and that they continue to be in place up to the date of approval of this report.

CORPORATE GOVERNANCE REPORT CONTINUED

The audit committee carries out an annual review of the need for an internal audit function. The committee continues to believe that the compliance and internal control systems and the internal audit function in place within the manager and the administrator provide sufficient assurance that a sound system of internal control, which safeguards shareholders' investment and the Company's assets, is maintained. An internal audit function, specific to the Company, is therefore considered unnecessary.

ACCOUNTABILITY AND AUDIT

The respective responsibilities of the directors and the auditors in connection with the financial statements are set out on pages 43 to 47.

AUDIT COMMITTEE

A separate audit committee report appears on page 37. Its chairman is James Will and all of the non-executive directors are members, including the chairman, Julian Cazalet, as his long corporate finance experience is a considerable asset to the committee's deliberations.

RELATIONS WITH SHAREHOLDERS

The board places great importance on communication with shareholders. The Company's manager meets regularly with larger shareholders and reports to the board. The chairman also meets with shareholders both with the manager and on his own. Shareholders wishing to communicate with the chairman or any other director may do so by writing to him at the registered office of the Company which is shown on page 70.

The Company's AGM provides a forum for communication with all shareholders. The level of proxies lodged for each resolution is announced at the meeting and is published on the manager's website, www.heralduk.com, subsequent to the meeting. The notice period for the AGM is at least 20 working days. Shareholders and potential investors may obtain up-to-date information on the Company from the manager's website.

PURCHASE OF OWN SHARES

At the AGM of the Company to be held on 19 April 2018, the Company will as usual be seeking authority to make limited purchases of the Company's ordinary shares – see the notice of AGM at page 67. Buy-backs are considered by the board to be a useful tool, where surplus cash is not being utilised for investment, to assist in the maintenance of liquidity in the Company's shares.

AGM – DIGITAL PROXY VOTING

Starting with this year's AGM, the Company has introduced a new initiative for shareholder proxy voting. Shareholders are strongly encouraged to submit proxy votes online by visiting www.signalshares.com. There is a straightforward registration process and a number of our shareholders are using the site already. All that you need is your name, address and investor code, which can be found on your share certificate. If you are having trouble locating your share certificate or investor code, please call the shareholder helpline on 0871 664 0300 (or from overseas +44 (0)371 664 0300).

Any shareholder who is unwilling or unable to vote digitally can 'opt-in' to receive a paper proxy card by telephoning the shareholder helpline. CREST members are unaffected by this change.

AGM – LIMIT ON DIRECTORS' FEES

The directors are proposing to increase the aggregate annual limit on directors' fees set out in the articles of association from £125,000 to £200,000. The current limit effectively restricts the number of directors to four, thus stopping the board from being able to enhance its skillset by bringing on one or more additional directors, should that be thought desirable or (for governance reasons) necessary.

AGM RECOMMENDATION

The directors unanimously recommend all holders to vote in favour of all the resolutions to be proposed at the AGM.

SUMMARY STATEMENT OF COMPLIANCE

The board has concluded that, as demonstrated by the disclosures made in the foregoing, the Company has complied throughout 2017 with all of the applicable requirements of the UK Corporate Governance Code.

By order of the board

Julian Cazalet Chairman 20 February 2018

37

AUDIT COMMITTEE REPORT

AUDIT COMMITTEE

An audit committee has been established consisting of all the independent non-executive directors, chaired by James Will. The committee considers that at least one of its members has recent and relevant financial experience and that the committee as a whole has competence relevant to the sector in which the Company operates. Its authority and duties are defined within its written terms of reference which are available on request from the Company and on the manager's website: www.heralduk.com.

ROLE AND DUTIES

The committee's responsibilities, which were discharged during the year, include:

• monitoring and reviewing the integrity of the half-yearly and annual financial statements and any formal announcements relating to the Company's financial performance;
• reviewing the adequacy and effectiveness of internal control and risk management systems;
• making recommendations to the board within the context of the EU Audit Regulation and Directive in relation to the appointment of the external auditor and approving the remuneration and terms of their engagement;
• overseeing and managing the audit tender and selection processes;
• developing and implementing policy on the engagement of the external auditor to supply non-audit services;
• reviewing and monitoring the independence, objectivity and effectiveness of the external auditor;
• reviewing the arrangements in place within HIML whereby their staff may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters insofar as they may affect the Company;
• reviewing the terms of the investment management agreement; and
• considering annually whether there is a need for the Company to have its own internal audit function.

RISK MANAGEMENT, INTERNAL CONTROL AND INTERNAL AUDIT

The extensive array of internal controls adopted by the Company are set out in the corporate governance report. The board as a whole is responsible for the effectiveness of internal control mechanisms but it is informed by more specific work carried out by the audit committee.

EXTERNAL AUDITORS – ASSESSING EFFECTIVENESS

The committee monitors the independence and objectivity of the auditors, their performance and effectiveness by meeting at least annually with the audit partner to discuss that year's audit. Part of that process requires the auditor to give the committee an assessment of how the audit team identifies and manages the threats to its independence. The committee receives confirmation from the auditor that it has complied with the relevant UK professional and regulatory requirements on independence. It will also take into account any findings in the most recent FRC audit quality inspection report on Ernst & Young. The committee does not believe that there has been any impairment to the auditor's independence.

The committee examines in detail the scope of the audit, ensuring that the auditor's objectives have met the committee's expectations, along with key audit and accounting matters considered that year. The principal findings of the audit are discussed and challenged, particularly in areas where management judgement has been required. The committee will give the auditor an opportunity to comment privately on the quality and standard of the manager's and administrator's performance generally and during the audit. Similarly, the committee will seek the views of the manager and administrator on the effectiveness and performance of the audit team.

NON-AUDIT SERVICES

There is not often a need for non-audit services to be provided by the auditor. The committee's policy is that non-audit work should be limited to those matters where the external auditor is most appropriately placed to carry out the work, unless there is a conflict of interest. No non-audit services were provided by the auditor during the period under review.

AUDIT TENDERING

Ernst & Young LLP has been the Company's auditor since before 16 June 1994. Having considered the experience and tenure of the audit partner and staff and level of service provided, the committee remains satisfied with the auditor's effectiveness and accordingly has recommended that Ernst & Young LLP be reappointed at the forthcoming AGM. The audit partner responsible for the audit must be rotated at least every five years and was rotated in 2017. The financial statements for the year ending 31 December 2017 are the first to be signed off by the new partner. There are no contractual obligations restricting the Company's choice of external auditor. The committee will put the audit to tender when the current auditor becomes subject to mandatory rotation after the 2020 year end under the terms of the EU Audit Regulation and Directive. This is subject to continuing satisfactory performance in the meantime.

SIGNIFICANT FINANCIAL ISSUES RELATING TO THE 2017 FINANCIAL STATEMENTS

The Code requires us to describe any significant issues considered in relation to the financial statements and how those issues were addressed. While there were no significant issues, two matters of risk of particular focus at the balance sheet date were the risks that investments might not have been correctly valued or beneficially owned. No issues were discovered.

SUMMARY

Following a detailed review of the financial statements and discussions with the manager, administrator, company secretary and auditor, the committee has concluded that the financial statements themselves, and the annual report as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy. That conclusion has been reported to and confirmed by the board.

James Will

Chairman, audit committee 20 February 2018

DIRECTORS' REPORT

The directors present their directors' report for the year ended 31 December 2017. The strategic report and the corporate governance report at pages 30 to 36 form a part of the directors' report.

RESULTS AND DIVIDEND

The net asset value (NAV) of the Company at 31 December 2017 was 1374.9p per ordinary share (2016 – 1083.2p). This represented an increase of 26.9% during the year, compared to increases in the comparative indices of 18.9% (Numis Smaller Companies Index plus AIM (ex. investment companies)) and 7.3% (Russell 2000 (small cap) Technology Index (in sterling terms)). The discount was 14.8% (2016 – 18.5%).

The directors do not recommend a dividend for the year ended 31 December 2017 (2016 – nil).

DIRECTORS

The directors are listed on page 33. The names of those directors who will be considered for re-election at the forthcoming AGM appear on page 67.

GOING CONCERN

In accordance with The Financial Reporting Council's guidance on going concern and liquidity risk, the directors have undertaken a rigorous review of the Company's ability to continue as a going concern. The Company's principal risks are market related and include market risk, liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 18 to the financial statements. The Company's assets, the majority of which are investments in quoted securities, exceed its liabilities significantly. All borrowings require the prior approval of the board. Gearing levels and compliance with loan covenants are reviewed by the board on a regular basis. In accordance with the Company's articles of association, shareholders have the right to vote on the continuation of the Company as an investment trust every three years and a resolution to that effect was approved at the AGM in 2016.

After making enquiries, the financial statements have been prepared on the going concern basis. There are no material uncertainties that call into question the Company's ability to continue to be a going concern for at least 12 months from the date of approval of these financial statements and the board is confident that the Company will be able to continue in operation and meet its liabilities as they fall due.

CONFLICTS OF INTEREST

Each director submits a list of potential conflicts of interest to the nomination committee on an annual basis, or as they arise. The committee considers these carefully, taking into account the circumstances surrounding them, and makes a recommendation to the board on whether or not the potential conflicts should be authorised. Board authorisation is for a period of one year. Having considered the lists of potential conflicts there were no situations which gave rise to a direct or indirect interest of a director which conflicted with the interests of the Company.

BRIBERY ACT 2010

The Company has a zero tolerance policy towards bribery and is committed to carrying out business fairly, honestly and openly. The manager, administrator and company secretary also adopt a zero tolerance approach and have policies and procedures in place to prevent bribery.

GREENHOUSE GAS EMISSIONS

As the Company's activities are all outsourced to third parties, the Company has no greenhouse gas emissions to report.

DIRECTOR INDEMNIFICATION AND INSURANCE

The Company has entered into deeds of indemnity in favour of each of the directors. The deeds cover any liabilities that may arise to a third party, other than the Company, for negligence, default or breach of trust or duty. The directors are not indemnified in respect of liabilities to the Company, any regulatory or criminal fines, any costs incurred in connection with criminal proceedings in which the director is convicted or civil proceedings brought by the Company in which judgement is given against him. In addition, the indemnity does not apply to any liability to the extent that it is recovered from another person.

