Annual Financial Report

RNS Number : 7889P

Standard Life UK Small.Co's Tst PLC

05 September 2017

 

STANDARD LIFE UK SMALLER COMPANIES TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2017

STRATEGIC REPORT  

Chairman's Statement

It gives me great pleasure to address shareholders for the first time as Chairman following my appointment on 22 August 2017. I have assumed the role of Chairman, as David Woods has decided to step down as he is no longer considered to be an independent Director, following the completion of the merger of Standard Life plc and Aberdeen Asset Management PLC.

Performance

For the year ended 30 June 2017, the Company's diluted net asset value (NAV) total return, calculated on the basis that all dividends received are reinvested in additional shares, was 35.0%, compared with a total return of 29.1% for the Company's reference index, the Numis Smaller Companies ex Investment Companies Index. The share price total return, calculated on the same basis, was 38.9%. The better performance of the share price against the NAV is the result of the discount narrowing.

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 UK smaller companies. The Board agrees with the Investment Manager's view that our emphasis on risk aversion, resilience, growth and momentum still feels right for the future and also that patient investors will be rewarded in the longer term.

Earnings and Dividend

The revenue return per share for the year ended 30 June 2017 was 6.42p (2016: 6.76p). Despite a significant reduction in special dividends received this year (£269k compared to £579k last year) underlying income from investments remained strong and increased by 3.6%. The Board is recommending an unchanged final dividend of 5.20p (2016: 5.20p). If approved, the final dividend, together with the interim dividend of 1.50p paid in April, will give a total dividend for the year of 6.70p and will represent an increase of 1.52% on last year.

Subject to shareholder approval at the Annual General Meeting on Thursday 26 October 2017, the final dividend will be paid on 30 October 2017 to shareholders on the register as at 29 September 2017 with an associated ex-dividend date of 28 September 2017.

Discount Control

The discount at which the Company's shares traded relative to the diluted net asset value was 5.6% at 30 June 2017. The Company's shares have traded at an average discount of 6.8% over the year ended 30 June 2017. This compares with the average peer group discount of 13.8% for the same period.

The Board aims to ensure that the discount to the diluted cum-income net asset value does not exceed 8% in normal market conditions. The timing and scale of share buy-backs will be at the discretion of the Board.

Key Performance Indicators (KPIs)

The KPIs by which performance of the Manager is measured are as follows:

•     diluted NAV total return relative to the Company's reference index 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. The ten year record is included in the Annual Report.

The diluted NAV total return of the Company over the five years to 30 June 2017 was 128.4%, while the share price total return was 129.8%. Over the same time frame, the Numis Smaller Companies ex Investment Companies Index returned 111.0%.

The Company's Shares traded at a materially narrower discount than the sector average throughout the period.

The discount has generally traded within the target range. The discount did however trade wider around the time of the Brexit referendum (June / July 2016), the conversion of a tranche of CULS (October 2016), Christmas 2016, on very low volumes, and in the week running up to the end of the tax year (March / April 2017). There were also individual days when the discount was outside 8% but in the view of the Board, it did not do so for long enough to establish a trend which required intervention. In each event, the Board discussed the merits of buying back shares to narrow the discount, and either bought in some shares or concluded that trading patterns were affected by other factors that could be expected to reverse in the short term and buying back shares would not be in all shareholders' best interests.

These results help confirm that the Manager is delivering against the investment objective set.

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

Gearing

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

companies. At 30 June 2017, the net gearing, or borrowing level, was 1.7%.

In the year under review, the only borrowing was in the form of the Convertible Unsecured Loan Stock (CULS) which is due to expire on 31 March 2018. When they were issued in 2011, the Company was geared to over 11%.

The Board recognises that the ability to gear the portfolio through borrowing is a key feature of an investment trust and is actively reviewing its options with regards to additional funding as the CULS expire within the coming year.

Convertible Unsecured Loan Stock

The Company currently has £13.3 million 3.5% Convertible Unsecured Loan Stock 2018 (CULS) in issue. The last opportunities for the holders of CULS to convert their investment into Ordinary Shares will be on 30 September 2017 or when the CULS expires on 31 March 2018, at a fixed price per Ordinary Share of 237.2542p. In the event that any remaining holders do not elect to convert their CULS into Ordinary Shares prior to 31 March 2018, the Trustee, appointed when the CULS were issued, has the ability, at its sole discretion, to exercise the rights to convert the remaining CULS and sell the Ordinary Shares allotted on such conversion. In such an event, the proceeds, net of any administration costs, would be distributed to the former holders of the CULS. If this discretion is not exercised by the Trustee, the nominal value of any CULS not previously redeemed, purchased or converted will be repaid by the Company on 31 March 2018.

Issue of Shares

The only issuance of shares during the year was as a result of CULS conversions. 1,274,097 Ordinary Shares were issued from treasury, increasing the number of shares in issue by 1.89%.

Share Buy-Backs

During the year, 443,818 shares representing 0.66% of the shares in issue, were bought back and held in treasury for a total cost of £1.54m and at a weighted average discount of 8.99%.

Investment Manager

The Board believes that the appointment of Standard Life Investments as Investment Manager continues to be in the long-term interests of shareholders. This conclusion has been reached on the basis of the strength of the long-term returns that the Manager has delivered for the Company and being confident that the process by which these returns have been generated remains appropriate for the objectives of the Company and that this process continues to be applied by the Manager, Harry Nimmo. Harry is Head of the Smaller Companies investment team at Standard Life Investments and has been the lead Portfolio Manager of the Company's investment portfolio since 2003. Since Standard Life Investments was appointed Manager to the Company on 1 September 2003, the Company has delivered an annualised diluted net asset value total return of 16.4% and has outperformed the Company's reference index by over 4.0% per annum.

Board Succession Planning

Following the merger of Standard Life plc and Aberdeen Asset Management PLC in August 2017, David Woods no longer qualifies as an independent Director under the Listing Rules, as a director is not considered independent if he or she serves on the board of more than one investment trust managed by the same group. David is also a non-executive director of Murray Income Trust PLC, which is now also managed by a subsidiary of Standard Life Aberdeen plc. As the Listing Rules also require that the Chairman of a Board must be independent, once the merger was completed, David brought forward the date upon which he stepped down as Chairman. He will retire from the Board following the AGM in October 2017 as previously announced. David has been a Director of the Company for over 11 years, including three years as Chairman and I would like to thank David for his long and distinguished service to the Company and wish him well in his retirement.

As a consequence of this, and as announced in May, Caroline Ramsay has taken on the role of Chair of the Audit and Management Engagement Committee.

We reported in the Interim Accounts that Tim Scholefield had joined the Board in February 2017. He will be proposed for election at the AGM in October 2017. Tim has extensive fund management experience, most recently as Head of Equities at Baring Asset Management and is already proving to be an invaluable addition to the Board.

AGM and London Presentation

The Annual General Meeting of the Company will be held at the offices of the Investment Manager, Standard Life Investments, 1 George Street, Edinburgh, EH2 2LL on Thursday, 26 October 2017. The meeting will start at 11.30am and will include a presentation from the Investment Manager. The Notice of Annual General Meeting can be found in the Annual Report.

In order to give shareholders in London an opportunity to meet the Board and the Manager, the Board intends to hold an investor presentation in the Manager's London office on Tuesday, 21 November 2017. Invitations have been sent to all recipients of the Annual Report and a copy can be downloaded from the Company's website www.standardlifeuksmallercompaniestrust.co.uk. As security at the Manager's office is tight, please ensure that you inform Computershare Investor Services plc if you are planning on attending. For security purposes, identification will also be required in order to gain entry to the building.

