Annual Financial Report

RNS Number : 5113B

Aberdeen Smaller Co's High Inc Tst

05 March 2014

ABERDEEN SMALLER COMPANIES HIGH INCOME TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2013

STRATEGIC REPORT

1. COMPANY SUMMARY AND FINANCIAL HIGHLIGHTS

The Company

The Company is an investment trust and its Ordinary shares are listed on the premium segment of the London Stock Exchange. The Company aims to attract long term private and institutional investors wanting to benefit from the income and capital growth prospects of smaller companies.

Our investment trust is a collective investment vehicle which invests in a diversified portfolio of securities and which enables a spread of investment and risk. The Company is governed by an independent Board of Directors and the management of the Company's investments is delegated to an Investment Manager.

Investment Objective

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.

Company Benchmark

FTSE SmallCap Index - excluding Investment Companies (total return).

Manager

The Company is managed by Aberdeen Asset Managers Ltd ("AAM" or the "Manager").

Website

Up-to-date information can be found on the Company's website - www.aberdeensmallercompanies.co.uk

Financial Highlights

	2013	2012
Net asset value total return	+45.0%	+32.2%
Share price total return	+52.1%	+50.7%
Earnings per share (revenue)	6.8p	5.7p
Dividend per share	6.25p	6.05p

2. OVERVIEW OF STRATEGY

Introduction

The purpose of this report is to provide shareholders with details of the Company's strategy and business model as well as the principal risks and challenges it faces.

The business of the Company is that of an investment trust and the Directors do not envisage any change in this activity in the foreseeable future.

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 investing in different categories of investment and by the Manager adhering to various guidelines set by the Board.

Gearing is used with the intention of enhancing income and long-term total returns.

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 14 to the financial statements. The Board has adopted a matrix of the key risks that affect its business.

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 under investment guidelines determined by the Board. The Board regularly reviews these guidelines to ensure they remain appropriate and Board approval is required before any exceptions are permitted.

The Manager invests in equities, bonds and preference shares, following their investment processes.

(i) 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. Great emphasis is placed on understanding the business and understanding how it should be valued. New investments are not made without the Manager having first met management of the investee company, undertaken further analysis and written detailed notes to outline the underlying investment merits. 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 which include:

· Maximum equity gearing of 110% of Net Asset Value

· Maximum 5% of investee company's ordinary shares

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

· No unquoted investments

(ii) 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:

· 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

Gearing Risk

Gearing is used with the intention of enhancing income and long-term total returns. Gearing has the effect of accentuating market falls and market gains. The Company's gearing currently in place is a two year facility comprising a £5 million fixed and £5 million floating rate. The facility commenced on 23 July 2013 and was fully drawn at the period end.

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

Scottish Independence

As a Scottish-registered Company, the Board is aware that there is uncertainty arising in relation to the referendum on Scottish independence due on 18 September 2014. The Board has given consideration to the implications that this might have for the Company, however, considers that it is too early at this stage to prejudge the outcome of a vote, or of any subsequent negotiations as they may affect the Trust and its shareholders.

Performance and Outlook

At each Board meeting, the Directors consider a number of performance measures to assess the Company's success in achieving its objectives. 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 regularly discussed as part of Board meeting agendas.

A review of the Company's activities and performance during the year to 31 December 2013 and future developments is detailed in the Chairman's Statement and the Manager's Review. This covers market background, investment activity, portfolio strategy, dividend and gearing policy and investment outlook. A comprehensive analysis of the portfolio is provided in the Portfolio of Investments and Distribution of Assets and Liabilities (see below).

Key Performance Indicators (KPIs)

The main KPIs used by the Board in assessing the Company's performance include:

· Net asset value total return v benchmark

· Share price total return

· Premium/(discount)

· Income generation

Details of the Company's results are provided below.

Duration

The Company does not have a fixed life. However, the Company's Articles of Association require that an ordinary resolution is proposed at the eighth and then every fifth Annual General Meeting to allow the Company to continue as an investment trust for a further five year period. The present five year mandate expires at the Annual General Meeting to be held in 2015.

Board Diversity

The Board recognises the importance of having a range of skilled, experienced individuals with the appropriate knowledge in order to allow the Board to fulfill its obligations. At 31 December 2013, the Board consisted of three males and one female. The Company has no employees. The Board's statement on diversity is set out in the Statement of Corporate Governance.

Employee and Socially Responsible Policies

As the Company has delegated the management of the portfolio, it has no employees and therefore has no requirement for disclosures in this area. The Company's socially responsible investment policy is in the Statement of Corporate Governance.

Global Greenhouse Gas Emissions

The Company has no greenhouse gas emissions to report from the operations of its Company, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013.

The Manager's corporate socially responsible policy including environmental policy can be found on http://www.aberdeen-asset.com/aam.nsf/groupCsr/home.

Carolan Dobson

Chairman

4 March 2014

3. CHAIRMAN'S STATEMENT

Overview

I am pleased to report that our Trust delivered another year of very strong growth. The Trust delivered a Net Asset Value (NAV) total return of 45.0%, the discount narrowed and the share price total return was 47.2%. This compares favourably against the total return of the FTSE Small Cap (excluding Investment Trust) index which was 43.9%.

Our Trust has now delivered good absolute and relative returns over both the short and long term and this is the consistency of returns that we are striving for as a Board. We understand there may be periods of volatility ahead but the quality of the companies in which the Trust invests leaves the portfolio well placed to deal with these conditions.

We are also pleased that we have grown the dividend over the last two years and this has been at the forefront of our thoughts throughout our Board meetings. As a Board, we are very aware of how important the yield is to our shareholders and this will continue to be an area of focus for us looking ahead.

Performance

Smaller companies ended 2013 at post financial crisis and two decade highs. This might come as a surprise given the economic backdrop has only recently improved but there is a case for sentiment improving and 2014 expectations for the UK and Eurozone economies are showing signs of recovery. Against this the Trust delivered a balanced return across Equity, Fixed Income and Preference share portfolios. The Equity portfolio returned 45.0%, Fixed Income a robust 12.8%, and Preference shares 9.6%.

