Annual Financial Report

RNS Number : 7573Y

Standard Life UK Small.Co's Tst PLC

24 August 2018

STANDARD LIFE UK SMALLER COMPANIES TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2018

STRATEGIC REPORT

Chairman's Statement

I am pleased to report another year of strong growth with the Company's Net Asset Value total return of 24.8% following last year's return of 35.0%.

We have also recently announced our proposed merger with Dunedin Smaller Companies Investment Trust PLC which is expected to increase the assets of the Company to over £550 million. The merger will benefit the Company's shareholders through increased scale, a reduction in the ongoing charges ratio and increased liquidity.

Performance

For the year ended 30 June 2018, the Company's diluted net asset value (NAV) total return, calculated on the basis that all dividends received are reinvested in additional shares, was 24.8%. The Company's performance compared with the total return of 8.5% of the Company's reference index. The share price total return, calculated on the same basis, was 17.7%. When coupled with the return delivered in 2017, the NAV total return and the share price total return are both over 60% since the year end immediately following the Brexit Referendum. This is testament to the strength of the investment process employed by the Investment Manager, Harry Nimmo and his team. 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 agreed with the Investment Manager's view, that an 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 basic revenue return per share for the year ended 30 June 2018 was 7.24p (2017: 6.42p). The Board is recommending an increased final dividend of 5.50p (2017: 5.20p). If approved, the final dividend, together with the interim dividend of 1.50p paid in April 2018, will give a total dividend for the year of 7.00p and will represent an increase of 4.5% on last year's dividend.

Subject to shareholder approval at the Annual General Meeting to be held on Thursday, 25 October 2018, the final dividend will be paid on 31 October 2018 to Shareholders on the register on 5 October 2018 with an associated ex-dividend date of 4 October 2018.

Key Performance Indicators (KPIs)

During the year we reviewed and revised the KPIs used to monitor the performance of the Company and we concluded that the four measures described below give the Board and shareholders a more transparent means of assessing the performance of the portfolio. The KPIs by which performance of the Manager will be measured, in future, are as follows:

· Net asset value total return relative to the Company's reference index, the Numis Smaller Companies plus AIM (excluding Investment Companies) Index, and also relative to the performance of its peer group of investment trusts.

· Share price total return relative to the Company's reference index and to the performance of its peer group of investment trusts.

· Discount or premium of the ordinary share price to the net asset value per share of the Company is compared to the discount of the peer group and also against the threshold of the Trust's discount control mechanism on a rolling 12 month basis.

· The on-going charges ratio (OCR) is monitored against prior years and compared to other similar sized trusts in our peer group.

The Board assesses the performance of the Company over a variety of timeframes, but has particular focus on the long term, which the Board considers to be 5 years. A 10 year record of the KPIs of the Company is also included in the Annual Report.

The Board is pleased to report that the portfolio has delivered returns in excess of the reference index over all timeframes. The on-going charges ratio (OCR) has fallen a further four basis points from 1.08% to 1.04%. The OCR has reduced for each of the last 3 years. Compared to trusts of a similar size, it is broadly in line. The Board expects that the OCR will be lower again in 2019, even assuming no change in the value of the current portfolio. The increase in the asset base resulting from the proposed merger with Dunedin Smaller Companies Investment Trust PLC ("Dunedin Smaller") coupled with the reduction in the management fee will mean that the fixed costs of managing the Company will be spread across a greater pool of assets, lowering the unit costs for shareholders.

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, are provided in the Investment Manager's Report.

Discount Control

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. Full details of the Board's Discount Control Policy can be found in the Annual Report.

As the chart in the Annual Report shows, the Board has been largely successful in this regard, as there are only a few isolated occasions during which the price has traded outside the prescribed band. The Company's shares have traded at an average discount of 3.9% over the year ended 30 June 2018. This compares with the average peer group discount of 10.8% for the same period.

