Annual Financial Report

RNS Number : 4453G

Aberdeen Smaller Co's High Inc Tst

04 March 2015

ABERDEEN SMALLER COMPANIES HIGH INCOME TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2014

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.

What is an Investment Trust?

Investment trusts are a way to make a single investment that gives you a share in a much larger portfolio. A type of collective investment, they let you spread your risk and access investment opportunities you might not find on your own.

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).

Alternative Investment Fund Manager

The Board has appointed Aberdeen Fund Managers Limited ("AFML" or "Manager") to act as the alternative investment fund manager appointed as required by EU Directive 2011/61/EU, authorised and regulated by the Financial Conduct Authority ("FCA").

The Company's portfolio is managed on a day-to-day basis by Aberdeen Asset Managers Ltd ("AAM" or "Investment Manager") by way of a delegation agreement in place between AFML and AAM.

Website

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

Pre-investment Disclosure Document (PIDD)

The Alternative Investment Fund Manager Directive ("AIFMD") requires AFML to make available to investors certain information prior to such investors' investment in the Company. The AIFMD is intended to offer increased protection to investors in investment products that do not fall under the existing European Union regime for regulation of investment products known as "UCITS".

The Company's PIDD is available for viewing at http://www.invtrusts.co.uk/doc.nsf/Lit/PressReleaseUKClosedaschitalternativeinvestmentfundmanagersdirectivepidd

Financial Highlights

	2014	2013
Net asset value total return	-2.1%	+45.0%
FTSE SmallCap Index (excluding Investment Companies)	-2.7%	+43.9%
Share price total return	-14.9%	+52.1%
Earnings per share (revenue)	7.1p	6.8p
Dividend per share	6.45p	6.25p

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, corporate bonds and preference shares. The primary objective of the Company is to invest in the equity shares of smaller companies listed on a regulated UK stock market in order to gain growth in dividends and capital. The Company employs gearing with the primary intention of enhancing income and to a lesser extent, long-term total returns. The majority of the additional funds raised by gearing are invested in investment grade corporate bonds and preference shares.

The level of gearing varies with opportunities in the market and the Board adopts a prudent approach to the use of gearing. The total level of gearing will not exceed 25% of the Company's net assets, at the time it is instigated, and within that gearing limit, the equity portfolio gearing will not exceed 10%, at the time it is instigated.

The investment risk within the portfolio is managed through a diversified portfolio of equities, corporate bonds and preference shares. The Company does not invest in securities that are unquoted at the time of investment. A maximum of 5% of the Company's total assets can be invested in the securities of one company at the time of purchase and the Company invests no more than 15% of its total assets in other listed investment companies (including investment trusts).

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

Equity Investment Process

The equity investment process is active and bottom up, based on a discipline devaluation of companies through direct visits by the Manager. Stock selection is the major source of added value, concentrating on company 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.

Fixed Income Investment Process

The fixed income investment processis 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 is £1 million and of an non-investment grade bond is £500,000

Gearing Risk

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.

Income and Dividend Risk

The ability of the Company to pay dividends and any future dividend growth will depend primarily on the level of income generated from its investments and the timing of receipt of such income by the Company and the size of the Company's revenue reserves, accordingly there is no guarantee that the Company's dividend objective will continue to be met. The Board monitors this risk through the receipt of detailed income forecasts and considers the level of income at each meeting.

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 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 2014 and future developments is detailed in the Chairman's Statement and the Investment 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.

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)

- Revenue return and Dividend growth

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 in 2015 and a vote on continuation will be proposed 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 2014, 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

3 March 2015

3. CHAIRMAN'S STATEMENT

Performance

While it is encouraging to be able to report that the Company outperformed the benchmark index during 2014, this still saw the Net Asset Value ("NAV") of the Company fall by 2.1% on a total return basis. The FTSE Small Cap (ex-IT) Index declined by 2.7% over the same period. That said I would re-iterate previous comments that whilst the Board is aware of the index, we do take a more holistic approach to judging the performance of what is a unique vehicle. We evaluate whether the amount of risk in the portfolio is appropriate to current market valuations and for our shareholders' expectations, we strive to produce consistent growth in our Company's dividend and we always focus on investing in companies with decent balance sheets. This approach has delivered consistent outperformance against the benchmark over the last five years through a variety of different stock market conditions.

The increase of 3.2% in the dividend demonstrates the continued focus on delivering steady dividend growth and the Company's dividend yield remains at a 30% premium to that of the index.

Over the year the discount to NAV at which the Company's shares were trading widened from 5.7% to 18.2%. Discounts of other smaller company trusts have also widened. The Board believes that the Company's investment proposition is attractive and we expect that as sentiment towards smaller companies improves, the discount will narrow. As at 2 March 2015, the discount had narrowed slightly to xx%.

Strategy

Following two years of very strong share price returns from our Company, 2014 could perhaps be described as a year of consolidation. There were a number of headline-grabbing economic and political events including the escalating crisis involving Russia, the collapse of emerging market currencies and Europe finally succumbing to deflation. All of these, together with the difficulty in finding decent earnings growth, have played their part in the heightened volatility in share prices over the year, which has created some large swings in performance. As a Board, our main focus for 2014 was in seeking to protect the downside for the Company, and this was generally achieved.

We spoke in the half yearly report about the fillip that smaller companies may get from a pick-up in domestic earnings as well as some economic recovery in Europe. As expected, the UK economic performance improved during the second half but in Europe it was a different story which, coupled with a slowdown in emerging markets economies and their currency weakness, meant that 2014 turned out to be a year of lower economic growth than was perhaps expected at the outset.

