Annual Financial Report

RNS Number : 2143Y

Aberdeen Smaller Co's High Inc Tst

28 February 2012

 



ABERDEEN SMALLER COMPANIES HIGH INCOME TRUST PLC

 

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2011

1. CHAIRMAN'S STATEMENT

Looking back over the last ten years we have seen unprecedented movements in world stockmarkets; a dramatic collapse in 2002 following the tech bubble and in 2008 a second collapse after the financial crash.  Over that ten year period our Trust has survived these troubles and our share price has delivered a total return greater than that of the Index.

After a very promising start to 2011 and a good uplift in our NAV at the interim results, markets became unsettled by worries about the prospects for global economic growth and the unprecedented turmoil in European sovereign debt issues. This resulted in a fall in all major equity stock market indices over our second half reporting period taking the return on the FTSE Small Cap ex IT index down 15.2% for the year ended 31 December 2011. The Trust's NAV total return fell 11.1%.

Whilst it is disappointing for the Board and the Manager to be reporting a fall in NAV per share we are encouraged by the Trust's relative performance. The Board have implemented a number of changes over the last few years to provide the Trust with more stability not only in the structure of our funding but also within the stock selection in our portfolio. 2011 proved a stern test and seeing both our bond and equity portfolios outperform their respective benchmarks is testament to the changes made and reflection of the Board's progress in delivering a more robust structure. 

This improved stability and the attractions of the Trust's 5.5% yield have been at the forefront of the Board's attention in our quarterly meetings. We are acutely aware of the pressures on our shareholders especially in a period where low interest rates look likely to persist. Investors are also getting little in the way of real returns from Government bonds where yields reached all-time lows during 2011. It is against this backdrop that the Board see the Trust as an attractive income alternative with the ability to own smaller companies coupled with a very attractive yield.

After another turbulent year we are pleased to continue our long history of paying covered dividends. The Board has declared a fourth quarter dividend of 1.5 pence per share for a full year dividend of 6 pence per share. Subject to any unforeseen circumstances we expect to declare an unchanged dividend for the year ending 31 December 2012.

The companies in our portfolio have in the main performed very well throughout the year, despite their inextricable link to the wider economic environment. Although there have been a few areas of concern where the Manager has had to take action, Aberdeen seek to buy quality companies with strong market positions and balance sheets that can perform throughout the cycle. It is these characteristics that allow us as a Board to have some comfort that the outlook isn't all gloomy. At a portfolio level profitability, dividend cover and balance sheet strength mean that we have seen the majority of our companies increase their dividends, in spite of a drop in earnings at company level.

The bond and preference share performance has also provided balance to the portfolio. Whilst equities have been volatile bonds have been much more defensive. We have benefited from the performance of both our utility holdings with investors seeking out the safety of these defensive holdings. The Manager has lately sold some of these positions where yields have contracted.

Board Changes

As you are aware this is my first year as your Chairman having taken over post the AGM in April 2011. Barry Rose joined the Board in March 2011 and has a wealth of experience as the former Chief Executive of Scottish Provident UK. He also has experience of smaller companies through his position as Chair of Baillie Gifford Shin Nippon. After almost 13 years with the Board, Dinah Nichols has decided to step down at the next AGM. She has been a valuable member of the Board and I would like to thank her for her support and wish her all the best in her future. We have already completed our search for a successor and I am delighted to announce that Robert Lister will join the Board with effect from 1 March 2012 and he has considerable experience in the financial services industry and will add greatly to the strength of the Board.

Outlook

The Manager has struck a cautious tone in our meetings throughout the year with GDP slowing, consumer budgets under pressure and further cuts to Government spending looming. These are not normal times to make a prediction on the outlook for 2012 but markets have started the year in buoyant mood despite the headwind of slowing growth. This slowdown and the uncertainty will keep investor appetite for smaller companies in check. However as a Board we feel the steps we have taken leave the portfolio well positioned should we see further turbulence but also to take advantage of opportunities.

Carolan Dobson

Chairman

27 February 2012

2. MANAGER'S REVIEW

Background

After the positive returns of the last few years it is disappointing to be writing about another tough year for smaller companies. After a strong start to the year the third quarter saw a sharp sell-off across global equity markets which continued to year end. The ongoing sovereign crisis in the Eurozone, lack of action among policy makers and worries about slowing global growth all had their part to play. Investors shunned riskier asset classes which could be seen from the sharp rally in Government All Stocks which returned an unprecedented 15.6% on a total return basis over 2011.

Performance

What the Trust has demonstrated this year is the resilience of the portfolio which gives us comfort that we are well positioned to outperform in tougher times. This can be seen from the relative performance with the Trust's NAV declining 11.1% against the FTSE Small Cap ex IT down 15.2%. It is pleasing that after two years of strong market conditions where we outperformed on a relative basis we are also protecting shareholder value through periods of volatility.

Economics

There have been plenty of economic lows to highlight over 2011, among them the bailout of peripheral Europe and ensuing sovereign debt concerns, and further afield the downgrading of the U.S. credit rating from AAA. These have all brought considerable volatility to markets and whilst the sovereign debt crisis remains the near term risk for markets the Eurozone is also close to a recession or at least a period of very low growth.

The Office for National Statistics upgraded third quarter GDP growth in the UK from 0.5% to 0.6% whilst the Bank of England has predicted that growth for 2012 will be no more than 1%. The recapitalisation of the banking sector and the European Central Bank's LTRO (Long Term Refinancing Operation) has provided the backdrop to a market rebound in January. Whilst these packages provide markets with short-term comfort the combination of high government indebtedness, budget deficits and austerity packages means this is going to be a long, slow and at times painful road to recovery as the whole system goes through a process of deleveraging.

Equity Portfolio 

The equity portfolio declined by 9.4% in 2011 which was an outperformance of 5.8% against the index. It is often difficult to remove companies from the wider markets and economic outlook but in contrast to the levels of debt held by governments, companies are in very good health. Trading has however become much tougher as we have progressed through the year with companies announcing profit warnings with a greater frequency to which the Trust has not been immune.

As a reminder Aberdeen analyses company fundamentals and not sectors. We don't buy or sell companies based on a top down view; what we are striving to do is pick the best quality companies and then construct the portfolio from the bottom up. Whilst we have a top down overview we analyse companies and their prospects, whether the weight in the fund is reflective of this view, and finally the comfort we have in the balance sheet and cash flow.

The outperformance in 2011 was delivered across a broad base of companies. Fenner was one of the main contributors and is currently the largest equity holding across the fund. They sell industrial belting to the mining sector which is a critical product in the operation of mines. This brings with it a high cost of failure given the potential losses from downtime. They have leveraged this relationship by acquiring a number of service agents over the last few years. This aftermarket servicing network is higher margin, embeds them with the customer - they have a service engineer on-site - whilst also providing a more stable recurring revenue stream. We have recently trimmed our position after a very strong run through January and valuation near the top end of our range. Oxford Instruments has also been one of our top performers. We have owned this for over six years and have seen a huge transformation as they have shifted to be a more commercial operator. They recently updated the market with their new plan, '14 cubed'. This will see them deliver 14% compound annual revenue growth and 14% return on sales by 2014 which is a tough target to set given the current outlook but one the management views as achievable.

The portfolio was also aided by two takeovers. The first was Holidaybreak which was acquired by Cox and Kings, while Arcus Infrastructure took over Forth Ports. 

Whilst the majority of the portfolio has performed well over the year there will always be a few names that are facing challenges. Mothercare is one such name where we have seen UK sales deteriorate more sharply than management had expected. The issues were isolated to the UK and in particular bigger ticket home & travel goods which are more susceptible in these tough times. The group has been reshaping the UK store footprint for a number of years and post the recent warning they have accelerated these closures. We have had a number of meetings with the management team over the past year and with the International business growing strongly we still feel there is value here once they stabilise the UK. Highlighting that not all consumer facing names find life tough we have taken profits after strong share price performance in A.G. Barr, Restaurant Group and Greggs. 