The Manager has spoken consistently about valuations looking stretched across equity and bond markets through the course of the year. The Manager has therefore been active in taking profits in strongly performing markets and reinvesting the proceeds into areas where they identified relative value. There were periods where value was elusive and this was not only an equity phenomenon; bond markets were similarly identified as being expensive at the onset of the year. The Manager and the Board therefore reviewed the potential capital loss from increases in interest rates and changes to the shape of the yield curve. As bond yields were at or near historic lows and with preservation of capital at the forefront of our thoughts, we sold some bond positions to further reduce the duration. Having the ability to search out value in both bond and equity markets and managing the portfolio as a cohesive entity is an important feature of our Trust. The proceeds realised from reducing our bond portfolio were used to increase our equity weighting, where we saw better valuations and higher yields. This increased the equity gearing to a modest 104%.

Strategy

Every year the Board and Manager set clear objectives for the year ahead. This has to be flexible as markets do not stand still but it is important to scenario plan, leading us to be proactive rather than reactive. This is normally conducted as usual course of business but we supplement this with reviews from the Manager on specific topics. In 2013 one of the topics we looked at was financing. This helped us formulate our views on the best course of action for the coming years and was integral in the decision making process. This year we also looked in more depth at the revenue account across the different asset classes and set parameters on the level of the equity yield premium that we should try to achieve.

This was an interesting exercise and engendered considerable debate around total, capital or income returns. These are really all intertwined and whilst we obviously strive to deliver the best total return, a balance of capital and income growth is an important goal. The strong share price performance of a number of companies had led to lower yields and the portfolio bias had swung towards growth at the expense of income. Inaddition we could not seek out yield in the bond market as we were reducing our exposure due to the very low yields. The decision was taken to sell some long standing equity holdings that through performance had moved to very low yields and seek out new holdings with good prospects on higher yields. Later in our report the Manager will explain the stock specifics of the changes. Hindsight is always wonderful but this proved to be the right decision for us and we saw strong capital and income growth delivered.

Gearing/Debt

We referred to the refinancing of the £10m facility in the half year report and accounts. We believe that we got the best of both worlds with a combination of a £5m fixed and £5m floating rate two year facility. This was also the most cost effective solution for our shareholders coming in cheaper than the previous financing, whilst also giving us some protection should interest rates rise. It is also worth pointing out that, with the growth in gross assets, the absolute level of gearing has fallen to 16% (Debt/Gross Assets). This is a comfortable level of debt to hold throughout an economic cycle as we are mindful that the share prices of smaller companies can be volatile.

Whilst we are currently comfortable with our position we have retained flexibility. We will keep this on our agenda especially in an environment of rising interest rates which may offer up some interesting future opportunities.

Dividends

As stated in my opening remarks this has been a tough year for income investors. This may look at odds with the 19% growth in revenue that the Trust delivered but the majority of this was derived from special dividends: Hiscox, Savills, Aveva, and Elementis. It's worth saying that buying companies with strong balance sheets is part of the Manager's process and special dividends are one option for such companies to return excess liquidity to shareholders. Whilst we therefore don't expect these to recur every year, it's not altogether surprising when this happens and this has allowed us to add to our already strong revenue reserves. We have used these reserves before during tough periods to supplement the income and as a Board we would be comfortable to do this again to support the dividend through tough times. The dividend increase of 3.3% continues the Board's plan to deliver steady dividend growth. The yield on the Trust as a whole has reduced due to the strong share price performance but at 2.8% it remains at a 30% premium to the index yield of 2.2%.

The Manager's expectations for earnings growth in 2014 for smaller companies are for mid-single digit earnings per share growth though it is still too early in the year for company management to be giving guidance but the Manager believes this to be a solid base to work from. A sustained recovery in the economic backdrop could see these figures trend higher.

Alternative Investment Fund Managers Directive ("AIFMD")

Shareholders will be aware of the AIFMD, which creates a European-wide framework for regulating managers of alternative investment funds ("AIF"s). Listed investment companies such as ASCHIT fall within the definition of an AIF. The AIFMD is intended to reduce systemic risk created by the financial sector and aims to improve regulation, enhance transparency and investor protection, develop a single EU market for AIFs and implement effective mechanisms for micro- and macro-prudential oversight. The AIFMD came into force in July 2013 but a transitional period means that investment companies have until July 2014 to comply with the relevant regulations. Your Board has agreed in principle to appoint a subsidiary of Aberdeen Asset Management PLC to act as the Company's AIFM and is currently in the process of finalising the appointment of a Depositary as well as revising the investment management agreement, both consequences of implementing the AIFMD.

Suitable for Retail Investors

The Company currently conducts its affairs so that the Ordinary shares issued by ASCHIT can be recommended by Financial Advisers to ordinary retail investors in accordance with the FCA's rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future.

The Ordinary shares are excluded from the FCA's restrictions which apply to non-mainstream investment products because they are shares in an investment trust.

Outlook

As a Board we are comfortable with the Manager's current positioning. We have retained flexibility in the bond portfolio to allocate more capital but we are happy to be patient in the pursuit of more attractive yields. Equity markets are still expensive but with their revenue exposed to a UK and Eurozone recovery we can see this being another good year for smaller companies from a capital and income perspective.

Carolan Dobson

Chairman

4 March 2014

4. MANAGER'S REVIEW

Background

In 2013 smaller companies globally took centre stage with the 44% total return in UK smaller companies joined by strong returns across the Eurozone. A rebound in peripheral Europe saw Portugal rise 70%, Italy 51%, Ireland 49% and Spain 48% but we also saw stronger regions like Sweden and Switzerland rising 40% and 35% respectively.