In the last quarter of the financial year the discount widened for two reasons, largely unreflective of the otherwise strong performance of the portfolio. Firstly, in April 2018, the issuance of additional shares following the expiry of the Convertible Unsecured Loan Stock (CULS) in March 2018 caused some shareholders to adjust their holdings in the Trust and secondly, we also saw pressure on the share price following the announcement of the merger with Dunedin Smaller which meant that the discount at the year end was 9.6%. Since the year end, the Board has stepped in and purchased 210,574 shares in the market, enhancing the NAV for continuing shareholders, demonstrating the Board's determination to manage the discount and helping to reduce the degree of volatility in the share price and the discount.

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. At the start of the year, gearing was provided by the £13.3m of the remaining CULS. £2.2m of CULS were converted in September 2017 into 927,892 Ordinary Shares and the remaining £11.1m was converted on the final conversion date of 29 March 2018. As a consequence, a further 4,658,405 Ordinary Shares were issued. All conversions took place at a rate of 237.2542p of CULS for one Ordinary Share.

As the CULS were due to expire, the Board reviewed alternative funding options for the Company and, on 1 November 2017, the Company entered into a £45,000,000 unsecured loan agreement with Royal Bank of Scotland International Ltd. The facilities consist of a 5 year fixed-rate term loan of £25,000,000 at a rate of 2.349% and a 5 year revolving credit facility of £20,000,000. At 30 June 2018, the £25,000,000 fixed-rate fixed-term loan was drawn which, net of cash holdings, equated to a level of gearing of 3.6%.

Reference Index

During the year, the Board changed the benchmark against which it assesses portfolio performance. On 1 January 2018, the reference index became the Numis Smaller Companies plus AIM (excluding Investment Companies) Index (the plus AIM index). During 2017, the Board had considered the appropriateness of the Numis Smaller Companies (excluding Investment Companies) Index as the reference index of the Company. The last few years have seen the quality of investment opportunities available on the Alternative Investment Market (AIM) improve and, as a consequence, the proportion of the portfolio that has been invested in stocks that are quoted on AIM has gradually increased to over 40%. The Manager believes that the best way to deliver positive absolute returns over the long term is to continue to have significant exposure to AIM quoted companies. The Board recognises the contribution that the investments which are not constituents of the existing reference index have made to absolute performance. By changing the reference index to include AIM stocks, the index is a better guide to Shareholders as to what sort of companies may be included in the portfolio and the performance of the portfolio can more easily be assessed against the index which includes AIM companies.

Proposed Merger with Dunedin Smaller Companies Investment Trust PLC

On 21 June 2018, the Boards of your Company and Dunedin Smaller announced that they propose to merge the two companies. This will be achieved by way of a scheme of reconstruction under section 110 of the Insolvency Act 1986, resulting in the voluntary liquidation of Dunedin Smaller and a roll-over of its assets into the Company.

The merger with Dunedin Smaller is expected to increase the assets of the Company to over £550 million which should benefit the Company's Shareholders, through increased scale, a reduction in the ongoing charges ratio and increased liquidity. This would be the second merger that the Company has undertaken in the last 10 years and demonstrates the Board's willingness to grow the Company by a combination of performance and carefully considered corporate activity.

A Circular containing details of the proposal, will be issued to Shareholders shortly and a General Meeting will be held on 3 October 2018. The merger is conditional upon the support of both sets of shareholders.

Management fee

As part of the discussions with the Manager over the merger, and in light of the increased size of the Company, the Board has negotiated a change in the fee structure. With effect from 1 July 2018 an additional tier to the management fee has been introduced. In addition, the basis upon which the fee is calculated has also been changed. In future years, the fee will be calculated on Net Assets, not Total Assets. The fee will be 0.85% per annum applying to the first £250m of the Company's Net Assets, 0.65% per annum applying above this £250m threshold until £550m and a new reduced fee of 0.55% charged on Net Assets above this figure.

Board Succession

As previously announced, Carol Ferguson has intimated her intention to step down from the Board of the Company following the conclusion of the AGM in October 2018. Carol has been on the Board since the merger with Gartmore Smaller Companies Trust in 2008. On behalf of the Board, I would like to thank Carol for her outstanding advice and guidance over the last ten years.

As a consequence of Carol's planned retirement, the Board undertook a search to find an additional Non-Executive Director. On 15 June 2018, the Board announced that Ashton Bradbury would join the Board on 2 July 2018. Ashton was previously a fund manager with Old Mutual Global Investors Limited where he established its Small and Mid-Cap equities team.