We have added three new names to the Trust over the year the first of which was Euromoney. They are a leading provider of subscription based business to business information, training and events - focused primarily on the financial and commodity sectors. Euromoney was an early adopter of digital which has given it a strong competitive position globally. The business is very cash generative and has a strong balance sheet which they partly deployed with the recent acquisition of Ned Davis Research. We have been looking to build our position on weakness with the valuation looking reasonable. In March we introduced Elementis to the portfolio. Elementis is a speciality chemical company focused on rheological products. The business is well set to grow as its products are increasingly used in industrial coatings and as they grow their Asian capabilities. Across the chemicals space we also own Victrex and Zotefoams. With the addition of Elementis, which offers a niche exposure, we decided to exit Zotefoams which had performed very well from the lows seen in 2008. The final introduction was BBA Aviation which has a leading position in the operation of flight support stations for private business jets in the US.  This is a recovering market with ample scope for additional growth through consolidation.  The barriers are high as the ability to provide a national network of bases is very attractive to customers whilst being difficult to replicate.  They also have a unique business that provides out of production spares to the aviation industry.

Bond Portfolio

The bond portfolio returned 2.8% over the year. Credit markets, especially the investment grade sector, initially performed well thanks to investors focusing on strong fundamentals and better than expected reported earnings. However, as risk aversion increased financial bonds saw their credit spreads widen the most due to concerns over the resilience of the European banking sector and potential losses that banks would face in the event of a sovereign default. In the portfolio, we have locked in profits in utility and secured property bonds, switching into equities and higher yielding telecom bonds.

Dividends

At a company level dividends have been increasing although this has been limited to high single digit growth. Despite company balance sheets being in good health management teams are reluctant to ramp up dividends when the earnings outlook is so uncertain. Whilst this might be frustrating in the short term, as long term investors in these companies we consider that it is the prudent decision to be taking.

As a whole we are encouraged by the stability of the portfolio, dividend cover and balance sheet strength. That said we see a similar trend to 2011 playing out in 2012 with caution on dividend increases but overall feel well placed with opportunities to add to positions where we see attractive yields and valuations.

Outlook

Many uncertainties remain both in terms of the broader economies of Europe but also the economic strength of the US and growth rates in emerging markets.  Whilst it is hard to strike a balance between the negatives of continued elevated debt levels in Western economies and the potential positives for global growth to be derived from emerging markets, we continue to believe that a focus on sensibly financed companies with strong competitive positions will serve us well.  Currently, the valuations of such companies remain attractive from both a relative and absolute perspective.

Aberdeen Asset Managers Limited

27 February 2012

3. RESULTS & DIVIDENDS

Financial Highlights

	31 December 2011	31 December 2010	% change
Total investments	£38,260,000	£42,814,000	-10.6
Shareholders' funds	£29,525,000	£34,545,000	-14.5
Market capitalisation	£23,381,000	£29,738,000	-21.4
Net asset value per share	133.54p	156.24p	-14.5
Share price (mid market)	105.75p	134.50p	-21.4
Discount to adjusted NAV{A}	19.9%	13.1%
Gearing	29.6%	23.9%
Total expense ratio	1.9%	1.8%
Dividends and earnings
Revenue return per share{B}	6.01p	6.04p	-0.5
Dividends per share{C}	6.00p	6.00p	-
Dividend cover	1.00	1.01
Revenue reserves{D}	£1,997,000	£1,995,000
{A}   Based on IFRS NAV above reduced by dividend adjustment of 1.50p (2010 - 1.50p).
{B}    Measures the revenue earnings for the year divided by the weighted average number of Ordinary shares in issue (see Statement of Comprehensive Income).
{C}    The figures for dividends per share reflect the years in which they were earned (see note 8).
{D}    The revenue reserve figure does not take account of the fourth interim dividend amounting to £332,000 (2010 - £332,000).

Performance (Total return)
	1 year	3 year	5 year
	% return	% return	% return
Net asset value	-11.1	+86.9	-34.5
Share price (based on mid price)	-17.6	+143.5	-40.3
FTSE SmallCap Index (excluding Investment Companies)	-15.2	+56.4	-33.7
FTSE All-Share Index	-3.5	+43.8	+6.2
All figures are for total return and assume re-investment of net dividends excluding transaction costs.

Dividends

	Rate per share	xd date	Record date	Payment date
First interim dividend	1.50p	6 April 2011	8 April 2011	28 April 2011
Second interim dividend	1.50p	6 July 2011	8 July 2011	29 July 2011
Third interim dividend	1.50p	12 October 2011	14 October 2011	31 October 2011
Fourth interim dividend	1.50p	4 January 2012	6 January 2012	31 January 2012
	__________
2011	6.00p
	__________
First interim dividend	1.50p	7 April 2010	9 April 2010	30 April 2010
Second interim dividend	1.50p	7 July 2010	9 July 2010	30 July 2010
Third interim dividend	1.50p	6 October 2010	8 October 2010	29 October 2010
Fourth interim dividend	1.50p	5 January 2011	7 January 2011	28 January 2011
	__________
2010	6.00p
	__________

4.  PORTFOLIO INVESTMENTS

Investment Portfolio - Ordinary Shares

	Valuation	Total	Valuation
	2011	portfolio	2010
Company	£'000	%	£'000
Fenner	1,375	3.6	970
Weir Group	1,229	3.2	1,077
RPC Group	1,224	3.2	881
Dechra Pharmaceuticals	1,090	2.8	810
Oxford Instruments	1,083	2.8	1,349
Morgan Sindall	997	2.6	1,184
Bellway	983	2.6	898
XP Power	972	2.5	1,282
Euromoney Institutional Investor	925	2.4	-
Helical Bar	867	2.3	915
Ten largest investments	10,745	28.0
Fuller Smith & Turner 'A'	844
Melrose	840	2.2	978
Wilmington	778	2.0	916
Restaurant Group	760	2.0	770
Interserve	750	2.0	693
Victrex	743	1.9	750
Chesnara	735	1.9	1,235
Greggs	714	1.9	816
Berendsen	709	1.9	-
Chemring Group	708	1.9	601
Twenty largest investments	18,326	47.9
Menzies (John)	652	1.7	666
Savills	648	1.7	502
Rathbone Brothers	647	1.7	337
McBride	640	1.7	898
Umeco	635	1.7	775
Barr	613	1.6	498
Dignity	605	1.6	531
Bloomsbury Publishing	588	1.5	817
Elementis	554	1.4	-
Aveva Group	546	1.4	616
Thirty largest investments	24,454	63.9
Robert Walters	540	1.4	670
Mothercare	527	1.4	1,324
Halfords Group	499	1.3	681
TT Electronics	492	1.3	877
Fisher James	473	1.2	470
Hornby	469	1.2	489
Intermediate Capital Group	453	1.2	503
BBA Aviation	449	1.2	-
Numis Corporation	412	1.1	450
Huntsworth	341	0.9	617
Forty largest investments	29,109	76.1
Keller Group	341	0.9	654
Zotefoams	206	0.5	467
Total Ordinary shares	29,656	77.5

Investment Portfolio - Other Investments

	Valuation	Total	Valuation
	2011	portfolio	2010
Company	£'000	%	£'000
Convertibles
Balfour Beatty Cum Conv 10.75%	1,116	2.9	1,161
Total Convertibles	1,116	2.9
Corporate Bonds
Society of Lloyds 6.875% 2025	918	2.4	956
National Westminster 5.98% 2012	637	1.7	737
Stagecoach Group 5.75% 2016	635	1.7	622
Telecom Italia 5.625% 2015{A}	620	1.6	655
Wales & West Utilities Finance 6.75% 2036	558	1.5	537
Telefonica Emisiones 5.375% 2018	556	1.4	-
Anglian Water 6.75% 2024	375	1.0	377
Bupa Finance 6.125% 2020	361	0.9	428
Lloyds TSB 6.375% 2014	297	0.8	301
Total Corporate Bonds	4,957	13.0
Preference shares
Aviva 8.75%	989	2.6	1,044
General Accident 8.875%	917	2.4	977
Ecclesiastical Insurance 8.625%	625	1.6	651
Total Preference shares	2,531	6.6
Total Other Investments	8,604	22.5
Total investments	38,260	100.0
{A}All investments are listed on the London Stock Exchange (sterling based), except those marked, which are listed on overseas exchanges based in sterling.

