Annual Financial Report

RNS Number : 0444N

Standard Life UK Small.Co's Tst PLC

03 September 2013

 

STANDARD LIFE UK SMALLER COMPANIES TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2013

1.      CHAIRMAN'S STATEMENT

Since Standard Life Investments took over as Investment Manager on 1 September 2003, the Company has delivered a net asset value total return of 374.2%, representing an annualised return of 17.2% per annum and outperforming the Company's benchmark, the Numis Smaller Companies Index (excluding investment companies), by 4.4% per annum.

The then Board appointed Standard Life Investments ten years ago and the investment managers have delivered excellent capital returns for shareholders over this period and provided significant growth in annual dividends. Assets under management have grown from a low of £30m to a high of over £220m whilst also returning capital of £48m to shareholders in the form of a tender offer, share buy backs and special dividends. The Board is very confident in the future prospects of the Company under the management of Harry Nimmo, Gordon Humphries and their colleagues who will work hard to extend the excellent growth record.

In recognition of the excellent long term performance record, the Company won the Moneywise UK Smaller Companies Investment Trust of the Year for the seventh year in a row, the first investment trust to win any Moneywise award seven years in a row. The Company also won the Investment Week Investment Trust 'UK Smaller Companies' category for the fourth year out of the past five. During the year, the Company was the first investment trust to be upgraded by the rating agency, Morningstar, to a Gold Rating.

Performance

The Company under-performed in the first half of the financial year, a period that was dominated by action by Central Banks to support the banking system on a global basis. As a result recovery stocks performed strongly and the Company's focus on quality growth stocks suffered during this period. In the second half the market has concentrated more on the underlying fundamentals of companies such as earnings and dividend growth and given the Investment Manager's focus on quality growth companies, investment performance has been very strong.

For the year ended 30 June 2013, the Company's diluted net asset value total return was 32.3%, compared with a total return of 31.8% for the Company's benchmark, the Numis Smaller Companies Index (excluding Investment Companies). The Company's long term performance remains exceptional and it continues to compare well against its peer group, as illustrated in the table below:

	1 year	3 years	5 years
Net asset value total return	32.3%	91.1%	118.1%
Share price total return	40.1%	115.0%	155.3%
Benchmark total return	31.8%	69.7%	90.3%
Peer group ranking	7/15	3/15	1/15

Sources: Thomson Datastream and JP Morgan Cazenove

On an undiluted basis (before dilution from the convertible unsecured loan stock), the NAV total return was 36.3%. This latter calculation is a fairer way of measuring the investment performance achieved by the Investment Manager and would place the Company 6/15 in the above rankings over one year.

The Investment Manager's Report provides further information on stock performance and portfolio activity during the year, as well as the Investment Manager's outlook for smaller companies.

Earnings and Dividend

The undiluted (or basic) revenue return per share for the year ended 30 June 2013 was 4.58p (2012 - 3.50p). Underlying earnings per share has increased by 30.9% this year as dividend growth from the portfolio remained strong. Income from investments increased by 35.5% in the period. The Company has benefitted from unprecedented levels of special dividends during the last financial year totalling £884,000

(1.34p per share).

The Board is recommending a final dividend of 2.90p per share, an increase of 38.1% on last year's final dividend.  If approved, the final dividend, together with the interim dividend of 1.15p paid in April, will give a total dividend for the year of 4.05p and will represent an increase of 30.6% on last year.

Subject to shareholder approval at the Annual General Meeting on 8 October 2013, the final dividend will be paid on 15 October 2013 to shareholders on the register as at 20 September 2013 with an associated ex-dividend date of 18 September 2013.

Investment Manager

The Board believes that the appointment of Standard Life Investments continues to be in the long-term interests of shareholders. Harry Nimmo, Head of Smaller Companies at Standard Life Investments, has been the lead investment manager of the Company's investment portfolio since 2003 and his excellent performance record gives the Board confidence in the ability of the Investment Manager to continue to deliver strong long term returns for shareholders. The Company was one of the first investment companies to simplify its investment management fee arrangements ahead of the implementation of the Retail Distribution Review. The performance fee was removed from 1 July 2012 and the investment management fee is now simplified to a basic fee of 0.85% of gross assets. 

Gearing

The Board has given the Investment Manager discretion to vary the level of net gearing between -5% and 25% of net assets, depending on the Investment Manager's view of the outlook for smaller companies.

The Company currently has £25million 3.5% Convertible Unsecured Loan Stock 2018 (CULS) in issue and the Investment Manager is able to vary net gearing by adjusting the level of cash held by the Company. Net gearing was increased in November 2012 reflecting the Investment Manager's increasing confidence in the long term prospects for the portfolio. At 30 June 2013, the gearing level was 8.8% comprising approximately £20 million of net debt. As a reminder to holders of the CULS, these can be converted into Ordinary shares on 30 September and 31 March of each year up to March 2018, at a fixed price per Ordinary share of 237.2542p.

Discount

The discount at which the Company's shares trade relative to the underlying diluted net asset value was 0.4% at 30 June 2013. The Company's shares have traded at an average discount of 0.0 per cent over the year ended 26 August 2013 (source: Winterflood Securities) and the Board will continue to monitor the discount level closely going forward. This discount compares very favourably with the peer group average, which was 12.7% at 30 June 2013.

Issue of Shares

During the period the Company issued over 1.6m new ordinary shares at a premium to net asset value increasing the capital base by 2.6%. The current market cap is now £200m with total assets of over £220m. The Board continues to seek ways of improving the size and liquidity of the Company's ordinary shares. Since the year end the Company has issued a further 350,000 new ordinary shares at a premium to net asset value.

Regular Tender Offers

The Board exercised its discretion and did not conduct a tender offer at either of the 31 December 2012 or 30 June 2013 tender dates as the Company's shares have traded at a very low discount as reflected in the discount section above.

AIFMD

The European Alternative Investment Fund Managers Directive (AIFMD) is almost upon us with the final implementation date being 22 July 2014. The Board has decided to appoint its Investment Manager to undertake the necessary regulatory returns, initial authorisations and registration.

Succession Planning

It is the Board's intention to appoint a new non-executive director during the current financial year. I have informed the Board that I would like to stand down as Chairman when the interim results are announced in February 2014 and I am delighted that the Board has agreed that David Woods should succeed me as Chairman.

AGM

To give our shareholders in the South an opportunity to meet the Board and Investment Manager, this year's AGM will be held at the Investment Manager's offices at 30 St. Mary Axe, London (the Gherkin) on Tuesday 8 October 2013. The meeting will start at 12:30pm and will include a presentation from the Investment Manager.

Outlook

The Board remains confident in the outlook for the Company over the long term. The Investment Manager's investment process has delivered excellent returns for shareholders. We expect the portfolio to continue to deliver strong earnings and dividend growth. The emphasis on risk aversion, quality and resilience, growth and momentum remains intact.

Donald MacDonald

Chairman

2 September 2013

2.      INVESTMENT MANAGER'S REPORT

The UK smaller companies sector as represented by the Numis Smaller Companies Index (excluding Investment Trusts) returned 31.8%, in total return terms, over the year. This compares with a net asset value total return for the Company of 32.3% and a share price total return of 40.1%. Over the same period the total return on the FTSE100 Index of the largest UK listed companies was 15.8%.