Standard Life Aberdeen

In March 2017, the Boards of Standard Life plc and Aberdeen Asset Management PLC announced their intention to merge the companies. This decision was approved by the shareholders of each company in June and the two companies came together in August 2017. Your Board is paying close attention to this and any possible implications for the management of your Company. It is still very early days, but the Board has been assured that the personnel and processes that have been pivotal in delivering the returns that shareholders have received will continue to operate for the Company.

Outlook

In the last 15 months a number of events have occurred which will have significant bearing on the future macro-economic landscape and which were not foreseen by most commentators: the Brexit vote; the appointment of Donald Trump; the election of a minority government in the UK to name but three. Because these outcomes were unexpected, the immediate reaction was all the more acute as a result. The full implications of the Brexit decision, in particular, will take time to take effect, but the Board is encouraged by the performance of the Company since the referendum result and remains confident in the outlook for the Company over the long term. 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.

Allister Langlands

Chairman

4 September 2017

Our Strategy

Standard Life UK Smaller Companies Trust plc offers an actively managed portfolio of equity shares of smaller and midsized companies listed in the UK. Over the long term, smaller company returns have outstripped those of their large-cap peers.

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% 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% of net assets. The Directors' policy is that gearing will be between 5% and 25% of net assets (at the time of drawdown) in normal market conditions. The Directors have delegated responsibility to the Investment Manager, Standard Life Investments (Corporate Funds) Limited ("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.

The Directors have set additional guidelines in order to reduce the risk borne by the portfolio:

•      Companies with a market capitalisation of below £50m should not represent more than 5% of total assets.

•      Companies involved in "Blue Sky" products should not represent more than 5% of total assets.

•      No more than 50% of the portfolio can be invested in companies that are constituents of the FTSE AIM Index.

Investment Process

Standard Life Investments (SLI) provides the investment management expertise to the Company and Harry Nimmo of SLI has been the Portfolio Manager since 2003.

Investment philosophy and process

The Board has identified that SLI has a proven and repeatable investment process, which has delivered returns to shareholders over the last 13 years. The investment process adheres to SLI's Focus on Change philosophy which assumes that asset prices are driven by fundamentals (all the necessary information used to value the asset). Its premise is also that markets are inefficient at pricing changes in these fundamentals. The aim is therefore to identify, understand and exploit the key drivers and the dynamics behind them.

The process is flexible as it is appreciated that different factors drive markets at different times so the approach does not favour any one particular investment style. This provides opportunities to outperform throughout the economic cycle rather than only at specific times.

The Matrix

In managing the investment portfolio of the Company, the Focus on Change philosophy is enhanced by using SLI's proprietary screening tool, 'The Matrix', to focus research efforts and stock selection process. The Matrix is a quantitative screening tool assessing potential and current investments on 13 separate proven indicators of financial performance. It is a powerful tool in helping the Manager identify a shortlist of investable stocks for further analysis and monitor the performance and prospects of the portfolio on an ongoing basis. Stocks that are identified in this way are then subjected to further analysis and may be selected for the portfolio following discussions with company management.

Investment characteristics

When building a portfolio of smaller companies, the Manager screens stocks using the Matrix and also considers a number of qualitative factors to help identify the best investment opportunities.

1.    Sustainable growth

       Companies in the portfolio will often produce niche products where demand is forecast to rise as these characteristics are the most predictive of future earnings and dividend growth.

2.    Quality

       The strength of each company's relationships with its customers or clients, the existence and importance of long-term contracts and the degree to which the company has any element of pricing power is important as it allows the company to pass on any cost increases and thereby maintain margins. The Manager will typically avoid companies with high or unsustainable levels of debt.

3.    Buy for the long term

       The Manager tries to identify the great companies of tomorrow and then hold them for the long term. This reduces the financial drag of high trading volumes.

4.    Concentrate the effort

       The Matrix helps identify the likely candidates for inclusion in the portfolio and reduces the risk that effort is spent on stocks that will not fulfil the criteria for inclusion within the portfolio.

5.    Management longevity

       Founders retaining positions of authority within the companies after flotation, along with longevity of tenure by CEOs are a positive signal. 4 of the top 10 holdings in the portfolio are still run by the company's founder. The significance of this is that founders tend to be much more attuned to the benefits of long-term investing than their successors, probably because of the scale of personal involvement.

6.    Value is secondary

       The Manager's research has led them to prefer to invest in companies which demonstrate positive earnings momentum as they believe that it is a reliable predictor of future performance.

Principal Risks and Uncertainties

The Board reviews regularly the principal risks and uncertainties facing the Company which the Board and the 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 controls 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. A description of the Directors' system of internal controls is set out in the Statement of Corporate Governance in the Annual Report.

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.

       Regular reports are received from the Manager on stock selection, sector allocation, gearing and market outlook. Investment performance is reviewed in detail and discussed with the Manager at each Board meeting.

•      Capital structure and gearing risk: The Company's capital structure, as at 30 June 2017, consisted of equity share capital comprising 68,251,333 Ordinary Shares and £13,253,889 nominal amount of CULS. The Company also held 3,375,842 Ordinary Shares in treasury.

       The effect of gearing should be beneficial in rising markets but could adversely affect returns to shareholders in falling markets. The 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% net cash and 25% net gearing 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 Manager aims 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 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 of the Corporation Tax Act 2010 would result in the Company being subject to capital gains tax on portfolio investments. Breaches of other regulations, including the Companies Act 2006, the FCA Listing Rules, the FCA Disclosure and Transparency Rules, the Market Abuse Regulation, the Foreign Account Tax Compliance Act and the Common Reporting Standard, 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 ensuring compliance with the Alternative Investment Fund Managers Directive (AIFMD). In accordance with the requirements of the AIFMD, the Company appointed Standard Life Investments (Corporate Funds) Limited as its Alternative Investment Fund Manager (AIFM) and BNP Paribas Securities Services as its Depositary. The Board receives regular reporting from the AIFM and the Depositary to ensure both are meeting their regulatory responsibilities in relation to 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 Manager in particular, to whom responsibility for the management of the Company has been delegated under an Investment Management Agreement, further details of which may be found in the Annual Report.

       The recent merger of Standard Life plc and Aberdeen Asset Management PLC creates additional supplier risk for the Company due to the potential for change in the way the Manager provides its services to the Company. The Board has received assurance that the key personnel and processes currently in place at the Manager will continue to operate for the Company. The Board will keep under close review any potential implications for the Company arising from the merger as the integration progresses.

•      Geopolitical risk: The Company is exposed to the effects of geopolitical instability or change, as this could have an adverse effect on stock markets. The Board and the Manager review regularly and discuss current geopolitical issues and seek appropriate expert advice, when necessary, in relation to managing any impacts on the Company.

       The Board is mindful of the uncertainty following the UK's referendum decision to leave the EU and, along with the Manager, is closely monitoring any impact on the Company's share price, discount level and underlying investment performance.

Management Policies

Reference Index

The Company uses the Numis Smaller Companies ex Investment Companies Index (the Numis Index) as its reference index and to assist in identifying potential investment opportunities. The Company will hold stocks outside the Numis Index, including stocks listed on FTSE AIM (the Alternative Investment Market). The Board has approved guidelines that permit the Manager to hold up to 50% of the value of the portfolio in companies listed on FTSE AIM (AIM).

The qualification criteria for being listed on AIM are less stringent than for a full listing on the London Stock Exchange. As a consequence, investors generally need to undertake higher degrees of due diligence, but recently the quality of the companies listing on AIM has improved and with it the returns from stocks on AIM have outstripped that of the Numis Index over 3 years, and are comfortably ahead of the returns from the large cap indices.

The investment process is centred on stock selection, not asset allocation. The weighting of stocks and sectors that make up the portfolio can differ significantly from the weightings of the Numis Index. For example, in the last couple of years, the portfolio has had no direct exposure to the Oil & Gas sector, despite the sector representing around 8% of the Numis Index in 2016. As a consequence, the returns generated by the portfolio may differ significantly from those generated by the Numis Index. However, the Board believe that the Manager's process of extended due diligence coupled with the quantitative analysis produced by the Matrix system will deliver returns in excess of those generated by the Numis Index over the longer term.