The Company maintains Directors' and Officers' liability insurance.

PRINCIPAL RISKS AND UNCERTAINTIES

These are set out as part of the strategic report.

MAJOR INTERESTS IN THE COMPANY'S SHARES

The following table sets out the names of those shareholders holding 3% or more of the issued share capital at 31 December 2017, and at the date of this report.

	% of issued share capital
Rathbone Investment Management	12.47
Lazard Asset Management LLC	8.51
Wells Capital Management Inc	6.71
Investec Wealth & Investment Limited	5.37
JM Finn & Co	3.86
Charles Stanley & Co	3.63
Speirs & Jeffrey	3.47

REGULATORY COMPLIANCE

THE ALTERNATIVE INVESTMENT FUND MANAGERS ("AIFM") DIRECTIVE

The AIFM is required to provide portfolio management, risk management, administration, accounting and company secretarial services to the Company. The Company has appointed HIML as its AIFM, to undertake these functions on its behalf. As reported elsewhere, HIML has elected to delegate some of these functions. BNY Mellon Trust & Depositary (UK) Limited is the depositary and is paid 0.015% per annum of the total net assets of the portfolio (adjusted to include any leverage). The depositary is responsible for custody activities and has appointed The Bank of New York Mellon SA/NV, London Branch, as its delegate to perform these activities.

AIFMs are obliged to publish certain information for investors and prospective investors, which may be found either in this annual report or on the Company's website. Any information on remuneration not already disclosed in the remuneration report will be provided to investors on request.

The AIFMD requires an annual disclosure of 'leverage'. On a 'gross' basis, this is 0.99 against a maximum of 2.00 (2016 – 0.97: 2.00) and on a 'commitment' basis, 1.00 against a maximum of 2.00 (2016 – 1.03: 2.00).

THE MODERN SLAVERY ACT 2015

The Company falls outside the scope of the Modern Slavery Act and is therefore not required to make a slavery and human trafficking statement.

PAYMENT TO SUPPLIERS

The Company is a signatory to the Prompt Payment Code, which enshrines a 30 day payment term as a norm.

DISCLOSURE OF INFORMATION TO THE AUDITOR

The directors confirm that so far as each of them is aware, there is no relevant audit information of which the Company's auditor is unaware and the directors have taken all the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

DIRECTORS' RESPONSIBILITY STATEMENT PURSUANT TO DTR4

The directors confirm to the best of their knowledge:

The financial statements have been prepared in accordance with applicable law and United Kingdom Accounting Standards (UK GAAP) including FRS 102 'The Financial Reporting Standard applicable to the UK and Republic of Ireland' and give a true and fair view of the assets, liabilities, financial position and profit of the Company.

The annual report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

INDEPENDENT AUDITORS

The auditors, Ernst & Young LLP, are willing to continue in office and in accordance with sections 489 and 491(1) of the Companies Act 2006 resolutions concerning their reappointment and remuneration will be submitted to the AGM.

By order of the board

Julian Cazalet Chairman 20 February 2018 39

DIRECTORS' REMUNERATION REPORT

1 CHAIRMAN'S ANNUAL STATEMENT

Dear Shareholder

I present below (at section 3) the Company's remuneration report for the year ended 31 December 2017.

Our remuneration policy (see section 2 below) was approved by shareholders at the 2017 AGM. The policy must be put to shareholders for approval every three years and the board must only operate in accordance with the approved policy during the three year cycle, unless shareholder approval is sought to amend the policy. I confirm that the board has complied with the policy during the year ended 31 December 2017. Fees were increased with effect from 1 July 2017 to: chairman – £33,000; audit committee chair – £25,000; NED – £22,000.

The law requires the Company's auditors to audit certain of the disclosures provided. Where disclosures have been audited, they are indicated as such. The auditor's opinion is included in their report on pages 44 to 47.

SCOPE AND RESPONSIBILITY

As the Company has no employees and no executive directors, the policy relates only to the non-executive directors.

2 POLICY ON DIRECTORS' FEES

The board's policy is that the remuneration of directors should be set at a reasonable level that is commensurate with the duties and responsibilities of the role and consistent with the requirement to attract and retain directors of the appropriate quality and experience. It should also reflect the experience of the board as a whole and be fair and comparable to that of other investment trusts that are similar in size. The board has taken account of any views expressed by shareholders in formulating this policy.

Component	Commentary
Basic fee arrangement	At the time the policy was approved in April 2017, the directors received fees for their services as follows:
	— Chairman fee – £31,500
	— Audit committee chair – £23,000
	— NED fee – £21,000
	These fees are determined within an aggregate limit set out in the Company's articles of association which stands at £125,000 per annum.
	There is no separate remuneration committee and the board as a whole considers changes to directors' fees from time to time. The company secretary provides advice and comparative information when the board considers the level of directors' fees.
	If the board concludes that it is appropriate to increase fees during the three year period that the policy is in force, such increase (or increases) will be limited to a maximum total increase of 20% of the amounts payable when the policy was approved, as set out above. Any new directors will be paid at the rates set out above (subject to any increase that may have been introduced in line with this policy).
	Under the terms of the directors' appointment letters, there is no notice period and no provision for compensation upon early termination of appointment.
Benefits	None
Pension arrangements	None
Bonus arrangements	None

DATES OF DIRECTORS' APPOINTMENT LETTERS

Name	Date of appointment
Julian Cazalet	18 January 2008
Tom Black	1 May 2013
Karl Sternberg	21 April 2015
James Will	21 April 2015

3 ANNUAL DIRECTORS' REMUNERATION REPORT FOR THE YEAR ENDING 31 DECEMBER 2017 (AUDITED)

The directors who served in the year received the following emoluments in the form of fees and received no other benefits.

	Fees 2017 £	Fees 2016 £
Directors who served during the year:
Julian Cazalet	32,250	31,500
Tom Black	21,500	21,000
Douglas McDougall (retired 19 April 2016)	–	6,900
Karl Sternberg	21,500	21,000
James Will	24,000	22,397
	99,250	102,797

DIRECTORS' INTERESTS (AUDITED)

Directors' shareholdings (beneficial unless stated) at the year-end (and unchanged at the date of this report) were as follows:

Interests as at 31 December	2017	2016
Julian Cazalet*	150,000	150,000
Tom Black	6,900	6,900
Karl Sternberg	3,578	3,578
James Will	6,000	6,000

* 50,000 held non-beneficially

COMPANY PERFORMANCE

The graph below compares the total return (assuming all dividends are reinvested) to ordinary shareholders compared to the total shareholder return on a notional investment made up of shares in the component parts of the MSCI World Index (in sterling terms). This index was chosen for comparison purposes as it is the most widely used global equity index.

HERALD'S SHARE PRICE AND MSCI WORLD INDEX (IN STERLING TERMS)* (FIGURES HAVE BEEN REBASED TO 100 AT 31 DECEMBER 2008)

750 50 150 250 350 450 550 650 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Share Price* MSCI World Index (in sterling terms)

Source: Thomson Reuters

* Total return (assuming all dividends are reinvested).

DIRECTORS' REMUNERATION REPORT CONTINUED

3 ANNUAL DIRECTORS' REMUNERATION REPORT FOR THE YEAR ENDING 31 DECEMBER 2017 (AUDITED) CONTINUED

RELATIVE SPEND ON FEES

The following table shows the total amount spent on payments to directors with a comparator to last year, along with total distributions to shareholders by way of dividend or (where applicable) share buy-back or other distributions.

	2017 £'000	2016 £'000
Total spend – directors' fees	99	103
Total distributed to shareholders – dividends	–	–
– share buybacks	27,581	23,531

VOTING ON REMUNERATION MATTERS AT THE 2017 AGM AND IN RESPECT OF REMUNERATION POLICY

At the AGM on 18 April 2017 the resolution to receive and approve the directors' remuneration report for the year ended 31 December 2016 received the following votes: for – 99.88%; against – 0.12%. Votes withheld were 0.03% of the total votes cast.

The resolution to approve the remuneration policy received the following votes: for – 99.88%; against – 0.12%; votes withheld – 0.03% of the total votes cast.

MISCELLANEOUS DISCLOSURES

The board took no external advice on remuneration matters during the year. No payments were made to former directors during the year, or to any director for loss of office.

The directors' annual remuneration report set out at section 3 above was approved by the board of directors on 20 February 2018 and signed on its behalf by

Julian Cazalet Chairman

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare the financial statements in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland". Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the directors are required to:

• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis, unless it is inappropriate to assume that the Company will continue in business.

The directors are responsible for the keeping of adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the directors' remuneration report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors have delegated responsibility to the manager for the maintenance and integrity of the Company's page of the manager's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The work carried out by the auditor does not involve any consideration of these matters and, accordingly, the auditor accepts no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

Each of the directors, whose names and functions are listed on page 33 confirm that, to the best of their knowledge:

• the financial statements, which have been prepared in accordance with applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice), give a true and fair view of the assets, liabilities, financial position and profit of the Company; and
• the strategic report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces and the directors' report contains those matters required to be disclosed by applicable law.

By order of the board

Julian Cazalet 20 February 2018

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF HERALD INVESTMENT TRUST PLC

OPINION

We have audited the financial statements of Herald Investment Trust PLC ("the Company") for the year ended 31 December 2017 which comprise the Income Statement, the Balance Sheet, the Statement of Changes in Equity, the Cash Flow Statement and the related notes 1 to 21, including a summary of significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and United Kingdom Accounting Standards including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland" (United Kingdom Generally Accepted Accounting Practice).

In our opinion, the financial statements:

• give a true and fair view of the Company's affairs as at 31 December 2017 and of its profit for the year then ended;
• have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
• have been prepared in accordance with the requirements of the Companies Act 2006.