Turning to performance, 2013 was a year for stock pickers with a number of companies and sectors, in particular mining, delivering large losses. As the Chairman pointed out a pleasing part of performance was the returns delivered across the asset classes which we will put more colour on throughout this report. It is also important to outline that, whilst capital returns have been stellar, finding yield remains tough. The Trust's NAV and share price rose 275% and 460% over the last five years respectively but the other side of this is that we have seen significant yield contraction. There are always pockets of value and attractive yields but it is becoming tougher to find. Fixed Income markets have not been much better with an increased level of issuance coupled with strong demand driving yields to unsustainable levels.

Performance

The equity portfolio had another strong year. We said last year, and it is worth repeating, that from year to year we do not chase themes or trends and with turnover low the core portfolio remains broadly as it was in 2012. The performance is an outcome therefore of the research, knowledge and understanding of the companies that we have built up over many years.

That said we did make some changes in the first quarter to improve the yield. Putting a little more colour to this the process of deciding what changes to make were based on company fundamentals and valuations with yield at the heart of the discussion. We looked at all the holdings that were yielding less than the market and questioned the opportunity cost from a yield perspective in total return terms. As you would expect some decisions were easier than others. The sale of Weir Group and Melrose, both FTSE 100 companies with sub market yields, was fairly easy in the overall context. We also chose to reduce Oxford Instruments, Victrex, Savills and housebuilder Bellway. All of these had performed very well over the medium term and with valuations up with events we trimmed our positions. In terms of reinvestment in the main we added to companies already held in the fund including XP Power, Elementis and Berendsen. We raised our weight in Acal a Pan-European distributor of electrical and electronic components. We also introduced two new financials to the portfolio; Hiscox and Close Brothers. Whilst these were new names to the portfolio they were not new names to us as a team having first met with Close back in 2003 and Hiscox in 2010. We had held these in other portfolios and therefore understood the business models and the diversification these would bring to the portfolio.

Hiscox is a Lloyds of London insurance business and the better known of the two names. Hiscox can be split into two divisions with half the business speciality/niche/retail/small-ticket insurance where they aim to lead on pricing. The other half is traditional underwriting of large syndicated deals including property, marine, or catastrophe risk. The management team have a disciplined approach to capital allocation and during 2013 they returned excess liquidity to shareholders. The second new entrant is Close Brothers which is a very different proposition with the majority of the profits delivered by their banking division. They lend to niche areas of the market with revenue equally split between retail, commercial and property markets. They are a conservative lender but due to the retreat of the high street banks they have grown the loan book double digit in the last four years. They have managed to do this whilst keeping the loss ratio low and with a much higher net interest margin than their peers. They also have a market making business Winterfloods and an Asset Management business that have the ability to add value over the medium term.

It was pleasing that our larger holdings were generally our better performers including Wilmington, RPC, Berendsen and XP Power. We also had very few bad performers over the year with only three companies delivering negative returns: Greggs, McBride and Devro. Our decisions to avoid mining and a number of profit warnings were well rewarded especially for a consolidated portfolio of 43 names where we have conviction positions to maximise returns.

Bonds and Preference Shares

Bond markets have had a mixed year. The first half saw events outside of the UK weigh heavily on bond sentiment. Disappointing economic data from Europe and the US, coupled with monetary stimulus from the Bank of Japan initially led to a fall in bond yields. However, comments from the Federal Reserve surrounding the possibility of tapering asset purchases at a faster pace and an improvement in UK economic data overwhelmed markets and led to short, medium and long dated gilt yields rising aggressively from late May. Speculation over Federal Reserve tapering dominated during the second half of the year but when it eventually occurred markets took in their stride. The UK market in the latter half of the year has also been buoyed by a raft of positive economic news. The 7% unemployment threshold is also in sight and whilst this does not necessarily mean the Bank of England will raise rates expectations for rate rises have crept up.

Turning to the portfolio itself we have been very active throughout the year. Firstly with very strong markets and yields contracting we reviewed our holdings alongside the equity portfolio. With a number of yields below that achievable in equities with little hope for capital appreciation we exited a number of positions. We sold out of Telecom Italia and Telefonica and we tendered our position in Society of Lloyds. With expectations of interest rate rises capital preservation was at the forefront of our decision to exit these holdings. Performance has again been very strong with the portfolio returning 12.8% driven predominately by the NatWest subordinated financial which recovered with the wider financial market.

The preference share portfolio also delivered a near 10% return. These can behave more like equity and following a rebound in the underlying Aviva share price the General Accident and Aviva preference shares were the top performers. More recently they have surged to post financial crisis highs and while they are important from a revenue perspective at less than 7% of the gross assets their impact on the portfolio as a whole is diminishing.

Dividends

As we said in the opening remarks yield is a scarce commodity at the moment. We understand, as do the Board, how important it is to keep growing the dividend. This is why we conducted the review and the changes we made allowed us to cover the dividend comfortably for 2013.

Looking out to 2014 companies remain cautious in growing their dividends and with the outlook for moderate earnings growth we would expect to see dividends grow at a similar level. Expectations for dividend growth are in the range of 5-8% excluding the potential for any special returns although this could accelerate if earnings turn out to be more positive.

Outlook

It is very early in the year to be giving any predictions for 2014 but with the UK and European backdrop improving we could see another decent year for smaller companies. We are not expecting anything like the returns of 2013 but with around 70% of the Trust's earnings exposed to UK and Europe a pick-up in growth could feed through to improved earnings. We are also keeping a close eye on valuations and with this in mind will continue to take advantage of opportunities in the market to reallocate capital where we feel more attractive valuations exist. In summation we feel well positioned heading into 2014 with the backdrop improving.