Following the retirement of Carol Ferguson, Tim Scholefield will assume the role of the Company's Senior Independent Director.

As part of the terms of the merger, it is expected that Alexa Henderson, a Non-Executive Director of Dunedin Smaller will join the Board of the Company.

Issue of Shares

The only issuance of shares during the year was as a result of CULS conversions. 5,586,297 Ordinary Shares were issued, of which 927,892 were issued from treasury, increasing the number of shares in issue by 8.2%.

Investment Manager

The Board believes that the appointment of Aberdeen Standard Investments (ASI) 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. Since the Investment Manager was appointed Manager to the Company on 1 September 2003, the Company has delivered an annualised diluted net asset value total return of 16.8% and has outperformed the Company's reference index by almost 4.0% per annum.

The Board monitored the impact of the merger of Standard Life plc and Aberdeen Asset Management PLC which was formalised in August 2017. The main concern for the Board was the potential impact that the merger might have on the investment process and team employed to manage the portfolio. Over the last 12 months, it has been confirmed that ASI will continue to support and promote the investment process centred on the Focus on Change philosophy and the use of the Matrix, as detailed in the Annual Report, and that Harry Nimmo and his team will continue to manage the Company's portfolio.

AGM and Manager's Presentation

The Annual General Meeting of the Company will be held at the offices of the Investment Manager, Aberdeen Standard Investments, Bow Bells House, 1 Bread Street, London EC4M 9HH on Thursday, 25 October 2018. The meeting will start at 12 noon and will include a presentation from the Investment Manager. The Notice of Annual General Meeting is contained within the Annual Report.

Outlook

Last year I wrote of three events that had been largely unforeseen and which would be expected to have a significant bearing on the macro-economic landscape. Twelve months later, two of those issues, the Brexit negotiations and the decisions of Donald Trump, continue to influence market movements and the geopolitical backdrop. The remaining challenge identified last year, that of the UK being run by a minority government, does seem to have been less problematic than we had anticipated, but the evolving Brexit negotiations still have the ability to test that.

Against this backdrop, which is not benign from an investors' perspective, markets have coped and, more particularly, the companies in which your Company invests are still identifying and developing new opportunities. The portfolio continues to deliver a combination of capital growth supported by healthy dividend growth and we expect this to be the case over the longer term. The emphasis on risk aversion, quality and resilience, growth and momentum remains intact.

Allister Langlands

Chairman

23 August 2018

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 Standard Life Investments (Corporate Funds) Limited's ("the Investment Manager") 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 have set parameters of between 5% net cash and 25% net gearing (at the time of drawdown) for the level of gearing that can be employed in normal market conditions. The Directors have delegated responsibility to the Investment Manager for the operation of the gearing level within the above parameters.

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

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 or services 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

Investment Manager

The Company's Investment Manager is Standard Life Investments (Corporate Funds) Limited (the AIFM) which is a wholly owned subsidiary of Standard Life plc, which merged with Aberdeen Asset Management PLC in August 2017 to form Standard Life Aberdeen plc (SLA). The investment management to the Company is provided by Aberdeen Standard Investments (ASI), the investment division of SLA. Harry Nimmo has been the Portfolio Manager since 2003.

Investment philosophy and process

The Board has identified that ASI has a proven and repeatable investment process, which has delivered returns to shareholders over the last 14 years. The investment process adheres to ASI'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 Matrix

In managing the investment portfolio of the Company, the Focus on Change philosophy is enhanced by using ASI'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 or services 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

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. Three 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. Valuation is secondary

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 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 2018, consisted of equity share capital comprising 73,837,630 Ordinary Shares. The Company also held 2,447,950 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 could result in the Company being subject to capital gains tax on portfolio investments. Breaches of other regulations, including but not limited to, the Companies Act 2006, the FCA Listing Rules, the FCA Disclosure, Guidance and Transparency Rules, the Market Abuse Regulation, the Foreign Account Tax Compliance Act, the Common Reporting Standard, the Packaged Retail and Insurance based Investment Products (PRIIPs) Regulation and the Second Markets in Financial Investments Directive (MiFID II), 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. The Company's control environment, including those controls exercised by third party providers, are reviewed by the Board and the Manager on a regular basis to ensure ongoing compliance.