BASIS FOR OPINION

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the financial statements section of our report below. We are independent of the company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the FRC's Ethical Standard as applied to public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

USE OF OUR REPORT

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

CONCLUSIONS RELATING TO PRINCIPAL RISKS, GOING CONCERN AND VIABILITY STATEMENT

We have nothing to report in respect of the following information in the annual report, in relation to which the ISAs(UK) require us to report to you whether we have anything material to add or draw attention to:

• the disclosures in the annual report set out on page 31 that describe the principal risks and explain how they are being managed or mitigated;
• the directors' confirmation set out on page 31 in the annual report that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity;
• the directors' statement set out on page 38 in the annual report about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity's ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements;
• whether the directors' statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or
• the directors' explanation set out on page 31 in the annual report as to how they have assessed the prospects of the entity, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

OVERVIEW OF OUR AUDIT APPROACH

Key audit matters	— Incorrect recognition of investment income.
	— Incorrect valuation of the quoted and unquoted investment portfolio, including incorrect application of exchange rate movements.
Materiality	— Overall materiality of £9.7m which represents 1% of net assets.

KEY AUDIT MATTERS

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.

Incorrect recognition of investment income, £10.8m (2016: £9.5m).

As described in Accounting policies (page 54); and Note 2 (page 55) to the financial statements. The Company has reported investment income of £10.8m (2016: £9.5m). Special dividend income for the year amounted to £358k, of which £267k was treated as income and £91k was treated as capital.

Special dividends by their nature require the exercise of judgment as to whether the income receivable should be classified as 'revenue' or 'capital' for Section 1158 of the Corporation Tax Act, 2010 purposes. For special dividends the Company determines whether amounts should be credited to the revenue or capital columns of the Income Statement based on the underlying substance of the transaction.

We focus on the recognition of revenue and its presentation in the financial statements as it is a key area for shareholders. There is a risk that an incorrect classification of revenue in the Income Statement could potentially result in the mis-representation of financial information to shareholders and put the Company's investment trust status at risk.

Specifically in relation to our procedures on management override, we consider the risk that inappropriate journal entries are applied to the income account resulting in a manipulation of the Company's revenue to support performance targets.

Incorrect valuation of the quoted and unquoted investment portfolio, including incorrect application of exchange rate movements.

As described in Accounting policies (page 54); and Note 9 (page 57-58) to the financial statements.

Investments held at the year-end were valued at £926m (2016: £713m). Quoted investments held at the year-end were £912.6m (2016: £701.2m).

Unquoted investments held at the year-end were £12.9m (comprising 1.6% of the total investment portfolio) (2016: £11.7m comprising 1.6% of the total investment portfolio).

The valuation of the assets held in the investment portfolio is the key driver of the Company's net asset value and investment return. Incorrect asset pricing or a failure to maintain proper legal title of assets by the Company could have a significant impact on portfolio valuation and, therefore, the return generated for shareholders.

Risk Our response to the risk

We performed the following procedures:

• We obtained an understanding of The Bank of New York Mellon International Limited ("the Administrator") and Herald Investment Management Limited's ("the Manager") processes and controls for the recognition of investment income by performing walkthrough procedures, reviewing the Administrator's and Manager's internal control reports and discussing with the Manager the governance structure and protocols for oversight of investment income recognition.
• For a sample of dividend receipts representing key items, we agreed dividends received from the income report to an independent pricing source for occurrence and measurement. We also agreed this sample to the bank statement to test the receipt of the income.
• We agreed all accrued dividends at the period end to the Custodian and Depositary statements, an independent pricing source, and post year-end broker statements.
• For all special dividends received during the year, we reviewed their recognition basis to ensure they were appropriately allocated between revenue and capital within the Income Statement.
• We corroborated the appropriateness of journal entry adjustments made in relation to investment income in the preparation of the financial statements with source documentation.

We performed the following procedures:

• We obtained an understanding of the Manager's and the Administrator's systems and controls in relation to quoted investments by performing a walkthrough, reviewing the Administrator's and Manager's internal control reports and discussing with the Manager the governance structure and protocols for oversight of the valuation for quoted investments.
• We agreed the existence for 100% of the quoted and unquoted investment portfolio to third-party confirmations.
• We reviewed the year end reconciliation of the Company's records to those of the Custodian and Depositary and confirmed all reconciling items were appropriate.

For quoted investments:

• We compared the prices of 100% of the quoted investment portfolio to an independent pricing source.
• We recalculated the value of quoted investments in foreign currencies to verify the accuracy of the corresponding sterling balances based upon exchange rates from an external source.

For unquoted investments:

— For a sample of unquoted investments representing 80% of their balance, we reviewed management's methodology for determining the fair value of the investments, agreed the inputs into the valuation models to third party sources and re-performed calculations in order to confirm their arithmetical accuracy.

Key observations communicated to the Audit Committee

The results of our procedures to test investment income identified no issues with the occurrence, measurement or completeness of investment income.

We concurred with the accounting treatment adopted for material special dividends.

Based on the work performed, we had no further observations to communicate.

The results of our procedures on existence of investments identified no material errors in the reconciliation.

The results of our procedures on the valuation of the total investment portfolio identified no material error.

Based on the work performed, we have no further observations to communicate.

INDEPENDENT AUDITOR'S REPORT CONTINUED TO THE MEMBERS OF HERALD INVESTMENT TRUST PLC

AN OVERVIEW OF THE SCOPE OF OUR AUDIT TAILORING THE SCOPE

Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for the company. This enables us to form an opinion on the financial statements. We take into account size, risk profile, the organisation of the company and effectiveness of controls, including controls and changes in the business environment when assessing the level of work to be performed. All audit work was performed directly by the audit engagement team.

OUR APPLICATION OF MATERIALITY

We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit and in forming our audit opinion.

Materiality

The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our audit procedures.

We determined materiality for the company to be £9.7m (2016: £7.9m), which is 1% (2016: 1%) of shareholders' funds. We have derived our materiality calculation based on a proportion of shareholders' funds as it is the most important financial metric on which shareholders judge the performance of the Company.

During the course of our audit, we reassessed initial materiality and made no changes to the basis of calculation from our original assessment at the planning stage.

Performance materiality

The application of materiality at the individual account or balance level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.

On the basis of our risk assessments, together with our assessment of the company's overall control environment, our judgement was that performance materiality was 75% (2016: 75%) of our planning materiality, namely £7.2m (2016: £5.9m). We have set performance materiality at this percentage due to our past experience of the audit that indicates a lower risk of misstatements, both corrected and uncorrected.

Given the importance of the distinction between revenue and capital for the Company we have also applied a separate testing threshold of £37k (2016: £34k) for the revenue column of the Income Statement, being 5% of the revenue profit before taxation.

Reporting threshold

An amount below which identified misstatements are considered as being clearly trivial.

We agreed with the Audit Committee that we would report to them all uncorrected audit differences in excess of £483k (2016: £395k), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds.

We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other relevant qualitative considerations in forming our opinion.

OTHER INFORMATION

The other information comprises the information included in the Annual Report set out on pages 1 to 43, other than the financial statements and our auditor's report thereon. The directors are responsible for the other information.

Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this report, we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to report that fact.

We have nothing to report in this regard.

In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the following conditions:

• Fair, balanced and understandable set out on page 37 the statement given by the directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the company's performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
• Audit committee reporting set out on page 37 the section describing the work of the audit committee does not appropriately address matters communicated by us to the audit committee; or
• Directors' statement of compliance with the UK Corporate Governance Code set out on page 36 – the parts of the directors' statement required under the Listing Rules relating to the company's compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.

OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006

In our opinion the part of the directors' remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.

In our opinion, based on the work undertaken in the course of the audit:

• the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
• the strategic report and directors' reports have been prepared in accordance with applicable legal requirements.

In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or directors' report.

We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:

• adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or
• the financial statements and the part of the Directors' Remuneration Report to be audited are not in agreement with the accounting records and returns; or
• certain disclosures of directors' remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.

RESPONSIBILITIES OF DIRECTORS

As explained more fully in the statement of directors' responsibilities set out on page 43, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.

AUDITOR'S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

EXPLANATION AS TO WHAT EXTENT THE AUDIT WAS CONSIDERED CAPABLE OF DETECTING IRREGULARITIES, INCLUDING FRAUD

The objectives of our audit, in respect to fraud, are: to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management.

Our approach was as follows:

• We obtained an understanding of the legal and regulatory frameworks that are applicable to the Company and determined that the most significant are the Companies Act 2006, the Listing Rules, the Disclosure and Transparency Rules, the UK Corporate Governance Code 2016 and section 1158 of the Corporation Tax Act 2010.
• We understood how Herald Investment Trust PLC is complying with those frameworks through discussions with the Audit Committee and company secretary, and review of the Company's documented policies and procedures.
• Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations. Our procedures involved review of the reporting to the Directors with respect to the application of the documented policies and procedures and review of the financial statements to ensure compliance with the reporting requirements of the Company.
• We have reviewed that the Company's control environment is adequate for the size and operating model of such a listed investment company.
• We assessed the susceptibility of the financial statements to material misstatement, including how fraud might occur by considering the key risks impacting the financial statements. We identified a fraud risk with respect to management override in relation to inappropriate revenue journals. We noted no issues in agreeing a sample of revenue journal entries back to the audited income report or through to the corresponding announcements prepared by the Company.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at https://www.frc.org. uk/auditorsresponsibilities. This description forms part of our auditor's report.

OTHER MATTERS WE ARE REQUIRED TO ADDRESS

— We were appointed by the company on 16 June 1994 to audit the financial statements for the year ending 31 December 1994 and subsequent financial periods.

The period of total uninterrupted engagement including previous renewals and reappointments is 24 years, covering the years ending 31 December 1994 to 31 December 2017.

• The non-audit services prohibited by the FRC's Ethical Standard were not provided to the company and we remain independent of the company in conducting the audit.
• The audit opinion is consistent with the additional report to the audit committee.

