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. 0845 60 24 247) 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

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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