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.

The Company must also comply with the General Data Protection Regulation (GDPR) which came into force on 25 May 2018, replacing the Data Protection Act 1998. This regulation enforces the principle of 'privacy by design' and enshrines new rights for individuals, including the right to be forgotten and to data portability. The Manager has worked with third parties that process Shareholders' personal data to ensure that their rights under the new regulation are protected.

• 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 merger of Standard Life plc and Aberdeen Asset Management PLC created additional supplier risk for the Company due to the potential for change in the way the Manager provides its services to the Company. The Investment Manager has confirmed that the investment process and the investment team that has served the Trust will continue to be employed in the management of the portfolio of the Company. The Board will continue to 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

As announced in the Half Yearly Report to 31 December 2017, from 1 January 2018, the Board uses the Numis Smaller Companies plus AIM (excluding Investment Companies) Index (the plus AIM Index) as its reference index. Prior to that date, the reference index was the Numis Smaller Companies (excluding Investment Companies) Index (the Numis Index). 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 particularly over the last three years the quality of the companies listing on AIM has improved and at the same time 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 reference index in 2016. As a consequence, the returns generated by the portfolio may differ significantly from those generated by the reference 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 reference index over the longer term.

	NAV Total Return	Total Return
	Std Life UK Smaller Companies	Numis Index plus AIM (ex IC)	Numis Index (ex IC)	FTSE AIM	FTSE All - Share	FTSE 100
1 year 2 years 3 years 5 years 10 years	24.8% 64.4% 71.4% 111.1% 361.1%	8.8%	7.6%	13.5%	9.0%	8.7%
		43.4%	39.0%	57.3%	28.8%	27.1%
		34.3%	29.8%	49.5%	31.6%	32.0%
		68.9%	72.3%	67.0%	52.8%	48.6%
		147.9%	228.0%	26.4%	111.2%	98.2%

Source: Thomson Reuters Datastream to 30 June 2018.

Discount Control Policy

The Board aims to maintain a discount level of less than 8% to the cum-income 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.

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 of the Trust in the year to 30 June 2018 was 24.8%, while the share price total return was 17.7%. This compares to the performance of the UK smaller companies sector as represented by the Numis Smaller Companies plus AIM (excluding Investment Companies) Index which rose 8.8%. Over the same period the FTSE100 Index of the largest UK listed companies rose by 8.7%. Standard Life Investments, and now Aberdeen Standard Investments, has managed the Trust since 1 September 2003. The Trust's share price at that time was 47.75p and has since risen by 947% to the current period end. By comparison, our reference index was up 256% and the FTSE All-Share Index rose by 104% over the same period.

Equity markets

Optimism in world markets about economic growth in the second half of calendar year 2017 was helped by Europe finally embarking on a sustained period of recovery after many years in the doldrums since the banking crisis of 2008. This was helped by the US and Chinese economies being in good shape. The UK economy had slowed down somewhat with pockets of weakness among traditional retailers in consumer markets that involve big ticket purchases such as cars and home improvements. Housebuilders have faced more challenging times, especially in the London market. Selected leisure activities, in particular restaurants, have come under pressure with a number of chains in difficulties such as Gaucho, Jamie's Italian, Byron and Prezzo. The weather has played its part with both very cold and very hot spells in the first half of 2018.

Market progress in the year has been impacted by two political issues. There has been the tortuous Brexit negotiation and the success or otherwise of Prime Minister Theresa May in corralling the various elements within her party. The second has been the on-going protectionism emanating from President Donald Trump. With each pronouncement, a trade war seems to come a step closer.

Interest rates in the US have been on an upward trend. In the UK the picture is more complex but still, on balance, would appear to be moving in an upward direction, even after the recent rate rise, as inflation remains about 2%. Business confidence remains febrile as Brexit negotiations continue.

Oil prices have been strong, rising 40% during the period in question from $52 to $73, helped along by a benign world economy and production discipline within OPEC. Copper prices have been in quite a tight range but have come off recently partly because of Trump inspired trade uncertainty. Gold prices likewise have been in a tight band all year.