Ashley Coups (Senior statutory auditor) for and on behalf of Ernst & Young LLP Statutory Auditor London

20 February 2018

Notes:

• 1. The maintenance and integrity of the Herald Investment Trust PLC web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the web site.
• 1. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Annual report & financial statements 2017

Annual report & financial statements 2017

Financial Statements

• Income Statement
• 51 Balance Sheet
• Statement of Changes in Equity
• Cash Flow Statement
• Notes to the Financial Statements
• Notice of Annual General Meeting
• Further Shareholder Information

INCOME STATEMENT

For the year ended 31 December

	Notes	2017 Revenue £'000	2017 Capital £'000	2017 Total £'000	2016 Revenue £'000	2016 Capital £'000	2016 Total £'000
Gains on investments	9	–	205,508	205,508	–	134,969	134,969
Currency (losses)/gains		–	(3,172)	(3,172)	–	7,951	7,951
Gains on derivative instruments	12	–	–	–	–	464	464
Income	2	10,799	–	10,799	9,541	–	9,541
Investment management fee	3	(8,962)	–	(8,962)	(7,133)	–	(7,133)
Other administrative expenses	4	(578)	(5)	(583)	(545)	(6)	(551)
Profit before finance costs and taxation		1,259	202,331	203,590	1,863	143,378	145,241
Finance costs of borrowings	5	(514)	–	(514)	(1,187)	–	(1,187)
Profit before taxation		745	202,331	203,076	676	143,378	144,054
Tax	6	(259)	–	(259)	(246)	–	(246)
Profit after taxation		486	202,331	202,817	430	143,378	143,808
Profit per ordinary share (basic and diluted)	8	0.68p	283.44p	284.12p	0.58p	191.75p	192.33p

There is no final dividend proposed (2016 – nil). More information on dividend distributions can be found in note 7 on page 57.

The total column of this statement is the profit and loss account of the Company, prepared in accordance with UK Accounting Standards.

The profit after taxation is the total comprehensive income and therefore no additional statement of comprehensive income is presented. The supplementary revenue and capital columns are presented for information purposes in accordance with the Statement of Recommended Practice issued by the Association of Investment Companies. All items in the above statement derive from continuing operations of the Company. No operations were acquired or discontinued in the year.

BALANCE SHEET

At 31 December

	Notes	2017 £'000	2017 £'000	2016 £'000	2016 £'000
Fixed assets
Investments held at fair value through profit or loss	9		925,541		712,969
Current assets
Cash and cash equivalents		41,870		82,448
Other receivables	10	1,682		23,529
		43,552		105,977
Current liabilities
Other payables	11	(2,443)		(27,532)
		(2,443)		(27,532)
Net current assets			41,109		78,445
TOTAL NET ASSETS			966,650		791,414
Capital and reserves
Called up share capital	13		17,577		18,266
Share premium	14		73,738		73,738
Capital redemption reserve	14		4,375		3,686
Capital reserve	14		869,799		695,049
Revenue reserve	14		1,161		675
SHAREHOLDERS' FUNDS			966,650		791,414
NET ASSET VALUE PER ORDINARY SHARE (including current year revenue)	15		1,374.88p		1,083.21p
NET ASSET VALUE PER ORDINARY SHARE (excluding current year revenue)			1,374.20p		1,082.63p

The financial statements of Herald Investment Trust plc (company registration number 02879728) were approved by the board of directors and authorised for issue on 20 February 2018 and signed on its behalf by

Julian Cazalet Chairman

STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2017

	Notes	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 January 2017		18,266	73,738	3,686	695,049	675	791,414
Profit after taxation		–	–	–	202,331	486	202,817
Shares purchased for cancellation	13	(689)	–	689	(27,581)	–	(27,581)
Shareholders' funds at 31 December 2017		17,577	73,738	4,375	869,799	1,161	966,650

For the year ended 31 December 2016

	Notes	Called up share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 January 2016		19,028	73,738	2,924	575,202	245	671,137
Profit after taxation		–	–	–	143,378	430	143,808
Shares purchased for cancellation	13	(762)	–	762	(23,531)	–	(23,531)
Shareholders' funds at 31 December 2016		18,266	73,738	3,686	695,049	675	791,414

CASH FLOW STATEMENT

For the year ended 31 December

	Notes	2017 £'000	2017 £'000	2016 £'000	2016 £'000
Profit before finance costs and taxation		203,590		145,241
Adjustments for gains on investments		(205,508)		(134,969)
Realised gains on interest rate swap		–		(464)
Decrease in accrued income		8		242
Purchase of investments		(156,421)		(66,449)
Sale of investments		171,125		107,087
Increase in other receivables		(38)		(39)
Increase in other payables		119		120
Amortisation of fixed income book cost		(22)		1
Effect of foreign exchange rate changes		3,172		(7,951)
Overseas tax suffered		(259)		(246)
Net cash inflow from operating activities			15,766		42,573
Finance activities
Loan repayment	11	(25,000)		–
Interest paid on loan and derivatives		(582)		(1,394)
Swap repayment	12	–		(12,538)
Shares repurchased	13	(27,590)		(23,504)
Net cash outflow from financing activities			(53,172)		(37,436)
(Decrease)/increase in cash and cash equivalents			(37,406)		5,137
Cash and cash equivalents at the start of the year			82,448		69,360
Effect of foreign exchange rate changes			(3,172)		7,951
Cash and cash equivalents at the end of the year			41,870		82,448
Comprised of:
Cash and cash equivalents			41,870		82,448

Cash flow from operating activities includes interest received of £518,000 (2016 – £140,000) and dividends received of £9,674,000 (2016 – £9,360,000).

NOTES TO THE FINANCIAL STATEMENTS

1. ACCOUNTING POLICIES

The financial statements for the year to 31 December 2017 have been prepared on the basis of the accounting policies set out below. The Company has applied 'FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland' (FRS102), which forms part of Generally Accepted Accounting Practice ('UK GAAP') issued by the Financial Reporting Council.

(A) ACCOUNTING CONVENTION

The financial statements are prepared on the assumption that approval as an investment trust will be retained.

The financial statements are presented in sterling, which is the Company's functional and presentational currency and the currency in which the Company's share capital and expenses, as well the majority of its assets and liabilities, are denominated.

The financial statements have been prepared in accordance with The Companies Act 2006, FRS102 and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued by the Association of Investment Companies (AIC) in November 2014 as amended in January 2017.

In order to better reflect the activities of the Company and in accordance with guidance issued by the AIC, supplementary information which analyses the profit and loss account between items of a revenue and capital nature has been presented in the income statement.

(B) FINANCIAL INSTRUMENTS

The Company recognises financial assets and financial liabilities when the Company becomes a party to the contractual provisions of the instrument. The Company will offset financial assets and financial liabilities if the Company has a legally enforceable right to set off the recognised amounts and interests and intends to settle on a net basis.

(C) INVESTMENTS

Purchases and sales of investments are accounted for on a trade date basis.

All investments are at fair value through profit or loss upon initial recognition and are measured at subsequent reporting dates at fair value. The fair value of listed security investments is bid value. Investments on the Alternative Investment Market are included at their bid value. The fair value of unlisted investments uses valuation techniques determined by the directors on the basis of latest information in line with the relevant principles of the International Private Equity and Venture Capital Valuation Guidelines.

Gains and losses arising from changes in the unrealised fair value and on the sale of investments are taken to capital reserve through the income statement.

(D) CASH AND CASH EQUIVALENTS

Cash and cash equivalents may comprise cash as well as cash equivalents (including short term deposits and money market funds which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value). Investments are regarded as cash equivalents if they meet all of the following criteria: highly liquid investments held in the Company's base currency that are readily convertible to a known amount of cash, are subject to an insignificant risk of change in value and provide a return no greater than the rate of a three-month high quality government bond.

(E) INCOME

Dividend income is accounted for when the entitlement to the income is established (normally on the ex-dividend date). Franked income is stated net of tax credits. Unfranked investment income includes the taxes deducted at source. Interest from fixed interest securities is recognised on an effective yield basis. Underwriting commission and interest receivable on deposits are recognised on an accruals basis. Foreign dividends that suffer withholding tax at source are shown gross, with the corresponding tax charge in the income statement.

(F) EXPENSES

All expenses are accounted for on an accruals basis and are charged through the revenue column of the income statement except where they relate directly to the acquisition or disposal of an investment (transaction costs) and are taken to the income statement as a capital item.

(G) FINANCE COSTS

Finance costs are accounted for on an effective interest basis and are charged through the revenue column of the income statement.

(H) DERIVATIVES

Until 29 July 2016, the Company used interest rate swaps to hedge the cash flow risk arising from interest rate fluctuations. The swap was marked to fair value. The fair value was estimated based on the swap provider's valuation and was compared to an external model and external prices. Gains or losses arising on the fair value of the interest rate swap during the year were taken to the income statement as a capital item.

In accordance with FRS102 section 12: 'Financial Instruments: Measurement', derivative instruments are valued at fair value and are included in current assets or current liabilities in the balance sheet.

Annual report & financial statements 2017

(I) DEFERRED TAXATION

Deferred taxation is provided on all timing differences which have originated but not reversed at the balance sheet date, calculated on an undiscounted basis, and based on enacted tax rates relevant to the benefit or liability. Deferred tax assets are recognised only to the extent that it is more likely than not that there will be taxable profits from which underlying timing differences can be deducted.

(J) FOREIGN CURRENCY

Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Assets and liabilities denominated in foreign currencies are translated at the rate of exchange ruling at the balance sheet date. Exchange differences of a revenue or capital nature are taken to the revenue or capital reserves respectively through the income statement.

(K) USE OF ESTIMATES

The preparation of financial statements requires the Company to make judgements, estimates and assumptions that affect amounts reported for assets and liabilities as at the balance sheet date and the amounts reported for revenues and expenses during the year. However, the nature of estimation means that the actual outcomes could differ from those estimates, possibly significantly. The judgements relate to the investments where there is no appropriate market price i.e. the unquoted investments and (before it was closed off on 29 July 2016) the interest rate swap.

(L) SINGLE SEGMENT REPORTING

The Company has only one material segment, being that of an investment trust company investing primarily in listed companies throughout the world.

2. INCOME	2017 £'000	2016 £'000
Income from investments
UK dividends from listed investments	2,893	2,856
UK dividends from unlisted investments (inc AIM)	3,657	3,087
Income from unlisted (inc AIM) UK convertible bonds	262	309
Overseas dividend from UK listed companies	1,080	1,049
Overseas dividend income	2,358	2,163
Overseas interest	178	51
	10,428	9,515
Other income
Other income	272	–
Deposit interest	99	1
Underwriting commission	–	25
	371	26
Total income	10,799	9,541
Total income comprises:
Dividends from equity securities at fair value through profit and loss	9,988	9,155
Interest from financial assets designated at fair value through profit and loss	440	360
Other income	371	26
	10,799	9,541
3. INVESTMENT MANAGEMENT FEE	2017 £'000	2016 £'000
Investment management fee	8,962	7,133

Herald Investment Management Limited is appointed investment manager under a management agreement which is terminable on twelve months' notice. Their fee is calculated on a monthly rate of 0.08333% of the Company's net asset value (excluding current year net income) based on middle market prices. The management fee is levied on all assets except the holding in Herald Ventures II Limited Partnership (for that period when it charged fees) managed by Herald Investment Management Limited.