	NAV Total Return	Total Return
	Std Life UK Smaller Companies	Numis Index	FTSE AIM	FTSE All-Share	FTSE 100
1 Year	35.0%	29.1%	38.5%	18.1%	16.9%
2 Years	40.6%	20.6%	31.6%	20.7%	21.4%
3 Years	60.5%	33.1%	28.4%	23.9%	21.6%
5 Years	128.4%	111.0%	51.9%	65.2%	58.2%
10 Years	242.4%	129.1%	-10.7%	68.5%	61.2%

Source: Thomson Reuters Datastream to 30 June 2017.

Discount Control Policy

The Board aims to maintain a discount level of less than 8% to the cum-income, diluted, net asset value under normal market conditions. In pursuit of this objective, the Board closely monitors the level of the discount and buys back shares in the market when it believes it is in the best interests of shareholders as a whole to do so. At each AGM, the Board seeks shareholder approval to buy back up to 14.99% of the Company's share capital.

The Company has a tender offer mechanism in place and the Board intends to continue to seek shareholder approval to enable it to carry out tender offers on a discretionary basis in circumstances where the Board believes that share buy-backs are not sufficient to maintain the discount at an appropriate level, although it expects that buy-backs should be the primary mechanism for managing the discount. The Board last exercised its discretion and conducted a tender offer in July 2015.

Employee, Environmental and Human Rights Policy

As a managed investment trust, the Company has no direct employee or environmental responsibilities, nor is it responsible for the emission of greenhouse gases. Its principal responsibility to shareholders is to ensure that the investment portfolio is properly managed and invested. The Company has no employees and, accordingly, has no requirement to report separately on employment matters. The management of the portfolio is undertaken by the Manager. The Manager engages with the Company's underlying investee companies in relation to their corporate governance practices and in developing their policies on social, community and environmental matters and further information may be found in the Statement of Corporate Governance. The Manager's specific policies are outlined in their Governance and Stewardship Guidelines, which may be found on the Manager's website at

https://www.standardlifeinvestments.com/governance_and_stewardship/what_is_corporate_governance/principles_and_policies.html

In light of the nature of the Company's business, there are no relevant human rights issues and, therefore, the Company does not have a human rights policy.

Investment Manager's Report

The net asset value total return for the Company for the year to 30 June 2017 was 35.0% and the share price total return was 38.9%.  By comparison, the UK smaller companies sector, as represented by the Numis Smaller Companies ex Investment Companies Index generated a total return of 29.1%. Over the same period the FTSE 100 Index of the largest UK listed companies posted a total return of 16.9%. Standard Life Investments has managed the Company since 1 September 2003 and the share price at that time was 47.75p. The Company's share   price total return has been 1,008.0% from then to the current period end, compared with a return on our reference index of 398.5%. The FTSE 100 Index total return was 187.7% over the same period.

Equity markets

At the time, the Brexit vote on 22 June 2016 was seen as a dire setback to the UK economy. It caused a sharp decline in the prices of many UK smaller companies in the final week of the Company's previous financial year. Thus, 30 June 2016 can conveniently be seen as the nadir prior to a sustained period of strength for smaller companies. Actually, the UK economy and in particular the Company's holdings, tended to perform better than expected. From a political perspective, the speedy appointment of Theresa May as Prime Minister removed the political vacuum and averted a crisis. Markets continued to respond to political events following Donald Trump's election victory. This was seen as bullish for the US and also the world economy.  Furthermore, by the start of 2017, European economies had started to display sustained recovery following many years in the doldrums. Optimism continued right through until the most unexpected near failure of Theresa May at the election on 8 June 2017. "Sell in May and go away" just took on a whole new meaning. In June and July, around the election and afterwards, consumer confidence took a knock as Brexit negotiations became serious.

The period has been a tug of war between the top down "macro" investors and the "bottom up" stock pickers. The two company reporting periods in Autumn and in Spring provided reasons to be cheerful particularly within our stable companies. The Autumn reporting period last year provided an unusually buoyant clutch of results across technology, healthcare, manufacturing construction and consumer sectors. Spring was good but slightly more muted.

Commodity prices diverged. Brent Crude found a range between $45 and $60 although it feels like this lower level might be tested as OPEC struggles to gain cohesion. Copper prices gained ground suggesting that the world economy and in particular the USA and China were in a good place. It is noticeable that copper prices responded upwards abruptly to Donald Trump's victory. Weaker gold prices through the year reflected lower levels of risk generally perceived in world markets as the VIX index (Chicago Board Options Exchange Index) reached record low levels.

US Fed Funds rates have moved up three times since October last year to a range of 1% to 1.25% reflecting Federal Reserve Chair Janet Yellen's determination to normalise monetary conditions and signal an end to quantitative easing. In the UK the opposite took place with what we consider to have been an unnecessary reduction to 0.25%.

The new issues market in the UK was more subdued and it is noticeable that the quality of new issues has gone down as compared with a golden period in 2015 and 2016.

The strength in the Alternative Investment Market (AIM) is noticeable with the FTSE AIM Index being up 38.5% in the past year compared with 29.1% for the Numis Smaller Companies ex Investment Companies Index. The private wealth management industry is fully on top of the tax benefits of AIM stocks, in particular ISA status and inheritance tax benefits. There is more to it than that however. Our analysis shows that there are more "proper" companies on AIM that make profits than there were five years ago. The number of the top 50 AIM companies paying dividends has risen from 8 to 34 since 2010. The decline in the significance of the commodity sectors coupled with a crop of strong new issues have led to the development of a much more broadly based sector exposure within the AIM market focused on growing and developing sectors and businesses. In my 2004 Manager's report, I stated that "The industry breakdown of the smaller companies market is vastly more attractive than ten years ago. It is now dominated by sectors where growth is evident and new company development is dynamic, such as IT, support services, retailing, media and healthcare". The same can now be said of AIM. Now, fully 44% of AIM is made up of IT, support services, retailing, media and healthcare, with the vast majority of them making profits and paying dividends, unlike during the techbubble era. This is why the Board of your Company has sanctioned the Company holding up to 50% of its assets in AIM listed stocks.

Performance

The Company underperformed in the first half of the financial year. The immediate impact of the unexpected US election result election was negative. Investors reverted to "global macro" type, favouring recovery and commodities and de-emphasising quality, predictability and company fundamentals. It is noticeable that during reporting periods the Company performed better as our holdings came through with strong results.

In terms of sector exposure the main positives were being heavy in Healthcare, Retailers and Food & Beverages while not holding any Oil & Gas stocks. The only real negative sector weightings were not owning Metals & Mining stocks and being underweight in Support Services.

There was no bid activity for any of the holdings in the Company during the period in question.

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

Fevertree Drinks. For the second year running Fevertree made the strongest contribution to performance as the premium gin revolution continues to be felt around the world. Consumers have been impressed by the quality and provenance of Fevertree's products in comparison with erstwhile market leaders Schweppes and Britvic. Fevertree's share price rose by 137% over the year.

NMC Healthcare. The Abu Dhabi based healthcare provider traded strongly as it continued to benefit from changes in the law in Dubai which now obliges companies to provide health cover for all their foreign workers. Some well-timed acquisitions expanded their reach by medical category and by geography within the Gulf region.

First Derivatives. The Newry based "big fast data" company gained significant traction in several new market verticals such as market research analytics, utilities analysis and aerospace. They are now on a solid path of earnings revisions momentum.

CVS Group. The company is the leading consolidator of Veterinary Surgery practices in the UK. They also own chains in the Netherlands. They are gaining economies of scale as they make earning enhancing acquisitions. The specialist surgical units and pet crematoria are also performing strongly.