Aberdeen Asset Managers Limited

4 March 2014

5. RESULTS AND PERFORMANCE

Financial Highlights

	31 December 2013	31 December 2012	% change
Total investments	£60,820,000	£45,694,000	+33.1
Shareholders' funds	£52,618,000	£37,466,000	+40.4
Market capitalisation	£49,305,000	£33,496,000	+47.2
Net asset value per share	237.99p	169.45p	+40.4
Share price (mid market)	223.00p	151.50p	+47.2
Discount to adjusted NAV{A}	5.7%	9.8%
Net gearing{B}	15.8%	22.4%
Ongoing charges ratio{C}	1.62%	1.90%

Dividends and earnings
Revenue return per share{D}	6.77p	5.69p	+19.0
Dividends per share{E}	6.25p	6.05p	+3.3
Dividend cover	1.08	0.94
Revenue reserves{F}	£2,052,000	£1,927,000
	_____________	_____________	_____________

{A} Based on IFRS NAV above reduced by dividend adjustment of 1.60p (2012 - 1.55p).
{B} Calculated in accordance with AIC guidance "Gearing Disclosures post RDR"
{C} The ongoing charges ratio has been calculated in accordance with guidance issued by the AIC as the total of investment management fees (excluding performance fees) and administrative expenses divided by the average cum income net asset value throughout the year.
{D} Measures the revenue earnings for the year divided by the weighted average number of Ordinary shares in issue (see Statement of Comprehensive Income).
{E} The figures for dividends per share reflect the years in which they were earned (see note 7).
{F} The revenue reserve figure does not take account of the fourth interim dividend amounting to £354,000 (2012 - £343,000).

	1 year	3 year	5 year
	% return	% return	% return
Net asset value	+45.0	+70.3	+258.2
Share price (based on mid price)	+52.1	+88.9	+458.2
FTSE SmallCap Index (excluding Investment Companies)	+43.9	+66.3	+206.6
FTSE All-Share Index	+20.8	+31.0	+95.2

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	1.55p	10 April 2013	12 April 2013	30 April 2013
Second interim dividend	1.55p	10 July 2013	12 July 2013	31 July 2013
Third interim dividend	1.55p	16 October 2013	18 October 2013	31 October 2013
Fourth interim dividend	1.60p	8 January 2014	10 January 2014	31 January 2014
	___________
2013	6.25p
	___________

First interim dividend	1.50p	4 April 2012	10 April 2012	27 April 2012
Second interim dividend	1.50p	4 July 2012	6 July 2012	27 July 2012
Third interim dividend	1.50p	3 October 2012	5 October 2012	26 October 2012
Fourth interim dividend	1.55p	9 January 2013	11 January 2013	31 January 2013
	___________
2012	6.05p
	___________

6. PORTFOLIO INVESTMENTS

Investment Portfolio - Ordinary Shares

	Valuation	Total	Valuation
	2013	portfolio	2012
Company	£'000	%	£'000
RPC Group	2,626	4.3	1,407
Fenner	2,401	4.0	1,514
Wilmington	2,306	3.8	1,581
Euromoney Institutional Investor	2,025	3.3	1,288
XP Power	2,015	3.3	1,201
Dechra Pharmaceuticals	1,651	2.7	1,251
Close Brothers	1,619	2.7	-
Elementis	1,588	2.6	939
Chesnara	1,587	2.6	952
Interserve	1,576	2.6	1,122
Ten largest investments	19,394	31.9
TT Electronics	1,546	2.5	1,130
Berendsen	1,545	2.5	1,312
Helical Bar	1,519	2.5	1,071
Bellway	1,429	2.4	1,148
Morgan Sindall	1,412	2.3	967
Bloomsbury Publishing	1,382	2.3	619
Rathbone Brothers	1,367	2.2	1,100
BBA Aviation	1,268	2.1	1,026
Hiscox	1,206	2.0	-
Numis Corporation	1,196	2.0	674
Twenty largest investments	33,264	54.7
Devro	1,172	1.9	494
Fisher James	1,162	1.9	753
Huntsworth	1,145	1.9	531
Dignity	1,123	1.9	804
Robert Walters	1,081	1.8	643
Fuller Smith & Turner 'A'	1,080	1.8	894
Restaurant Group	1,054	1.7	1,128
Savills	995	1.6	926
Victrex	990	1.6	1,098
Acal	932	1.5	-
Thirty largest investments	43,998	72.3
Oxford Instruments	929	1.5	1,309
Anite	873	1.4	-
A G Barr	857	1.4	750
Intermediate Capital Group	832	1.4	626
Mothercare	814	1.4	850
Hansteen	811	1.3	-
Aveva Group	774	1.3	832
Greggs	749	1.2	645
Keller Group	747	1.2	673
McBride	702	1.2	761
Forty largest investments	52,086	85.6
Domino Printing	688	1.1	525
Menzies (John)	515	0.9	466
Majestic Wine	390	0.7	340
Total Ordinary shares	53,679	88.3

Investment Portfolio - Other Investments

	Valuation	Total	Valuation
	2013	portfolio	2012
Company	£'000	%	£'000
Convertibles
Balfour Beatty Cum Conv 10.75%	1,034	1.7	1,098
	___________	___________	___________
Total Convertibles	1,034	1.7
	___________	___________	___________

Corporate Bonds
National Westminster 5.98%	893	1.5	618
Stagecoach Group 5.75% 2016	657	1.1	666
Wales & West Utilities Finance 6.75% 2036	572	0.9	584
Electricite de France 6% {A}	518	0.9	-
Anglian Water 4.5% 2026	480	0.8	-
	___________	___________	___________
Total Corporate Bonds	3,120	5.2
	___________	___________	___________