NOTES TO THE FINANCIAL STATEMENTS CONTINUED

4. OTHER ADMINISTRATIVE EXPENSES	2017 £'000	2016 £'000
Custodian's fees	64	74
Registrars' fees	41	35
Directors' fees	99	103
Auditor's fees – statutory audit	24	24
Depositary's fees	159	129
Miscellaneous expenses	191	180
	578	545

Bank loan* 514	567
Interest on swap** –	620
514	1,187

* The bank loan of £25 million was repaid on 29 December 2017.

** The interest rate swap was closed on 29 July 2016.

6. TAXATION	2017 £'000	2016 £'000
Analysis of charge in year
Overseas taxation	259	246
Factors affecting tax charge for year
The tax charge for the year is lower than the standard rate of corporation tax in the UK of 19.25% (2016 – 20.00%). The differences are explained below:
Profit before taxation	203,076	144,054
Profit multiplied by the standard rate of corporation tax in the UK of 19.25% (2016 – 20.00%)	39,092	28,811
Effects of:
Capital gains not taxable	(39,560)	(27,087)
UK dividends not subject to UK tax	(1,261)	(1,233)
Overseas dividends not subject to UK tax	(662)	(598)
Capital gains/(losses) on foreign exchange movements not subject to tax	611	(1,590)
Disallowable expenses	1	2
Overseas withholding tax	259	246
Movement in excess management expenses	1,779	1,695
Total tax charge for the year	259	246

As an investment trust, the Company's capital gains are not taxable.

There is no UK corporation tax charge at 31 December 2017 or 31 December 2016 as the Company has unrelieved management expenses which are available to be carried forward. The tax charge for 31 December 2017 and 2016 comprises overseas withholding taxes written off.

At 31 December 2017, the Company had a potential deferred tax asset of £14,370,000 (2016 – £12,798,000) on taxable losses of £85 million (2016 – £75 million) which are available to be carried forward and offset against future taxable profits. A deferred tax asset has not been provided on these losses as it is considered unlikely that the Company will make taxable revenue profits in the future and it is not liable to tax on its capital gains. The potential deferred tax asset has been calculated using a corporation tax rate of 17% (2016 – 17%).

7. DIVIDENDS ON ORDINARY SHARES	2017	2016	2017 £'000	2016 £'000
Amounts recognised as distributions in the period:
Previous year's final	nil	nil	nil	nil

Set out below are the total dividends payable in respect of the financial year, which is the basis on which the requirements of Section 1158 of the Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year ended 31 December 2017 is £486,000 (2016 – £430,000).

			2017	2016	2017 £'000	2016 £'000
Amounts paid and proposed in respect of the period:
Proposed final dividend per ordinary share			nil	nil	nil	nil
8. NET RETURN PER ORDINARY SHARE	2017 Revenue	2017 Capital	2017 Total	2016 Revenue	2016 Capital	2016 Total
	0.68p	283.44p	284.12p	0.58p	191.75p	192.33p

Revenue return per ordinary share is based on the net profit after taxation of £486,000 (2016 – profit of £430,000) and on 71,385,469 ordinary shares (2016 – 74,774,437) being the weighted average number of ordinary shares in issue during the year.

Capital return per ordinary share is based on the net capital profit for the financial year of £202,331,000 (2016 – net capital profit of £143,378,000) and on 71,385,469 ordinary shares (2016 – 74,774,437) being the weighted average number of ordinary shares in issue during the year.

There are no dilutive or potentially dilutive shares in issue.

9. FIXED ASSET INVESTMENTS	2017 £'000	2016 £'000
Financial assets at fair value through profit or loss on initial recognition
Listed UK – equity investments – London Stock Exchange	147,622	145,319
– AIM	422,131	297,463
Listed overseas – equity investments	313,464	250,416
Government debt securities	29,445	8,041
Unquoted*	12,879	11,730
Total investments in financial assets at fair value through profit or loss	925,541	712,969

* The unquoted balance comprises BE Heard Group at £160,000, Business Control Solutions at £943,000, Celoxica at £218,000, Constellation Healthcare Technology at £233,000, EU Supply at £250,000, Freshwater UK at £137,000, Fusionex International at £1,320,000, Herald Venture II at £1,245,000, HIML at £3,482,000, Intechnology at £257,000, Intercede at £375,000, Zinc Media at £2,639,000 and Zoo Digital at £1,620,000.

NOTES TO THE FINANCIAL STATEMENTS CONTINUED

9. FIXED ASSET INVESTMENTS CONTINUED

	Listed in UK	Listed overseas	AIM	Unquoted*	2017 Total	2016 Total
	£'000	£'000	£'000	£'000	£'000	£'000
Cost of investments at 1 January	77,941	151,219	203,230	18,422	450,812	463,039
Investment holding gains/(losses) 1 January	67,378	107,238	94,233	(6,692)	262,157	179,112
Fair value of investments at 1 January	145,319	258,457	297,463	11,730	712,969	642,151
Movements in the year:
Purchases at cost	9,145	87,406	58,316	1,423	156,290	65,257
Sales – proceeds	(28,288)	(60,073)	(59,516)	(998)	(148,875)	(129,122)
– gains/(losses) on investments	10,341	20,394	31,404	(329)	61,810	51,924
Amortisation of fixed income book cost	–	22	–	–	22	1
Transferred from listed overseas to AIM	–	(70)	70	–	–	–
Transferred from listed to AIM	(4,327)	–	4,327	–	–	–
Transferred from AIM to unquoted	–	–	(2,901)	2,901	–	–
Transferred from unquoted to AIM	–	–	2,440	(2,440)	–	–
Return of capital/capital special dividends	–	(44)	–	(329)	(373)	(287)
Changes in investment holding gains/(losses)	15,432	36,817	90,528	921	143,698	83,045
Fair value of investments at 31 December	147,622	342,909	422,131	12,879	925,541	712,969
Cost of investments at 31 December	64,812	198,854	237,370	18,650	519,686	450,812
Investment holding gains/(losses) 31 December	82,810	144,055	184,761	(5,771)	405,855	262,157
Fair value of investments at 31 December	147,622	342,909	422,131	12,879	925,541	712,969
					2017 £'000	2016 £'000
Gains on investments
Realised gains on sales					61,810	51,924
Changes in investment holding gains/(losses)					143,698	83,045
					205,508	134,969

The investments in the equity and fixed interest stocks of unlisted companies that the Company holds are not traded and as such the prices are more uncertain than those of more widely traded securities. The fair value of unlisted investments uses valuation techniques determined by the directors on the basis of latest information in line with the relevant principles of the International Private Equity and Venture Capital Valuation Guidelines as described in note 1(c). The fair value of unlisted investments at 31 December 2017 was £12,879,000 (31 December 2016 – £11,730,000).

At 31 December 2017 the Company was the beneficial owner of 15.4% (2016 – 15.4%) of the ordinary share capital of HIML Holdings Limited, which is incorporated in the United Kingdom and is the parent company of the Company's manager.

	2017 £'000	2016 £'000
Transaction costs
Commission costs:
Purchases	339	170
Sales	453	402
Total commission costs	792	572
Custody transaction costs	5	6
Other transaction costs	66	65
	863	643

10. OTHER RECEIVABLES ²⁰¹⁷

	£'000	£'000
Due within one year:
Income accrued and prepayments	1,071	1,079
Sales for subsequent settlement	444	22,321
Taxation recoverable	167	129
	1,682	23,529

The carrying amount of other receivables is a reasonable approximation of fair value.

11. OTHER PAYABLES	2017 £'000	2016 £'000
Amounts falling due within one year:
Purchases for subsequent settlement	1,477	1,608
Bank loan	–	25,000
Other payables	966	924
	2,443	27,532

Included in other payables is £812,000 (2016 – £663,000) in respect of the investment management fee.

The Company has a £25 million multi-currency revolving credit facility maturing 31 December 2019. The Company's £25 million sterling loan facility was repaid in full on 29 December 2017.

At 31 December 2017, there were no outstanding drawings on the multi-currency loan of £25 million (2016 – multi-currency loan: £nil; sterling loan: £25 million).

The main covenants relating to the loan are:

Total borrowings shall not exceed 25% of the Company's Total Qualifying Assets adjusted by deducting:

(i) the amount by which the market value of any single investment of the Borrower exceeds 5% of Total Qualifying Assets;

(ii) the amount by which the aggregated value of the ten largest Qualifying Assets exceeds 35% of Total Qualifying Assets; and

(iii)the amount by which the aggregated value of AIM Assets exceeds 45% of Total Qualifying Assets.

All covenants have been complied with during the year (2016 – same).

12. DERIVATIVE FINANCIAL INSTRUMENTS

At 31 December 2017, the Company held no open positions in derivative financial instruments (2016 - nil).

13. CALLED UP SHARE CAPITAL	2017 Number	2017 £'000	2016 Number	2016 £'000
Allotted, called up and fully paid:
Ordinary shares of 25p:	70,307,785	17,577	73,061,801	18,266

At the annual general meeting in April 2017, shareholders granted the Company authority to purchase shares in the market up to 10,770,597 ordinary shares (equivalent to 14.99% of its issued share capital at that date). During the year to 31 December 2017, a total of 2,754,016 (2016 – 3,049,745) ordinary shares with a nominal value of £688,504 (2016 – £762,436) were bought back and cancelled at a total cost of £27,580,701 (2016 – £23,530,902). At 31 December 2017 the Company had authority to buy back a further 8,016,581 ordinary shares. Under the provisions of the Company's articles share buy-backs are funded from the capital reserve.