Standard Life Investments has managed the Company since 1 September 2003, at which time the share price was 47.75p. The share price has risen by 487% from then to the current year end, compared with our benchmark that was up 136%.

Equity markets

World Equity markets performed strongly in the past year. The turning point was unequivocal support from the European Central Bank to "do what it takes" to protect the Euro and the European Banking System back in June 2012. This has been enough to turn sentiment and to focus investors on tangible recovery. A useful component has been the resilience of the USA. As usual the US is leading the world out of recession. Their housing market has turned, consumer spending is on the increase and their industrial sector is showing signs of activity. A very useful and timely bonus for the US has been the impact of the development of shale gas resources on the gas price and energy costs in general.

This recovery progression has been punctuated by bouts of concern over the Euro, particularly when the Cypriot Banking System fell apart. The Chinese economy continued to slowdown suggesting strain on the Chinese Banking Infrastructure. Markets have however in each case managed to shrug off these transient concerns. A China slowdown, particularly in the scale of the infrastructure spending, has led to steady falls in metal prices such as copper and some soft commodities too. Precious metals in particular gold have seen sharp falls in 2013. The most likely reason for this is optimism about economic recovery. Gold is often seen as a safe haven asset in times of trouble. All in all, the up phase of the mineral price cycle seems to be well and truly over.

A bonus for sentiment was a new and aggressive bout of quantitative easing in Japan and a determination there to stimulate the domestic economy and see the Yen depreciate in value. This was helpful to markets in the first quarter of 2013.

In May the US Monetary Authorities signalled that "Quantitative Easing" would not continue indefinitely. This caused a market sentiment shift towards higher inflation and significant weakness in bond markets. UK & European Central Banks however seem prepared to run quantitative easing for longer.

Oil prices have remained in the band of $100 to $120 for Brent over the past year and are certainly holding up better than metals prices. The outlook is more finely balanced. Continental deep margin developments in Brazil, East & West Africa, West Australia and previously mentioned shale gas developments may well be enough to counter continued rising demand from China. Our best prognosis is for gently declining oil prices over the next few years.

Bid activity has been remained subdued for both large and smaller companies. Notable features were Barr/Britvic, which was then referred, Canada Borealis/Severn Trent, Kier/May Guerney and William Hill/GVC/Sortingbet.  Bid activity may well increase under the influence of greater certainty about the recovery.

Performance

There have been two phases in the performance of the Company over the past year. The Company steadily under-performed in the period up to the end of January 2013. The reverse was the case after that date. The end of January marked the end of the recovery phase of the market. By that date it had become increasingly obvious that recovery was taking place. The typically forward looking investment community then turned its focus to company earnings momentum, which saw stockmarkets embark on a new bullish phase. Our stock selection system ("The Matrix") has started to emphasise a number of sectors that have been absent since 2007, well before the banking crisis, notably financials, real estate and media. A firm favourite of the Matrix this year has been retailers while electricals, engineering, mining, food & drink and oil & gas have also tended to fall from favour as the year progressed.

Our five leading performers in the year have been as follows:-

Xaar plc, a designer and manufacturer of laser print-heads, commercialised their technology for the ceramic tile printing market. This breakthrough has caused the tile manufacturing industry worldwide to standardise on the Xaar technology, leading to earnings forecasts being beaten in a very meaningful way. The shares were up 246% in the period in question.

Asos plc has established itself as the world's leading on-line clothing retailer mainly aimed at the 15 to 35 age category. Their international reach now stretches to China and Russia with their own Asos brand in particular performing strongly. The shares rose 128% during the year.

Dunelm plc the retailer of soft furnishing products has become the premier player in this market in the UK. With scope to expand their store base from 120 to 200, this leaves plenty of expansion possible in the UK. The shares were up 92% over the year.

Ted Baker plc has succeeded in making the breakthroughs that have eluded them for many years outside the UK and in particular in the USA. A strong and controlled, mass-affluent brand positioning and PR led approach to expansion is starting to pay off in a major way. The shares rose by 89%.

Hargreaves Lansdown plc. Their market leading "Vantage" platform continues to provide an information rich, low cost and easy to use method for clients to manage their investments. The share price climbed by 68% in the Company's financial year.

The poorest performers included New Britain Palm Oil which has been hit by lower palm oil prices and the wrong kind of weather. Mulberry has been impacted by growing pains, a new strategy from a new chief executive and has been sold. Andor Technologies has suffered weaker demand from, in particular, US based customers of its advanced cameras. Brainjuicer the market research company, came unstuck at the end of last year following a buyers strike.

From a sector point of view our large positions in leading retailers was very positive. Our continued focus on "on-line" businesses which amount to at least 35% of the portfolio remained a positive. Our lack of exposure to oil & gas and mining sectors was also beneficial. The biggest negative was the lack of exposure to UK Housebuilders that saw spectacular periods of out-performance. Holding no recovering plant hire companies was also a negative.

Dealing and Activity

The most significant new additions to the portfolio were as follows:-

The Company bought back into Workspace. They provide business work places within their centres across London. Their clients are generally small businesses that appreciate the all services and short term nature of their contract commitments. The Company bought James Fisher & Sons, the Barrow on Furness based providers of specialist engineering services to the marine and offshore oil & gas industries. Lookers, one of the leading UK auto dealers was purchased. Supergroup, a leading clothing retail brand (Superdry) with international reach was added to the portfolio. Finally Lo-Q, the innovative queuing technologies for visitor attractions was bought. All these shares score well in our stock selection process. They all are predictable growth businesses with proven business models.

Our key sales were:-

First Quantum Minerals, the diversified copper producer, was sold. This share has been owned for 8 years and is no longer a smaller company. Profits were taken in Asos, although the holding remains the largest in the portfolio. The Company has made 16.7 times its money on this holding. Profits have also been taken in Telecity, again a holding of long standing. NCC Group, the internet security company was sold as it no longer complied with our stock selection process. Mulberry was also sold in its entirety. This company has suffered from having grown too quickly bringing question marks over the development of the business. The Company has made 5.3 times its money in this share.

In terms of sector exposure the Company has increased significantly its exposure to the real estate, financial, insurance and media sectors for the first time since 2007. This has been led by our Matrix and reflects new found stability and growth prospects in these sectors. On the other hand, considerable reductions have been made to exposure to the electrical, engineering, food & drink and mining sectors during the period in question. Again, our Matrix is the key driver for stock and thus sector selection.

Themes that remain powerful are "On-line" business models, mass affluent brands and London as a place to do business. The exposure to development in China theme is very much on the wane and is reflected in the reductions in sector exposures mentioned above.

Outlook

The establishment of recovery in a meaningful way as the theme for much of the developed world is a welcome change over what has been a gloomy and intractable prognosis over the last four years. As usual the US leads, with the UK and North Europe second and the rest of Europe and Japan bringing up the rear. All this is positive and is certainly helped by the impact of shale gas discovery and development in the USA. China is undoubtedly coming out of its very rapid development phase which may present adaption issues for their economy and banking system. China is increasingly not necessarily seen as the cheapest place for manufacturing. Sources of finance may be tighter and government spending there may be more tightly controlled.