Corporate results for the period in question have been somewhat mixed with 2018 heralding a higher number of earnings downgrades from the sell side analyst community. In general the less cyclical, more growth-orientated, businesses have fared better.

Bid activity has returned in 2018 with Laird, Fenner, Virgin Money, Fidessa and ZPG being acquired at handsome premiums by mainly trade buyers.

Sector highlights include a strong showing from Industrials prior to Christmas and good returns from Media and Software sectors pretty much all year. On the negative side Retailers have generally been poor all year. The retail sector in smallcaps reads like a who's who of famous names from the high streets of yester-year such as Debenhams, Mothercare and Carpetright all in deep trouble under the onslaught of the well documented digital challenge. Commodity stocks strangely failed to respond fully to rising prices. Financial and Real Estate sectors were generally subdued in the new year.

Last year I highlighted the improvement in the quality of companies listed on the Alternative Investment Market (AIM). This trend has continued and has led to steady out- performance by growth orientated AIM stocks. The portfolio is well represented in this area.

New issues activity has seen a pick up especially in 2018 across a surprisingly wide range of sectors. This encompasses law firms (Knights), guarantor loans companies (Amigo), Funds platforms (Integrafin/Transact), computer game software (Sumo and Codemasters) and even a retailer (The Works).

Performance

The Trust has steadily out-performed throughout the year in question with a particularly strong post-Christmas period. It is also gratifying to see out-performance particularly in periods of market weakness. This underlines the resilience of our investment process. Our investment style of focusing on quality, growth and momentum driven stocks hit the spot.

Out-performance by the portfolio was driven by market focus on trading results by individual companies. This is helpful as many of our holdings are trading strongly.

Our heavy overweight positions in high quality Software, Healthcare, Food & Drink, Support Services and Electronics companies served the Trust well. Lower weightings in Financials and Property stocks were positive, as was the total lack of exposure to Oil & Gas and Mining companies. An underweight position in Industrials was negative prior to Christmas and positive thereafter. An overweight position in Retailers was negative from a sector point of view, however our stock selection was strong with good performances from JD Sports, Joules and Motorpoint.

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

It is notable that three out of our five best performers were the same as last year:- Fevertree Drinks, NMC Healthcare and First Derivatives. This is vindication of our "run your winners" approach to investing.

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

Fevertree Drinks has been a top contributor to performance for three years now. The phenomenal success of the Fevertree mixer brand continues as premium spirits take hold around the world.

NMC Group. This Abu Dhabi based hospitals group has become the partner of choice for Saudi Arabia as that country strives to improve cost effective healthcare delivery.

Midwich. This leading audio-visual display unit distributor has learnt the art of under-promising and over delivering in the past year. They are currently in a performance virtuous circle as audio visual displays become increasingly ubiquitous.

First Derivatives. The Newry based "big fast" data company continues to enter new sectors such as utilities and aerospace. Their continued success with new verticals underscores the scale of their potential.

Dechra Pharmaceuticals. This animal pharmaceuticals business continues to extend its distribution reach more deeply into US & European markets. Careful "bolt-on" acquisitions of product portfolios capitalises on their distribution strength.

Other strong performers include ID verification company GB Group, Accesso Technology, the visitor attraction software company, Abcam, the antibody distributor, which was first purchased in 2007 at less than 5% of the current share price, and XP Power, the miniaturised electric motor specialist.

The poorest performers were Alfa Financial Software and Luceco, the electrical components company. These two companies issued profit warnings and both holdings have since been sold. CVS Group had a significant price setback. Trading in Autumn 2017 was sub-par which led to a temporary but loss of confidence in the management, some of which had been recovered by the end of the period. Medica Group, the supplier of radiologists to the NHS, recorded lacklustre trading and has seen its share price punished. Growth at Moneysupermarket continues to slow, not helped by high turnover in its senior management.

Dealing and Activity

The five largest additions to the portfolio were as follows:

Safestore Holdings operates self-storage units across the UK, with a subsidiary covering Paris representing 20% of their assets. The company is run by the irrepressible Frenchman, Frederic Vecchioli, who has transformed this business over the past five years.