Gamma Communications. The telecoms service provider to small & medium sized businesses continued to consistently beat expectations.

Other strong performers were Sanne Group, the specialist fund administrator, Medica, a new issue that provides radiologist services to the NHS, JD Sports Fashion, the branded footwear led retailer who is expanding rapidly into Continental Europe and Mattioli Woods, a wealth management and employee benefit services provider.

Again it was Numis Index constituents that we didn't own that were negative for performance. These were all Mining stocks - Vedanta Resources, the Indian copper producer, Ferrexpo, the Russian steel company, Kaz Minerals, the Kazakh copper producer and Evraz, another Russian steel producer were the biggest negatives. Domino's Pizza (UK & Ireland) and EMIS in GP's surgery software were weak throughout the year due to sub-par trading performances.

Dealing and Activity

The five largest additions to the portfolio were as follows:

RWS Holdings: RWS is a patent translation and intellectual property management business. Following the CTi and Luz acquisitions, RWS has true scale in key growth markets like North America and China.  Relationships are now deeper with their customers particularly in the Pharmaceutical sector. China is a key growth market as research expenditure increases along with greater respect for international patent law. Translators at RWS have to have PhD level scientific training as well as language skills. This is not easily replicable.

Hilton Food Group: Hilton is a meat packer but no ordinary meat packer. They take over the entire beef logistics of a supermarket and manage the process on an open book, long-term basis. This delivers high returns and impeccable hygiene and provenance standards that are so important today. They have an international customer base across Europe and stretching to Australia.

James Fisher & Sons: James Fisher is a provider of a range of marine engineering services ranging from oil & gas through port services, defence, marine rescue, transportation and nuclear engineering. Organic growth is in the region of 5 to 10% but "bolt-on" acquisitions are being made regularly to push growth up into double digits. The business is international in its exposure.

Gooch & Housego: G&H is a leader in laser technology, in particular QSwitch technology in laser guided cutting. Other core product strengths would include undersea optical fibre couplings. This end market is accelerating as Amazon, Google, Facebook and others are building out their world wide networks. G&H are moving out from componentry to sub-systems. The business is most international in its orientations as well as being diversified by end markets, ranging from industrial through scientific research to aerospace and defence.

Ricardo: Ricardo is a diversified engineering consultancy slanted towards cars. Although it majors on emissions and fuel efficiency it is developing expertise in electric cars and autonomous vehicles. Non-auto segments include rail, environmental and defence.

The key period for dealing was in the three months post the Brexit vote. Our Matrix started to highlight more internationally focused business while UK orientated companies tended to show up as sells. The impact on the portfolio as a whole was to slant it significantly towards companies with international operations.  This means that around 55% of the profits from the Company's portfolio are derived from outside the UK. For the Numis Smaller Companies ex Investment Companies Index as a whole that number would be around 45%.

There were fewer new issues in the year with just two, Medica and Alfa Financial Software. The former is a supplier of the scarce resource of radiologists to the NHS and private medical sector while the latter is a specialist in leasing software with an international client base. Other significant purchases included Diploma, the diversified specialist distributor and two new holdings, ECO Animal Health in animal antibiotics and Gear4music, the online distributor of musical instruments.

Our key sales were:

The largest sale in year was Rightmove, as it became too large a company for our smaller company portfolio.

It is worth noting that the exit price for this holding was more than 5 times the book cost. On a similar vein it was time to say goodbye to Shaftesbury, the specialist in London retail property. This highly successful investment had been in the portfolio since 2004. A third stock fitting into this category was Halma, the specialist safety electronics company was sold as it moved up above our smaller company universe. Five other large sales of long standing holdings were Secure Trust Bank, Lookers, the auto dealer, Computacenter in IT hardware, Dunelm the retailer and Victrex in speciality chemicals. They all no longer complied with our matrix-led stock selection system. Harvey Nash Group, Solid State, Sprue Aegis, Novae, Fusionex and Servelec were sold as they no longer matched our buying criteria.

Sector Exposures: Our stock selection has produced a portfolio with significant exposure to growing sectors. It is noteworthy that four out of our top ten holdings are Healthcare companies. Indeed the Company holds fully three holdings specifically related to veterinary care:- Dechra  Pharmaceuticals, CVS, the vet chain and ECO Animal Health in antibiotics. Food & Drink is an important sector for us now. Partly because of the success of Fevertree and Nichols, makers of Vimto, but also because of Cranswick and Hilton Foods in meat. The importance of provenance, knowing exactly where the meat comes from and extremely high standards in processing has not been lost on retailers following scares in this regard some years ago.

The Company still has no exposure to Oil & Gas and Mining. At the smaller companies end of the market these sectors are often characterised by very high risk, cash consumptive business which in a period of uncertain commodity prices generally do not score well within our Matrix.

Income account

Dividend income that can be considered to be recurring rose by 3.6% to £5.417m, compared to £5.227m in 2016. However, total income in the year was £5.712m compared to £5.865m in 2016. The decline of 2.6% is largely explained by a reduction in the value of special dividends of over 50% from £579k to £269k. In the Outlook statement of the 30 June 2016 Manager's Report I referred to "the new wave of British smaller companies" that I expected to be "tomorrow's larger companies".  There has been a natural recycling of assets from "large" more mature and thus higher yielding but slower growing companies into this "new wave". This has meant slower dividend growth in the short term but I anticipate that these companies will deliver improved capital and dividend growth in the future. It's the natural scheme of things in smaller companies.

Outlook

In March 2017, the starting gun was fired with the invoking of Article 50 of the Lisbon Treaty, bringing to an end the United Kingdom's membership of the European Union. 29 March 2019 is the target date for exit from the EU meaning that a deal needs to be apparent by October 2018 if the European and United Kingdom parliament are to have time to ratify the agreement.

There is just no way of predicting the turn of events. My guess is that the oscillation in views on the outcome will become increasingly fraught between now and October 2018. If the last year is anything to go by the last thing one should do is obsess about the macro scenarios.

If Brexit indeed works out badly for the UK it is worth remembering that our investment process focuses on quality, growth and business momentum. This should mean that our companies should be more resilient in poor market conditions related to an economic downturn in the UK. What is more, as I stated previously, the majority of our holdings have businesses that are international in their scope. Indeed a successful UK smaller company often has a business model that initially works in the UK but can then generate success in international markets. Fully seven out of our top ten largest holdings have made very significant breakthroughs outside the UK.

Investors should not become obsessed with Brexit, because in the long run, stock selection is more important than market timing, and investors and fund managers should focus on the long-term investment horizon; "running your winners" is an important maxim for our investment process. In the end, I am genuinely excited about the current line-up of stocks in the portfolio.

I see five to six years being the holding period one should be considering at the very least. In my experience that is the length of time required to deliver decent returns even through the trough of a bear market.

Our top ten holdings have an average holding period of 4 years and 4 months. On average, they have delivered a 507% return from when first purchased for the Company. They all score well on our stocks selection Matrix and may be held for some considerable time to come.  Reliable "Winners" are hard to come by and should be nurtured for the long term.

I also alluded earlier in this report to important changes in the character of AIM.  This "junior" market" in my view has finally come of age as a dynamic and successful venue for investing in growing smaller companies.  Far more proper businesses, making money, paying dividends are in evidence. There is also broadly based sector exposure within AIM and in particular exposure to sectors that we have always found to be fertile ground for "tomorrow's larger company". Tax breaks certainly help to make AIM a great venue for investing in smaller companies that are creating wealth and jobs within the UK and further afield.

I reiterate that smaller company investing should be viewed as a long-term investment and we have no doubt that patient investors will be rewarded in the longer term. Our stable process has been seasoned by fully four economic cycles. I remain optimistic about the long-term performance of the Company.