The very fact of recovery may lead to higher inflation and rising interest rates and thus an end to quantitative easing. This in turn may be negative for consumer spending and bring to a close a period of very cheap money which arguably has caused an inflation in asset prices including equities.

The Euro has managed to survive a number of minor emergencies in the past year but fundamental issues remain. It is becoming common wisdom that greater integration of banking regulation, monitory and fiscal policy is required before a unified and stable currency can be considered a healthy entity. Many seemingly intractable issues have to be overcome before that is achieved. Extreme dangers lurk along this route.

The three themes I mentioned last year are still valid and likely to influence the corporate environment in coming years:-

Firstly, the level of regulatory scrutiny into the banking industry and their business practices is likely to continue at a high level and will lead to significant re-regulation as to how that industry conducts itself and indeed its very structure.

Secondly, the mining super-cycle of remorselessly rising raw material prices is drawing to a close. China's growth in future is more about changing consumer patterns and greater disposable income and less about building infrastructure. This is occurring just as huge newly developed mines are coming into production. Growth in the Chinese economy is likely to slow further. The cost structure advantage in Chinese manufacturing is not nearly as convincing as it once was.

Thirdly, 4G, iPads and the mobile internet are likely to continue the current period of mass corporate extinction for businesses that have been slow to adapt to the on-line world, be it in retailing, sports betting, media, tourism, leisure, airlines or financial services.

These themes remain bad for large companies and generally good for smaller companies. Banking and the extractive industries are to be found in the FTSE100 to a much greater extent than further down the market capitalisation range. Furthermore, on the issue of the internet it is newer smaller companies that can build their businesses with new technologies and methodologies in mind. Older, established businesses find it very difficult to adapt to the new environment. This all suggests to us that smaller and medium sized companies are likely to out-perform larger companies for another ten years. Our strong view is that investors should rebalance their portfolios to reflect this likelihood.

While the business outlook is significantly better than a year ago valuations are undoubtedly higher and not as compelling as investors have rushed into equities. It is therefore possible that equities may have to tread water to allow earnings to catch up with valuations.

Nothing has changed with our process. It has worked well over the past ten years and we see no reason for this to change. The vast majority of our companies have net cash positions and can grow from internally generated cash-flows in a predictable way. Dividend growth is strong and special dividends are quite plentiful without compromising growth prospects. This all gives us great confidence in the long term outlook for the Company. Our aim is to be exposed to predictable growth, but in a lower risk way as there is always risk out there particularly in this inter-dependent global financial system. Given that uncertainty remains behind every corner, our emphasis on risk aversion, resilience, growth and momentum still feels right for the future.

Harry Nimmo

Standard Life Investments Limited, Manager

2 September 2013

3.      FINANCIAL HIGHLIGHTS

	30 June
	2013	2012	% change
Capital
Net asset value per Ordinary share
- Basic	290.23p	215.61p	34.6
-Diluted	281.58p	215.61p	30.6
Share price	280.50p	203.00p	38.2
Benchmark capital return	5,525.53	4,318.73	27.9
Discount of Ordinary share price to net asset value
- Basic	3.4%	5.8%
- Diluted	0.4%	5.8%
Total assets (£m)1	217.05	163.47	32.8
Shareholders' funds (£m)	193.48	140.15	38.1
Ordinary shares in issue	66,665,988	64,999,905	2.6
Gearing
Gearing2	8.8%	5.8%
CULS
CULS in issue	£24,896,887	£24,935,071	(0.2)
CULS yield	3.0%	3.4%
CULS price	116.13p	103.50p	12.2
Earnings and Dividends (year ended)
Revenue return per Ordinary share
-Basic	4.58p	3.50p	30.9
-Diluted	4.01p	3.50p	14.6
Interim dividend paid for the year	1.15p	1.00p	15.0
Proposed final dividend for the year	2.90p	2.10p	38.1
Total dividends for the year	4.05p	3.10p	30.6
Dividend yield	1.4%	1.5%
Expenses
Ongoing charges3	1.28%	0.96%
1        Total assets less current liabilities, after excluding short-term debt of nil (2012-nil).
2     Net gearing ratio calculated as the total liability component of £23.6m of the Convertible Unsecured Loan Stock less the cash invested in AAA money market funds and cash and short term deposits, divided by net assets.
3     Ongoing charges ratio calculated in accordance with guidance issued by the AIC as the total of the investment management fee and administrative expenses divided by the average cum income net asset value throughout the year. The increase in 2013 is primarily due to the new management fee arrangements put in place on 1 July 2012. The performance fee element of the fee was removed (£nil in the year ended 30 June 2012) and the basic fee was increased.

4.            BUSINESS REVIEW

With the rest of the Annual Report and Financial Statements, this Review is intended to provide shareholders with the information and measures which the Directors use to assess, direct and oversee Standard Life Investments (Corporate Funds) Limited ("the Investment Manager") in the management of the Company's activities.

A review of the Company's activities may be found in the Chairman's Statement, Manager's Report and the Financial Highlights.

Principal Activity and Status

The Company was incorporated on 9 July 1993 and its Ordinary shares were listed on the London Stock Exchange on 19 August 1993. The Company is registered as a public limited company in Scotland under company number SC145455. The Company is an investment company within the meaning of Section 833 of the Companies Act 2006 and carries on business as an investment trust. The Company is a member of The Association of Investment Companies.

The Company has been applied for and been accepted as an approved investment trust under sections 1158 and 1159 of the Corporation Taxes Act 2010 and Part 2 Chapter 1 of the Statutory Instrument 2011/2999. This approval relates to accounting periods commencing on or after 1 July 2012. The Directors are of the opinion, under advice, that the Company has conducted its affairs so as to be able to retain such approval. The Company intends to manage its affairs so that its Ordinary shares continue to be a qualifying investment for inclusion in the stocks and shares component of an Individual Savings Account.

Investment objective

To achieve long-term capital growth by investment in UK quoted smaller companies.

Investment policy

The Company intends to achieve its investment objective by investing in a diversified portfolio consisting mainly of UK quoted smaller companies. The portfolio will normally comprise around 50 individual holdings representing the Investment Manager's highest conviction investment ideas. In order to reduce risk in the Company without compromising flexibility, no holding within the portfolio should exceed 5 per cent. of total assets at the time of acquisition.

The Company may use derivatives for portfolio hedging purposes (i.e. only for the purpose of reducing, transferring or eliminating the investment risks in its investments in order to protect the Company's portfolio). Within the Company's Articles of Association, the maximum level of gearing is 100 per cent. of net assets. The Directors' policy is that gearing will be between -5 per cent. and 25 per cent. of net assets (at the time of drawdown) in normal market conditions. The Directors have delegated responsibility to the Investment Manager for the operation of the gearing level within the above parameters.

The Investment Manager's investment process combines asset allocation, stock selection, portfolio construction, risk management, and dealing. The investment process is research intensive and is driven by the Investment Manager's distinctive "focus on change" which recognises that different factors drive individual stocks and markets at different times in the cycle. This flexible, but disciplined, process ensures that the Investment Manager has the opportunity to perform in different market conditions.

Oversight and Review of Performance

For the year ended 30 June 2013, the Company's diluted net asset value total return was 32.3%, compared to a total return of 31.8% for the Company's benchmark, the Numis Smaller Companies Index (excluding Investment Companies).