Preference shares
Aviva 8.75%	1,174	1.9	1,141
General Accident 8.875%	1,123	1.8	1,100
Ecclesiastical Insurance 8.625%	690	1.1	705
	___________	___________	___________
Total Preference shares	2,987	4.8
	___________	___________	___________
Total Other Investments	7,141	11.7
	___________	___________	___________
Total investments	60,820	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
	2012		Purchases	Sales	Other{A}	(losses)	2013
	£'000	%	£'000	£'000	£'000	£'000	£'000	%
Listed investments
Ordinary shares	36,698	98.0	8,742	(6,817)	-	15,056	53,679	102.0
Convertibles	1,098	2.9	-	-	-	(64)	1,034	2.0
Corporate bonds	4,952	13.2	992	(3,139)	(32)	347	3,120	5.9
Other fixed interest	2,946	7.9	-	-	-	41	2,987	5.7
	______	______	________	______	________	________	______	______
	45,694	122.0	9,734	(9,956)	(32)	15,380	60,820	115.6
	________	________	________	________	________	________	________	________
Current assets	1,965	5.2	-				2,021	3.8
Other current liabilities	(193)	(0.5)	-				(223)	(0.4)
Short-term loan	(10,000)	(26.7)	-				-	-
Long-term loan	-	-	-				(10,000)	(19.0)
	______	______	________	_______	________	_______	______	______
Net assets	37,466	100.0					52,618	100.0
	______	______	________	_______	________	_______	______	______
Net asset value per Ordinary share	169.5p						238.0p
	______						______

{A} Amortisation adjustment of £32,000 (see note 2).

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report & Accounts and the financial statements, in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with UK Accounting Standards.

The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing these financial statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgments and estimates that are reasonable and prudent;

· state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

· prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Statement of Corporate Governance that comply with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

We confirm that to the best of our knowledge:

· the financial statements, prepared in accordance with the applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

· that in the opinion of the Directors, the Annual Report and Accounts taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Company's performance, business model and strategy; and

· the Strategic Report and Directors' Report include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces.

For and on behalf of Aberdeen Smaller Companies High Income Trust PLC

James West

Chairman of the Audit Committee

4 March 2014

GOING CONCERN

The Company's assets comprise mainly readily realisable securities which can be sold to meet funding commitments if necessary. The Company has a two year credit facility in place which is available until July 2015. The Board considers that the Group has adequate financial resources to continue in operational existence for the foreseeable future. Accordingly, the Directors believe that it is appropriate to prepare the financial statements on a going concern basis.

FINANCIAL STATEMENTS

STATEMENT OF COMPREHENSIVE INCOME (audited)

		Year ended			Year ended
		31 December 2013			31 December 2012
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments
Gains on investments at fair value	9	-	15,380	15,380	-	8,356	8,356

Revenue	2
Dividend income		1,829	-	1,829	1,486	-	1,486
Interest income from investments		300	(32)	268	392	(40)	352
Other income		-	-	-	2	-	2
		_______	_______	_______	_______	_______	_______
		2,129	15,348	17,477	1,880	8,316	10,196
		_______	_______	_______	_______	_______	_______
Expenses
Investment management fee	3	(207)	(207)	(414)	(164)	(164)	(328)
Other administrative expenses	4	(312)	-	(312)	(318)	-	(318)
Finance costs of borrowings	5	(114)	(114)	(228)	(141)	(141)	(282)
		_______	_______	_______	_______	_______	_______
Profit before tax		1,496	15,027	16,523	1,257	8,011	9,268
Tax expense	6	-	-	-	-	-	-
		_______	_______	_______	_______	_______	_______
Profit attributable to equity holders	8	1,496	15,027	16,523	1,257	8,011	9,268
		_______	_______	_______	_______	_______	_______

Earnings per Ordinary share (pence)	8	6.77	67.96	74.73	5.69	36.23	41.92
		_______	_______	_______	_______	_______	_______

The total column of this statement represents the Company'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 " is also the "Total comprehensive income attributable to equity holders" as defined in IAS 1 (revised).
All of the profit and comprehensive income are attributable to the equity holders of the Company.
All items in the above statement derive from continuing operations.
The accompanying notes are an integral part of these financial statements.

BALANCE SHEET (audited)

		As at	As at
		31 December	31 December
		2013	2012
	Notes	£'000	£'000
Non-current assets
Ordinary shares		53,679	36,698
Convertibles		1,034	1,098
Corporate bonds		3,120	4,952
Other fixed interest		2,987	2,946
		_________	_________
Securities at fair value	9	60,820	45,694

Current assets
Cash and cash equivalents		1,683	1,602
Other receivables	10	338	363
		_________	_________
		2,021	1,965
		_________	_________

Current liabilities
Short-term loan	11	-	(10,000)
Trade and other payables	11	(223)	(193)
		_________	_________
		(223)	(10,193)
		_________	_________
Net current assets/(liabilities)		1,798	(8,228)
		_________	_________
Total assets less current liabilities		62,618	37,466
		_________	_________

Non-current liabilities
Long-term loan	11	(10,000)	-
		_________	_________
Net assets		52,618	37,466
		_________	_________

Issued capital and reserves attributable to equity holders
Called-up share capital	12	11,055	11,055
Share premium account		11,892	11,892
Capital redemption reserve		2,032	2,032
Retained earnings:
Capital reserve	13	25,587	10,560
Revenue reserve	13	2,052	1,927
		_________	_________
		52,618	37,466
		_________	_________

Net asset value per Ordinary share (pence)	8	237.99	169.45
		_________	_________

STATEMENT OF CHANGES IN EQUITY (audited)

Year ended 31 December 2013
			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
As at 31 December 2012		11,055	11,892	2,032	10,560	1,927	37,466
Revenue profit for the year		-	-	-	-	1,496	1,496
Capital profits for the year		-	-	-	15,027	-	15,027
Equity dividends	7	-	-	-	-	(1,371)	(1,371)
		_______	_______	_______	_______	_______	_______
As at 31 December 2013		11,055	11,892	2,032	25,587	2,052	52,618
		_______	_______	_______	_______	_______	_______

Year ended 31 December 2012
			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
As at 31 December 2011		11,055	11,892	2,032	2,549	1,997	29,525
Revenue profit for the year		-	-	-	-	1,257	1,257
Capital profits for the year		-	-	-	8,011	-	8,011
Equity dividends	7	-	-	-	-	(1,327)	(1,327)
		_______	_______	_______	_______	_______	_______
As at 31 December 2012		11,055	11,892	2,032	10,560	1,927	37,466
		_______	_______	_______	_______	_______	_______

The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.
The accompanying notes are an integral part of the financial statements.