	Distribution of Assets and Liabilities
		Valuation at		Movement during the year				Valuation at
		31 December					Gains/	31 December
		2010		Purchases	Sales	Other{A}	(losses)	2011
		£'000	%	£'000	£'000	£'000	£'000	£'000	%
Listed investments
Ordinary shares		32,900	95.2	7,627	(6,514)	-	(4,357)	29,656	100.5
Convertibles		1,161	3.4	-	-	-	(45)	1,116	3.8
Corporate bonds		6,081	17.6	551	(1,499)	(65)	(111)	4,957	16.8
Other fixed interest		2,672	7.7	-	-	-	(141)	2,531	8.6
		________	________	________	________	________	________	________	________
		42,814	123.9	8,178	(8,013)	(65)	(4,654)	38,260	129.7
		________	________	________	________	________	________	________	________
Current assets		1,882	5.4					1,429	4.8
Current liabilities		(151)	(0.4)					(164)	(0.6)
Long-term loan		(10,000)	(28.9)					(10,000)	(33.9)
		________	________					________	________
Net assets		34,545	100.0					29,525	100.0
		________	________					________	________
Net asset value per Ordinary share		156.2p						133.5p
		________						________
{A} Amortisation adjustment of £65,000 (see note 2).

5. BUSINESS REVIEW

Activities

The Company is an investment trust. Its subsidiary undertaking, Shirescot Securities Limited, is an investment dealing company. There was no investment dealing activity in the year and the subsidiary was dissolved on 6 January 2012.

Results and Dividends

The financial statements for the year ended 31 December 2011 are detailed below. Dividends declared for the year amounted to 6.00p per share (2010 - 6.00p).

A fourth interim dividend of 1.50p per share was announced by the Board on 16 December 2011 with an ExD date of 4 January 2012 and paid on 31 January 2012. Under accounting standards this dividend will be accounted for in the financial year ended 31 December 2012.

Current and Future Developments

A review of the business is given in the Chairman's Statement and the Investment Manager's Review. Key performance indicators ("KPIs") are shown in the financial information above. These KPIs include the net asset value total return, share price total return, and the premium/(discount) at which the shares trade. The Board also considers the marketing and promotion of the Company, including effective communications with shareholders. The future strategic direction and development of the Company is discussed frequently as part of Board meeting agendas.

Principal Risks and Uncertainties

The principal risks facing the Company relate to the Company's investment activities and include market risk (comprising interest rate risk and other price risk), liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 16 to the financial statements.

Investment Policy

The Company invests in equities, bonds and preference shares. Investment in corporate bonds and preference shares is primarily to enhance the income generation of the Company. The investment risk within the portfolio is managed by the diversification of the overall portfolio and by the Manager adhering to various guidelines set by the Board. The Board regularly reviews the guidelines to ensure they remain appropriate and Board approval is required before any exceptions are permitted.

Gearing is used with the intention of enhancing long-term returns. The Company's gearing is currently in the form of bank borrowing. The bank borrowing comprises a £10 million three year revolving credit facility which commenced on 23 July 2010 and which was fully drawn at the period end.

The risk of the gearing is also managed by investing in corporate bonds, the vast majority of which are investment grade and preference shares of large financial institutions.

Investment Risk

The Directors are responsible for determining the investment policy and the investment objectives of the Company, while the day-to-day management of the Company's assets has been delegated to the Manager. The Manager invests in equities, bonds and preference shares, following their investment processes.

Equity Investment Process

The equity investment process is active and bottom-up, based on disciplined evaluation of companies through direct visits by fund managers. Stock selection is the major source of added value, concentrating on quality first, then value. Top-down investment factors are secondary in the equity portfolio construction, with diversification rather than formal controls guiding stock and sector weights. However, the exposure to equities is limited by investment guidelines drawn up by the Board in conjunction with the Manager.

These include:

-        Maximum equity gearing of 110% of Net Asset Value

-        Maximum 5% of investee companies' ordinary shares

-        Maximum 5% of the Company's total assets invested in the securities of one company

-        No unquoted investments

Fixed Income Investment Process

The fixed income investment process is an active investment style which identifies value between individual securities.

This is achieved by combining bottom-up security selection with a top-down investment approach. Investments in corporate bonds and preference shares are also managed by investment guidelines drawn up by the Board in conjunction with the Manager which include:

-        Fixed income securities not to exceed 60% of shareholders funds

-        No holding in a single fixed interest security to exceed 5% of the total bond issue of the investee company

-        Maximum acquisition cost of an investment grade bond - £1 million

-        Maximum acquisition cost of non-investment grade bond - £500,000

Analysis of Portfolio

A comprehensive analysis of the portfolio is given in the Investment Manager's Review, the distribution of assets and liabilities and the portfolio of investments.

ABERDEEN SMALLER COMPANIES HIGH INCOME TRUSTPLC

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

		Year ended			Year ended
		31 December 2011			31 December 2010
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Gains and losses on investments
(Losses)/gains on investments at fair value	10	-	(4,654)	(4,654)	-	9,763	9,763
Fair value movement in zero coupon finance derivatives	13	-	-	-	-	(58)	(58)
Revenue	2
Dividend income		1,522	-	1,522	1,367	-	1,367
Interest income from investments		410	(65)	345	486	(27)	459
Deposit interest		-	-	-	19	-	19
Other income		4	-	4	1	-	1
		_______	_______	_______	_______	_______	_______
		1,936	(4,719)	(2,783)	1,873	9,678	11,551
		_______	_______	_______	_______	_______	_______
Expenses
Investment management fee	3	(162)	(162)	(324)	(151)	(151)	(302)
VAT recovered on investment management fees	3	-	-	-	16	16	32
Other administrative expenses	4	(304)	-	(304)	(231)	-	(231)
Finance costs of borrowings	5	(141)	(141)	(282)	(171)	(279)	(450)
		_______	_______	_______	_______	_______	_______
Profit/(loss) before tax		1,329	(5,022)	(3,693)	1,336	9,264	10,600
Tax expense	6	-	-	-	-	-	-
		_______	_______	_______	_______	_______	_______
Profit/(loss) attributable to equity holders of the Group	7	1,329	(5,022)	(3,693)	1,336	9,264	10,600
		_______	_______	_______	_______	_______	_______
Earnings/(loss) per Ordinary share (pence)	9	6.01	(22.71)	(16.70)	6.04	41.90	47.94
		_______	_______	_______	_______	_______	_______
The total column of this statement represents the Group's Statement of Comprehensive Income, prepared in accordance with IFRS. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies. All items in the above statement derive from continuing operations.
The Company does not have any income or expense that is not included in profit for the year, and therefore the "Profit/(loss) attributable to equity holders of the Group" is also the "Total comprehensive income attributable to equity holders of the Group" as defined in IAS 1 (revised).
All of the profit and comprehensive income are attributable to the equity holders of the parent Company. There are no minority interests.
All items in the above statement derive from continuing operations.
The accompanying notes are an integral part of these financial statements.