The Board considers performance with the Investment Manager at every meeting. As well as carrying out the matters reserved to the Board, the Board receives a detailed portfolio report for each meeting, sets the overall strategy for the Company and assesses the extent to which the Company is successful in achieving its objectives, as measured by three key performance indicators ("KPIs") which are as follows:

•       net asset value total return relative to the Company's benchmark with particular attention to long-term performance, which is considered by the Board to be over a period of five years;

•       Ordinary share price (total return); and

•       discount or premium of the Ordinary share price to underlying net asset value.

A record of these KPIs, for the year under review, is included in the Financial Highlights.

A review of the Company's performance, market background, investment activity and portfolio strategy during the year under review, as well as the Investment Manager's investment outlook, is provided in the Investment Manager's Report.

Future Trends

The Company's smaller company portfolio features high quality growth stocks with visible, recurring revenue, which exhibit both earnings and price momentum. Given the availability of high quality companies at sustainable valuations, the Company continues to be positive about the long-term outlook for smaller companies.

Principal Risks and Uncertainties

The Board regularly reviews the principal risks and uncertainties facing the Company which the Board and the Investment Manager have identified and the Board sets out delegated controls designed to manage those risks and uncertainties. Key risks within investment strategy, including inappropriate stock selection and gearing, are managed by the Board through a defined investment policy, with guidelines and restrictions, and by the process of oversight at each Board meeting. Operational disruption, accounting and legal risks are also covered at least annually and regulatory compliance is reviewed at each Board meeting.

The Directors have adopted a robust framework of internal control and risk management systems which is designed to monitor the principal risks and uncertainties facing the Company and to provide a monitoring system to enable the Directors to mitigate these risks as far as possible.

The major risks associated with the Company are:

• Investment and market risk: The Company is exposed to the effect of variations in share prices due to the nature of its business. A fall in the value of its investment portfolio will have an adverse effect on the value of shareholders' funds.

• Capital structure and gearing risk: The Company's capital structure, as at 30 June 2013, consisted of equity share capital comprising 66,665,988 Ordinary shares and £24,896,887 nominal amount of CULS.

An additional 350,000 new ordinary shares were issued in July 2013. As at the date of this Report there are 67,015,988 Ordinary shares in issue.

The Company's credit facility was repaid in full on 28 March 2011 following the receipt of proceeds from the issue of the CULS.

The effect of gearing should be beneficial in rising markets but could adversely affect returns to shareholders in falling markets. The Investment Manager is able to increase or decrease the Company's level of net gearing by holding a lower or higher cash balance subject to the Company's investment policy,  which requires that gearing should remain between -5% and 25% of net assets at the time of drawdown.

• Revenue and dividend risk: In view of the Company's investment objective, which is to generate long-term capital growth by investment in UK quoted smaller companies, the Investment Manager is required to strike a balance more in favour of capital growth than revenue return. In normal circumstances, the Board intends to pay a dividend commensurate with the year's income. The Board receives regular updates as to the progress made by the Investment Manager in generating a revenue return and the consequent level of the Company's anticipated dividend.

• Regulatory risk: The Company operates in a complex regulatory environment and faces a number of regulatory risks. A breach of Section 1158 would result in the Company being subject to capital gains tax on its portfolio investments. Breaches of other regulations, including the Companies Act 2006, the UKLA Listing Rules or the UKLA Disclosure and Transparency Rules, could lead to a number of detrimental outcomes and reputational damage. Breaches of controls by service providers to the Company could also lead to reputational damage or loss.

There is also a further regulatory risk in the form of the Alternative Investment Fund Managers Directive ("AIFMD") which came into force in July 2011 and is due to be fully implemented by 22 July 2014. The AIFMD introduces a new authorisation and supervisory regime for all investment trust fund managers in the European Union. This is likely to create some additional regulatory costs for the Company.

• Supplier risk: In common with most investment trusts, the Company has no employees. The Company therefore relies upon services provided by third parties, including the Investment Manager in particular, to whom responsibility for the management of the Company's investments has been delegated under an Investment Management Agreement.

5.            STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK Accounting Standards. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

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

•       select suitable accounting policies and then apply them consistently;

•       make judgments and estimates that are reasonable and prudent; and

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

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that 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 hosted by the Investment Manager. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

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

Directors' Responsibilities statement

Each Director confirms, to the best of their knowledge,

that:

•       the financial statements have been prepared in accordance with UK Accounting Standards and applicable law, give a true and fair view of the assets, liabilities, financial position and profit of the Company; and that

•       the Directors' Report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that the Company faces.

For and on behalf of the Board of Standard Life UK Smaller Companies Trust plc

Donald MacDonald

Chairman

2 September 2013

INCOME STATEMENT

for the year ended 30 June 2013

		2013			2012
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Net gains/(losses) on investments held at fair value	9	-	50,634	50,634	-	(14,397)	(14,397)
Currency losses		-	(5)	(5)	-	-	-
Income	2	4,197	-	4,197	3,192	-	3,192
Investment management fee	3	(413)	(1,240)	(1,653)	(238)	(713)	(951)
Other administrative expenses	4	(459)	-	(459)	(367)	-	(367)
		________	________	________	________	________	________
NET RETURN BEFORE FINANCE COSTS AND TAXATION		3,325	49,389	52,714	2,587	(15,110)	(12,523)
Finance costs	5	(288)	(865)	(1,153)	(289)	(866)	(1,155)
		________	________	________	________	________	________
RETURN ON ORDINARY ACTIVITIES BEFORE TAXATION		3,037	48,524	51,561	2,298	(15,976)	(13,678)
Taxation	6	(11)	-	(11)	(25)	-	(25)
		________	________	________	________	________	________
RETURN ON ORDINARY ACTIVITIES AFTER TAXATION		3,026	48,524	51,550	2,273	(15,976)	(13,703)
		________	________	________	________	________	________
RETURN PER ORDINARY SHARE:
BASIC	8	4.58p	73.48p	78.06p	3.50p	(24.61p)	(21.11p)
DILUTED	8	4.01p	63.56p	67.57p	n/a	(n/a)	(n/a)
The total column of this statement represents the profit and loss account of the Company.
A Statement of Total Recognised Gains and Losses has not been prepared as all gains or losses are recognised in the Income Statement.
All revenue and capital items in the above statement derive from continuing operations.
The accompanying notes are an integral part of the financial statements.