Harry Nimmo

Standard Life Investments, Investment Manager

4 September 2017

Key Financial Highlights

Capital return for the year to 30 June 2017			As at 30 June  2017
NAV per Share	Diluted NAV per Share	Share Price		Discount	Net Gearing
474.74p +33.0%	456.60p +32.2%	431.00p +36.4%		5.6%	1.7%
(2016: 356.90p)	(2016: 345.43p)	(2016: 316.00p)		(2016: 8.5%)	(2016: 3.6%)

Total return for periods to 30 June 2017
	1 year	3 years	5 years	10 years
Diluted NAV per Share	+35.0%	+60.5%	+128.4%	+242.4%
Share price	+38.9%	+61.4%	+129.8%	+284.7%

As at 30 June 2017

Market Cap	Net Assets	Gross Assets
£294.2 million +38.1% (2016: £213.1m)	£324.0 million +34.7% (2016: £240.6m)	£337.1 million +31.4% (2016: £256.6m)

For the year to 30 June 2017

Revenue EPS	DPS	Ongoing Charges
6.42p -5.0% (2016: 6.76p)	6.70p 1.5% (2016: 6.60p)	1.08% (2016: 1.13%)

Convertible Unsecured Loan Stock (CULS) as at 30 June 2017

CULS in Issue	CULS Price	CULS Yield
£13.3 million (2016: £16.3m)	168.00p +27.8% (2016: 131.50p)	2.1% (2016: 2.70%)

Going Concern

The Company's assets consist of equity shares in companies listed on recognised stock exchanges and are considered by the Board to be realisable within a short timescale under normal market conditions. The Board has set overall limits for borrowing and reviews regularly the Company's level of gearing, cash flow projections and compliance with banking covenants, when applicable.

The Company had no bank borrowings at 30 June 2017 (2016: nil).

The Directors are mindful of the Principal Risks and Uncertainties disclosed in the Strategic Report within the Annual Report and, having reviewed forecasts detailing revenue and liabilities, the Directors believe that the Company has adequate financial resources to continue its operational existence for a period of not less than 12 months from the date of approval of the Financial Statements. Accordingly, the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the Financial Statements.

Viability Statement

In accordance with Provision C.2.2 of the UK Corporate Governance Code published in April 2016 and Principle 21 of the AIC Code of Corporate Governance published in July 2016, the Board has assessed the Company's prospects for a five year period. The Board considers five years to be an appropriate period for an Investment Trust company with a portfolio of equity investments and based on the financial position of the Company as detailed in the Strategic Report.

The Board has considered the Company's financial position and its ability to liquidate its portfolio and meet its liabilities and draws attention to the following points which the Board took into account in its assessment of the Company's future viability:

a)    The Company's investments are traded on the London Stock Exchange and there is a spread of investments held.

b)    The Company is closed ended in nature and therefore does not require to sell investments when shareholders wish to sell their shares.

c)    The Company's cash balance (including money market funds) at 30 June 2017 was £7.6m.

d)    The Board has considered the principal risks faced by the Company, together with the steps taken to mitigate these risks, as detailed in the Strategic Report and in the Statement of Corporate Governance and referred to in Note 15 of the Financial Statements and has concluded that the Company would be able to take appropriate action to protect the value of the Company. The Company takes any potential risks to its ongoing success and ability to perform very seriously and works hard to ensure that risks are kept to a minimum at all times.

e)    Due to the nature of the business of the Company and the nature of its investments and to the Company's long history, the Board are able to conclude that expenses are predictable and modest in relation to asset values.

f)     There are no capital commitments currently foreseen that would alter the Board's view.

As detailed in the Financial Highlights, the Company has performed strongly over the past year and since the appointment of the current Investment Manager in 2003. The Directors consider the Company's future prospects to be positive, as highlighted in the Chairman's Statement.

In assessing the Company's future viability, the Board has assumed that investors will wish to continue to have exposure to the Company's activities, in the form of a closed ended entity, performance will continue to be satisfactory, and the Company will continue to have access to sufficient capital.

Therefore, after careful consideration of the Company's current position and future prospects and taking into account its risk- aware attitude, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five year period of its assessment.

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Annual Report and 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 (United Kingdom Generally Accepted Accounting Practice), including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland". 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 judgements 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 Strategic Report, 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.

The work carried out by the auditor does not involve a review of the corporate and financial information included on the Company's website 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.

The Directors are also responsible for ensuring that the Annual Report and Financial Statements, taken as a whole is fair, balanced and understandable and provides the information necessary to assess the Company's position and performance, business model and strategy.

Directors' Responsibilities Statement

Each Director confirms, to the best of their knowledge, that:

•      the financial statements, prepared in accordance with UK Accounting Standards (United Kingdom Generally Accepted Accounting Practice), including FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland" and applicable law, give a true and fair view of the assets, liabilities, financial position and profit of the Company as at 30 June 2017 and for the year to date;

•      the Strategic Report includes a fair review of the development and performance of the business and the financial position of the Company together with a description of the principal risks and uncertainties that the Company faces; and

•      the Annual Report and Financial Statements taken as a whole is fair, balanced and understandable and provides the information necessary to assess the Company's position and performance, business model and strategy.

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

Allister Langlands

Chairman

4 September 2017

Statement of Comprehensive Income

For the year ended 30 June 2017

	Notes	2017			2016
		Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net gains on investments held at fair value	9	-	84,529	84,529	-	7,422	7,422
Currency gains		-	-	-	-	1	1
Income	2	5,712	-	5,712	5,865	-	5,865
Investment management fee	3	(625)	(1,874)	(2,499)	(566)	(1,699)	(2,265)
Other administrative expenses	4	(569)	(16)	(585)	(559)	-	(559)
NET RETURN BEFORE FINANCE COSTS AND  TAXATION		4,518	82,639	87,157	4,740	5,724	10,464
Finance costs	5	(180)	(540)	(720)	(209)	(628)	(837)
RETURN ON ORDINARY ACTIVITIES BEFORE  TAXATION		4,338	82,099	86,437	4,531	5,096	9,627
Taxation	6	-	-	-	(26)	-	(26)
RETURN ON ORDINARY ACTIVITIES AFTER  TAXATION		4,338	82,099	86,437	4,505	5,096	9,601
RETURN PER ORDINARY SHARE:
BASIC	8	6.42p	121.50p	127.92p	6.76p	7.66p	14.42p
DILUTED	8	6.07p	111.60p	117.67p	6.28p	7.51p	13.79p

The total column of this statement represents the profit and loss account of the Company. The 'Revenue' and 'Capital' columns represent supplementary information prepared under guidance issued by the Association of Investment Companies.

All revenue and capital items in the above statement derive from continuing operations.