Gooch & Housego is a designer and manufacturer of precision electro-optical and laser components and sub-systems used in industrial, healthcare and research applications. Their key products include laser q-switches and micro-fibre couplers. They are a world leader in these niche markets.

Alpha Financial Markets is a management consultant to the fund management industry. Growth over the next few years is likely to be substantial as fund managers respond to threats their industry faces from increased regulation, passive products, mergers and complex IT and information supply arrangements. This purchase was a new issue.

Blue Prism is a world leading process automation and configuration company. They are bringing robotics to many office functions, delivering immediate productivity gains.

The Gym Group is a leading value-for-money gym operator in the UK. This is the growth segment of fitness industry.

The other new issue purchased in the year was Team 17, a specialist in developing and marketing game software. The founder is Debbie Bestwick who has received an MBE for services to the gaming industry. The company added to its holding in Kainos, the Belfast based data services company. The other significant addition was Hilton Foods, the beef and fish packer. They recently made a highly successful earnings enhancing acquisition through the purchase of Seachill.

Our key sales were:

By far our largest sale in the year was NMC Healthcare yet it remains a top five holding. NMC has become a member of the FTSE100 index in the past year. Ultimately, our intention is to sell down this holding in an orderly fashion. Profits were also taken in what still remains the largest holding; Fevertree Drinks. It is the policy of the Company to sell down holdings when they become more than 5% of the portfolio. Very significant profits were taken in First Derivatives and Dechra Pharmaceuticals for similar reasons. Luceco, Emis, Eckoh, Dominos Pizza, Avon Rubber and Safestyle were sold because they no longer matched our holding criteria.

Sector Exposures: Our key sector exposures are all growth orientated. They include the Software, Healthcare, Food & Drink, Support Services and Retail sectors. The growth in healthcare and software is perhaps self-evident. Support services is a catch-all sector that covers a range of interesting growth markets which in the case of the portfolio includes fund administration Sanne, RWS (specialist language translation and intellectual property management) and Midwich in audio-visual displays among others. Food & drink covers smaller companies that are exposed to the growth themes of choice, provenance and premiumisation through Fevertree, Cranswick, Hotel Chocolat and Hilton Food Group. Retailers provides a contrast; there are nuggets of brilliance in what is a deeply troubled sector. The stars include clothing brands, such as Joules and Ted Baker that are becoming worldwide winners or JD Sports who are benefiting from the boom in "athleisure". Joules and Ted Baker are examples of the type of retailer that we believe has a future, namely those that are in control of the whole production process, and not simply selling other people's goods.

I'd also like to highlight another theme which is developing. One could call it focusing on customer satisfaction in industries where customer satisfaction is thin on the ground. Firstly Dart Group, the operator of the Jet2 airlines business. It is now ranked in the top ten world's best airlines according to Tripadvisor. This is showing through in their superlative trading performance. Secondly Motorpoint which is a mould breaker in used car sales.

Income account

Dividend income that can be considered recurring rose by 15.0% to £6.2m, compared with £5.4m in 2017.

Total income in the year was £6.8m compared to £5.7m, a rise of 18.4%. 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". I'm pleased to say that this new wave has come of age resulting in the delivery of much improved capital and dividend growth as predicted.

Outlook

In June 2016, I also referred to 19 new holdings in the sub £250m market cap space, representing this "new wave" of British smaller companies. Six of these companies are now amongst the top 20 holdings in the portfolio and they now have an average market capitalisation significantly in excess of £1 billion. This process of renewal is what smaller company investing is all about.

In the Annual Report for the year ended 30 June 2017, I commented on the Alternative Investment Market (AIM) coming of age. That process of rapid improvement continues into 2018. The AIM market is now broader and deeper than it has ever been. There are now 235 companies with a market capitalisation of over £100m that are investable by your Company. 90% of the top 50 AIM stocks are profitable. The AIM market has a market capitalisation of around £100 billion and is half as big as the Numis Smaller Companies (excluding Investment Companies) Index. Sector exposure is diversified with the top five sectors having between 9% and 12% of the total index market value. The success of AIM continues to create wealth and jobs across the UK and beyond. It is entirely right that the reference index for this company has encompassed AIM.