BALANCE SHEET

as at 30 June 2013

		2013	2012
	Notes	£'000	£'000
NON-CURRENT ASSETS
Investments at fair value through profit or loss	9	210,492	147,937
		___________	___________
CURRENT ASSETS
Debtors	10	928	966
Investments in AAA Money Market funds	15	6,468	15,208
Cash and short term deposits	15	19	18
		___________	___________
		7,415	16,192
		___________	___________
CURRENT LIABILITIES
Creditors: amounts falling due within one year	11	(856)	(661)
		___________	___________
NET CURRENT ASSETS		6,559	15,531
		___________	___________
TOTAL ASSETS LESS CURRENT LIABILITIES		217,051	163,468
NON-CURRENT LIABILITIES
3.5% Convertible Unsecured Loan Stock 2018	12	(23,567)	(23,321)
		___________	___________
NET ASSETS		193,484	140,147
		___________	___________
CAPITAL AND RESERVES
Called-up share capital	13	16,666	16,250
Share premium account		7,225	3,722
Equity component of Convertible Unsecured Loan Stock 2018	12	1,470	1,470
Special reserve		46,871	46,871
Capital reserve		117,562	69,038
Revenue reserve		3,690	2,796
		___________	___________
EQUITY SHAREHOLDERS' FUNDS		193,484	140,147
		___________	___________
NET ASSET VALUE PER ORDINARY SHARE
BASIC	16	290.23p	215.61p
DILUTED	16	281.58p	n/a

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 30 June 2013
		Share	Equity
	Share	premium	component	Special	Capital	Revenue
	capital	account	CULS 2018	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 June 2012	16,250	3,722	1,470	46,871	69,038	2,796	140,147
Return on ordinary activities after taxation	-	-	-	-	48,524	3,026	51,550
Issue of  shares	412	3,469	-	-	-	-	3,881
Issue of new Ordinary Shares from conversion of  3.5% Convertible Unsecured Loan Stock 2018	4	34	-	-	-	-	38
Dividends paid (see note 7)	-	-	-	-	-	(2,132)	(2,132)
	________	________	________	________	________	________	________
BALANCE AT 30 JUNE 2013	16,666	7,225	1,470	46,871	117,562	3,690	193,484
	________	________	________	________	________	________	________
For the year ended 30 June 2012
		Share	Equity
	Share	premium	component	Special	Capital	Revenue
	capital	account	CULS 2018	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 June 2011	16,137	2,881	1,470	46,871	85,014	2,959	155,332
Return on ordinary activities after taxation	-	-	-	-	(15,976)	2,273	(13,703)
Issue of  shares	106	790	-	-	-	-	896
Issue of new ordinary shares from conversion of 3.5% Convertible Unsecured Loan Stock 2018	7	51	-	-	-	-	58
Dividends paid (see note 7)	-	-	-	-	-	(2,436)	(2,436)
	________	________	________	________	________	________	________
BALANCE AT 30 JUNE 2012	16,250	3,722	1,470	46,871	69,038	2,796	140,147
	________	________	________	________	________	________	________
The revenue reserve represents the amount of the Company's retained reserves distributable by way of dividend.
The accompanying notes are an integral part of the financial statements.

CASHFLOW STATEMENT

Year ended 30 June 2013

		2013		2012
	Notes	£'000	£'000	£'000	£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES	14		1,763		878
SERVICING OF FINANCE
Interest paid			(873)		(874)
TAXATION			(23)		(53)
FINANCIAL INVESTMENT
Purchase of investments		(43,024)		(30,093)
Sale of investments		31,674		37,609
		_________		_________
NET CASH (OUTFLOW)/INFLOW FROM FINANCIAL INVESTMENT			(11,350)		7,516
EQUITY DIVIDENDS PAID			(2,132)		(2,436)
			_________		_________
NET CASH (OUTFLOW)/INFLOW BEFORE MANAGEMENT OF LIQUID RESOURCES AND FINANCING			(12,615)		5,031
FINANCING
Shares issued		3,881		896
		_________		_________
NET CASH INFLOW FROM FINANCING			3,881		896
			_________		_________
NET CASH (OUTFLOW)/INFLOW BEFORE MANAGEMENT OF LIQUID RESOURCES			(8,734)		5,927
MANAGEMENT OF LIQUID RESOURCES
Purchase of AAA Money Market funds		(28,860)		(34,184)
Sale of AAA Money Market funds		37,600		28,272
		_________		_________
NET CASH  INFLOW/(OUTFLOW) FROM MANAGEMENT OF LIQUID RESOURCES			8,740		(5,912)
			_________		_________
INCREASE IN CASH	15		6		15
			_________		_________

RECONCILIATION OF NET CASHFLOW TO MOVEMENT IN NET DEBT
Increase in cash		6		15
Net change in liquid resources		(8,740)		5,912
Other non-cash movements		(251)		(281)
		_________		_________
MOVEMENT IN NET DEBT IN YEAR			(8,985)		5,646
OPENING NET DEBT			(8,095)		(13,741)
			_________		_________
CLOSING NET DEBT			(17,080)		(8,095)
			_________		_________

The accompanying notes are an integral part of the financial statements.

NOTES TO FINANCIAL STATEMENTS:

For the year ended 30 June 2013

1	Accounting policies
	(a)	Basis of accounting
		The financial statements have been prepared on a going concern basis and in accordance with applicable UK Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts'. They have also been prepared on the assumption that approval as an investment trust will continue to be granted.
	(b)	Valuation of investments
		Investments have been designated upon initial recognition as 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 timeframe established by the market concerned, and are measured initially 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 electronic trading service covering most of the market including all FTSE 100 constituents and most liquid FTSE 250 along with some other securities. Gains and losses arising from changes in fair value are included in net profit or loss for the period as a capital item in the Income Statement and are ultimately recognised in the capital reserve.
	(c)	AAA money market funds
		The AAA money market funds are used by the Company to provide additional short term liquidity. As they are not listed on a recognised exchange and due to their short term nature, they are recognised in the financial statements at cost and as a current asset.
	(d)	Income
		Income from equity investments (other than special dividends), including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend. Special dividends are credited to revenue or capital in the Income Statement depending on the commercial circumstances behind the payment. Foreign income is converted at the exchange rate applicable at the time of receipt. Interest receivable on short term deposits is accounted for on an accruals basis.
	(e)	Expenses and interest payable
		Expenses are accounted for on an accruals basis. Expenses are charged to the capital column of the Income Statement when they are incurred in connection with the maintenance or enhancement of the value of investments. In this respect, the investment management fee and relevant finance costs are allocated 25% to revenue and 75% to the capital columns of the Income Statement in line with the Board's expectation of returns from the Company's investments over the long term in the form of revenue and capital respectively (see note 3).
		Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the Income Statement.
	(f)	Dividends payable
		Dividends are recognised in the period in which they are paid.
	(g)	Capital reserve
		Gains and losses on realisation of investments and changes in fair values which are readily convertible to cash, without accepting adverse terms, are transferred to the capital reserve.
	(h)	Taxation
		Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the Balance Sheet date where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the Balance Sheet date measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying temporary differences can be deducted. Temporary differences are differences arising between the Company's taxable profits and its results as stated in the Financial Statements which are capable of reversal in one or more subsequent periods.
		Owing to the Company's status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
	(i)	Other reserves
		The special reserve arose following court approval for the cancellation of the share premium account balance at 24 June 1999 and on 13 October 2009, Court of Session approval was granted for the cancellation of the Company's entire share premium account and capital redemption reserve and subsequent creation of a special distributable capital reserve.
	(j)	Foreign currency
		Overseas monetary assets and liabilities are converted into Sterling at the rate of exchange ruling at the Balance Sheet date.  Transactions during the year involving foreign currencies are converted at the rate of exchange ruling at the transaction date.  Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in the Income Statement.
	(k)	3.5% Convertible Unsecured Loan Stock 2018
		Convertible Unsecured Loan Stock ("CULS") issued by the Company is regarded as a compound instrument, comprising of a liability component and an equity component.  At the date of issue, the fair value of the liability component was estimated by assuming that an equivalent non-convertible obligation of the Company would have a coupon rate of 4.83%.  The fair value of the equity component, representing the option to convert liability into equity, is derived from the difference between the issue proceeds of the CULS and the fair value of assigned to the liability.  The liability component is subsequently measured at amortised cost using the effective interest rate method and the equity component remains unchanged.
		Direct expenses associated with the CULS issue are allocated to the liability and equity components in proportion to the split of the proceeds of the issue.  Expenses allocated to the liability component are amortised over the life of the instrument using the effective interest rate.
		The interest expense on the CULS is calculated according to the effective interest rate method by applying the assumed rate of 4.83% at initial recognition to the liability component of the instrument.
		On conversion of CULS, equity is issued and the liability component is derecognised.  The original equity component recognised at inception remains in equity.  No gain or loss is recognised on conversion.
		When CULS is repurchased for cancellation, the fair value of the liability at the redemption date is compared to its carrying amount, giving rise to a gain or loss on redemption that is recognised through profit or loss. The amount of consideration allocated to equity is recognised in equity with no gain or loss being recognised.