Our Board meetings with the Manager could be characterised as striking a cautious tone throughout the year. Whilst it is very difficult to predict where markets are going, there were some very clear signs that equity markets were looking extended. Firstly, the Manager was struggling to find value in smaller companies' share price valuations, especially at the start of the year. This was coupled with the very average quality of many of the initial public offerings (IPOs), a problem that I touched on in the half yearly report. Since then some of the most highly rated companies' share prices have collapsed following announcements that reduced future profit expectations.

The Company's fixed income portfolio faced a very similar scenario where value was difficult to find in the fixed interest market. Investors were chasing income and paying historically low yields fairly for both quality companies and high yield debt, another sign that risk was being sought to increase returns. So far, taking higher risk has delivered positive returns but increasing risk in pursuit of yield, does not tend to end well for investors and we have remained cautious and focused our bond portfolio only on companies with good quality covenants.

In addition, every time that there was an improvement in the domestic backdrop, which one might have expected to lead to interest rate rises, extenuating factors came to the rescue. The most recent of these was the collapse of the oil price and the knock-on effect on inflation. While the expectation was that interest rates might start to move up in 2014, the first rate rise has again been elusive. The bond portfolio was positioned with relatively short duration in anticipation of rises in interest rates with preservation of capital our key objective. The Manager reduced the size of this part of the portfolio, given that the level of yield on offer had reduced, but we shall continue to keep this under review should opportunities for attractive medium term yields from good quality companies arise.

Gearing/Debt

The maximum level of gearing in the Company at its current level of around 20% is appropriate given where we are in the economic cycle. Our two £5 million debt tranches are due to be refinanced in the middle of 2015. Strategically we want to maintain our flexibility, whilst protecting the revenue account when interest rates do eventually rise. We have had indications of willingness to provide new facilities to the Company and it is likely that we shall, therefore, consider fixing the interest rate on at least part of this debt.

Dividend

The yield backdrop remains tough and, at the time of writing, the Company's dividend is at a 30% premium to the smaller companies index, and yields significantly above most of our peers in the smaller companies' investment trust sector.

Earnings growth for smaller companies during 2014 was low to mid-single digit on average and dividend growth was slightly higher, around mid-high single digits. We did benefit from the receipt of a number of special dividends as companies with robust balance sheets have been returning excess capital. We would note, however, that companies are reluctant to grow dividends much ahead of earnings.

Although gross revenue levels were marginally lower than for 2013, the revenue return per share increased to 7.14p for the year to 31 December 2014 (2013 - 6.77p). This largely resulted from the change in the allocation of management and finance costs. The Board reviews the allocation of these costs between revenue and capital on an annual basis and as disclosed in last year's report, it was agreed that with effect from 1 January 2014 these costs should be charged 70% to capital and 30% to revenue, in line with the Company's expected long-term returns.

The Board has declared four interim dividends during the year ended 31 December 2014 making a total dividend of 6.45p (2013 - 6.25p), representing an increase of 3.2% and in line with the Board's plan to deliver steady dividend growth.

Outlook

The Board and the Manager believe there is potential for growth in capital and income in 2015, with the right risk controls in place. We believe in the importance of protecting the downside through more volatile periods through investing in quality companies with strong balance sheets and cash-flow.

Alternative Investment Fund Managers Directive ("AIFMD")

The Alternative Investment Fund Managers Directive (the "Directive"), proposed by the EU to enhance shareholder protection, was fully implemented in the UK on 22 July 2014. This Directive required the Company to appoint an authorised Alternative Investment Fund Manager ("AIFM) and a depositary, the latter overlaying the previous custody arrangements.

The Company appointed Aberdeen Fund Managers Limited ("AFML") as its AIFM, following its authorisation by the FCA, to act as the Company's AIFM entering a new management agreement with AFML on 17 July 2014. Under this agreement AFML delegates portfolio management services to Aberdeen Asset Managers Limited, which continues to act as the Company's Investment Manager. There is no change in the commercial arrangements from the previous investment management agreement.

In addition, the Company entered into a Depositary agreement with AFML and BNP Paribas Securities Services London Branch on 17 July 2014 for the provision of depositary services (including custody of assets), resulting in slightly increased costs compared with the previous custody arrangements.

These regulatory changes have also placed additional periodic disclosure requirements on the Company's AIFM, AFML. As a result, the 2015 Annual Report contains an additional unaudited disclosure page which you will find in the published Annual Report.

Suitable for Retail Investors

The Company currently conducts its affairs so that the Ordinary shares issued by it can be recommended by Financial Advisers to ordinary retail investors in accordance with the FCA's rules in relation to non-mainstream pooled investments 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 pooled investments because they are shares in an investment trust.

Continuation Vote

The Company's Articles of Association require the Board to put a resolution to shareholders, at this year's AGM and each fifth AGM thereafter, to resolve that the Company should continue as an investment trust. In the event that the resolution is not passed, the Board must convene a General Meeting, to be held within four months after the AGM, at which a special resolution would be proposed requiring the Company to be wound up voluntarily or to approve a unitisation of the vehicle.

The Board is of the view that the Company's investment objective and policy remains attractive. The Company has continued to deliver a yield higher than that generally available in the smaller company equity market and steady growth in the dividend, as well as capital growth through a portfolio of good quality companies run by strong management teams. The Board and Manager remain confident that the opportunities to invest in small cap companies with attractive growth prospects will continue and therefore considers that it is in the best interests of shareholders to vote in favour of continuation at this year's AGM.

Annual General Meeting

The Annual General Meeting will be held at Aberdeen's London office on Thursday 23 April 2015 at 12.00 noon followed by a lunch for shareholders. This will give shareholders the opportunity to meet the Directors and Manager after the formal AGM business has concluded and we welcome all shareholders to attend.