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

Statement of Financial Position

As at 30 June 2017

	Notes	2017		2016
		£'000	£'000	£'000	£'000
NON-CURRENT ASSETS
Investments held at fair value through profit or loss	9		329,587		248,945
CURRENT ASSETS
Debtors	10	964		1,280
Investments in AAA rated Money Market funds		7,371		7,231
Cash and short term deposits		247		6
		8,582		8,517
CURRENT LIABILITIES
Creditors: amounts falling due within one year	11	(1,028)		(874)
3.5% Convertible Unsecured Loan Stock 2018	12	(13,125)		-
		(14,153)		(874)
NET CURRENT (LIABILITIES)/ASSETS			(5,571)		7,643
TOTAL ASSETS LESS CURRENT LIABILITIES			324,016		256,588
Creditors: amounts falling due after more than one year
3.5% Convertible Unsecured Loan Stock 2018	12	-		(15,959)
			-		(15,959)
NET ASSETS			324,016		240,629
CAPITAL AND RESERVES
Called-up share capital	13		17,907		17,907
Share premium account			19,805		19,805
Equity component of Convertible Unsecured Loan Stock 2018	12		1,470		1,470
Special reserve			34,109		32,645
Capital reserve			244,399		162,300
Revenue reserve			6,326		6,502
EQUITY SHAREHOLDERS' FUNDS			324,016		240,629
NET ASSET VALUE PER ORDINARY SHARE:
BASIC	14		474.74p		356.90p
DILUTED	14		456.60p		345.43p

The Financial Statements in the Annual Report were approved by the Board of Directors on 4 September 2017 and were signed on its behalf by:

Allister Langlands, Director

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

Statement of Changes in Equity

For the year ended 30 June 2017

	Share capital £'000	Share premium account £'000	Equity component CULS 2018 £'000	Special reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total £'000
Balance at 30 June 2016	17,907	19,805	1,470	32,645	162,300	6,502	240,629
Return on ordinary activities after taxation	-	-	-	-	82,099	4,338	86,437
Share Buybacks	-	-	-	(1,544)	-	-	(1,544)
Issue of Ordinary Shares from Treasury from conversion of 3.5% Convertible Unsecured Loan Stock 2018 (see note 12)	-	-	-	3,008	-	-	3,008
Dividends paid (see note 7)	-	-	-	-	-	(4,514)	(4,514)
BALANCE AT 30 JUNE 2017	17,907	19,805	1,470	34,109	244,399	6,326	324,016

For the year ended 30 June 2016

	Share capital £'000	Share premium account £'000	Equity component CULS 2018 £'000	Special reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total £'000
Balance at 30 June 2015	17,907	19,805	1,470	40,558	157,204	5,832	242,776
Return on ordinary activities after taxation	-	-	-	-	5,096	4,505	9,601
Issue of Ordinary Shares from Treasury from conversion of 3.5% Convertible Unsecured Loan Stock 2018 (see note 12)	-	-	-	3,408	-	-	3,408
Repurchase of Ordinary Shares into Treasury from Tender Offer	-	-	-	(11,321)	-	-	(11,321)
Dividends paid (see note 7)	-	-	-	-	-	(3,835)	(3,835)
BALANCE AT 30 JUNE 2016	17,907	19,805	1,470	32,645	162,300	6,502	240,629

The capital reserve at 30 June 2017 is split between realised of £91,051,000 and unrealised of £153,348,000 (30 June 2016 realised £75,033,000 and unrealised £87,267,000).

The revenue reserve and realised element of the capital reserve represent the amount of the Company's retained reserves distributable by way of dividend.

The accompanying notes are an integral part of the Financial Statements.

Statement of Cash Flows

For the year ended 30 June 2017

	Year ended 30 June 2017 £'000	Year ended 30 June 2016 £'000
RETURN  ON  ORDINARY ACTIVITIES BEFORE FINANCE COSTS AND  TAXATION	87,157	10,464
Adjustment for:
Net gains on investments	(84,529)	(7,422)
Dividend income	(5,686)	(5,806)
Interest income	(26)	(59)
Dividends received	5,984	5,363
Interest received	29	58
Decrease in other debtors	-	2
Increase/(decrease) in other creditors	105	(43)
Decrease/(increase) in overseas withholding tax	25	(3)
NET CASH INFLOW FROM OPERATING ACTIVITIES	3,059	2,554
INVESTING ACTIVITIES
Purchases of investments	(56,623)	(52,800)
Sales of investments	60,557	64,038
Purchases of AAA rated Money Market funds	(58,059)	(56,938)
Sales of AAA rated Money Market funds	57,919	58,945
NET CASH INFLOW FROM INVESTING ACTIVITIES	3,794	13,245
FINANCING ACTIVITIES
Bank and loan interest paid	(554)	(664)
Repurchase of Ordinary Shares	(1,544)	(11,321)
Dividends paid	(4,514)	(3,835)
NET  CASH  OUTFLOW FROM  FINANCING ACTIVITIES	(6,612)	(15,820)
INCREASE/(DECREASE) IN CASH	241	(21)
ANALYSIS OF CHANGES IN CASH DURING THE YEAR
Opening balance	6	27
Increase/(decrease) in cash as above	241	(21)
CLOSING BALANCE	247	6

Notes to the Financial Statements

For the year ended 30 June 2017

1.    Accounting policies

(a)   Basis of accounting

The financial statements have been prepared in accordance with Financial Reporting Standard 102 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. The financial statements have been prepared on a going concern basis. The Directors believe that this is appropriate for the reasons outlined in the Directors' Report in the Annual Report.

(b)   Investments

Investments have been designated upon initial recognition as fair value through profit or loss in accordance with IAS 39. As permitted by FRS 102, the Company has elected to apply the recognition and measurement provisions of IAS 39 Financial Instruments (as adopted for use in the EU). This is done because all investments are considered to form part of a group of financial assets which is evaluated on a fair value basis, in accordance with the Company's documented investment strategy, and information about the grouping is provided internally on that basis.

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 sourced from the London Stock Exchange.

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 Statement of Comprehensive Income and are ultimately recognised in the capital reserve.

(c)   AAA rated money market funds

The AAA rated money market funds are used by the Company to provide additional short term liquidity. Due to their short term nature, they are recognised in the financial statements as a current asset and are included at fair value through profit and loss.

(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 Statement of Comprehensive Income, according to the circumstances of the underlying payment. Foreign income is converted at the exchange rate applicable at the time of receipt. Interest receivable on short-term deposits and money market funds 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 Statement of Comprehensive Income 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 Statement of Comprehensive Income 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 notes 3 and 5).

Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the Statement of Comprehensive Income.

(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. This reserve also includes gains and losses from foreign currency exchange differences. Additionally, expenses, including finance costs, are charged to this reserve in accordance with (e) above.

Revenue reserve

This reserve reflects all income and costs which are recognised in the revenue column of the Statement of Comprehensive Income.

(h)   Taxation

Tax expense represents the sum of tax currently payable and deferred tax. Any tax payable is based on taxable profit for the period. Taxable profit differs from profit before tax as reported in the Statement of Comprehensive Income because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the year end date.

Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the year end 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 year end 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 timing differences can be deducted. Timing 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

Non-monetary assets and liabilities denominated in foreign currency carried at fair value through profit or loss are converted into Sterling at the rate of exchange ruling at the year end 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 Statement of Comprehensive Income.

(k)   3.5% Convertible Unsecured Loan Stock 2018

Convertible Unsecured Loan Stock (CULS) issued by the Company is regarded as a compound instrument, comprising 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 assigned to the liability. The liability component is subsequently measured at amortised cost using the effective interest rate and the equity component remains unchanged.

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.

If, at any time after 30 June 2016, the middle market price of the Ordinary Shares is 30 per cent or more above the Conversion Price for at least 20 dealing days during a period of 30 consecutive dealing days, the Company is able to require CULS Holders to redeem their CULS at par. In such event, CULS Holders would be given a final opportunity to convert their CULS into Ordinary Shares.

(l)    Judgements and key sources of estimation uncertainty

The preparation of the financial statements requires the Company to make judgements, estimates and assumptions that affect amounts reported for assets and liabilities as at reporting date and the amounts reported for revenues and expenses during the year. The nature of estimation means that the actual outcomes could differ from those estimates, possibly significantly. The judgements relate to the fair value of financial instruments.

(m)  Cash and cash equivalents

Cash comprises bank balances and cash held by the Company. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

2.    Income

	2017 £'000	2016 £'000
Income from investments
UK dividend income	4,628	4,405
Overseas dividend income	789	822
Special dividends	269	579
	5,686	5,806
Other income
Interest from AAA rated Money Market funds	26	59
	26	59
Total income	5,712	5,865

3.    Investment management fee

	2017 £'000	2016 £'000
Investment management fee	2,499	2,265
Charged to capital reserve	(1,874)	(1,699)
	625	566

The balance due to Standard Life Investments (Corporate Funds) Limited at the year end was £673,000 (2016 - £542,000).