ABERDEEN SMALLER COMPANIES HIGH INCOME TRUST PLC

Balance Sheets

		Group		Company
		As at	As at	As at	As at
		31 December	31 December	31 December	31 December
		2011	2010	2011	2010
	Notes	£'000	£'000	£'000	£'000
Non-current assets
Ordinary shares		29,656	32,900	29,656	32,900
Convertibles		1,116	1,161	1,116	1,161
Corporate bonds		4,957	6,081	4,957	6,081
Other fixed interest		2,531	2,672	2,531	2,672
		_______	_______	_______	_______
Securities at fair value	10	38,260	42,814	38,260	42,814
Current assets
Cash and cash equivalents		1,049	1,552	1,049	1,552
Other receivables	12	380	330	380	472
		_______	_______	_______	_______
		1,429	1,882	1,429	2,024
		_______	_______	_______	_______
Current liabilities
Trade and other payables		(164)	(151)	(164)	(151)
		_______	_______	_______	_______
Net current assets		1,265	1,731	1,265	1,873
		_______	_______	_______	_______
Total assets less current liabilities		39,525	44,545	39,525	44,687
		_______	_______	_______	_______
Non-current liabilities
Long-term loan	13	(10,000)	(10,000)	(10,000)	(10,000)
		_______	_______	_______	_______
Net assets		29,525	34,545	29,525	34,687
		_______	_______	_______	_______
Issued capital and reserves attributable to equity holders of the parent
Called-up share capital	14	11,055	11,055	11,055	11,055
Share premium account		11,892	11,892	11,892	11,892
Capital redemption reserve		2,032	2,032	2,032	2,032
Retained earnings:
Capital reserve	15	2,549	7,571	2,549	7,571
Revenue reserve	15	1,997	1,995	1,997	2,137
		_______	_______	_______	_______
		29,525	34,545	29,525	34,687
		_______	_______	_______	_______
Net asset value per Ordinary share (pence)	9	133.54	156.24
		_______	_______	_______	_______

ABERDEEN SMALLER COMPANIES HIGH INCOME TRUST PLC

Consolidated Statement of Changes in Equity

Year ended 31 December 2011
			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
As at 31 December 2010		11,055	11,892	2,032	7,571	1,995	34,545
Revenue profit for the year		-	-	-	-	1,329	1,329
Capital losses for the year		-	-	-	(5,022)	-	(5,022)
Equity dividends	8	-	-	-	-	(1,327)	(1,327)
		_______	_______	_______	_______	_______	_______
As at 31 December 2011		11,055	11,892	2,032	2,549	1,997	29,525
		_______	_______	_______	_______	_______	_______
Year ended 31 December 2010
			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
As at 31 December 2009		11,055	11,892	2,032	(1,693)	2,041	25,327
Revenue profit for the year		-	-	-	-	1,336	1,336
Capital profits for the year		-	-	-	9,264	-	9,264
Equity dividends	8	-	-	-	-	(1,382)	(1,382)
		_______	_______	_______	_______	_______	_______
As at 31 December 2010		11,055	11,892	2,032	7,571	1,995	34,545
		_______	_______	_______	_______	_______	_______
Company Statement of Changes in Equity
Year ended 31 December 2011
			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
As at 31 December 2010		11,055	11,892	2,032	7,571	2,137	34,687
Current year transfer of subsidiary undertaking's reserves	11	-	-	-	142	(142)	-
Revenue profit for the year		-	-	-	-	1,329	1,329
Capital losses for the year		-	-	-	(5,022)	-	(5,022)
Dissolution of subsidiary undertaking			-	-	(142)	-	(142)
Equity dividends	8	-	-	-	-	(1,327)	(1,327)
		_______	_______	_______	_______	_______	_______
As at 31 December 2011		11,055	11,892	2,032	2,549	1,997	29,525
		_______	_______	_______	_______	_______	_______
Year ended 31 December 2010
			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
As at 31 December 2009		11,055	11,892	2,032	(1,693)	2,183	25,469
Revenue profit for the year		-	-	-	-	1,336	1,336
Capital profits for the year		-	-	-	9,264	-	9,264
Equity dividends	8	-	-	-	-	(1,382)	(1,382)
		_______	_______	_______	_______	_______	_______
As at 31 December 2010		11,055	11,892	2,032	7,571	2,137	34,687
		_______	_______	_______	_______	_______	_______

ABERDEEN SMALLER COMPANIES HIGH INCOME TRUST PLC

Group and Company Cash Flow Statement

	Year ended		Year ended
	31 December 2011		31 December 2010
	£'000	£'000	£'000	£'000
Cash flows from operating activities
Investment income received		1,872		1,922
Deposit interest received		2		20
Investment management fee paid		(330)		(291)
VAT recovered		-		32
Other cash expenses		(274)		(240)
		_______		_______
Cash generated from operations		1,270		1,443
Interest paid		(281)		(428)
		_______		_______
Net cash inflows from operating activities		989		1,015
		_______		_______
Cash flows from investing activities
Purchases of investments	(8,178)		(11,401)
Sales of investments	8,013		13,276
	_______		_______
Net cash (outflow)/inflow from investing activities		(165)		1,875
		_______		_______
Cash flows from financing activities
Equity dividends paid	(1,327)		(1,382)
Repayment of July 2010 ZCF position	-		(5,337)
Loan repaid	-		(7,000)
Loan drawndown	-		10,000
	_______		_______
Net cash outflow from financing activities		(1,327)		(3,719)
		_______		_______
Net decrease in cash and cash equivalents		(503)		(829)
Cash and cash equivalents at start of year		1,552		2,381
		_______		_______
Cash and cash equivalents at end of year		1,049		1,552
		_______		_______