Carolan Dobson

Chairman

3 March 2015

4. INVESTMENT MANAGER'S REVIEW

After the strong returns of 2013, smaller companies had a muted 2014 with the market ending the year down 2.7%. It would, however, be disingenuous to say that this outcome in any way reflected the challenging and at times volatile environment. We will elaborate on these throughout and given this backdrop it is pleasing to recover from a weaker first-half to finish the year outperforming the index.

There were a number of themes in play during 2014 including stubbornly low interest rates, negative government yields (latterly), a strong initial public offerings (IPO) market, large currency swings and the collapse of oil and commodity prices.

Turning firstly to interest rates, few were expecting the Monetary Policy Committee to hold rates throughout the year. The knock-on effect of this coupled with declining inflation saw another surprisingly strong year for UK Government and Corporate bonds rising 13.9% and 12.3% respectively on a total return basis. With capital preservation and delivery of a yield premium at the core of our fixed income strategy, we were running a short duration position throughout 2014. Whilst protection of your capital was our focus the portfolio still managed an admirable 9% return with preference shares up 15%. The performance of the preference share portfolio was in the main driven by Aviva and General Accident which highlights investor appetite for yield.

Sticking with the topic of yield, which we know is important to our shareholders, 2014 was yet another tough year for savers and investors alike. What became clear as we progressed through the year was the increased level of risk being sought in the pursuit of yield. Low, or lately negative rates, are not normal events although the market seems extremely relaxed which we find perplexing. In this environment, yields on offer are, therefore, extreme and whether driven by cheap access to capital, quantitative easing, fear or deflation what is worth saying is that this position is not sustainable in our view. From our perspective our message remains consistent. We maintain a quality blue chip portfolio and will not be dragged into risk seeking behaviour in the pursuit of enhanced returns. We have, post the year-end, had the NatWest bond called at par which we have replaced with a short-term HSBC bond.

Another sign of the level of risk being sought was the IPO market which we have spoken about consistently in our monthly shareholder updates. The volume of issuance has been vast and in our opinion has been well timed to make the seller rather than the buyer money. We met with a number of companies which we thought were good quality business models but we couldn't make the valuations stack up. In hindsight, this has proven to be the correct stance with a significant number of these already issuing profit warnings.

There have, therefore, been a number of challenges this year but strategically the message is the same and the process does not change. We are not thematic, we tend not to buy into new issues at IPO and we remain vigilant on valuations in both equity and fixed income markets. Whilst we were cautious at the outset of the year, we felt the portfolio was well placed to deliver both earnings and dividend growth, both of which have been hard-won in 2014. The recovering domestic backdrop has provided a fillip to earnings across a number of sectors with 44% of the Trust's revenue exposed to the UK. The consumer sector which includes Restaurant Group, Fuller Smith and Turner and Greggs posted strong share price returns. More widely, recruitment consultant Robert Walters saw both temporary and permanent jobs markets in the UK continuing to recover. This confidence coupled with the help-to-buy scheme fed into the housing market with Bellway seeing another strong year of volume and price growth.

Europe has been one area that we expected to perform better in 2014 but yet again it floundered from one issue to the next. The delay of QE (Quantitative Easing), interest rates turning negative and deflation have all culminated in a lacklustre performance. We are not going to tarnish all companies with this brush but the Eurozone as a whole has been a tough place to deliver growth for smaller companies. RPC and Acal are two companies that bucked that trend through a combination of taking share, acquisitions and in the case of Acal moving up the value-add chain in support of customers. Europe could surprise us in 2015 as expectations remain low but it won't be plain sailing.

Emerging markets have also had a tough year hindered further by the collapse of currencies. XP Power has delivered some steady growth against this backdrop but Oxford Instruments has been impacted by a slowdown in their core research and development markets and in China. Interserve has seen competitive pressures in the Middle East, Fenner in Australia and Aveva in Brazil and Korea. Most of the emerging market issues are stock specific and if we drill down further the fall in commodity prices has been the main cause. Our preferred access to the oil and gas sector has been through the more diversified service companies which give the business a more balanced earnings profile but in the case of Aveva the share price reaction has been severe. This remains one of the best quality companies in the sector with a high degree of recurring revenue and a strong net cash balance sheet. The weight in the Company was limited due to the lowly yield but we have recently increased our exposure on weakness.

In terms of trading, we have had another year of low turnover which is consistent with the Aberdeen process. Preservation of capital has been at the forefront of our thinking when allocating capital across the portfolio. Valuations have been a guiding barometer when coupled with the growth trajectory and for large parts of last year we felt markets were expensive. We have therefore consistently taken profits in the most highly rated companies and reduced exposures to a level that better reflects the underlying growth. We have also taken the equity gearing back from 4% towards neutral for the first time in a number of years.

Outlook

We struck a cautious tone throughout 2014 but must now turn our attention to what lies ahead. We still believe, as we did last year, that the portfolio can deliver single digit earnings and dividend growth but share price performance remains out of our control. This does not seem like an excessive assumption and we would also add that smaller companies look better value than they have been for a while so this does provide some protection. This is a cautious but realistic outlook and through our process of investing in quality companies with strong or net cash balance sheets and a short duration fixed income portfolio we believe we have positioned the portfolio conservatively.