For further details see note 18 Transactions with the Manager.

4.    Administrative expenses

	2017 £'000	2016 £'000
Secretarial fees	180	181
Directors' fees	104	106
Auditor's remuneration:
fees payable to the Company's auditor for the audit of the Company's annual accounts	26	22
fees payable to the Company's auditor and its associates for non-audit services - iXBRL conversion	2	2
Registrar's fees	33	17
Professional fees	58	43
Custody fees	15	15
Depositary fees	58	52
Other expenses	93	121
	569	559

The balance due to the Company Secretary at the year end was £44,877 (2016: - £40,432)

The 2016 expenses in relation to Auditor's fees, Registrar's fees and Professional fees include credits for prior year over accruals. The underlying fees for 2016 were Auditor's fees £26,000, Registrar's fees £32,000 and Professional fees £58,000. The 2017 'Other expenses' include a credit of £50,000 in relation to prior year over accruals for marketing expenditure. £16,000 of stamp duty has been charged to the capital account.

5.    Finance costs

	2017 £'000	2016 £'000
Notional interest on 3.5% Convertible Unsecured Loan Stock 2018	546	634
Effective Interest Rate adjustments	102	131
Amortisation of 3.5% Convertible Unsecured Loan Stock 2018 issue expenses	72	72
	720	837
Charged to capital reserve	(540)	(628)
Charged to revenue reserve	180	209

6.    Taxation

	2017			2016
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
(a) Analysis of charge for year
Overseas taxation	-	-	-	26	-	26

(b)   Provision for deferred taxation

At 30 June 2017, the Company had unutilised management expenses and loan relationship losses of £52,059,000

(2016 - £48,480,000). 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 19.75% (2016: 20.00%)

The differences are explained below.

	2017			2016
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net profit on ordinary activities before taxation	4,338	82,099	86,437	4,531	5,096	9,627
Corporation tax at an effective rate of 19.75% (2016: 20.00%)	857	16,215	17,072	906	1,019	1,925
Effects of:
Non-taxable UK dividend income	(944)	-	(944)	(959)	-	(959)
Non-taxable overseas dividends	(120)	-	(120)	(143)	-	(143)
Excess management expenses and loan relationship losses	207	477	684	199	465	664
Capital returns (e.g. gains on investments not subject to tax)	-	(16,692)	(16,692)	-	(1,484)	(1,484)
Writing off prior year withholding tax	-	-	-	23	-	23
Total tax charge	-	-	-	26	-	26

7.    Dividends

	2017 £'000	2016 £'000
Amounts recognised as distributions to equity holders in the period:
2016 final dividend of 5.20p per share (2015 - 4.40p) paid on 03 November 2016	3,504	2,902
2017 interim dividend of 1.50p per share (2016 - 1.40p) paid on 07 April 2017	1,010	933
	4,514	3,835

The proposed 2017 final dividend for the year 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 Taxes Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £4,274,000 (2016 - £4,505,000).

	2017 £'000	2016 £'000
2017 interim dividend of 1.50p per share (2016 - 1.40p) paid on 7 April 2017	1,010	933
2017 final dividend of 5.20p per share (2016 - 5.20p) payable on 30 October 2017	3,549	3,504
	4,559	4,437

The amount payable for the proposed final dividend is based on the Ordinary Shares in issue as the date of approval of this report (4 September 2017) which satisfies the requirement of Section 1159 Corporation Tax Act 2010.

Dividends have been paid out of revenue reserves.

8.    Return per Ordinary Share

	2017		2016
	p	£'000	p	£'000
Basic
Revenue return	6.42	4,338	6.76	4,505
Capital return	121.50	82,099	7.66	5,096
Total return	127.92	86,437	14.42	9,601
Weighted average number of Ordinary Shares in issue		67,569,244		66,603,376
Diluted
Revenue return	6.07	4,487	6.28	4,665
Capital return	111.60	82,545	7.51	5,575
Total return	117.67	87,032	13.79	10,240
Weighted average number of Ordinary Shares in issue		73,965,603		74,281,569

The calculation of the diluted total, revenue and capital returns per Ordinary Share are carried out in accordance with IAS 33. 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). The calculations indicate that the exercise of CULS would result in an increase in the weighted average number of Ordinary Shares of 6,396,359 (2016 - 7,678,193) to 73,965,603 (2016 - 74,281,569) Ordinary Shares.

Where dilution occurs, the net returns are adjusted for items relating to the Convertible Unsecured Loan Stock ("CULS"). Total earnings for the period are tested for dilution. Once dilution has been determined individual revenue and capital earnings are adjusted. CULS finance costs for the period £648,000 (2016 - £765,000) and unamortised issues expenses £53,000 (2016 - £126,000) are reversed.

9.    Investments

	2017 £'000	2016 £'000
Fair value through profit or loss
Opening fair value	248,945	252,517
Opening fair value gains on investments held	(87,267)	(96,282)
Opening book cost	161,678	156,235
Additions at cost	56,680	52,800
Disposals - proceeds	(60,567)	(63,794)
- realised gains on sales	18,448	16,437
Closing book cost	176,239	161,678
Closing fair value gains on investments held	153,348	87,267
Closing fair value	329,587	248,945
Gains on investments
Realised gains on sales	18,448	16,437
Increase/(decrease) in fair value gains on investments held	66,081	(9,015)
Net gains on investments held at fair value	84,529	7,422

All investments are equity shares listed on the London Stock Exchange.

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 Statement of Comprehensive Income. The total costs were as follows:

	2017 £'000	2016 £'000
Purchases	212	178
Sales	48	59
	260	237

10.   Debtors

	2017 £'000	2016 £'000
Amounts due from brokers	10	-
Dividends receivable	934	1,235
Tax recoverable	6	31
Other debtors	14	14
	964	1,280

11.   Creditors: amounts falling due within one year

	2017 £'000	2016 £'000
Interest payable	134	142
Investment management fee payable	673	542
Sundry creditors	221	190
	1,028	874

12.   3.5% Convertible Unsecured Loan Stock 2018

	Nominal amount £'000	Liability Component £'000	Equity Component £'000
As at 30 June 2017
Opening balance	16,277	15,959	1,470
Conversion of 3.5% Convertible Unsecured Loan Stock 2018 into Ordinary Shares	(3,023)	(3,008)	-
Effective interest rate adjustments on 3.5% Convertible Unsecured Loan Stock 2018	-	102	-
Amortisation	-	72	-
Closing balance	13,254	13,125	1,470

	Nominal amount £'000	Liability Component £'000	Equity Component £'000
As at 30 June 2016
Opening balance	19,773	19,164	1,470
Conversion of 3.5% Convertible Unsecured Loan Stock 2018 into Ordinary Shares	(3,496)	(3,408)	-
Effective interest rate adjustments on 3.5% Convertible Unsecured Loan Stock 2018	-	131	-
Amortisation	-	72	-
Closing balance	16,277	15,959	1,470

On 10 October 2016 the Company converted £898,071 (08 October 2015 £1,588,511) nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 into 378,514 (2016 - 669,513) Ordinary Shares. Also on 13 April 2017 (14 April 2016) the Company converted £2,124,852 (2016 - £1,907,259) nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 into 895,583 (2016 - 803,871) Ordinary Shares.

As at 30 June 2017, there was £13,253,889 (2016 - £16,276,812) 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 borrowings, under the terms of the Trust Deed.