The two over-arching issues going forward are Brexit and the threat of trade wars. Bad outcomes in both cases could cause mayhem far beyond the realm of British smaller companies. Investors thus continue to favour better quality, growing companies with strong business momentum. Our process starts from the bottom up where picking great companies is central to our process. We feel that it is wrong to start with a top down macro view of the future when investing in small companies. These great companies are best suited to ride out difficult economic conditions if they occur. Given that these two macro-uncertainties are likely to persist for some time I am optimistic that our process will continue to deliver out-performance in potentially troubled times.

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 very optimistic about the future of the company in the long term.

Harry Nimmo

Aberdeen Standard Investments, Portfolio Manager

23 August 2018

Key Financial Highlights

Total Return for periods to 30 June 2018
	1 year	3 years	5 years	10 years
NAV Total Return	+24.8%	+71.4%	+111.1%	+361.1%
Share Price Total Return	+17.7%	+75.2%	+93.1%	+393.0%

Capital Return for the year to 30 June 2018		As at 30 June 2018
NAV per Share	Share Price	Discount	Net Gearing
552.93p +21.1%	500.00p +16.0%	9.6%	3.6%
(2017: 456.60p) ⁽¹⁾	(2017: 431.00p)	(2017: 5.6%)	(2017: 1.7%)

Source: Thomson Reuters Datastream

(1) The comparable NAV per share of 456.60p as at 30 June 2017 is the Diluted NAV per share as at that date.

As at 30 June 2018

Market Cap

Net Assets

Gross Assets

£369.2 million

+25.5%

(2017: £294.2m)

£408.3 million

+26.0%

(2017: £324.0m)

£433.1 million

+28.5%

(2017: £337.1m)

For the year ended 30 June 2018

Revenue EPS

DPS

Ongoing Charges

7.24p

12.8%

(2017: 6.42p)

7.00p

4.5%

(2017: 6.70p)

1.04%

(2017: 1.08%)

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.

As at 30 June 2018, the Company had a £45 million unsecured loan facility agreement with Royal Bank of Scotland International Ltd. This consists of a 5 year, fixed-rate term loan facility of £25 million and a 5 year revolving credit facility of £20 million. (2017: no bank borrowings).

The Directors are mindful of the Principal Risks and Uncertainties disclosed in the Strategic 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 from 30 June 2018. 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 typically has cash balances which, including money market funds, at 30 June 2018 amounted to £10.0 million. These balances allow the Company to meet liabilities as they fall due.

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 16 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 in the Annual Report, 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 the Annual Report.

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 are required to prepare the Financial Statements in accordance with UK Accounting Standards, 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 its profit or loss 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;

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

· assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

· use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping adequate 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 are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and 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 complies 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.

Responsibility Statement of the Directors in respect of the Annual Financial Report

We confirm that to the best of our knowledge:

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

· the Strategic Report and the Directors' Report includes a fair review of the development and performance of the business and the position of the issuer, together with a description of the principal risks and uncertainties that they face.

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

Allister Langlands

Chairman

23 August 2018

Statement of Comprehensive Income

For the year ended 30 June 2018

	Notes	2018			2017
	Notes	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net gains on investments held at fair value	9	-	73,456	73,456	-	84,529	84,529
Income	2	6,765	-	6,765	5,712	-	5,712
Investment management fee	3	(770)	(2,309)	(3,079)	(625)	(1,874)	(2,499)
Other administrative expenses	4	(722)	-	(722)	(569)	(16)	(585)
NET RETURN BEFORE FINANCE COSTS AND TAXATION		5,273	71,147	76,420	4,518	82,639	87,157

Finance costs	5	(207)	(622)	(829)	(180)	(540)	(720)
RETURN BEFORE TAXATION		5,066	70,525	75,591	4,338	82,099	86,437

Taxation	6	-	-	-	-	-	-
RETURN AFTER TAXATION		5,066	70,525	75,591	4,338	82,099	86,437