Aberdeen Asset Managers Limited*

3 March 2015

*on behalf of Aberdeen Fund Managers Limited

Both companies are subsidiaries of Aberdeen Asset Management PLC

5. RESULTS AND PERFORMANCE

Financial Highlights

	31 December 2014	31 December 2013	% change
Total investments	£58,222,000	£60,820,000	-4.3
Shareholders' funds	£50,098,000	£52,618,000	-4.8
Market capitalisation	£40,682,000	£49,305,000	-17.5
Net asset value per share	226.59p	237.99p	-4.8
Share price (mid market)	184.00p	223.00p	-17.5
Discount to adjusted NAV{A}	18.2%	5.7%
Net gearing{B}	16.5%	15.8%
Ongoing charges ratio{C}	1.58%	1.62%

Dividends and earnings
Revenue return per share{D}	7.14p	6.77p	+5.5
Dividends per share{E}	6.45p	6.25p	+3.2
Dividend cover	1.11	1.08
Revenue reserves{F}	£2,216,000	£2,052,000

{A} Based on IFRS NAV above reduced by dividend adjustment of 1.65p (2013 - 1.60p).
{B} Calculated in accordance with AIC guidance "Gearing Disclosures post Retail Distribution Review".
{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 £365,000 (2013 - £354,000).

Performance	1 year	3 year	5 year
	% return	% return	% return
Net asset value	-2.1	+87.7	+139.0
Share price (based on mid price)	-14.9	+95.0	+141.6
FTSE SmallCap Index (excluding Investment Companies)	-2.7	+90.8	+89.2
FTSE All-Share Index	+1.2	+37.3	+51.8

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	1.60p	2 April 2014	4 April 2014	30 April 2014
Second interim dividend	1.60p	9 July 2014	11 July 2014	31 July 2014
Third interim dividend	1.60p	16 October 2014	17 October 2014	31 October 2014
Fourth interim dividend	1.65p	8 January 2015	9 January 2015	30 January 2015
	________
2014	6.45p
	________
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
	________

6. PORTFOLIO INVESTMENTS

Investment Portfolio - Ordinary Shares

	Valuation	Total	Valuation
	2014	portfolio	2013
Company	£'000	%	£'000
RPC Group	2,056	3.5	2,626
Wilmington	2,025	3.5	2,306
Dechra Pharmaceuticals	1,999	3.4	1,651
Chesnara	1,839	3.2	1,587
Helical Bar	1,781	3.1	1,519
XP Power	1,773	3.0	2,015
Devro	1,668	2.9	1,172
Euromoney Institutional Investor	1,612	2.8	2,025
Close Brothers	1,524	2.6	1,619
Berendsen	1,426	2.5	1,545
Ten largest investments	17,703	30.5
Interserve	1,410	2.4	1,576
Elementis	1,405	2.4	1,588
Acal	1,387	2.4	932
Victrex	1,374	2.4	990
Rathbone Brothers	1,345	2.3	1,367
BBA Aviation	1,296	2.2	1,268
Hansteen	1,236	2.1	811
Domino Printing	1,165	2.0	688
Morgan Sindall	1,159	2.0	1,412
Robert Walters	1,073	1.8	1,081
Twenty largest investments	30,553	52.5
Fenner	1,070	1.8	2,401
Savills	1,047	1.8	995
Fuller Smith & Turner 'A'	1,041	1.8	1,080
Hiscox	1,034	1.8	1,206
Dignity	1,031	1.8	1,123
Bloomsbury Publishing	1,030	1.8	1,382
Oxford Instruments	1,014	1.7	929
Mothercare	1,001	1.7	814
TT Electronics	963	1.7	1,546
Numis Corporation	948	1.6	1,196
Thirty largest investments	40,732	70.0
Anite	940	1.6	873
Abcam	932	1.6	-
Fisher (James) & Sons	923	1.6	1,162
Intermediate Capital Group	911	1.6	832
Huntsworth	887	1.5	1,145
Aveva Group	880	1.5	774
Bellway	834	1.4	1,429
Greggs	776	1.3	749
Manx Telecom	751	1.3	-
Keller Group	717	1.2	747
Forty largest investments	49,283	84.6
Restaurant Group	614	1.1	1,054
Barr (A.G.)	574	1.0	857
McBride	220	0.4	702
Majestic Wine	57	0.1	390
Total Ordinary shares	50,748	87.2

Investment Portfolio - Other Investments

	Valuation	Total	Valuation
	2014	portfolio	2013
Company	£'000	%	£'000
Convertibles
Balfour Beatty Cum Conv 10.75%	1,016	1.8	1,034
	___________	___________	___________
Total Convertibles	1,016	1.8
	___________	___________	___________
Corporate Bonds
National Westminster 5.98%	936	1.6	893
Stagecoach Group 5.75% 2016	646	1.1	657
Wales & West Utilities Finance 6.75% 2036	579	1.0	572
Anglian Water 4.5% 2026	542	0.9	480
Electricite de France 6% {A}	531	0.9	518
	___________	___________	___________
Total Corporate Bonds	3,234	5.5
	___________	___________	___________
Preference shares
Aviva 8.75%	1,238	2.1	1,174
General Accident 8.875%	1,215	2.1	1,123
Ecclesiastical Insurance 8.625%	771	1.3	690
	___________	___________
Total Preference shares	3,224	5.5
	___________	___________
Total Other Investments	7,474	12.8
	___________	___________
Total investments	58,222	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 As at 31 December 2014

		Valuation at		Movement during the year				Valuation at
		31 December					Gains/	31 December
		2013		Purchases	Sales	Other{A}	(losses)	2014
		£'000	%	£'000	£'000	£'000	£'000	£'000	%
Listed investments
Ordinary shares		53,679	102.0	7,068	(7,425)	-	(2,574)	50,748	101.3
Convertibles		1,034	2.0	-	-	-	(18)	1,016	2.0
Corporate bonds		3,120	5.9	-	-	(34)	148	3,234	6.5
Other fixed interest		2,987	5.7	-	-	-	237	3,224	6.4
		______	______	________	_______	________	_______	______	______
		60,820	115.6	7,068	(7,425)	(34)	(2,207)	58,222	116.2
		______	______	________	_______	________	_______	______	______
Current assets		2,021	3.8					2,115	4.2
Other current liabilities		(223)	(0.4)					(239)	(0.5)
Short-term loan		-	-					(10,000)	(19.9)
Long-term loan		(10,000)	(19.0)					-	-
		______	______					______	______
Net assets		52,618	100.0					50,098	100.0
		______	______					______	______
Net asset value per Ordinary share		238.0p						226.6p
		______						______

{A} Amortisation adjustment of £34,000 (see note 2).