2016

NOTES TO THE FINANCIAL STATEMENTS CONTINUED

14. CAPITAL AND RESERVES

	Share premium £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue Reserve £'000
At 1 January 2017	73,738	3,686	695,049	675
Shares purchased for cancellation	–	689	(27,581)	–
Gains on sales	–	–	61,810	–
Changes in investment holding gains	–	–	143,698	–
Other exchange differences	–	–	(3,172)	–
Custody transaction costs	–	–	(5)	–
Profit after taxation	–	–	–	486
Balance at 31 December 2017	73,738	4,375	869,799	1,161

The capital reserve includes investment holding gains of £405,855,000 (2016 – gain of £262,157,000) as disclosed in note 9.

The revenue reserve represents the only reserve from which dividends can be funded.

15. NET ASSET VALUE PER ORDINARY SHARE

The net asset value per ordinary share and the net assets attributable to the ordinary shareholders at the year end calculated in accordance with the articles of association were as follows:

	2017	2016	2017 £'000	2016 £'000
Ordinary shares	1,374.88p	1,083.21p	966,650	791,414

Net asset value per ordinary share is based on net assets as shown above and on 70,307,785 (2016 – 73,061,801) ordinary shares, being the number of ordinary shares in issue at each balance sheet date.

16. CONTINGENT LIABILITIES, GUARANTEES AND FINANCIAL COMMITMENTS

There were no contingent liabilities, guarantees or financial commitments at 31 December 2017.

17. CAPITAL MANAGEMENT

The Company does not have any externally imposed capital requirements. The capital of the Company is the ordinary share capital and reserves as detailed in notes 13 and 14. It is managed in accordance with its investment policy in pursuit of its investment objective, both of which are detailed on page 2, and shares may be repurchased as explained on page 36.

18. FINANCIAL INSTRUMENTS

In accordance with the corporate objective of maximising capital appreciation the Company invests in securities on a worldwide basis. The Company makes use of gearing to achieve improved performance in rising markets. The Company's other financial instruments consist of cash, short term debtors and creditors.

The main risks arising from the Company's financial instruments are:

A. MARKET RISK

• (i) Other price risk, being the risk that the value of investment holdings will fluctuate as a result of changes in market prices caused by factors other than interest rate or currency rate movement;
• (ii) Interest rate risk, being the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates; and
• (iii)Foreign currency risk, being the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

B. CREDIT RISK

Being the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

The Company is exposed to counterparty credit risk from the parties with which it trades and will bear the risk of settlement default. Counterparty credit risk to the Company arises from transactions to purchase or sell investments held within the portfolio.

There were no past due nor impaired assets as of 31 December 2017 (31 December 2016 – nil).

The counterparties engaged with the Company are well recognised and regulated entities.

C. LIQUIDITY RISK

Being the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.

These risks and the policies for managing them have been applied throughout the year and are summarised below. Further detail is contained in the strategic report on page 31.

A. MARKET RISK

(i) Other Price Risk

The Company's investment portfolio is exposed to market price fluctuations which are monitored by the manager in pursuance of the corporate objective. Listed securities held by the Company are valued at bid prices, whereas material unlisted investments are valued using valuation techniques selected by the directors on the basis of the latest information in line with the relevant principles of the International Private Equity and Venture Capital Valuation Guidelines (Accounting Policy 1(c)). These valuations also represent the fair value of the investments, see note 9 on pages 57 and 58.

A full list of the Company's investments is given on pages 20 to 25. In addition, a geographical analysis of the portfolio, an analysis of the investment portfolio by broad industrial or commercial sector and a review of the 20 largest equity investments by their aggregate market value, are shown on pages 7 and 15 to 19.

Other Price Risk Sensitivity

16.7% of the Company's equity investments at 31 December 2017 (2016 – 20.6%) were listed on the main list of the London Stock Exchange and a further 47.8% (2016 – 42.2%) on AIM. The NASDAQ Stock Exchange accounts for 20.9% (2016 – 19.3%), New York Stock Exchange for 3.2% (2016 – 5.0%) and other stock exchanges 11.4% (2016 – 12.9%). A 10% increase in equity investment prices at 31 December 2017 would have increased total net assets and profit & loss after taxation by £89,610,000 (2016 – £70,493,000). A decrease of 10% would have the exact opposite effect. The portfolio does not target any exchange as a comparative index, and the performance of the portfolio has a low correlation to generally used indices.

(ii) Interest Rate Risk

The majority of the Company's assets are equity shares and other investments which neither pay interest nor have a maturity date. However, the Company does hold convertible bonds and Government bonds, the interest rate and maturity dates of which are detailed below. Interest is accrued on cash balances at a rate linked to the UK Bank of England base rate.

At 31 December 2017, the Company had an undrawn £25 million multi-currency credit facility (2016 – multi currency loan: £nil; sterling loan: £25 million). The aim of the use of gearing is to enhance long term returns to shareholders by investing borrowed funds in equities and other assets. Gearing is actively managed. How and where borrowings are invested is reviewed by the board in consultation with the manager at every board meeting. In light of the decisions made, appropriate adjustments to the gearing position are then made by the manager.

The interest rate risk profile of the financial assets and financial liabilities at 31 December was:

FINANCIAL ASSETS

	2017 Fair value £'000	2017 Weighted average interest rate/interest rate	2017 Weighted average period until maturity/ maturity date	2016 Fair value £'000	2016 Weighted average interest rate/interest rate	2016 Weighted average period until maturity/ maturity date
Fixed rate:
US bonds	29,445	1.0%	0.8 Years	8,041	2.6%	2.3 Years
UK convertible bonds	3,238	9.8%	3.4 Years	2,782	11.2%	1.6 Years
Cash:
Other overseas currencies	26,363	0.2%		52,675	0.0%
Sterling	15,507	0.0%		29,773	0.3%
	41,870			82,448

The benchmark rate which determines the interest payments received on cash balances is the Bank of England base rate.

NOTES TO THE FINANCIAL STATEMENTS CONTINUED

18. FINANCIAL INSTRUMENTS CONTINUED

FINANCIAL LIABILITIES

	2017 £'000	2017 Net interest rate paid	2017 Loan facility expired	2016 £'000	2016 Net interest rate paid	2016 Loan facility expires
Bank Loan	–	–	–	25,000	1.6%	Dec 2017
Total	–	–	–	25,000	1.6%

At 31 December 2017, the Company had a committed revolving multi currency credit facility of £25 million (2016 – multi-currency £25 million and sterling £25 million), maturing on 31 December 2019 with a cost associated rate of 0.63% (2016 – 0.63%) for unutilised amounts.

The effective fixed rate of interest on the sterling loan for the period 1 January to 29 December 2017 was 1.5% (2016 – 1.5%).

Interest rate risk sensitivity

(a) Cash

An increase of 100 basis points in interest rates as at 31 December 2017 would have a direct effect on net assets. Based on the position at 31 December 2017, over a full year, an increase of 100 basis points would have increased the profit & loss after taxation by £419,000 (2016 – £824,000) and would have increased the net asset value per share by 0.60p (2016 – 1.13p). The calculations are based on the cash balances as at the respective balance sheet dates and are not representative of the year as a whole.

(b) Fixed rate bonds

An increase of 100 basis points in bond yields as at 31 December 2017 would have decreased total net assets and profit & loss after taxation by £294,000 (2016 – £80,000) and would have decreased the net asset value per share by 0.42p (2016 – 0.11p). A decrease in bond yields would have had an equal and opposite effect. The convertible loan stocks having an element of equity are not included in this analysis as given the nature of the businesses and the risk profile of the balance sheets they are considered to have more equity like characteristics.

(c) Bank loans

At 31 December 2017, the Company had no loan drawn down (2016 – an increase of 100 basis points in 3 month LIBOR interest rates as at 31 December 2016 on the interest cost of the bank loans would have decreased total net assets and profit & loss after taxation by £250,000 and would have decreased the net asset value per share by 0.34p. A decrease of 100 basis points in 3 month LIBOR interest rates would have the exact opposite effect).

(iii) Foreign Currency Risk

The Company's reporting currency is sterling, but investments are made in overseas markets as well as the United Kingdom and the asset value can be affected by movements in foreign currency exchange rates.

Furthermore many companies trade internationally both through foreign subsidiaries, and through exports. The greatest foreign currency risk occurs when companies have a divergence in currencies for costs and revenues. A much less risky exposure to currency is straight translation of sales and profits. The list of investments on pages 20 to 25 breaks down the portfolio by geographic listing. However the location of the stock market quote only has a limited correlation to the costs, revenues and even activities of those companies, and so this note should not be regarded as a reliable guide to the sensitivity of the portfolio to currency movements. For example, the holdings in the portfolio that have suffered most from US\$ weakness are UK companies with dollar revenues and sterling costs.

The Company does not hedge the sterling value of investments that are priced in other currencies. Overseas income is subject to currency fluctuations. The Company does not hedge these currency fluctuations because it is impossible to quantify the effect for the reasons stated above. However, from time to time the manager takes a view by holding financial assets or liabilities in overseas currencies.

Exposure to currency risk through asset allocation by currency of listing is indicated below:

AT 31 DECEMBER 2017

				Other receivables
		Cash and		and	Net
	Investments £'000	deposits £'000	Loans £'000	payables £'000	exposure £'000
US dollar	243,248	20,655	–	103	264,006
Norwegian krone	9,264	4,510	–	–	13,774
Korean won	14,505	–	–	110	14,615
Taiwan dollar	17,175	1,143	–	–	18,318
Euro	44,852	52	–	611	45,515
Other overseas currencies	14,098	3	–	15	14,116
Exposure to currency risk on translation of valuations of securities
listed in overseas currencies	343,142	26,363	–	839	370,344
Sterling	582,399	15,507	–	(1,600)	596,306
	925,541	41,870	–	(761)	966,650

AT 31 DECEMBER 2016

	Investments £'000	Cash and deposits £'000	Loans £'000	Other receivables and payables £'000	Net exposure £'000
US dollar	190,106	42,034	–	44	232,184
Norwegian krone	5,692	4,698	–	–	10,390
Korean won	11,669	–	–	119	11,788
Taiwan dollar	11,586	5,920	–	–	17,506
Euro	25,369	21	–	117	25,507
Other overseas currencies	14,035	2	–	13	14,050
Exposure to currency risk on translation of valuations of securities listed in overseas currencies	258,457	52,675	–	293	311,425
Sterling	454,512	29,773	(25,000)	20,704	479,989
	712,969	82,448	(25,000)	20,997	791,414

Foreign currency risk sensitivity

At 31 December 2017, had sterling strengthened by 10% (2016 – 10%) in relation to all currencies, with all other variables held constant, total net assets and profit & loss after taxation would have decreased by the amounts shown below based solely on translation of securities quoted in currencies overseas. A 10% (2016 – 10%) weakening of sterling against all currencies, with all other variables held constant, would have had the exact opposite effect on the financial statement amounts. However, companies whose cost base diverges in currency terms from its sales will in the longer term have a significantly greater effect on valuation than simple translation. In the short term investee companies generally cover their currency exposure to varying degrees. There is insufficient publicly disclosed information to quantify this, but in the long term this effect is expected to dwarf simple translation of foreign listings in terms of both risk and reward, because many investee companies trade globally. Furthermore, the country of listing is not necessarily an indication of the geography of some or even any operational activities for investee companies. The manager does not use financial instruments to protect against currency movements. From time to time financial leverage has been made using debt in overseas currencies.