ABERDEEN SMALLER COMPANIES HIGH INCOME TRUST PLC

YEAR ENDED 31 DECEMBER 2011

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31 December 2011
1.	Accounting policies
	(a)	Basis of accounting
		The financial statements of the Group and Company have been prepared in accordance with International Financial Reporting Standards (IFRSs) which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), and International Accounting Standards and International Financial Reporting Interpretations Committee interpretations approved by the International Accounting Standards Committee ("IASC") that remain in effect, and to the extent that they have been adopted by the European Union.
		The financial statements have been prepared under the historical cost convention as modified to include the revaluation of securities held at fair value and on the assumption that approval as an investment trust will continue to be granted. The principal accounting policies adopted are set out below. These policies have been applied consistently throughout the year. Where presentational guidance set out in the Statement of Recommended Practice ("SORP") for investment trusts issued by the Association of Investment Companies is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP except as referred to in paragraph (d) and (h) below. The effects on capital and revenue of the items involving departures from the SORP are set out in note 17.
		In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income. In accordance with the Company's status as a UK investment company under Section 833 of the Companies Act 2006, net capital returns may not be distributed by way of dividend. Additionally, the net revenue of the Company is the measure the Directors believe appropriate in assessing the Group's compliance with certain requirements set out in Sections 1158 - 1159 of the Corporation Tax Act 2010.
		At the date of authorisation of these financial statements, the following Standards and Interpretations were in issue but not yet effective:
		-	Amendments to IFRS 1 - Severe Hyperinflation and Removal of Fixed Dates for First Time Adopters (effective for annual periods beginning on or after 1 July 2011).
		-	Amendments to IFRS 7 - Financial Instruments: Transfers of Financial Assets Disclosures (effective for annual periods beginning on or after 1 July 2011).
		-	IFRS 9 - Financial Instruments: Classification and Measurement (effective for annual periods beginning on or after 1 January 2013).
		-	IFRS 10 - Consolidated Financial Statements (early adoption permitted) (effective for annual periods beginning on or after 1 January 2013).
		-	IFRS 11 - Joint Arrangements (early adoption permitted) (effective for annual periods beginning on or after 1 January 2013).
		-	IFRS 12 - Disclosure of Interests in Other Entities (early adoption permitted) (effective for annual periods beginning on or after 1 January 2013).
		-	IFRS 13 - Fair Value Measurement (effective for annual periods beginning on or after 1 January 2013).
		-	Amendments to IAS 1 - Presentation of Items of Other Comprehensive Income (effective for annual periods beginning on or after 1 July 2012)
		-	Amendments to IAS 12 - Income Taxes - Deferred Tax Amendment (effective for annual periods beginning on or after 1 January 2012).
		-	Amendments to IAS 19 - Employee Benefits (effective for annual periods on or after 1 January 2013).
		-	IAS 27 - Separate Financial Statements (early adoption permitted) (effective for annual periods beginning on or after 1 January 2013).
		-	IAS 28 - Investments in Associates and Joint Ventures (early adoption permitted) (effective 1 January 2013).
		The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material financial impact on the financial statements of the Group. The Group concludes however that certain additional disclosures may be necessary on their application.
	(b)	Consolidation
		The consolidated financial statements incorporate the financial statements of the Company and entity controlled by the Company (its subsidiary) made up to 31 December each year. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. All intra-group transactions, balances, income and expenses are eliminated on consolidation. The Company has availed itself of the relief from showing a Statement of Comprehensive Income for the parent company, granted under Section 408 of the Companies Act 2006. During the year, the inter company balance was extinguished and the subsidiary undertaking was formally dissolved on 6 January 2012.
	(c)	Investments
		Investments have been designated upon initial recognition at fair value through profit or loss. Investments are recognised and de-recognised at trade date where a purchase or sale is under a contract whose terms require delivery within the time frame established by the market concerned, and are initially measured at fair value. Subsequent to initial recognition, investments are valued at fair value. For listed investments, this is deemed to be bid market prices or closing prices for SETS stocks sourced from The London Stock Exchange. SETS is the London Stock Exchange's electronic trading service for UK securities including all the FTSE All-Share Index constituents.
		Gains and losses arising from the changes in fair value are included in net profit or loss for the period as a capital item. Transaction costs are treated as a capital cost.
		No investments were held in the dealing subsidiary undertaking in either the current or previous year, prior to the subsidiary undertaking's dissolution on 6 January 2012.
	(d)	Income
		Dividend income from equity investments including preference shares which have a discretionary dividend is recognised when the shareholders' rights to receive payment have been established, normally the ex-dividend date.
		Interest from debt securities which include preference shares which do not have a discretionary dividend are accounted for on an effective yield basis. Any write off of the premium or discount on acquisition as a result of using this basis is allocated against capital reserve. The SORP recommends that such a write off should be allocated against revenue. The Directors believe this treatment is not appropriate for a high yielding investment trust which frequently trades in debt securities and believe any premium or discount paid for such an investment is a capital item.
		Interest receivable on AAA rated money market funds and short term deposits are accounted for on an accruals basis.
		Underwriting commission is taken to revenue, unless any shares underwritten are required to be taken up, in which case the proportionate commission received is deducted from the cost of the investment.
	(e)	Expenses
		All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Consolidated Statement of Comprehensive Income, all expenses have been presented as revenue items except those where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. Accordingly the investment management fee and finance costs have been allocated 50% to revenue and 50% to capital, in order to reflect the Directors expected long-term view of the nature of the investment returns of the Company.
	(f)	Bank borrowings
		Interest-bearing bank loans and overdrafts are recorded at the proceeds received. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the Consolidated Statement of Comprehensive Income using the effective interest rate method.
	(g)	Finance costs and long-term borrowings
		Long-term borrowings are stated at the amount of the proceeds of issue net of expenses. The finance costs, being the difference between the net proceeds of borrowing and the total amount of payments that require to be made in respect of that borrowing, accrue evenly over the life of the borrowing and are allocated between capital and revenue.
		With the exception of the loan redemption costs incurred during 2010, which were allocated 100% to capital, finance costs have been allocated 50% to revenue and 50% to capital in the Consolidated Statement of Comprehensive Income, in order to reflect the Directors expected long-term view of the nature of the investment returns of the Company.
	(h)	Taxation
		The tax payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Consolidated Statement of Comprehensive Income because it excludes items of income or expenditure that are taxable or deductible in other years and it further excludes items that are never taxable or deductible (see note 6 for a more detailed explanation). The Group has no liability for current tax.
		Deferred tax is provided in full on timing differences which result in an obligation at the Balance Sheet date to pay more tax, or a right to pay less tax, at a future date at rates expected to apply when they crystallise, based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in financial statements. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered.
		The SORP requires that a transfer should be made from income to capital equivalent to the tax value of any management expenses that arise in capital but are utilised against revenue. The Directors consider that this requirement is not appropriate for an investment trust with an objective to provide a high and growing dividend that does not generate a corporation tax liability. Given there is only one class of shareholder and hence overall the net effect of such a transfer to the net asset value of the shares is nil no such transfer has been made.
	(i)	Foreign currencies
		Transactions involving foreign currencies are converted at the rate ruling at the time of the transaction. Assets and liabilities in foreign currencies are translated at the closing rates of exchange at the Balance Sheet date. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in capital reserve or the revenue account as appropriate.

		2011	2010
2.	Income	£'000	£'000
	Income from investments
	Dividend income from UK equity securities	1,441	1,244
	Dividend income from overseas equity securities	42	123
	Interest income from investments	410	486
	Stock dividends	39	-
		__________	__________
		1,932	1,853
		__________	__________
	Other income
	Interest on VAT recoverable on investment management fees	-	1
	Deposit interest	-	19
	Underwriting commission	4	-
		__________	__________
		4	20
		__________	__________
	Total revenue income	1,936	1,873
		__________	__________
	As per note 1 (d), the Company amortises the premium or discount on acquisition on debt securities against unrealised capital reserve. For 2011 this represented £65,000 (2010 - £27,000) which has been reflected in the capital column of the Consolidated Statement of Comprehensive Income.

		2011			2010
		Revenue	Capital	Total	Revenue	Capital	Total
3.	Investment management fees	£'000	£'000	£'000	£'000	£'000	£'000
	Investment management fee	162	162	324	151	151	302
		________	________	_______	_______	_______	_______
	For the year ended 31 December 2011 management and secretarial services were provided by Aberdeen Asset Managers Limited. The fee is at an annual rate of 0.75%, calculated monthly and paid quarterly. The fee is allocated 50% to capital and 50% to revenue.
	On 5 November 2007, the European Court of Justice ruled that management fees on investment trusts should be exempt from VAT. HMRC announced its intention not to appeal against this ruling to the UK VAT Tribunal and therefore protective claims were made in relation to the Company with HMRC. The Company has not been charged VAT on its investment management fees from 1 October 2007.
	The VAT charged on the investment management fees has been refunded in stages. The Manager has refunded £440,000 (excluding interest) for the period 1 January 2004 to 30 September 2007 and £288,000 (excluding interest) to the Company for VAT charged on investment management fees for the periods 28 August 1992 (commencement of trading) to 3 December 1996 and 1 January 2001 to 31 December 2003. The amounts received were included in the financial statements for the year ended 31 December 2008 and 31 December 2009 respectively. In addition, a further £32,000 (excluding interest) was refunded by the Manager and included in the prior year's financial statements. The repayment related to VAT charged on investment management fees for the quarter 1 July 2007 to 30 September 2007. This repayment was allocated to revenue and capital in line with the accounting policy of the Company for the periods in which the VAT was charged. In addition, interest of £132,000 was received and included in the financial statements to 31 December 2009. A further £1,000 of interest was included in the prior year's financial statements.

		2011	2010
4.	Other administrative expenses	£'000	£'000
	Directors' remuneration - fees as Directors	97	77
	Fees payable to auditors and associates:
	fees payable to the Company's auditors for the audit of the annual accounts	21	19
	Marketing fees	35	12
	Legal and professional fees	15	15
	Registrars fees	15	13
	Printing and postage	13	12
	Broker fees	30	-
	Directors & Officers' liability insurance	8	9
	Trade subscriptions	23	22
	Other management expenses	47	52
		__________	__________
		304	231
		__________	__________
	Marketing expenses of £35,000 (2010 - £12,000) were paid to the Manager in respect of marketing and promotion of the Company.
	The Company had no employees during the year (2010 - nil). No pension contributions were paid for Directors (2010 - £nil). Further details on Directors' Remuneration can be found in the Directors Remuneration Report on page 24.