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and 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

- 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

3 March 2015

FINANCIAL STATEMENTS

STATEMENT OF COMPREHENSIVE INCOME (audited)

		Year ended			Year ended
		31 December 2014			31 December 2013
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments at fair value	9	-	(2,207)	(2,207)	-	15,380	15,380

Revenue	2
Dividend income		1,840	-	1,840	1,829	-	1,829
Interest income/(expense) from investments		265	(34)	231	300	(32)	268
Other income		12	-	12	-	-	-
		_______	______	______	_______	______	______
		2,117	(2,241)	(124)	2,129	15,348	17,477
		_______	______	______	_______	______	______

Expenses
Investment management fee	3	(137)	(319)	(456)	(207)	(207)	(414)
Other administrative expenses	4	(347)	-	(347)	(312)	-	(312)
Finance costs of borrowings	5	(54)	(124)	(178)	(114)	(114)	(228)
		_______	_______	_______	_______	______	______
Profit/(loss) before tax		1,579	(2,684)	(1,105)	1,496	15,027	16,523
Tax expense	6	-	-	-	-	-	-
		_______	______	______	_______	______	______
Profit/(loss) attributable to equity holders	8	1,579	(2,684)	(1,105)	1,496	15,027	16,523
		_______	_______	_______	_______	_______	_______

Earnings/(loss) per Ordinary share (pence)	8	7.14	(12.14)	(5.00)	6.77	67.96	74.73
		_______	______	______	_______	______	______

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
		2014	2013
	Notes	£'000	£'000
Non-current assets
Ordinary shares		50,748	53,679
Convertibles		1,016	1,034
Corporate bonds		3,234	3,120
Other fixed interest		3,224	2,987
		_________	_________
Securities at fair value	9	58,222	60,820

Current assets
Cash and cash equivalents		1,747	1,683
Other receivables	10	368	338
		_________	_________
		2,115	2,021
		_________	_________

Current liabilities
Short-term loan	11	(10,000)	-
Trade and other payables		(239)	(223)
		_________	_________
		(10,239)	(223)
		_________	_________
Net current (liabilities)/assets		(8,124)	1,798
		_________	_________
Total assets less current liabilities		50,098	62,618
		_________	_________

Non-current liabilities
Long-term loan	11	-	(10,000)
		_________	_________
Net assets		50,098	52,618
		_________	_________

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	22,903	25,587
Revenue reserve	13	2,216	2,052
		_________	_________
		50,098	52,618
		_________	_________

Net asset value per Ordinary share (pence)	8	226.59	237.99
		_________	_________

STATEMENT OF CHANGES IN EQUITY (audited)

Year ended 31 December 2014
			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
As at 31 December 2013		11,055	11,892	2,032	25,587	2,052	52,618
Revenue profit for the year		-	-	-	-	1,579	1,579
Capital losses for the year		-	-	-	(2,684)	-	(2,684)
Equity dividends	7	-	-	-	-	(1,415)	(1,415)
		_______	_______	_______	_______	_______	_______
As at 31 December 2014		11,055	11,892	2,032	22,903	2,216	50,098
		_______	_______	_______	_______	_______	_______

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
		_______	_______	_______	_______	_______	_______

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 2014		31 December 2013
	£'000	£'000	£'000	£'000
Cash flows from operating activities
Investment income received		2,121		2,111
Investment management fee paid		(460)		(387)
Other cash expenses		(320)		(313)
		_______		_______
Cash generated from operations		1,341		1,411

Interest paid		(178)		(228)
		_______		_______
Net cash inflows from operating activities		1,163		1,183
		_______		_______
Cash flows from investing activities
Purchases of investments	(7,068)		(9,734)
Sales of investments	7,384		10,003
	_______		_______
Net cash inflow from investing activities		316		269
		_______		_______
Cash flows from financing activities
Loan repaid		-		(10,000)
Loan drawdown		-		10,000
Equity dividends paid		(1,415)		(1,371)
		_______		_______
Net cash outflow from financing activities		(1,415)		(1,371)
		_______		_______
Net increase in cash and cash equivalents		64		81
		_______		_______
Reconciliation of net cash flow to movements in net debt
Net increase in cash and cash equivalents as above		64		81
Opening net debt		(8,317)		(8,398)
		_______		_______
Closing net debt		(8,253)		(8,317)
		_______		_______

NOTES TO THE FINANCIAL STATEMENTS (audited)

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.

		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 (revised, early adoption permitted) (effective for annual periods beginning on or after 1 January 2018).