	2017 £'000	2016 £'000
US dollar	26,401	23,218
Norwegian krone	1,377	1,039
Korean won	1,461	1,179
Taiwan dollar	1,832	1,751
Euro	4,551	2,551
Other overseas currencies	1,412	1,405
	37,034	31,143

NOTES TO THE FINANCIAL STATEMENTS CONTINUED

18. FINANCIAL INSTRUMENTS CONTINUED

B. CREDIT RISK

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment which it has entered into with the Company. The manager monitors counterparty risk on an ongoing basis.

The Company has investments in convertible loan stocks that have an element of equity. These securities are viewed as having a risk profile similar to the equity holdings. This is because the convertibles held are in nascent technology companies that may be loss making and may have weak balance sheets. For this reason these stocks are categorised as equity holdings and for risk management purposes excluded from the credit risk analysis.

Credit Risk Exposure

The exposure to credit risk at 31 December was:

	2017 £'000	2016 £'000
Fixed interest investments	29,445	8,041
Cash and cash equivalents	41,870	82,448
Other receivables	1,682	23,529
	72,997	114,018

During the year the maximum exposure in fixed interest investments was £30,825,000 (2016 – £8,041,000) and the minimum £7,520,000 (2016 – £nil). The maximum exposure in cash was £101,245,000 (2016 – £82,448,000) and the minimum £41,870,000 (2016 – £60,243,000).

None of the Company's financial assets are past due or impaired.

C. LIQUIDITY RISK

The Company's policy with regard to liquidity is to provide a degree of flexibility so that the portfolio can be repositioned when appropriate and that most of the assets can be realised without an excessive discount to the market price.

Equity Securities

The Company's unlisted investments are not readily realisable, but these only amount to 1.3% of the Company's total assets at 31 December 2017 (2016 – 1.4%).

In practice, liquidity in investee companies is imperfect, particularly those with a market value of less than £100 million. To reduce this liquidity risk it is the policy to diversify the holdings and generally to restrict the holding in any one company to less than 10% of the share capital of that company. Furthermore the guideline is for no single investment to account for more than 5% of the assets of the Company.

The market valuation of each underlying security gives an indication of value, but the price at which an investment can be made or realised can diverge materially from the bid or offer price depending on market conditions generally and particularly to each investment. 20.1% (£178 million) (2016 – 22.8% (£158 million)) of the portfolio is invested in listed stocks with a market capitalisation below £100 million, where liquidity is expected to be more limited. If these stocks had on average a realisable value 20% below the bid price the value of the total fund would be adversely affected by 3.7% (2016 – 4.0%).

Liquidity Risk Exposure

Contractual maturities of the financial liabilities at the year end, based on the earliest date on which payment can be required are as follows:

	2017 One year or less £'000	2016 One year or less £'000
Bank loans	–	25,101
Other payables	2,443	2,532
	2,443	27,633

Fair Value of Financial Instruments

The Company's investments, as disclosed in the Company's balance sheet, are valued at fair value.

Nearly all of the Company's portfolio of investments are disclosed in the Level 1 category as defined in FRS102.

Categorisation is based on the lowest level input that is significant to the fair value measure in its entirety.

The three levels set out in FRS102 follow:

Level 1 – The unadjusted quoted price in an active market for identical assets or liabilities that the entity can access at the measurement date.

Annual report & financial statements 2017

Level 2 – Inputs other than quoted prices included within Level 1 that are observable (i.e. developed using market data) for the asset or liability, either directly or indirectly.

Level 3 – Inputs are unobservable (i.e. for which market data is unavailable) for the asset or liability.

The investment manager considers observable data to be that market data that is readily available, regularly distributed or updated, reliable and verifiable, not proprietary, and provided by independent sources that are actively involved in the relevant market.

The analysis of the valuation basis for the financial instruments based on the hierarchy as at 31 December is as follows:

AT 31 DECEMBER 2017
	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Financial assets
Equity investments	883,217	–	8,349	891,566
Government debt securities	29,445	–	–	29,445
Other debt securities	–	–	4,530	4,530
Current assets	43,552	–	–	43,552
Total assets	956,214	–	12,879	969,093
Financial liabilities
Bank loans	–	–	–	–
Current liabilities	2,443	–	–	2,443
Total liabilities	2,443	–	–	2,443
Total net assets	953,771	–	12,879	966,650

A reconciliation of fair value measurements in Level 3 is set out below:

AT 31 DECEMBER 2017	£'000
Opening balance at 1 January 2017	11,730
Purchases	1,423
Sales	(998)
Total (losses) or gains:
– on assets sold during the year	(329)
– on assets held at 31 December 2017	921
Assets transferred during the year	461
Return of capital	(329)
Closing balance at 31 December 2017	12,879

AT 31 DECEMBER 2016
	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Financial assets
Equity investments	693,198	–	7,656	700,854
Government debt securities	8,041	–	–	8,041
Other debt securities	–	–	4,074	4,074
Current assets	105,977	–	–	105,977
Total assets	807,216	–	11,730	818,946
Financial liabilities
Bank loans	25,000	–	–	25,000
Current liabilities	2,532	–	–	2,532
Total liabilities	27,532	–	–	27,532
Total net assets	779,684	–	11,730	791,414

NOTES TO THE FINANCIAL STATEMENTS CONTINUED

18. FINANCIAL INSTRUMENTS CONTINUED

A reconciliation of fair value measurements in Level 3 is set out below:

At 31 December 2016	£'000
Opening balance at 1 January 2016	12,438
Purchases	2,115
Sales	(1,028)
Total losses:
– on assets sold during the year	(1,412)
– on assets held at 31 December 2016	(383)
Closing balance at 31 December 2016	11,730

19. RELATED PARTY DISCLOSURE

Under UK GAAP, the Company has identified the directors as related parties. The directors' emoluments and interests have been disclosed on page 41 with additional disclosure in note 4. No other related parties have been identified. The Company has no ultimate controlling party.

Details of the manager's services and fees are disclosed in the strategic report on page 32, and in note 3.

20. POST BALANCE SHEET EVENTS

Any significant events that occurred after the end of the reporting period but before the signing of the statement of financial position will be shown here.

There are no significant events after the end of the reporting period requiring disclosure.

NOTICE OF ANNUAL GENERAL MEETING

Notice is hereby given that the Annual General Meeting of Herald Investment Trust plc will be held at 10–11 Charterhouse Square, London EC1M 6EE on 19 April 2018 at 11.30 am for the following purposes:

To consider and, if thought fit, approve resolutions 1 to 9 as ordinary resolutions and resolution 10 as a special resolution.

ORDINARY RESOLUTIONS

• 1. To receive and adopt the directors' report, the strategic report and the financial statements and the auditor's report in respect of the year ended 31 December 2017.
• 1. To approve the directors' remuneration report for the year ended 31 December 2017.
• 1. To re-elect Julian Cazalet as a director of the Company.
• 1. To re-elect Tom Black as a director of the Company.
• 1. To re-elect Karl Sternberg as a director of the Company.
• 1. To re-elect James Will as a director of the Company.
• 1. To reappoint Ernst & Young LLP as independent auditor of the Company to hold office until the conclusion of the next Annual General Meeting at which financial statements are laid before the Company.
• 1. To authorise the audit committee to determine the remuneration of the independent auditor.
• 1. To increase the aggregate amount of all fees paid to the directors (excluding amounts payable for executive or extra or special services) set out in article 95 of the Company's articles of association from £125,000 to £200,000 per annum with immediate effect. See note 18 below.

SPECIAL RESOLUTION

1. That, the Company be generally and subject as hereinafter appears unconditionally authorised in accordance with Section 701 of the Companies Act 2006 (the 'Act') to make market purchases (within the meaning of Section 693(4) of the Act) of its issued shares of 25p each in the capital of the Company in substitution for any existing authority under section 701 of the Act but without prejudice to any exercise of any such authority prior to the date hereof.

PROVIDED ALWAYS THAT

• (i) the maximum number of shares hereby authorised to be purchased shall be 14.99% of the issued share capital on the date on which this resolution is passed;
• (ii) the minimum price which may be paid for a share shall be 25p;
• (iii)the maximum price (exclusive of expenses) which may be paid for a share shall not be more than the higher of (a) 5% above the average mid closing price (as derived from the Daily Official List of the London Stock Exchange) for the shares for the five business days immediately preceding the date of purchase and (b) the higher of the last independent trade and the highest current independent bid on the London Stock Exchange;
• (iv)any purchase of shares will be made in the market for cash at prices below the prevailing net asset value per share (as determined by the directors);
• (v) unless previously varied, revoked or renewed, the authority hereby conferred shall expire at the conclusion of the Annual General Meeting of the Company to be held in 2019; and
• (vi)the Company may make a contract to purchase shares under the authority hereby conferred prior to the expiry of such authority and may make a purchase of shares pursuant to any such contract notwithstanding such expiry.