CASH FLOW STATEMENT

	Year ended		Year ended
	31 December 2013		31 December 2012
	£'000	£'000	£'000	£'000
Cash flows from operating activities
Investment income received		2,111		1,932
Investment management fee paid		(387)		(316)
Other cash expenses		(313)		(298)
		_______		_______
Cash generated from operations		1,411		1,318

Interest paid		(228)		(269)
		_______		_______
Net cash inflows from operating activities		1,183		1,049
		_______		_______

Cash flows from investing activities
Purchases of investments	(9,734)		(5,669)
Sales of investments	10,003		6,500
	_______		_______
Net cash inflow from investing activities		269		831
		_______		_______

Cash flows from financing activities
Loan repaid		(10,000)		-
Loan drawdown		10,000		-
Equity dividends paid		(1,371)		(1,327)
		_______		_______
Net cash outflow from financing activities		(1,371)		(1,327)
		_______		_______
Net increase in cash and cash equivalents		81		553

Cash and cash equivalents at start of year		1,602		1,049
		_______		_______
Cash and cash equivalents at end of year		1,683		1,602
		_______		_______

NOTES TO THE FINANCIAL STATEMENTS (audited)

For the year ended 31 December 2013

1.	Accounting policies
	(a)	Basis of accounting
		The financial statements of the 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 (c) and (g) below. The effects on capital and revenue of the items involving departures from the SORP are set out in note 15.

		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. Additionally, the net revenue of the Company is the measure the Directors believe appropriate in assessing its compliance with certain requirements set out in Sections 1158 - 1159 of the Corporation Tax Act 2010.

		The Company's assets consist substantially of equity shares in companies listed on the London Stock Exchange and in most circumstances are realisable within a short timescale. The Board has set limits for borrowing and regularly reviews actual exposures, cash flow projections and compliance with banking covenants. Borrowings of £10 million are committed to the Company until 23 July 2015. The Directors believe that the Company has adequate resources to continue in operational existence for the foreseeable future and, for the above reasons, they continue to adopt the going concern basis in preparing the financial statements.

		At the date of authorisation of these financial statements, the following Standards and Interpretations were in issue but not yet effective:
		-	IFRS 9 - Financial Instruments: Classification and Measurement (effective for annual periods beginning on or after 1 January 2015).
		-	Amendments to IFRS 10, IFRS 12 and IAS 27 - Definition of Investment Entity (early adoption permitted) (effective for annual periods beginning on or after 1 January 2014).
		-	Amendments to IAS 32 - Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after 1 January 2014).

		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 Company. The Company concludes however that certain additional disclosures may be necessary on their application.

	(b)	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.

	(c)	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.

	(d)	Expenses
		All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the 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.

	(e)	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 Statement of Comprehensive Income using the effective interest rate method.

	(f)	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.

		Finance costs have been allocated 50% to revenue and 50% to capital in the Statement of Comprehensive Income, in order to reflect the Directors expected long-term view of the nature of the investment returns of the Company.

	(g)	Taxation
		Tax payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the 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 Company 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.

	(h)	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.

		2013	2012
2.	Income	£'000	£'000
	Income from investments
	Dividend income from UK equity securities	1,613	1,399
	Dividend income from overseas equity securities	177	58
	Stock dividends	33	29
	Property income distribution	6	-
	Interest income from investments	300	392
		_________	_________
		2,129	1,878
		_________	_________
	Other income
	Underwriting commission	-	2
		_________	_________
	Total revenue income	2,129	1,880
		_________	_________

	As per note 1 (d), the Company amortises the premium or discount on acquisition on debt securities against unrealised capital reserve. For 2013 this represented £32,000 (2012 - £40,000) which has been reflected in the capital column of the Statement of Comprehensive Income.

		2013			2012
		Revenue	Capital	Total	Revenue	Capital	Total
3.	Investment management fee	£'000	£'000	£'000	£'000	£'000	£'000
	Investment management fee	207	207	414	164	164	328
		_______	_______	_______	_______	_______	_______

	For the year ended 31 December 2013 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.

		2013	2012
4.	Other administrative expenses	£'000	£'000
	Directors' remuneration - fees as Directors	93	96
	Fees payable to auditor and associates (net of VAT):
	fees payable to the Company's auditor for the audit of the annual accounts	19	18
	Marketing fees	41	35
	Legal and professional fees	23	16
	Registrars fees	21	13
	Printing and postage	14	14
	Broker fees	36	41
	Directors & Officers' liability insurance	7	7
	Trade subscriptions	21	25
	Other management expenses	37	53
		_________	_________
		312	318
		_________	_________

	Marketing expenses of £41,000 (2012 - £35,000) were paid to the Manager in respect of marketing and promotion of the Company.

	The Company had no employees during the year (2012 - nil). No pension contributions were paid for Directors (2012 - £nil). Further details on Directors' Remuneration can be found in the Directors Remuneration Report.

	All of the expenses above, with the exception of auditor's remuneration, include irrecoverable VAT where applicable. For auditor's remuneration VAT on total fees amounted to £4,000 (2012 - £3,000) and is included within other expenses above. The prior year expenses have been restated to take account of irrecoverable VAT, though the overall total value remains unchanged.

		2013			2012
		Revenue	Capital	Total	Revenue	Capital	Total
5.	Finance costs and borrowings	£'000	£'000	£'000	£'000	£'000	£'000
	Bank loans	114	114	228	141	141	282
		_______	_______	_______	_______	_______	_______

6.	Taxation
	Management expenses arising on revenue items this year were sufficient to offset against taxable revenue. In accordance with accounting policy 1(g) no amount (2012 - £nil) has been credited to capital and charged to revenue as a notional corporation tax item.