		2013	2012
		£000	£000
2	Income
	UK dividend income	3,687	2,504
	REIT income	71	58
	Overseas dividend income	392	501
		__________	__________
	Total Income from Dividends	4,150	3,063
		__________	__________
	Other income
	Interest from AAA Money Market funds	47	129
		__________	__________
		47	129
		__________	__________
	Total income	4,197	3,192
		__________	__________

		2013	2012
3	Investment management fee	£000	£000
	Investment management fee	1,653	951
	Charged to capital reserve	(1,240)	(713)
		__________	__________
		413	238
		__________	__________
	The Company has an agreement with Standard Life Investments (Corporate Funds) Limited ('SLI') for the provision of investment management services. The contract is terminable by either party on twelve months notice.
	The management fee paid to SLI is 0.85% per annum of the gross assets of the Company. The fee is chargeable 25% to revenue and 75% to capital.
	There is no Performance Fee payable to the Investment Manager.
	The balance due to SLI at the year end was £461,000 (2012 - £245,000).

		2013	2012
		£,000	£,000
4	Administrative expenses (inclusive of VAT)
	Secretarial fees Directors' fees	156	113
		83	79
	Auditor's remuneration
	- fees payable to the Company's auditor for the audit of the Company's annual accounts	22	22
	- fees payable to the Company's auditor and its associates for iXBRL tagging services	2	3
	- fees payable to the Company's auditor for CULS Discount Factor review	-	3
	Registrar's fees	32	30
	Professional fees*	63	17
	Other expenses	101	100
		__________	_________
		459	367
		__________	_________
	The secretarial fee is paid to SLI and reflects revised arrangements put in place at the time of the appointment of Maven Capital Partners UK LLP.
	*Professional fees for 2012 include overaccruals from previous years written back in 2012.

		2013		2012
		£,000		£,000
5	Finance costs
	Interest on 3.5% Convertible Unsecured Loan Stock 2018	869		870
	Notional Interest on 3.5% Convertible Unsecured Loan Stock 2018		209	213
	Amortisation of 3.5% Convertible Unsecured Loan Stock 2018 issue expenses	75		72
		__________		_________
		1,153		1,155
	Charged to capital reserve	(865)		(866)
		__________		_________
	Charged to revenue reserve	288		289
		__________		_________

			2013				2012
			Revenue		Capital	Total	Revenue		Capital	Total
6	Taxation		£000		£000	£000	£000		£000	£000
	(a)  Analysis of charge for year
	Overseas taxation		11		-	11	25		-	25
			_______		_____	_______	_______		_____	_______
	(b)  Provision for deferred taxation
	At 30 June 2013, the Company had unutilised management expenses and loan relationship losses of £38,391,000 (2012 - £35,273,000).  No deferred asset has been recognised on the unutilised management expenses and loan relationship losses as it is unlikely there will be suitable taxable profits from which the future reversal of the deferred asset could be deducted.
	(c)  Factors affecting current tax charge for year
	UK corporation tax at an effective rate of 23.75% (2012: 25.5%). The differences are explained below.
		2013					2012
		Revenue		Capital		Total	Revenue		Capital	Total
		£'000		£'000		£'000	£'000		£'000	£'000
	Net profit on ordinary activities before taxation	3,037		48,524		51,561	2,298		(15,976)	(13,678)
		_______		_______		_______	_______		______	_______
	Corporation tax at an effective rate of 23.75% (2012: 25.5%)	721		11,524		12,245	586		(4,074)	(3,488)
	Effects of:
	Non-taxable UK dividend income	(876)		-		(876)	(639)		-	(639)
	Non-taxable overseas dividends	(93)		-		(93)	(128)		-	(128)
	Income taxable in different years	-		-		-	(1)		-	(1)
	Overseas taxes	11		-		11	25		-	25
	Excess management expenses and loan relationship losses	248		501		749	182		403	585
	Other capital returns (e.g. gains on investments ) that are not taxable	-		(12,025)		(12,025)	-		3,671	3,671
		_______		_______		_______	_______		_______	_______
	Current tax charge	11		-		11	25		-	25
		_______		_______		_______	_______		_______	_______
								2013		2012
7	Dividends							£000		£000
	Amounts recognised as distributions to equity holders in the period:
	2012 final dividend of 2.10p per share (2011 - 1.75p) paid on 18 October 2012							1,365		1,137
	2012 special dividend of nil (2011-1.00p)							-		649
	2013 interim dividend of 1.15p per share (2012 - 1.00p) paid on 8 April 2013							767		650
								__________		__________
								2,132		2,436
								__________		__________
	The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.
	We set out below the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Section 1158 - 1159 of the Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £3,026,000 (2012 - £2,273,000).

		2013	2012
		£000	£000
	2013 interim dividend of 1.15p per share (2012 - 1.00p) paid on 8 April 2013	767	650
	2013 final dividend of 2.90p per share (2012 - 2.10p) payable on 15 October 2013	1,943	1,365
		__________	__________
		2,710	2,015
		__________	__________
	The amount payable for the proposed final dividend is based on the Ordinary shares in issue as at 2 September 2013 (67,015,988) which satisfies the requirement of Section 1159 of the Corporation Tax Act 2010.

		2013		2012
		p	£000	p	£000
8	Return per ordinary share
	Basic	4.58	3,026	3.50	2,273
	Revenue return	73.48	48,524	(24.61)	(15,976)
	Capital return
		________	________	________	________
	Total return	78.06	51,550	(21.11)	(13,703)
		________	________	________	________
	Weighted average number of Ordinary shares in issue		66,040,454		64,926,950
			__________		__________
	Diluted
	Revenue return                                                                                              4.01		3,066	n/a	n/a
	Capital return                                                             63.56		48,643	n/a	n/a
	________		________	________	________
	Total return                                                                67.57		51,709	n/a	n/a
	________		________	_______	_______
	Diluted weighted average number of Ordinary
	Shares in issue		76,534,215		n/a

	The calculation of the diluted total, revenue and capital returns per Ordinary share are carried out in accordance of with Financial Reporting Standard 22, "Earnings per Share". For the purpose of calculating total, revenue and capital returns per Ordinary share, the number of Ordinary shares used is the weighted average number used in the basic calculation plus the number of Ordinary shares deemed to be issued for no consideration on exercise of all Convertible Unsecured Loan Stock 2018 (CULS) by reference to the average share price of the Ordinary shares during the year. The calculations indicate that the exercise of CULS would result in an increase in the weighted average number of Ordinary shares of 10,493,761 (2012-nil) to 76,534,215 (2012-nil) Ordinary shares.
	For the period ended 30 June 2012 there was no dilution. Where dilution occurs, the net returns are adjusted for items relating to the CULS. Total earnings for the period are tested for dilution. Once dilution has been determined individual revenue and capital earnings are adjusted. Accrued CULS finance costs for the period and unamortised issues expenses are reversed.