By order of the Board Law Debenture Corporate Services Limited Secretary

Registered Office: 10–11 Charterhouse Square London EC1M 6EE 20 February 2018

NOTICE OF ANNUAL GENERAL MEETING CONTINUED

NOTES

• 1. As a member you are entitled to appoint a proxy or proxies to exercise all or any of your rights to attend, speak and vote at the AGM. A proxy need not be a member of the Company but must attend the AGM to represent you. You may appoint more than one proxy provided each proxy is appointed to exercise rights attached to different shares. You can only appoint a proxy using the procedure set out in these notes. You may not use any electronic address provided either in this notice or any related documents to communicate with the Company for any purpose other than those expressly stated.
• 1. Shareholders are asked to use the online proxy voting service offered by Link Asset Services at www.signalshares.com to vote or appoint a proxy online. Votes must be received no later than 48 hours (excluding non-working days) before the time of the meeting or any adjourned meeting. To vote online, the unique personal identification Investor code printed on your share certificate will be required. Shareholders who are unwilling or unable to vote digitally can 'opt-in' to receive a paper proxy card by telephoning the shareholder helpline on 0871 664 0300.
• 1. To be valid any hard copy proxy form or other instrument appointing a proxy, together with any power of attorney or other authority under which it is signed or a certified copy thereof, must be received by post or (during normal business hours only) by hand at the Registrars of the Company at Link Asset Services, PXS1, 34 Beckenham Road, Beckenham, BR3 4TU no later than 48 hours (excluding nonworking days) before the time of the meeting or any adjourned meeting.
• 1. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so by using the procedures described in the CREST Manual and/or by logging on to the website www.euroclear.com/CREST. CREST personal members or other CREST sponsored members, and those CREST members who have appointed a voting service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf.
• 1. In order for a proxy appointment or instruction made using the CREST service to be valid, the appropriate CREST message (a 'CREST Proxy Instruction') must be properly authenticated in accordance with Euroclear UK & Ireland Limited's specifications, and must contain the information required for such instruction, as described in the CREST Manual. The message, regardless of whether it constitutes the appointment of a proxy or is an amendment to the instruction given to a previously appointed proxy must, in order to be valid, be transmitted so as to be received by the Company's registrar (ID RA10) no later than 48 hours (excluding nonworking days) before the time of the meeting or any adjournment. For this purpose, the time of receipt will be taken to be the time (as determined by the timestamp applied to the message by the CREST Application Host) from which the Company's registrar is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST. After this time any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means.
• 1. CREST members and, where applicable, their CREST sponsors, or voting service providers should note that Euroclear UK & Ireland Limited does not make available special procedures in CREST for any particular message. Normal system timings and limitations will, therefore, apply in relation to the input of CREST Proxy Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member, or sponsored member, or has appointed a voting service provider(s), to procure that his CREST sponsor or voting service provider(s) take(s)) such action as shall be necessary to ensure that a message is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsors or voting system providers are referred, in particular, to those sections of the CREST Manual concerning practical limitations of the CREST system and timings.
• 1. The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001.
• 1. The submission of a completed proxy form or other instrument of proxy will not prevent you attending the AGM and voting in person if you wish.
• 1. Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001 and Section 311 of the Companies Act 2006 the Company specifies that to be entitled to attend and vote at the AGM (and for the purpose of the determination by the Company of the votes they may cast), shareholders must be registered in the Register of Members of the Company no later than 48 hours (excluding non-working days) prior to the commencement of the AGM or any adjourned meeting. Changes to the Register of Members after the relevant deadline shall be disregarded in determining the rights of any person to attend and vote at the meeting.
• 1. Any person to whom this notice is sent who is a person nominated under Section 146 of the Companies Act 2006 to enjoy information rights (a 'Nominated Person') may, under an agreement between him/her and the shareholder by whom he/she was nominated, have a right to be appointed (or to have someone else appointed) as a proxy for the AGM. If a Nominated Person has no such proxy appointment right or does not wish to exercise it, he/she may, under any such agreement, have a right to give instructions to the shareholder as to the exercise of voting rights.
• 1. The statement of the rights of shareholders in relation to the appointment of proxies in Notes 1 and 3 above does not apply to Nominated Persons. The rights described in those Notes can only be exercised by shareholders of the Company.
• 1. The members of the Company may require the Company to publish, on its website, (without payment) a statement (which is also passed to the auditors) setting out any matter relating to the audit of the Company's accounts, including the auditors' report and the conduct of the audit. The Company will be required to do so once it has received such requests from either members representing at least 5% of the total voting rights of the Company or at least 100 members who have a relevant right to vote and hold shares in the Company on which there has been paid up an average sum per member of at least £100. Such requests must be made in writing and must state your full name and address and be sent to the Company at 10–11 Charterhouse Square, London, EC1M 6EE.
• 1. Information regarding the AGM, including information required by Section 311A of the Companies Act 2006, is available from the Company's page of the manager's website at www.heralduk.com.
• 1. Members have the right to ask questions at the meeting in accordance with Section 319A of the Companies Act 2006.
• 1. As at 19 February 2018 (being the last practicable date prior to the publication of this notice) the Company's issued share capital consisted of 70,307,785 ordinary shares, carrying one vote each. Therefore, the total voting rights in the Company as at 19 February 2018 were 70,307,785 votes.
• 1. Any person holding 3% or more of the total voting rights of the Company who appoints a person other than the Chairman of the meeting as his proxy will need to ensure that both he and his proxy complies with their respective disclosure obligations under the UK Disclosure and Transparency Rules.
• 1. No director has a contract of service with the Company.
• 1. The Company's articles of association contain a maximum limit on the aggregate level of fees that can be paid to the non-executive directors per annum, currently £125,000 as approved by shareholders in 2013. The total spend on fees in 2018 (assuming four directors) will be £102,000. Should the nomination committee recommend that one or more additional non-executive directors should be appointed, then the article limit might be breached. Accordingly, the board recommends that the limit on fees in the articles of association be increased from £125,000 to £200,000 per annum. This is within best practice guidelines (i.e. that article limits should be increased by a factor no greater than two times current levels). The proposed increase does not amend the remuneration policy as approved by shareholders in 2017.

FURTHER SHAREHOLDER INFORMATION

HOW TO INVEST

The Company's shares are traded on the London Stock Exchange. They can be bought by placing an order with a stockbroker or an online share dealing platform or by asking a professional adviser to do so.

SOURCES OF FURTHER INFORMATION ON THE COMPANY

The price of shares is quoted daily in the Financial Times, The Daily Telegraph and The Times. The NAV per share is calculated and released daily to the London Stock Exchange and monthly to the Association of Investment Companies.

KEY DATES

If a dividend is declared in respect of a financial year, it is normally paid late April/early May. The AGM is normally held in April.

TAXATION

The price of the ordinary shares (adjusted for the price of attributable warrants) on 21 February 1994, which was the first day of trading, was 90.9p. The amount attributable to the warrants for the purpose of capital gains tax is 9.1p per share issued (1994 Annual Report). Any shareholder uncertain of his or her position is recommended to seek expert advice.

ISAS

The ordinary shares of the Company are qualifying investments for individual saving accounts.

ELECTRONIC PROXY VOTING

If you hold stock in your own name you should vote by returning proxies electronically at www.signalshares.com. If you have any questions about this service please contact Link Asset Services on 0871 664 0300 (overseas +44 (0)371 664 0300) (calls cost 12p per minute plus your phone company's access charge; or applicable international rate; lines are open 9.00 am to 5.30 pm Monday-Friday). Shareholders who wish to do so can obtain a hard copy proxy form by calling the above number or writing to the registrar at: Link Asset Services, 34 Beckenham Road, Beckenham, BR3 4TU.

MAINSTREAM INVESTMENT

The Company conducts its affairs so that its ordinary shares are capable of being recommended by independent financial advisors to ordinary retail investors in accordance with relevant FCA rules. Our ordinary shares are, we consider, mainstream investment products because they are shares in an investment trust. The Company intends to continue conducting its affairs for the foreseeable future so that the ordinary shares can continue to be categorised as mainstream.

KEY INFORMATION DOCUMENT ("KID")

From 1 January 2018 we are required to make a KID available to retail investors in the Company. The KID provides key information about the Company's shares as an investment product. The information is required by law to help potential shareholders understand the nature, risks, costs, potential gains and losses of the Company's shares and to help them compare it with other products. The KID can be viewed at https://www.heralduk.com/the-packaged-retail-andinsurance-based-investment-products-regulation-priips/

The Company is an investment trust. Investment trusts offer investors the following:

• Participation in a diversified portfolio of shares.
• Constant supervision by experienced professional managers.
• The Company is free from capital gains tax on capital profits realised within the portfolio.
• The opportunity to achieve improved performance for shareholders' funds in rising markets by the borrowing of additional money.

FURTHER SHAREHOLDER INFORMATION CONTINUED

SECRETARY

Law Debenture Corporate Services Limited

REGISTERED OFFICE

10–11 Charterhouse Square London EC1M 6EE

ADMINISTRATOR

The Bank of New York Mellon

COMPANY NUMBER

02879728 (England and Wales)

ALTERNATIVE INVESTMENT FUND MANAGER AND PORTFOLIO MANAGER

Herald Investment Management Limited 10–11 Charterhouse Square London EC1M 6EE Tel: 020 7553 6300 Fax: 020 7490 8026 Website: www.heralduk.com E-mail: info@heralduk.com

ADVISERS

INDEPENDENT AUDITORS Ernst & Young LLP 25 Churchill Place

Canary Wharf London E14 5EY

SOLICITORS

Macfarlanes 20 Cursitor Street London EC4A 1LT

STOCKBROKERS

N+1 Singer One Bartholomew Lane London EC2N 2AX

Peel Hunt LLP Moor House 120 London Wall London EC2Y 5ET

BANKERS

The Bank of New York Mellon One Piccadilly Gardens Manchester M1 1RN

REGISTRARS

Link Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Tel: 0871 664 0300 (overseas +44 (0)371 664 0300)

(calls cost 12p per minute plus your phone company's access charge; or applicable international rate; lines are open 9.00 am to 5.30 pm Monday–Friday)

Website: www.signalshares.com

E-mail: enquiries@linkgroup.com

DEPOSITARY

BNY Mellon Trust & Depositary (UK) Limited 160 Queen Victoria Street London EC4V 7LA

NOTES

NOTES

Herald Investment Trust plc

10–11 Charterhouse Square London EC1M 6EE 020 7553 6300 www.heralduk.com