13.   Called up share capital

	2017 £'000	2016 £'000
Authorised:
	37,500	37,500
Issued and fully paid:
68,251,333 (2016 - 67,421,054) Ordinary Shares of 25p each - equity	17,063	16,855
Held in treasury:
3,375,842 (2016 - 4,206,121) Ordinary Shares of 25p each - equity	844	1,052
	17,907	17,907

	2017 Ordinary shares Number	2016 Ordinary shares Number
Opening balance	67,421,054	69,418,600
Conversion of CULS	1,274,097	1,473,384
Share buybacks	(443,818)	-
Tender offer	-	(3,470,930)
Closing balance	68,251,333	67,421,054

During the year the Company issued 1,274,097 Ordinary Shares from Treasury following the receipt of elections to convert by holders of the Company's 3.5% Convertible Unsecured Loan Stock 2018.

During the year the Company repurchased 443,818 Ordinary Shares to Treasury.

During the prior year the Company released a periodic Tender Offer document to shareholders. The Company announced on 24 July 2015 that the Offer resulted in 3,470,930 Ordinary shares (representing approximately 8.38 per cent of the Company's issued share capital) being tendered into Treasury.

The cost of the shares brought back was £11,199,000 excluding tender offer costs of £122,000 which were charged against the special reserve during the year to 30 June 2016.

14.   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 Statement of Financial Position reflects the rights, under the Articles of Association, of the ordinary shareholders on a return of assets.

	2017	2016
Basic net asset value per share
Net assets attributable (£'000)	324,016	240,629
Number of Ordinary Shares in issue at year end (excluding shares held in treasury)	68,251,333	67,421,054
Net asset value per share	474.74p	356.90p
Diluted net asset value per share
Net assets attributable (£'000)	337,141	256,588
Potential number of Ordinary Shares in issue at year end (excluding shares held in treasury)	73,837,699	74,281,549
Net asset value per share	456.60p	345.43p

The diluted net asset value per Ordinary share as at 30 June 2017 has been calculated on the assumption that £13,253,889 3.5% Convertible Unsecured Loan Stock 2018 are converted at 237.25p per share, giving a total of 73,837,699 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 2017 the cum income (debt at fair value) NAV was 474.74p and thus the CULS 2018 were 'in the money'.

15.   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. No such transactions took place during the year.

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. There was no material currency risk to the Company for the period.

The Board regularly reviews and agrees policies for managing each of these risks. The 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 due to materiality.

(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 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 2017, the Company's had no revolving credit facility in place. The Board regulates the overall level of gearing by raising or lowering the level of the credit facility.

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 Statement of Financial Position 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 year end date was as follows:

	Weighted average period for which rate is fixed Years	Weighted average interest rate %	Fixed rate £'000	Floating rate £'000
As at 30 June 2017
Assets
AAA rated Money Market funds	-	0.34	-	7,371
Cash deposits	-	-	-	247
Total assets	-	-	-	7,618
Liabilities
3.5% Convertible Unsecured Loan Stock 2018	0.75	3.50	13,125	-
Total liabilities	-	-	13,125	-

	Weighted average period for which rate is fixed Years	Weighted average interest rate %	Fixed rate £'000	Floating rate £'000
As at 30 June 2016
Assets
AAA rated Money Market funds	-	0.60	-	7,231
Cash deposits	-	-	-	6
Total assets	-	-	-	7,237
Liabilities
3.5% Convertible Unsecured Loan Stock 2018	1.75	3.50	15,959	-
Total liabilities	-	-	15,959	-

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 rated 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 year end 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 2017 and net assets would increase / decrease by £76,000 (2016 : increase / decrease by £72,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances and money market funds.

Other price risk

Other price risks (ie changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments.

It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular sector. The allocation of assets and the stock selection process, as detailed in the Annual Report, 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. The investments held by the Company are mainly listed on the London Stock Exchange.

Other price risk sensitivity

If market prices at the year end 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 2017 would have increased / decreased by £32,959,000 (2016 - increase / decrease of £24,895,000). 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. The maturity of the Company's existing borrowings is set out in the credit risk profile section of this note.

	Expected cash flows £'000	Due within 3 months £'000	Due between  3 months and 1 year £'000	Due after 1 year £'000
As at 30 June 2017
3.5% Convertible Unsecured Loan Stock 2018	13,717	232	13,485	-
	13,717	232	13,485	-

	Expected cash flows £'000	Due within 3 months £'000	Due between 3 months and 1 year £'000	Due after 1 year £'000
As at 30 June 2016
3.5% Convertible Unsecured Loan Stock 2018	17,413	285	284	16,844
	17,413	285	284	16,844

(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 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 Statement of Financial Position, the maximum exposure to credit risk at 30 June was as follows:

	2017		2016
	Statement of Financial Position £'000	Maximum exposure £'000	Statement of Financial Position £'000	Maximum exposure £'000
Current assets
Debtors	964	964	1,280	1,280
AAA rated Money Markets funds	7,371	7,371	7,231	7,231
Cash and short term deposits	247	247	6	6
	8,582	8,582	8,517	8,517

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

 

16.   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 Company's capital comprises the following:

	2017 £'000	2016 £'000
Equity
Equity share capital	17,907	17,907
Reserves	306,109	222,722
Liabilities
CULS	13,125	15,959
	337,141	256,588

	2017 £'000	2016 £'000
3.5% Convertible Unsecured Loan Stock 2018	13,125	15,959
Cash and AAA rated Money Market funds	(7,618)	(7,237)
Net debt	5,507	8,722
Net assets	324,016	240,629
Gearing (%)	1.7	3.6

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.

17.   Fair Value hierarchy

FRS 102 requires an entity to classify fair value measurement 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 classifications.

•      Level 1: unadjusted quoted prices in an active market for identical assets or liabilities that the entity can access at the measurement date.

•      Level 2: inputs other than quoted prices included within Level 1 that are observable (ie developed using market date) for the asset or liability, either directly or indirectly.

•      Level 3: inputs are unobservable (ie for which market data is unavailable) for the asset or liability.

All of the Company's investments are in quoted equities (2016 - same) that are actively traded on recognised stock exchanges, with their fair value being determined by reference to their quoted bid prices at the reporting date. The total value of the investments (2017 - £329,587,000; 2016 - £248,945,000) 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 (2017 - £22,267,000; 2016 - £21,404,000) has therefore been deemed Level 1.

18.   Transactions with the Manager

The Company has an agreement with Standard Life Investments (Corporate Funds) Limited ('SLI') for the provision of management services. During the 6 months ended 31 December 2015, the management fee paid to SLI was 0.85% per annum of the total net assets of the Company after deducting current liabilities ('total assets').

The fee is chargeable 25% to revenue and 75% to capital. From 1 January 2016, the management fee has been charged applying the rate of 0.85% to the first £250m of total assets, reduced to 0.65% on total assets above this threshold. The contract is terminable by either party on six months (previously twelve months) notice.

19.   Related party transactions

Standard Life Investments (Corporate Funds) Limited received fees for its services as Investment Manager and Company Secretary. Company secretarial and administrative services are provided by Maven Capital Partners UK LLP under a separate agreement with the Manager. Further details are provided in notes 3 & 4. The Directors of the Company received fees for their services. Further details are provided in the Directors' Remuneration Report in the Annual Report.  The Directors' shareholdings are also detailed in the Annual Report.

Additional notes

This Annual Financial Report is not the Company's statutory accounts.  The statutory accounts for the year ended 30 June 2016 have been delivered to the Registrar of Companies.  The statutory accounts for the years ended 30 June 2016 and 30 June 2017 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 2017 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 11.30am on Thursday 26 October 2017 at the offices of Standard Life Investments Limited, 1 George Street, Edinburgh, EH2 2LL.

The Annual Report will be posted to shareholders in September 2017 and copies will be available from the Manager or by download from the Company's website www.standardlifeuksmallercompaniestrust.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 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, Company Secretary

For further information please contact:

Hilda Stewart/Sara Reed

Press Office, Standard Life Investments               Tel: [phone] 245 2750

Evan Bruce-Gardyne

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

 

END

 

 

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