		2011			2010
		Revenue	Capital	Total	Revenue	Capital	Total
5.	Finance costs and borrowings	£'000	£'000	£'000	£'000	£'000	£'000
	Bank loans	141	141	282	171	171	342
	Bank loan redemption costs	-	-	-	-	108	108
		________	________	________	________	________	________
		141	141	282	171	279	450
		________	________	________	________	________	________

6.	Taxation
	Management expenses arising on revenue items this year were sufficient to offset against taxable revenue. In accordance with accounting policy 1(h) described on page 32 no amount (2010 - £nil) has been credited to capital and charged to revenue as a notional corporation tax item.
	At 31 December 2011, the Company had net surplus management expenses and loan relationship deficits of £8,965,000 (2010 - £8,274,000) in respect of which a deferred tax asset has not been recognised. This is because the Company is not expected to generate taxable income in a future period in excess of the deductible expenses and deficits of that future period and, accordingly, it is unlikely that the Company will be able to reduce future tax liabilities through the use of existing surplus expenses and loan relationship deficits.
	The UK corporation tax rate was 28% until 31 March 2011 and 26% from 1 April 2011 giving an effective rate of 26.5% (2010 - effective rate of 28%). The tax assessed for the year is lower than the rate of corporation tax. The differences are explained below:
		2011			2010
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
	Profit/(loss) before tax	1,329	(5,022)	(3,693)	1,336	9,264	10,600
		________	________	________	________	________	________
	Taxation of return on ordinary activities at the standard rate of corporation tax	352	(1,331)	(979)	374	2,594	2,968
	Effects of:
	UK dividend income not liable to further tax	(405)	-	(405)	(373)	-	(373)
	Capital losses/(gains) disallowed for the purposes of corporation tax	-	1,251	1,251	-	(2,726)	(2,726)
	Zero coupon finance costs not an allowable tax deduction	-	-	-	-	16	16
	Income not subject to tax	(22)	-	(22)	(34)	-	(34)
	Excess management expenses not utilised	75	109	184	33	116	149
	Adjustment to prior year management expenses not utilised	-	(29)	(29)	-	-	-
		________	________	________	________	________	________
	Taxation charge for the year	-	-	-	-	-	-
		________	________	________	________	________	________

7.	Revenue and capital losses attributable to equity holders of the Company
	The revenue and capital losses attributable to equity holders of the Group for the financial year includes losses of £3,693,000 (2010 - profits of £10,600,000) which has been dealt with in the Company's financial statements.

		2011	2010
8.	Dividends	£'000	£'000
	Amounts recognised as distributions to equity holders in the period:
	Fourth interim dividend for the year ended 31 December 2010 of 1.50p (2009 - 1.75p) per share	332	387
	Three interim dividends for the year ended 31 December 2011 totalling 4.50p (2010 - 4.50p) per share	995	995
		________	________
		1,327	1,382
		________	________
	The fourth interim dividend of 1.50p per share, declared on 16 December 2011 and paid on 31 January 2012, has not been included as a liability in these financial statements.
	We also set out below the total dividends payable in respect of the financial year, which is the basis on which the requirements of Sections 1158-1159 of the Corporation Tax Act 2010 are considered:
		2011	2010
		£'000	£'000
	Three interim dividends for the year ended 31 December 2011 totalling 4.50p (2010 - 4.50p) per share	995	995
	Fourth interim dividend for the year ended 31 December 2011 of 1.50p (2010 - 1.50p) per share	332	332
		________	________
		1,327	1,327
		________	________

		2011	2010
9.	Return and net asset value per share	£'000	£'000
	The returns per share are based on the following figures:
	Revenue return	1,329	1,336
	Capital return	(5,022)	9,264
		________	________
	Net return	(3,693)	10,600
		________	________
	Weighted average number of shares in issue	22,109,765	22,109,765
		___________	___________
	The net asset value per share is based on net assets attributable to shareholders of £29,525,000 (2010 - £34,545,000) and on the 22,109,765 (2010 - 22,109,765) shares in issue at 31 December 2011.

		Group & Company
		2011	2010
10.	Non-current assets - securities at fair value	£'000	£'000
	Listed on recognised stock exchanges:
	United Kingdom	37,640	42,159
	Overseas	620	655
		________	________
		38,260	42,814
		________	________
		Group & Company
		2011	2010
		£'000	£'000
	Cost at 31 December 2010	36,203	38,355
	Investment holdings gains/(losses) at 31 December 2010	6,611	(3,408)
		________	________
	Fair value at 31 December 2010	42,814	34,947
	Purchases	8,178	11,401
	Amortised cost adjustments to fixed interest securities	(65)	(27)
	Sales - proceeds	(8,013)	(13,270)
	Sales - net gains/(losses)	60	(256)
	Movement in investment holdings gains during the year	(4,714)	10,019
		________	________
	Valuation at 31 December 2011	38,260	42,814
		________	________
	Cost at 31 December 2011	36,363	36,203
	Investment holdings gains at 31 December 2011	1,897	6,611
		________	________
	Fair value at 31 December 2011	38,260	42,814
		________	________
	For an analysis of investments between equity and fixed interest securities and for detailed interest rates, see pages 10 to 11.
		Group & Company
		2011	2010
	(Losses)/gains on investments	£'000	£'000
	Net realised gains/(losses) on sales	60	(256)
	Movement in fair value	(4,714)	10,019
		________	________
	(Losses)/gains on investments	(4,654)	9,763
		________	________
	The total transaction costs on the purchases and sales in the year were £44,000 (2010 - £59,000) and £7,000 (2010 - £11,000) respectively.
	All investments are categorised as held at fair value through profit and loss.

		Company
		2011	2010
11.	Subsidiary undertaking	£'000	£'000
	Shares at cost	-	-
		________	________
	On 2 September 2011 the Company applied to Companies House to dissolve Shirescot Securities Limited. The Company owned the whole of the issued ordinary share capital of its sole subsidiary undertaking, an investment dealing company registered in Scotland. The Company has since received notification that the dissolution date was 6 January 2012.
	As at 31 December 2011 Shirescot Securities Limited had net liabilities of £nil (2010 - net liabilities of £142,000). The inter-company balance was extinguished during the year and written off against the Company's capital reserve.

		Group		Company
		2011	2010	2011	2010
12.	Other receivables	£'000	£'000	£'000	£'000
	Accrued income & prepayments	354	287	354	287
	Due by subsidiary undertaking	-	-	-	142
	Other debtors	26	43	26	43
		________	________	________	________
		380	330	380	472
		________	________	________	________
	None of the above amounts are overdue.

			2011	2010
13.	Loan and zero coupon finance derivatives at fair value		£'000	£'000
	Bank loan included at amortised cost		10,000	10,000
			________	________
	Bank loan
	The Company has a three year facility of £10 million with National Australia Bank, which was drawn down in full on 29 July 2010 and rolled over monthly hence. On 30 November 2011 the loan was rolled over for 2 months at a rate of 2.86% per annum. The loan has subsequently been rolled over on 31 January 2012 for one month at a rate of 2.78%.
	The Directors are of the opinion that the fair value of the bank loan at 31 December 2011 is not materially different from the book value.
	Zero coupon finance
	The zero coupon finance arrangement comprised a set of separately traded financial instruments (FTSE 100 Index options) each with its own market value, which equated to their fair values. The options ran until July 2010 when the tranche taken out in July 2005, was repaid at a cost of £5.3 million.
	The amount charged to capital fluctuates over accounting periods due to market volatility over the life of the options but was approximately 5.5% per annum for the options which expired in July 2010.
	On repayment of the July 2010 tranche the collateral previously pledged was no longer required.
	The movements in the fair value of this finance were as follows:
		Group and Company
		2011		2010
		£'000		£'000
	At 31 December 2010	-		5,275
	Cost of closure of existing zero coupon finance arrangement	-		(5,333)
		________		________
		-		(58)
	Finance costs charged to capital	-		58
		________		________
	At 31 December 2011	-		-
		________		________

		Ordinary shares
		of 50 pence each
14.	Called-up share capital	Number	£'000
	Allotted and fully paid
	At 31 December 2011 and 31 December 2010	22,109,765	11,055
		___________	________
	The objective of the Company is to provide a high and growing dividend and capital growth from a portfolio invested principally in the ordinary shares of smaller UK companies and UK fixed income securities.
	The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance.
	The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes:
	the planned level of gearing, which takes account of the Investment Manager's views on the market;
	the level of equity shares in issue; and
	the extent to which revenue in excess of that which is required to be distributed should be retained.
	The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period.
	The Company does not have any externally imposed capital requirements.