	At 31 December 2013, the Company had net surplus management expenses and loan relationship deficits of £10,318,000 (2012 - £9,589,000) 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 24% until 31 March 2013 and 23% from 1 April 2013 giving an effective rate of 23.25% (2012 - effective rate of 24.5%). The tax assessed for the year is lower than the rate of corporation tax. The differences are explained below:

		2013			2012
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
	Profit before tax	1,496	15,027	16,523	1,257	8,011	9,268

	Taxation of return on ordinary activities at the standard rate of corporation tax	348	3,494	3,842	308	1,963	2,271
	Effects of:
	UK dividend income not liable to further tax	(395)	-	(395)	(364)	-	(364)
	Capital gains disallowed for the purposes of corporation tax	-	(3,569)	(3,569)	-	(2,038)	(2,038)
	Income not subject to tax	(49)	-	(49)	(21)	-	(21)
	Excess management expenses not utilised	96	75	171	77	75	152
		______	______	______	_______	_______	______
	Taxation charge for the year	-	-	-	-	-	-
		______	______	______	_______	_______	______

		2013	2012
7.	Dividends	£'000	£'000
	Amounts recognised as distributions to equity holders in the period:
	Fourth interim dividend for the year ended 31 December 2012 of 1.55p (2011 - 1.50p) per share	343	332
	Three interim dividends for the year ended 31 December 2013 totalling 4.65p (2012 - 4.50p) per share	1,028	995
		________	________
		1,371	1,327
		________	________

	The fourth interim dividend of 1.60p per share, declared on 18 December 2013 and paid on 31 January 2014, 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:

		2013	2012
		£'000	£'000
	Three interim dividends for the year ended 31 December 2013 totalling 4.65p (2012 - 4.50p) per share	1,028	995
	Fourth interim dividend for the year ended 31 December 2013 of 1.60p (2012 - 1.55p) per share	354	343
		________	________
		1,382	1,338
		________	________

		2013	2012
8.	Return and net asset value per share	£'000	£'000
	The returns per share are based on the following figures:
	Revenue return	1,496	1,257
	Capital return	15,027	8,011
		________	________
	Net return	16,523	9,268
		________	________
	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 £52,618,000 (2012 - £37,466,000) and on the 22,109,765 (2012 - 22,109,765) shares in issue at 31 December 2013.

		2013	2012
9.	Non-current assets - securities at fair value	£'000	£'000
	Listed on recognised stock exchanges:
	United Kingdom	60,302	45,008
	Overseas	518	686
		________	________
		60,820	45,694
		________	________

		2013	2012
		£'000	£'000
	Cost at 31 December 2012	36,337	36,363
	Investment holdings gains at 31 December 2012	9,357	1,897
		________	________
	Fair value at 31 December 2012	45,694	38,260
	Purchases	9,734	5,669
	Amortised cost adjustments to fixed interest securities	(32)	(40)
	Sales - proceeds	(9,956)	(6,551)
	Sales - net gains	3,726	896
	Movement in investment holdings gains during the year	11,654	7,460
		________	________
	Fair value at 31 December 2013	60,820	45,694
		________	________

		2013	2012
		£'000	£'000
	Cost at 31 December 2013	39,809	36,337
	Investment holdings gains at 31 December 2013	21,011	9,357
		________	________
	Fair value at 31 December 2013	60,820	45,694
		________	________

	An analysis of investments between equity and fixed interest securities and detailed interest rates is found under Portfolio Investments.

		2013	2012
	Gains on investments	£'000	£'000
	Net realised gains on sales	3,726	896
	Movement in fair value	11,654	7,460
		________	________
	Gains on investments	15,380	8,356
		________	________

	The total transaction costs on the purchases and sales in the year were £47,000 (2012 - £30,000) and £7,000 (2012 - £7,000) respectively.

	All investments are categorised as held at fair value through profit and loss.

		2013	2012
10.	Other receivables	£'000	£'000
	Due from brokers	4	51
	Accrued income & prepayments	321	302
	Other debtors	13	10
		________	________
		338	363
		________	________
	None of the above amounts are overdue.

11.	Current liabilities
			2013	2012
	(a)	Loan at fair value	£'000	£'000
		Bank loan included at amortised cost	10,000	10,000
			________	________

		Bank loan
		The bank loan of £10 million with National Australia Bank was repaid in full on 23 July 2013. On 23 July 2013, a new two year facility of £10 million with State Street Bank was drawn down in full. The loan consists of two tranches, each of £5 million. Tranche A was drawn down in full and is repayable on 23 July 2015. The interest on Tranche A is fixed at 1.94% per annum, payable quarterly in arrears. Tranche B was drawn down in full and rolled over monthly. On 20 December 2013 Tranche B was rolled over for one month at a rate of 1.43938% per annum. Tranche B has subsequently been rolled over on a monthly basis with a rate of 1.4325% applying at the date this was approved.

		The Directors are of the opinion that the fair value of the bank loan at 31 December 2013 is not materially different from the book value.

			2013	2012
	(b)	Trade and other payables	£'000	£'000
		Investment management fee	115	87
		Interest payable	21	21
		Sundry creditors	87	85
			________	________
			223	193
			________	________

		Ordinary shares
		of 50 pence each
12.	Called-up share capital	Number	£'000
	Allotted and fully paid
	At 31 December 2013 and 31 December 2012	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.

		2013	2012
13.	Retained earnings	£'000	£'000
	Capital reserve
	At 1 January 2013	10,560	2,549
	Net gains on sales of investments during the year	3,726	896
	Movement in investment holdings gains during the year	11,654	7,460
	Amortised cost adjustment relating to capital	(32)	(40)
	Finance costs of borrowings (note 5)	(114)	(141)
	Investment management fee	(207)	(164)
		________	________
	At 31 December 2013	25,587	10,560
		________	________

	The capital reserve includes investment holding gains amounting to £21,011,000 (2012 - £9,357,000), as disclosed in note 9.