		The following amendments to Standards are all effective for annual periods beginning on or after 1 January 2016.
		-	IFRS 11 - Accounting for Acquisitions of Interests in Joint Operations
		-	IFRS 10, IFRS 12 and IAS 28 - Investment Entities: Applying the Consolidation Exception
		-	IFRS 10 and IAS 28 - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
		-	IAS 1 - Disclosure Initiative
		-	IAS 16 and IAS 38 - Clarification of Acceptable Methods of Depreciation and Amortisation
		-	IAS 27 - Investment Entities: Applying the Consolidation Exception

		In addition, under the Annual Improvements to IFRSs 2010 - 2012 and 2011 - 2013 Cycles, a number of Standards are included for annual periods beginning on or after 1 July 2014.
		Under the Annual Improvements to IFRSs 2012 - 2014 Cycle, a number of Standards are included for annual periods beginning on or after 1 January 2016.

		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 management fee and finance costs have been allocated 30% (2013: 50%) to revenue and 70% (2013: 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 30% (2013: 50%) to revenue and 70% (2013: 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
		The 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.

		2014	2013
2.	Income	£'000	£'000
	Income from investments
	Dividend income from UK equity securities	1,547	1,613
	Dividend income from overseas equity securities	185	177
	Stock dividends	93	33
	Property income distribution	15	6
	Interest income from investments	265	300
		_______	_______
		2,105	2,129
		_______	_______

	Other income
	Bank interest	1	-
	Underwriting commission	11	-
		_______	_______
	Total revenue income	2,117	2,129
		_______	_______

	As per note 1 (c), the Company amortises the premium or discount on acquisition on debt securities against unrealised capital reserve. For 2014 this represented £34,000 (2013 - £32,000) which has been reflected in the capital column of the Statement of Comprehensive Income.

		2014			2013
		Revenue	Capital	Total	Revenue	Capital	Total
3.	Management fee	£'000	£'000	£'000	£'000	£'000	£'000
	Management fee	137	319	456	207	207	414
		_______	______	______	_______	_______	______

	For the year ended 31 December 2014 management services were provided by Aberdeen Asset Managers Limited ("AAML") until 17 July 2014 and thereafter by Aberdeen Fund Managers Limited ("AFML"). There were no changes to the commercial arrangements. Under the terms of an agreement effective from 17 July 2014 (which replaced the existing arrangements with AAML), the Company has appointed AFML to provide management, accounting, administrative and secretarial duties. The fee is at an annual rate of 0.75% on the Company's net assets adding back bank debt, calculated monthly and paid quarterly. The balance due to AFML at the year end was £111,000 (2013 - £115,000). The fee is allocated 70% (2013 - 50%) to capital and 30% (2013 - 50%) to revenue.

		2014	2013
4.	Other administrative expenses	£'000	£'000
	Directors' remuneration - fees as Directors	107	93
	Fees payable to auditor (net of VAT):
	fees payable to the Company's auditor for the audit of the Annual Report	19	19
	Promotional activities	52	41
	Legal and professional fees	8	23
	Registrars fees	18	21
	Printing and postage	19	14
	Broker fees	36	36
	Directors' & Officers' liability insurance	6	7
	Trade subscriptions	22	21
	Other expenses	60	37
		_______	_______
		347	312
		_______	_______

	Expenses of £52,000 (2013 - £41,000) were paid to AAML in respect of the promotion of the Company. The balance outstanding at the year end was £14,000 (2013 - £10,000).

	All of the expenses above, with the exception of the auditor's remuneration, include irrecoverable VAT where applicable. The VAT charged on the auditor's remuneration is disclosed within other expenses.

		2014			2013
		Revenue	Capital	Total	Revenue	Capital	Total
5.	Finance costs and borrowings	£'000	£'000	£'000	£'000	£'000	£'000
	Bank loans	54	124	178	114	114	228
		____	____	____	____	____	____

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 (2013 - £nil) has been credited to capital and charged to revenue as a notional corporation tax item.

	At 31 December 2014, the Company had net surplus management expenses and loan relationship deficits of £11,095,000 (2013 - £10,318,000) 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 23% until 31 March 2014 and 21% from 1 April 2014 giving an effective rate of 21.50% (2013 - effective rate of 23.25%). The tax assessed for the year is lower than the rate of corporation tax. The differences are explained below:

		2014			2013
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
	Profit/(loss) before tax	1,579	(2,684)	(1,105)	1,496	15,027	16,523
		______	______	______	______	______	_____
	Taxation of return on ordinary activities at the standard rate of corporation tax	339	(577)	(238)	348	3,494	3,842
	Effects of:
	UK dividend income not liable to further tax	(351)	-	(351)	(395)	-	(395)
	Capital gains disallowed for the purposes of corporation tax	-	482	482	-	(3,569)	(3,569)
	Income not subject to tax	(60)	-	(60)	(49)	-	(49)
	Excess management expenses not utilised	72	95	167	96	75	171
		______	______	______	______	_______	_____
	Taxation charge for the year	-	-	-	-	-	-
		______	______	______	______	______	_____

		2014	2013
7.	Dividends	£'000	£'000
	Amounts recognised as distributions to equity holders in the period:
	Fourth interim dividend for the year ended 31 December 2013 of 1.60p (2012 - 1.55p) per share	354	343
	Three interim dividends for the year ended 31 December 2014 totalling 4.80p (2013 - 4.65p) per share	1,061	1,028
		______	_____
		1,415	1,371
		______	_____

	The fourth interim dividend of 1.65p per share, declared on 12 December 2014 and paid on 30 January 2015, 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:

		2014	2013
		£'000	£'000
	Three interim dividends for the year ended 31 December 2014 totalling 4.80p (2013 - 4.65p) per share	1,061	1,028
	Fourth interim dividend for the year ended 31 December 2014 of 1.65p (2013 - 1.60p) per share	365	354
		______	_____
		1,426	1,382
		______	_____

		2014	2013
8.	Return and net asset value per share	£'000	£'000
	The returns per share are based on the following figures:
	Revenue return	1,579	1,496
	Capital return	(2,684)	15,027
		________	_______
	Net return	(1,105)	16,523
		________	_______
	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 £50,098,000 (2013 - £52,618,000) and on the 22,109,765 (2013 - 22,109,765) shares in issue at 31 December 2014.