		Group	Company	Group	Company
		2011	2011	2010	2010
15.	Retained earnings	£'000	£'000	£'000	£'000
	Capital reserve
	At 1 January 2011	7,571	7,571	(1,693)	(1,693)
	Current year transfer of subsidiary undertaking's reserves	-	142	-	-
	Net gains/(losses) on sales of investments during the year	60	60	(256)	(256)
	Movement in investment holdings gains during the year	(4,714)	(4,714)	10,019	10,019
	Dissolution of subsidiary undertaking	-	(142)	-	-
	Amortised cost adjustment relating to capital	(65)	(65)	(27)	(27)
	Zero coupon finance costs (note 13)	-	-	(58)	(58)
	Finance costs of borrowings (note 5)	(141)	(141)	(279)	(279)
	Investment management fee	(162)	(162)	(151)	(151)
	VAT recovered on management fees	-	-	16	16
		________	________	________	________
	At 31 December 2011	2,549	2,549	7,571	7,571
		________	________	________	________
	The capital reserve includes investment holding gains amounting to £1,897,000 (2010 - £6,611,000), as disclosed in note 10.
		Group	Company	Group	Company
		2011	2011	2010	2010
	Revenue reserve	£'000	£'000	£'000	£'000
	At 1 January 2011	1,995	2,137	2,041	2,183
	Current year transfer of subsidiary undertaking's reserves	-	(142)	-	-
	Revenue return	1,329	1,329	1,336	1,336
	Dividends paid	(1,327)	(1,327)	(1,382)	(1,382)
		________	________	________	________
	At 31 December 2011	1,997	1,997	1,995	2,137
		________	________	________	________
	The subsidiary undertaking's revenue reserves were reclassified as capital and subsequently written off on its dissolution.

16.	Risk management, financial assets and liabilities
	Risk management
	The Company's objective of providing a high and growing dividend with capital growth is addressed by investing in smaller UK market capitalisation equities to provide growth in capital and income and in fixed income securities to provide a high level of income.
	The impact of security price volatility is reduced by diversification. Diversification is by type of security - ordinary shares, preference shares, convertibles and corporate fixed interest - and by investment in the stocks and shares of companies in a range of industrial, commercial and financial sectors. The management of the portfolio is conducted according to investment guidelines, established by the Board after discussion with the Managers, which specify the limits within which the Manager is authorised to act.
	The Manager has a dedicated investment management process, as disclosed in the Directors' Report on pages 16 and 17, which ensures that the investment objective explained on page 2 is achieved. Stock selection procedures are in place based on the active portfolio management and identification of stocks. The portfolio is reviewed on a periodic basis by a Senior Investment Manager and also by the Manager's Investment Committee.
	The Company's Manager has an independent Investment Risk department for reviewing the investment risk parameters of all core equity, balanced, fixed income and alternative asset classes on a regular basis. The department reports to the Manager's Performance Review Committee which is chaired by the Manager's Chief Investment Officer. The department's responsibility is to review and monitor ex-ante (predicted) portfolio risk and style characteristics using best practice, industry standard multi-factor models.
	Additionally, the Manager's Compliance department continually monitor the Company's investment and borrowing powers and report to the Manager's Risk Management Committee.
	The Manager has a Business Risk department to consolidate risk management functions. The department is responsible for supporting management in the efficient identification of risk and resolution of control issues. The department incorporates Operational Risk, Breaches and Errors Risk Control Management, Counterparty Risk, and the Procedures and Business Control teams. The Head of Front Office risk reports directly to the Manager's Group Head of Risk.
	Financial assets and liabilities
	The Company's financial assets include investments, cash at bank and short-term debtors. Financial liabilities consist of bank loans and overdrafts, other short-term creditors and a long term creditor arising from a fixed rate term loan.
	The main risks the Company faces from its financial instruments are (i) market risk (comprising interest rate risk and other price risk), (ii) liquidity risk and (iii) credit risk. The Company has no exposure to foreign currency risk as it does not hold any foreign currency assets or have exposure to any foreign currency liabilities.
	The Company is subject to interest rate risk because bond yields are linked to underlying bank rates or equivalents, and its short-term borrowings and cash resources carry interest at floating rates. The interest rate profile is managed as part of the overall investment strategy of the Company.
	(i)	Market risk
		The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk and other price risk.
		Interest rate risk
		Interest rate movements may affect:
		-	the fair value of the investments in fixed interest rate securities;
		-	the level of income receivable on cash deposits;
		-	interest payable on the Company's variable rate borrowings.
		The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.
		The Board reviews on a regular basis the values of the fixed interest rate securities.
		Interest rate profile
		The interest rate risk profile of the portfolio of financial assets and liabilities (excluding ordinary shares and convertibles) at the Balance Sheet date was as follows:
				Weighted average	Weighted
				period for which	average interest	Fixed	Floating		Non- interest
				rate is fixed	rate	rate	rate		bearing
		As at 31 December 2011		Years	%	£'000	£'000		£'000
		Assets
		UK corporate bonds		8.93	6.62	4,957	-		-
		UK preference shares		-	8.45	2,531	-		-
		Cash		-	-	-	1,049		-
				________	________	________	________		________
		Total assets		-	-	7,488	1,049		-
				________	________	________	________		________
		Liabilities
		Long-term bank loan		0.08	2.86	(10,000)		-	-
				________	________	________		________	________
		Total liabilities		-	-	(10,000)		-	-
				________	________	________		________	________
		Total		-	-	(2,512)		1,049	-
				________	________	________	________		________
				Weighted average	Weighted
				period for which	average interest	Fixed	Floating		Non- interest
				rate is fixed	rate	rate	rate		bearing
		As at 31 December 2010		Years	%	£'000	£'000		£'000
		Assets
		UK corporate bonds		9.29	6.39	6,081	-		-
		UK preference shares		-	8.01	2,672	-		-
		Cash		-	-	-	1,552		-
				________	________	________	________		________
		Total assets		-	-	8,753	1,552		-
				________	________	________	________		________
		Liabilities
		Long-term bank loan		0.08	2.63	(10,000)	-		-
				________	________	________	________		________
		Total liabilities		-	-	(10,000)	-		-
				________	________	________	________		________
		Total		-	-	(1,247)	1,552		-
				________	________	________	________		________
		The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average interest rate on bank loan is based on the interest rate payable, weighted by the total value of the loan. The maturity date of the Company's loan is shown in note 13 to the financial statements.
		The cash assets consist of cash deposits on call earning interest at prevailing market rates.
		Short-term debtors and creditors have been excluded from the above tables.
		All financial liabilities are measured at amortised cost.