		2013	2012
	Revenue reserve	£'000	£'000
	At 1 January 2013	1,927	1,997
	Revenue return	1,496	1,257
	Dividends paid	(1,371)	(1,327)
		________	________
	At 31 December 2013	2,052	1,927
		________	________

14.

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, which ensures that the investment objective 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, and other short-term creditors which includes a 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
average

Non-

period for which

interest

Fixed

Floating

interest

rate is fixed

rate

bearing

As at 31 December 2013

Years

£'000

Assets

UK corporate bonds

9.01

5.69

3,120

UK preference shares

7.16

2,987

Cash

1,683

_______

Total assets

6,107

1,683

_______

Liabilities

Long-term bank loan

0.83

1.69

(10,000)

_______

Total liabilities

(10,000)

_______

Total

(3,893)

1,683

_______

Weighted average

Weighted
average

Non-

period for which

interest

Fixed

Floating

interest

rate is fixed

rate

bearing

As at 31 December 2012

Years

£'000

Assets

UK corporate bonds

8.71

6.13

4,952

UK preference shares

7.26

2,946

Cash

1,602

_______

Total assets

7,898

1,602

_______

Liabilities

Short-term bank loan

0.08

2.52

(10,000)

_______

Total liabilities

(10,000)

_______

Total

(2,102)

1,602

_______

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 11 to the financial statements.

The cash assets consist of cash deposits on call earning interest at prevailing market rates.

Short-term debtors and creditors, with the exception of bank loans, 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

More than

1
year

1-2 years

2-3 years

3-4
years

4-5
years

5
years

At 31 December 2013

£'000

Fixed rate

UK corporate bonds

1,551

1,569

Bank loan

(10,000)

1,551

1,569

Floating rate

Cash

1,683

_______

Total

1,683

(10,000)

1,551

1,569

_______

Within

More than

1
year

1-2 years

2-3 years

3-4
years

4-5
years

5
years

At 31 December 2012

£'000

Fixed rate

UK corporate bonds

618

686

666

2,982

Bank loan

(10,000)

(9,382)

686

666

2,982

Floating rate

Cash

1,602

_______

Total

(7,780)

686

666

2,982

_______

The maturity table above excludes the value of holdings in UK irredeemable preference shares held at the year end, which equated to £2,987,000 (2012 - £2,946,000).

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 and all other variables were held constant, the Company's:

profit before tax for the year ended 31 December 2013 would decrease by £83,000 (2012 - £84,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances and long term loan. These figures have been calculated based on cash positions and long term loan at each year end; and

profit before tax for the year ended 31 December 2013 would decrease by £119,000 (2012 - £193,000). 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.

If interest rates had been 100 basis points lower and all other variables were held constant, the Company's:

profit before tax for the year ended 31 December 2013 would increase by £83,000 (2012 - £84,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances and long term loan. These figures have been calculated based on cash positions and long term loan at each year end; and

profit before tax for the year ended 31 December 2013 would increase by £119,000 (2012 - £193,000). 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 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 Electricite de France, which is traded on Euronext Paris.

Other price sensitivity

If market prices at the Balance Sheet date had been 10% higher while all other variables remained constant, the profit before tax attributable to ordinary shareholders for the year ended 31 December 2013 would have increased by £5,471,000 (2012 - £3,780,000). If market prices at the Balance Sheet date had been 10% lower while all other variables remained constant, the profit before tax attributable to ordinary shareholders for the year ended 31 December 2013 would have decreased by £5,471,000 (2012 - £3,780,000).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 11).

(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. The Company does not currently use derivatives. The Manager requires the Board's approval to implement the use of derivatives;

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:

2013

2012

Balance

Maximum

Balance

Maximum

Sheet

exposure

Sheet

exposure

£'000

Non-current assets

Securities at fair value through profit or loss

60,820

45,694

Current assets

Trade and other receivables

Accrued income

321

302

Cash and cash equivalents

1,683

1,602

_______

62,841

47,659

_______

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 above. 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 above. 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.

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 2013 the net asset value stood at £52.6 million (2012 - £37.5 million).

15.	Income enhancement
	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(c). The effect of this treatment on revenue and capital is set out below.

	As explained in note 1(g) 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.

		2013		2012
		Income	Capital	Income	Capital
		£'000	£'000	£'000	£'000
	Finance costs arising on bank loan finance	(57)	(57)	(71)	(71)
	Return on corresponding investments	106	174	152	185
	Amortised cost adjustment charged to capital on debt securities	32	(32)	40	(40)
		_______	_______	_______	_______
		81	85	121	74
		_______	_______	_______	_______

16.	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 has 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 2013 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)	56,666	-	-	56,666
	Quoted bonds			b)	4,154	-	-	4,154
					_______	_______	_______	_______
	Total				60,820	-	-	60,820
					_______	_______	_______	_______

	As at 31 December 2012
					Level 1	Level 2	Level 3	Total
				Note	£'000	£'000	£'000	£'000
	Financial assets at fair value through profit or loss
	Quoted equities			a)	39,644	-	-	39,644
	Quoted bonds			b)	6,050	-	-	6,050
					_______	_______	_______	_______
	Total				45,694	-	-	45,694
					_______	_______	_______	_______

	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.

17.	Subsequent events
	Subsequent to the year end, the Directors reviewed the allocation of management fees and finance costs on a 50%/50% basis between capital and revenue. It was agreed that with effect from 1 January 2014 these expenses be charged 70% to capital and 30% to revenue, which is in line with the Company's expected long-term returns.

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 2013. The statutory accounts for the year ended 31 December 2013 received an audit report which was unqualified.

The statutory accounts for the financial year ended 31 December 2013 were approved by the Directors on 4 March 2014 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 17 April 2014 at Bow Bells House, One Bread Street, London EC4M 9HH.

The Annual Report will be posted to shareholders in March 2014 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

END

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