		2013	2012
		£000	£000
9	Investments
	Fair value through profit or loss
	Opening fair value	147,937	170,172
	Opening fair value gains on investments held	(61,104)	(78,376)
		__________	_________
	Opening book cost	86,833	91,796
	Additions at cost	42,985	30,180
	Disposals - proceeds	(31,064)	(38,018)
	- realised gains on sales	11,003	2,875
		__________	_________
	Closing book cost	109,757	86,833
	Current year fair value gains on investments held	100,735	61,104
		__________	_________
	Closing fair value	210,492	147,937
		__________	_________
	Gains on investments
	Realised gains on sales	11,003	2,875
	Increase/(Decrease) in fair value gains on investments held	39,631	(17,272)
		__________	_________
		50,634	(14,397)
		__________	_________
	All investments are equity shares listed on the main market of the London Stock Exchange or on AiM.
	Transaction costs
	During the year, expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within gains on investments in the Income Statement. The total costs were as follows:
		2013	2012
		£000	£000
	Purchases	259	166
	Sales	40	49
		__________	_________
		299	215
		__________	_________

		2013	2012
		£000	£000
10	Debtors
	Amounts due from brokers	-	610
	Net dividends and interest receivable	859	303
	Tax recoverable	54	42
	Other debtors	15	11
		__________	__________
		928	966
		__________	__________

		2013	2012
		£000	£000
11	Creditors: amounts falling due within one year
	Interest payable	217	221
	Investment management fee payable	461	245
	Sundry creditors	130	108
	Amounts due to brokers	48	87
		__________	__________
		856	661
		__________	__________

12	Non-current liabilities
		Nominal	Liability	Equity
	3.5% Convertible Unsecured Loan Stock 2018	Amount £000	Component £000	Component £000
	Opening balance	24,935	23,321	1,470
	Conversion of 3.5% Convertible Unsecured Loan Stock 2018 into Ordinary Shares	(38)	(38)	-
	Notional Interest on 3.5% Convertible Unsecured Loan Stock 2018	-	209	-
	Amortisation	-	75	-
		__________	__________	__________
	Closing balance	24,897	23,567	1,470
		__________	__________	__________
	On 5 October 2012 the Company converted £11,111 nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 into 4,679 Ordinary Shares. Also on 8 April 2013 the Company converted £27,073 nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 into 11,404 Ordinary Shares. As at 30 June 2013, there was £24,896,887 nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 in issue. The loan stock can be converted at the election of holders into Ordinary Shares during the months of March and September each year throughout their life up until 31 March 2018 at a fixed price per Ordinary share of 237.2542p.  Interest is paid on the 3.5% Convertible Unsecured Loan Stock 2018 on 30 September and 31 March each year. In the event of a winding-up of the Company the rights and claims of the Trustee and CULS holders would be subordinate to the claims of all creditors in respect of the Company's secured and unsecured borrowing, under the terms of the Trust Deed.

		2013	2012
13	Called up share capital	£000	£000
	Authorised:
		37,500	37,500
		__________	_________
	Issued and fully paid:
	66,665,988 (2012 - 64,999,905) Ordinary shares of 25p each - equity	16,666	16,250
	Held in treasury:
	Nil (2012 - nil) Ordinary shares of 25p each - equity	-	-
		__________	_________
		16,666	16,250
		__________	_________
	During the year the Company issued 1,650,000 Ordinary shares to satisfy shareholder demand for a total consideration received of £3,881,000.  Also, the Company issued 16,083 Ordinary shares following the receipt of elections to convert by holders of the Company's 3.5% Convertible Unsecured Loan Stock 2018.
	Capital Management
	The investment objective of the Company is to achieve long term capital growth by investment in UK quoted smaller companies.
	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;
	- 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.
	Subsequent to the year end, a further 350,000 Ordinary shares were issued for a total consideration of £1,052,500, resulting in 67,015,988 Ordinary shares being in issue at the date of this report.

		2013	2012
14	Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities	£000	£000
	Net return before finance costs and taxation	52,714	(12,523)
	Adjusted for:
	(Gains)/losses on investments	(50,634)	14,397
	Currency losses	5	-
	(Increase)/decrease in accrued income	(556)	98
	(Increase)/decrease in other debtors	(4)	8
	Increase/(decrease) in sundry creditors including investment management fee	238	(1,102)
		__________	_________
	Net cash inflow from operating activities	1,763	878
		__________	_________

		At 30 June 2012	Cashflow	Currency and other movements	At 30 June 2013
		£000	£000	£000	£000
15	Analysis of changes in net debt
	Cash and short term deposits	18	6	(5)	19
	AAA Money Market funds	15,208	(8,740)	-	6,468
	Debt due in more than one year	(23,321)	-	(246)	(23,567)
		__________	_________	__________	_________
	Net debt	(8,095)	(8,734)	(251)	(17,080)
		__________	_________	__________	_________

16	Net asset value per share
	Total shareholders' funds have been calculated in accordance with the provisions of applicable accounting standards. The analysis of total shareholders' funds on the face of the Balance Sheet reflects the rights, under the Articles of Association, of the ordinary shareholders on a return of assets.
		2013	2012
	Basic net asset value per share
	Net assets attributable (£000)	193,484	140,147
	Number of Ordinary shares in issue at year end	66,665,988	64,999,905
	(excluding shares held in treasury)
	Net asset value per share	290.23p	215.61p
		_________	________
	Diluted net asset value per share
	Net assets attributable (£000)	217,268	-
	Potential number of Ordinary shares in issue at year end	77,159,748	-
	(excluding shares held in treasury)
	Net asset value per share	281.58p	-
		_________	_________

The diluted net asset value per Ordinary share as at 30 June 2013 has been calculated on the assumption that £24,896,887 3.5% Convertible Unsecured Loan Stock 2018 are converted at 237.25p per share, giving a total of 77,159,748 Ordinary shares. Where dilution occurs, the net assets are adjusted for items relating to the convertible loan stock. Net asset value per share - debt converted In accordance with the Company's understanding of the current methodology adopted by the AIC, convertible financial instruments are deemed to be 'in the money' if the cum income (debt at fair value) net asset value ("NAV") exceeds the conversion price of 237.25p per share. In such circumstances a net asset value is produced and disclosed assuming the convertible debt is fully converted. At 30 June 2013 the cum income (debt at fair value) NAV was 290.23p and thus the CULS 2018 were 'in the money'. At 30 June 2012 the CULS were 'not in the money'.