		2014	2013
9.	Non-current assets - securities at fair value	£'000	£'000
	Listed on recognised stock exchanges:
	United Kingdom	57,691	60,302
	Overseas	531	518
		________	_______
		58,222	60,820
		________	_______

		2014	2013
		£'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
	Purchases	7,068	9,734
	Amortised cost adjustments to fixed interest securities	(34)	(32)
	Sales - proceeds	(7,425)	(9,956)
	Sales - net gains	3,277	3,726
	Movement in investment holdings gains during the year	(5,484)	11,654
		________	_______
	Fair value at 31 December 2014	58,222	60,820
		________	_______
	Cost at 31 December 2014	42,695	39,809
	Investment holdings gains at 31 December 2014	15,527	21,011
		________	_______
	Fair value at 31 December 2014	58,222	60,820
		________	_______

	For an analysis of investments between equity and fixed interest securities and for detailed interest rates.

		2014	2013
	(Losses/gains on investments	£'000	£'000
	Net realised gains on sales	3,277	3,726
	Movement in fair value	(5,484)	11,654
		________	_______
	(losses)/gains on investments	(2,207)	15,380
		________	_______

	The total transaction costs on the purchases and sales in the year were £27,000 (2013 - £47,000) and £7,000 (2013 - £7,000) respectively.

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

		2014	2013
10.	Other receivables	£'000	£'000
	Due from brokers	45	4
	Accrued income & prepayments	318	321
	Other debtors	5	13
		________	_______
		368	338
		________	_______
	None of the above amounts are overdue.

			2014	2013
11.	Current liabilities		£'000	£'000
	(a)	Bank loan included at amortised cost	10,000	10,000
			________	_______

		Bank loan
		The Company has a two year facility of £10 million with State Street Bank which was drawn down in full on 23 July 2013. 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 23 December 2014 Tranche B was rolled over for one month at a rate of 1.45319% per annum. Subsequently, the amount drawn down under Tranche B has been reduced to £4 million and rolled over on a monthly basis with a rate of 1.45381% applying at the date this report was approved.

		The Directors are of the opinion that the fair value of the bank loan at 31 December 2014 is not materially different from the book value.

			2014	2013
	(b)	Trade and other payables	£'000	£'000
		Investment management fee	111	115
		Interest payable	21	21
		Sundry creditors	107	87
			________	_______
			239	223
			________	_______

		Ordinary shares
		of 50 pence each
12.	Called-up share capital	Number	£'000
	Allotted and fully paid
	At 31 December 2014 and 31 December 2013	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.

		2014	2013
13.	Retained earnings	£'000	£'000
	Capital reserve
	At 1 January 2014	25,587	10,560
	Net gains on sales of investments during the year	3,277	3,726
	Movement in investment holdings gains during the year	(5,484)	11,654
	Amortised cost adjustment relating to capital	(34)	(32)
	Finance costs of borrowings (note 5)	(124)	(114)
	management fee	(319)	(207)
		________	_______
	At 31 December 2014	22,903	25,587
		________	_______

	The capital reserve includes investment holding gains amounting to £15,527,000 (2013 - £21,011,000), as disclosed in note 9.

		2014	2013
	Revenue reserve	£'000	£'000
	At 1 January 2014	2,052	1,927
	Revenue return	1,579	1,496
	Dividends paid	(1,415)	(1,371)
		________	_______
	At 31 December 2014	2,216	2,052
		________	_______

14.

Financial instruments and risk management

The Company's investment activities expose it to various types of financial risk associated with the financial instruments and markets in which it invests. The Company's financial instruments comprise UK listed equities, preference shares, convertibles and corporate fixed interest bonds, cash balances, debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income. The Company may enter into derivative transactions for the purpose of managing market risks arising from the Company's activities though there was no exposure to derivative instruments, including contracts for difference, during the year.

The Board has delegated the risk management function to Aberdeen Fund Managers Limited ("the AIFM" or "AFML") under the terms of its management agreement with AFML (further details of which are included under note 3). The Board regularly reviews and agrees policies for managing each of the key financial risks identified with the Manager. The types of risk and the Manager's approach to the management of each type of risk, are summarised below. Such approach has been applied throughout the year and has not changed since the previous accounting period. The numerical disclosures exclude short-term debtors and creditors.

Risk management framework

The directors of AFML collectively assume responsibility for AFML's obligations under the AIFMD including reviewing investment performance and monitoring the Company's risk profile during the year.

AFML is a fully integrated member of the Aberdeen Asset Management PLC ("Aberdeen") group of companies (referred to as "the Group"), which provides a variety of services and support to AFML in the conduct of its business activities, including in the oversight of the risk management framework for the Company. The AIFM has delegated the day to day administration of the investment policy to Aberdeen Asset Managers Limited, which is responsible for ensuring that the Company is managed within the terms of its investment guidelines and the limits set out in FUND 3.2.2R (details of which can be found on the Company's website). The AIFM has retained responsibility for monitoring and oversight of investment performance, product risk and regulatory and operational risk for the Company.

The AIFM conducts its risk oversight function through the operation of the Group's risk management processes and systems which are embedded within the Group's operations. The Group's Risk Division supports management in the identification and mitigation of risks and provides independent monitoring of the business. The Division includes Compliance, Business Risk, Market Risk, Risk Management and Legal. The team is headed up by the Group's Head of Risk, who reports to the Chief Executive Officer of the Group. The Risk Division achieves its objective through embedding the Risk Management Framework throughout the organisation using the Group's operational risk management system ("SWORD").