		Maturity profile
		The maturity profile of the Company's financial assets and liabilities at the Balance Sheet date was as follows:
				Within	Within		Within		Within	Within	More than
				1 year	1-2 years		2-3 years		3-4 years	4-5 years	5 years
		At 31 December 2011		£'000	£'000		£'000		£'000	£'000	£'000
		Fixed rate
		UK corporate bonds		637	-		297		620	635	2,768
		Bank loan		-	(10,000)		-		-	-	-
				________	________		________		________	________	________
				637	(10,000)		297		620	635	2,768
				________	________		________		________	________	________
		Floating rate
		Cash		1,049	-		-		-	-	-
				________	________		________		________	________	________
		Total		1,686	(10,000)		297		620	635	2,768
				________	________		________		________	________	________
				Within	Within		Within		Within	Within	More than
				1 year	1-2 years		2-3 years		3-4 years	4-5 years	5 years
		At 31 December 2010		£'000	£'000		£'000		£'000	£'000	£'000
		Fixed rate
		UK corporate bonds		737	-		-		301	-	5,043
		Bank loan		-	-		(10,000)		-	-	-
				________	________		________		________	________	________
				737	-		(10,000)		301	-	5,043
				________	________		________		________	________	________
		Floating rate
		Cash		1,552	-		-		-	-	-
				________	________		________		________	________	________
		Total		2,289	-		(10,000)		301	-	5,043
				________	________		________		________	________	________
		The maturity table above excludes the value of holdings in UK irredeemable preference shares held at the year end, which equated to £2,531,000 (2010 - £2,672,000).
		Interest rate sensitivity
		The sensitivity analysis below have been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the Balance Sheet date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.
		If interest rates had been 100 basis points higher or lower and all other variables were held constant, the Company's:
		-	profit before tax for the year ended 31 December 2011 would increase/decrease by £10,000 (2010 - £16,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances. These figures have been calculated based on cash positions at each year end.
		-	profit before tax for the year ended 31 December 2011 would increase/decrease by £258,000 (2010 - £237,000). This is also mainly attributable to the Company's exposure to interest rates on its fixed interest securities. This is based on a Value at Risk ('VaR') calculated at a 99% confidence level.
		In the opinion of the Directors, the above sensitivity analyses would not necessarily reflect the year as a whole, since the level of exposure changes frequently as part of the interest rate risk management process used to meet the Company's objectives. The risk parameters used will also fluctuate depending on the current market perception.
		Other price risk
		Other price risks (ie changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments.
		It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular sector. The allocation of assets to specific sectors and the stock selection process, as detailed on pages 16 and 17, both act to reduce market risk. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy. All of the investments held by the Company are listed on the London Stock Exchange, with the exception of its holding in Telecome Italia 5.625% 2015, which is traded on Clearstream in Luxembourg.
		Other price sensitivity
		If market prices at the Balance Sheet date had been 10% higher or lower while all other variables remained constant, the profit before tax attributable to ordinary shareholders for the year ended 31 December 2011 would have increased/decreased by £3,077,000 (2010 - increase/decrease of £3,406,000). This is based on the Company's equity portfolio and convertibles held at each year end.
	(ii)	Liquidity risk
		This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.
		Liquidity risk is not considered to be significant as the Company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the use of loan and overdraft facilities (note 13).
	(iii)	Credit risk
		This is failure of the counter party to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss.
		The Company considers credit risk not to be significant as it is actively managed as follows:
		-	where the Manager makes an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Company of default;
		-	investments in quoted bonds are made across a variety of industry sectors so as to avoid concentrations of credit risk;
		-	transactions involving derivatives are entered into only with investment banks, the credit rating of which is taken into account so as to minimise the risk to the Company of default;
		-	investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the Manager, and limits are set on the amount that may be due from any one broker;
		-	the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the review of failed trade reports on a daily basis. In addition, both stock and cash reconciliations to the custodian's records are performed on a daily basis to ensure discrepancies are investigated on a timely basis. The Manager's Compliance department carries out periodic reviews of the Custodian's operations and reports its finding to the Manager's Risk Management Committee.
		-	transactions involving derivatives, structured notes and other arrangements wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest are subject to rigorous assessment by the Manager of the credit worthiness of that counterparty. The Company's aggregate exposure to each such counterparty is monitored regularly by the Board;
		-	cash is held only with reputable banks with high quality external credit enhancements.
		None of the Company's financial assets are secured by collateral or other credit enhancements.
		Credit risk exposure
		In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit risk at 31 December was as follows:
						2011				2010
						Balance		Maximum		Balance	Maximum
						Sheet		exposure		Sheet	exposure
						£'000		£'000		£'000	£'000
		Non-current assets
		Securities at fair value through profit or loss				38,260		38,260		42,814	42,814
		Current assets
		Trade and other receivables				26		26		43	43
		Accrued income				354		354		287	287
		Cash and cash equivalents				1,049		1,049		1,552	1,552
						________		________		________	________
						39,689		39,689		44,696	44,696
						________		________		________	________
		None of the Company's financial assets is past due or impaired.
		Fair value of financial assets and liabilities
		The fair value of the short term loan is shown on page 37. The book value of cash at bank and bank loans and overdrafts included in these financial statements approximate to fair value because of their short-term maturity. Investments held as dealing investments are valued at fair value. The carrying values of fixed asset investments are stated at their fair values, which have been determined with reference to quoted market prices. For details of bond maturities and interest rates, see page 11. For all other short-term debtors and creditors, their book values approximate to fair values because of their short-term maturity.
		Gearing
		The Company has in place a £10 million unsecured loan. The Company augments this from time to time with short-term borrowings so that greater returns to shareholders may be generated from the capital stock thus enlarged. Although this gearing increases the opportunity for gain, it also increases the risk of loss in falling markets. The risk of increased gearing is managed by retaining the flexibility to reduce short term borrowings as appropriate.
		Gearing is also restricted by the various covenants applicable to the different borrowings. The unsecured loan contains a clause which stipulates that total borrowings cannot exceed 40% of adjusted assets. As at 31 December 2011 the reported ratio was 25.2% (2010 - 22.4%).
		There is a second short term borrowing facility with another major bank for £1 million. In respect of this lender, the Company's net asset value must not fall below £10 million. As at 31 December 2011 the net asset value stood at £29.5 million (2010 - £34.5 million).

17.	Income enhancement
	Zero coupon finance (note 13) raised in the derivatives market was invested in corporate fixed interest securities to augment the income available for distribution to shareholders. The cost of these funds was fixed when they were raised, and was charged wholly to capital.
	In addition the SORP recommends that debt securities are accounted for on an effective yield basis with the associated adjustment being allocated to revenue. The Company has decided to allocate this adjustment to capital as explained in note 1(d). The effect of this treatment on revenue and capital is set out below.
	Finally, as explained in note 1(h) revenue may utilise surplus management expenses that have arisen in capital but does not compensate capital for this tax effect as recommended by the SORP.
	The effect of these income enhancement strategies on capital and income is summarised in the table below. There is a risk with these strategies that capital will be eroded unless the charges to capital are covered by gains elsewhere in the portfolio, and this is managed by investing in a portfolio of shares which in the long run is expected to provide adequate capital growth to absorb the effective yield adjustment while paying growing dividends which contribute to the pursuit of the Company's objectives.
	In following this strategy, the Directors recognise that there is only one class of shareholder.
		2011		2010
		Income	Capital	Income	Capital
		£'000	£'000	£'000	£'000
	Finance costs arising on zero coupon finance charged to capital	-	-	-	(58)
	Finance costs arising on bank loan finance	(71)	(71)	(30)	(30)
	Return on corresponding investments	161	(56)	199	(355)
	Amortised cost adjustment charged to capital on debt securities	65	(65)	27	(27)
		________	_______	_______	_______
		155	(192)	196	(470)
		_______	_______	_______	_______

18.	Fair value hierarchy
	Under IFRS 7 'Financial Instruments: Disclosures' an entity is required to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the following levels:
	-	Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
	-	Level 2: inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly (ie as prices) or indirectly (ie derived from prices); and
	-	Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
	The financial assets and liabilities measured at fair value in the statement of financial position are grouped into the fair value hierarchy at 31 December 2011 as follows:
					Level 1		Level 2		Level 3	Total
			Note		£'000		£'000		£'000	£'000
	Financial assets at fair value through profit or loss
	Quoted equities		a)		32,187		-		-	32,187
	Quoted bonds		b)		6,073		-		-	6,073
					_______		_______		_______	_______
	Total				38,260		-		-	38,260
				_______		_______		_______		_______
	As at 31 December 2010
				Level 1		Level 2		Level 3		Total
			Note	£'000		£'000		£'000		£'000
	Financial assets at fair value through profit or loss
	Quoted equities		a)	35,572			-	-		35,572
	Quoted bonds		b)	7,242			-	-		7,242
				_______			_______	_______		_______
	Total			42,814			-	-		42,814
				_______		_______		_______		_______
	a)	Quoted equities
		The fair value of the Group's investments in quoted equities have been determined by reference to their quoted bid prices at the reporting date. Quoted equities included in Fair Value Level 1 are actively traded on recognised stock exchanges.
	b)	Quoted bonds
		The fair value of the Group's investments in Corporate quoted bonds has been determined by reference to their quoted bid prices at the reporting date.

Additional Notes to the Annual Financial Report

This Annual Financial Report announcement is not the Company's statutory accounts for the year ended 31 December 2011. The statutory accounts for the year ended 31 December 2011 received an audit report which was unqualified.

The statutory accounts for the financial year ended 31 December 2011 were approved by the Directors on 27 February 2012 but will not be filed with the Registrar of Companies until after the Company's Annual General Meeting which is to be held at 12 noon on 18 April 2012 at Bow Bells House, One Bread Street, London EC4M 9HH.

The Annual Report will be posted to shareholders in March 2012 and additional copies will be available from the Manager (Investor Helpline - Tel. [phone]) or by download from the Company's webpage

(www.aberdeensmallercompanies.co.uk)

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.

For Aberdeen Smaller Companies High Income Trust PLC

Aberdeen Asset Management PLC, Secretaries

 

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