17

Financial instruments

The Company's financial instruments comprise securities and other investments, cash balances, loans and 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 also has the ability to enter into derivative transactions for the purpose of managing currency and market risks arising from the Company's activities.

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

The Board regularly reviews and agrees policies for managing each of these risks. The Investment Manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term debtors and creditors, other than for currency disclosures.

(i) Market price 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 and money market funds;

- 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.

It is the Company's policy to increase its exposure to equity market price risk through the judicious use of borrowings.  When borrowed funds are invested in equities, the effect is to magnify the impact on Shareholders' funds of changes - both positive and negative - in the value of the portfolio.

During the year ended 30 June 2013, the Company had no revolving credit facility in place.

The 3.5% Convertible Unsecured Loan Stock 2018 was issued by the Company at a fixed cost until its conversion.  It is carried in the Company's balance sheet at amortised cost rather than at fair value.

Interest risk profile

The interest rate risk profile of the portfolio of financial assets and liabilities at the Balance Sheet date was as follows:

Weighted

average period for

Weighted average

which rate is fixed

interest rate

Floating rate

As at 30 June 2013

Years

%

£000

Assets

AAA Money Market funds

-

0.50

6,468

Cash deposits

-

-

19

_________

________

________

Total assets

-

-

6,487

_________

________

________

Liabilities

3.5% Convertible Unsecured Loan Stock 2018

5.25

3.50

23,567

_________

________

________

Total liabilities

-

-

23,567

_________

________

________

Weighted

average period for

Weighted average

which rate is fixed

interest rate

Floating rate

At 30 June 2012

Years

%

£000

Assets

AAA Money Market funds

-

0.69

15,208

Cash deposits

-

-

18

_________

________

_________

Total assets

-

-

15,226

_________

________

________

Weighted average period for

Weighted average

which rate is fixed

interest rate

Floating rate

Years

%

£000

Liabilities

3.5% Convertible Unsecured Loan Stock 2018

6.25

3.50

23,321

_________

________

________

Total liabilities

-

-

23,321

_________

________

________

The weighted average interest rate is based on the current yield of each asset, weighted by its market value.

The floating rate assets consist of AAA Money Market funds and cash deposits on call earning interest at prevailing market rates.

All financial liabilities are measured at amortised cost.

Interest rate sensitivity

The sensitivity analyses below have been determined based on the exposure to interest rates at the balance sheet date and with the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.

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

- profit for the year ended 30 June 2013 and net assets would increase / decrease by £65,000 (2012: increase / decrease by £152,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances and money market funds.

Foreign currency risk

A small proportion of the Company's investment portfolio is invested in overseas securities and the Balance Sheet can be affected by movements in foreign exchange rates. It is not the Company's policy to hedge this risk on a continuing basis.  The Company only has borrowings denominated in sterling.

The revenue account is subject to currency fluctuation arising on overseas income. The Company does not hedge this currency risk.

Foreign currency risk exposure by currency of denomination:

30 June 2013

30 June 2012

Net

Total

Net

Total

Overseas

monetary

currency

Overseas

monetary

currency

investments

assets

exposure

investments

assets

exposure

£'000

£'000

£'000

£'000

£'000

£'000

Euro

9,219

-

9,219

7,218

-

7,218

_________

_________

________

_________

_________

________

The asset allocation between specific markets can vary from time to time based on the Investment Manager's opinion of the attractiveness of the individual markets.

Foreign currency sensitivity

There is no sensitivity analysis included as the Company has no outstanding foreign currency denominated monetary items.  Where the Company's equity investments (which are non-monetary items) are priced in a foreign currency, they have been included within the other price risk sensitivity analysis so as to show the overall level of exposure.

Other price risk

Other price risks (i.e. 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 and the stock selection process, both act to reduce market risk.  The Investment Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy.  The investments held by the Company are mainly listed on the London Stock Exchange.

Other price risk sensitivity

If market prices at the Balance Sheet date had been 10% higher or lower while all other variables remained constant, the return attributable to Ordinary shareholders for the year ended 30 June 2013 and net assets would have increased / decreased by £21,049,000 (2012 - increase / decrease of £14,794,000).  This is based on the Company's equity portfolio 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.

(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 risk is not significant, and is managed as follows:

-     where the Investment 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;

-     investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the investment 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 monthly basis. In addition, both stock and cash reconciliations to the Custodians' records are performed on a daily basis to ensure discrepancies are investigated on a timely basis.

-     cash and money invested in money market funds 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 30 June was as follows:

		2013		2012
		Balance	Maximum	Balance		Maximum
		Sheet	exposure	Sheet		exposure
	Current assets	£'000	£'000	£'000		£'000
	Loans and receivables	928	928	966		966
	AAA Money Markets funds	6,468	6,468	15,208		15,208
	Cash and short term deposits	19	19	18		18
		_________	_________	_________		_________
		7,415	7,415	16,192		16,192
		_________	_________	_________		_________
	None of the Company's financial assets is past due or impaired.
	Maturity of financial liabilities
	The maturity profile of the Company's financial liabilities at 30 June was as follows:
					2013	2012
					£'000	£'000
	In less than five years				23,567	23,321
					_________	_________
					23,567	23,321
					_________	_________
	All the other financial assets and liabilities will be settled within three months. The full contractual liability for the CULS assuming no further conversions is £29,036,000 (2012 -  £29,953,000)
18	Fair Value hierarchy
FRS 29 'Financial Instruments: Disclosures' requires an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements.  The fair value hierarchy shall have the following levels:
-        Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
-        Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
-        Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
All of the Company's investments are in quoted equities (2012- same) that are actively traded on recognised stock exchanges, with their fair value being determined by a reference to their quoted bid prices at the reporting date.  The total value of the investments (2013 - £210,492,000; 2012 - £147,937,000) have therefore been deemed as Level 1. The Company's CULS are actively traded on a recognised stock exchange.  The fair value of the CULS (2013 - £28,912,000; 2012 - £25,808,000) has therefore been deemed Level 1.
19.	Related party transactions
Standard Life Investments (Corporate Funds) Limited received fees for its services as investment manager and company secretary.  Further details are provided in notes 3 and 4.  The Directors of the Company received fees for their services.

Additional notes

This Annual Financial Report is not the Company's statutory accounts.  The statutory accounts for the year ended 30 June 2012 have been delivered to the Registrar of Companies.   The statutory accounts for the years ended 30 June 2012 and 30 June 2013 received an audit report which was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not include a statement under either section 498(2) or 498(3) of the Companies Act 2006. 

The statutory accounts for the financial year ended 30 June 2013 have been approved and audited but will not be filed with the Registrar of Companies until after the Company's Annual General Meeting which will be held at 12.30pm on 8 October 2013 at the offices of Standard Life Investments, 30 St Mary Axe, London EC31 8EP.

The Annual Report will be posted to shareholders in September 2013 and copies will be available from the Manager or by download from the Company's webpage hosted by the Manager (www.standardlifeinvestments.com/its).

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 and may be affected by exchange rate movements.  Investors may not get back the amount they originally invested.

For Standard Life UK Smaller Companies Trust PLC

Maven Capital Partners UK LLP, Secretaries

For Further Information please contact:

Standard Life Investments - Gordon Humphries, Head of Investment Companies - Tel. [phone]

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