The Group's Internal Audit Department is independent of the Risk Division and reports directly to the Group CEO and to the Audit Committee of the Group's Board of Directors. The Internal Audit Department is responsible for providing an independent assessment of the Group's control environment.

The Group's corporate governance structure is supported by several committees to assist the board of directors of Aberdeen, its subsidiaries and the Company to fulfil their roles and responsibilities. The Group's Risk Division is represented on all committees, with the exception of those committees that deal with investment recommendations. The specific goals and guidelines on the functioning of those committees are described on the committees' terms of reference.

Risk Management

The main risks the Company faces from its financial instruments are (i) market risk (comprising interest rate risk and price risk), (ii) liquidity risk and (iii) credit risk.

(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 two elements - interest rate risk and price risk.

Interest rate risk

Interest rate risk is the risk that interest rate movements will 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.

Management of the risk

The Board will monitor the effects of interest movements closely to take account of 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

period for which

Weighted

average

Non

rate is fixed

interest
rate

Fixed
rate

Floating
rate

interest
bearing

As at 31 December 2014

Years

£'000

Assets

Corporate bonds

8.03

5.49

3,234

Preference shares

6.64

3,224

Cash

1,747

________

_______

________

Total assets

6,458

1,747

________

_______

________

Liabilities

Short-term bank loan

0.33

1.70

(10,000)

________

_______

________

_______

________

_______

________

_______

________

Total liabilities

(10,000)

________

_______

________

Total

(3,542)

1,747

________

_______

________

Weighted average

period for which

Weighted average

Non

rate is fixed

interest
rate

Fixed
Rate

Floating
rate

Interest
bearing

As at 31 December 2013

Years

£'000

Assets

Corporate bonds

9.01

5.69

3,120

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

________

_______

________

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

1 year

1-2 years

2-3 years

3-4 years

4-5 years

than
5 years

At 31 December 2014

£'000

Fixed rate

Corporate bonds

936

646

1,652

Bank loan

(10,000)

_______

(9,064)

646

1,652

_______

Floating rate

Cash

1,747

_______

______

_______

Total

(7,317)

646

1,652

_______

Within

1 year

1-2 years

2-3 years

3-4 years

4-5 years

than
5 years

At 31 December 2013

£'000

Fixed rate

Corporate bonds

1,551

1,569

Bank loan

(10,000)

_______

(10,000)

1,551

1,569

_______

Floating rate

Cash

1,683

_______

Total

1,683

(10,000)

1,551

1,569

_______

The maturity table above excludes the value of holdings in UK irredeemable preference shares held at the year end, which equated to £3,224,000 (2013 - £2,987,000).

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 2014 would decrease by £83,000 (2013 - £83,000 ). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances and term loan. These figures have been calculated based on cash positions and term loan at each year end; and

profit before tax for the year ended 31 December 2014 would decrease by £116,000 (2013 - £119,000). 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 2014 would increase by £83,000 (2013 - £83,000 ). 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 2014 would increase by £116,000 (2013 - £119,000). 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.

Price risk

Price risks (ie changes in market prices other than those arising from interest rate will affect the value of the quoted investments. The Company's stated objective is to provide a high and growing dividend with capital growth from a portfolio invested principally in the ordinary shares of smaller UK companies and UK fixed income securities.

Management of the risk

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.

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 2014 would have increased by £5,176,000 (2013 - £5,471,000). 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 2014 would have decreased by £5,176,000 (2013 - £5,471,000). 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 raising funds to meet its cash commitments as they fall due. Liquidity risk may result from either the inability to sell financial instruments quickly at their fair value or from the inability to generate cash inflows as required.

Management of the risk

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 (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.

Management of the risk

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:

2014

2013

Balance

Maximum

Balance

Maximum

Sheet

exposure

Sheet

exposure

£'000

Non-current assets

Securities at fair value through profit or loss

58,222

60,820

Current assets

Trade and other receivables

Accrued income

318

321

Cash and cash equivalents

1,747

1,683

________

_______

________

_______

60,337

62,841

________

_______

________

_______

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

Fair value of financial assets and liabilities

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 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. 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.

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.

		2014		2013
		Income	Capital	Income	Capital
		£'000	£'000	£'000	£'000
	Finance costs arising on bank loan finance	(27)	(62)	(57)	(57)
	Return on corresponding investments	53	104	106	174
	Amortised cost adjustment charged to capital on debt securities	34	(34)	32	(32)
		________	_______	________	_______
		60	8	81	85
		________	_______	________	_______

16.	Fair value hierarchy
	Under IFRS 13 'Fair Value Measurement' 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 2014 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)	53,972	-	-	53,972
	Quoted bonds		b)	4,250	-	-	4,250
				________	_______	________	_______
	Total			58,222	-	-	58,222
				________	_______	________	_______

	As at 31 December 2013
				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
				________	_______	________	_______

	a)	Quoted equities
		The fair value of the Company's investments in quoted equities has 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 Company's investments in Corporate quoted bonds has been determined by reference to their quoted bid prices at the reporting date.

	There have been no transfers of assets or liabilities between levels of the fair value hierarchy during any of the above periods.

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 2014. The statutory accounts for the year ended 31 December 2014 received an audit report which was unqualified.

The statutory accounts for the financial year ended 31 December 2014 were approved by the Directors on 3 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 23 April 2015 at Bow Bells House, One Bread Street, London EC4M 9HH.

The Annual Report will be posted to shareholders in March 2015 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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