RETURN PER ORDINARY SHARE:
BASIC	8	7.24p	100.82p	108.06p	6.42p	121.50p	127.92p

DILUTED	8	7.00p	95.94p	102.94p	6.07p	111.60p	117.67p

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 2018

	Notes	2018		2017
	Notes	£'000	£'000	£'000	£'000
NON-CURRENT ASSETS
Investments held at fair value through profit or loss	9		424,194		329,587

CURRENT ASSETS
Debtors	10	1,161		964
Investments in AAA-rated money market funds		9,559		7,371
Cash and short term deposits		415		247
		11,135		8,582

CURRENT LIABILITIES
Creditors: amounts falling due within one year	11	(2,265)		(1,028)
3.5% Convertible Unsecured Loan Stock 2018	12	-		(13,125)
		(2,265)		(14,153)
NET CURRENT ASSETS/ (LIABILITIES)			8,870		(5,571)
TOTAL ASSETS LESS CURRENT LIABILITIES			433,064		324,016

Creditors: amounts falling due after more than one year
Bank loan	13	(24,790)		-
			(24,790)		-
NET ASSETS			408,274		324,016

CAPITAL AND RESERVES
Called-up share capital	14		19,071		17,907
Share premium account			29,693		19,805
Equity component of 3.5% Convertible Unsecured Loan Stock 2018	12		-		1,470
Special reserve			36,311		34,109
Capital reserve			314,924		244,399
Revenue reserve			8,275		6,326
EQUITY SHAREHOLDERS' FUNDS			408,274		324,016

NET ASSET VALUE PER ORDINARY SHARE:
BASIC	15		552.93p		474.74p

DILUTED	15		552.93p		456.60p

The Financial Statements in the Annual Report were approved by the Board of Directors on 23 August 2018 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 2018

	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 2017	17,907	19,805	1,470	34,109	244,399	6,326	324,016
Return after taxation	-	-	-	-	70,525	5,066	75,591
Issue of Ordinary Shares from Treasury from conversion of 3.5% Convertible Unsecured Loan Stock 2018 (see note 12)	-	-	-	2,202	-	-	2,202
Issue of Ordinary Shares from maturity of 3.5% Convertible Unsecured Loan Stock 2018 (see note 12)	1,164	9,888	(1,470)	-	-	1,470	11,052
Dividends paid (see note 7)	-	-	-	-	-	(4,587)	(4,587)
BALANCE AT 30 JUNE 2018	19,071	29,693	-	36,311	314,924	8,275	408,274

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 after taxation	-	-	-	-	82,099	4,338	86,437
Share Buybacks (see note 14)	-	-	-	(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

The capital reserve at 30 June 2018 is split between realised of £108,543,000 and unrealised of £206,381,000 (30 June 2017: realised £91,051,000 and unrealised £153,348,000).

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

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

Statement of Cash Flows

For the year ended 30 June 2018

	Year ended 30 June 2018 £'000	Year ended 30 June 2017 £'000
RETURN ON ORDINARY ACTIVITIES BEFORE FINANCE COSTS AND TAXATION	76,420	87,157
Adjustment for:
Net gains on investments	(73,456)	(84,529)
Movement in dividend income receivable	(199)	298
Movement in interest income receivable	(7)	3
Decrease in other debtors	(2)	-
Increase in other creditors	157	105
Decrease in overseas withholding tax	-	25
NET CASH INFLOW FROM OPERATING ACTIVITIES	2,913	3,059

INVESTING ACTIVITIES
Purchases of investments	(70,819)	(56,623)
Sales of investments	50,777	60,557
Purchases of AAA-rated money market funds	(68,936)	(58,059)
Sales of AAA-rated money market funds	66,748	57,919
NET CASH INFLOW FROM INVESTING ACTIVITIES	(22,230)	3,794

FINANCING ACTIVITIES
Bank and loan interest paid	(928)	(554)
Repurchase of Ordinary Shares	-	(1,544)
Drawdown of loan	25,000
Dividends paid	(4,587)	(4,514)
NET CASH INFLOW/(OUTFLOW) FROM FINANCING ACTIVITIES	19,485	(6,612)
INCREASE IN CASH	168	241

ANALYSIS OF CHANGES IN CASH DURING THE YEAR
Opening balance	247	6
Increase in cash as above	168	241
CLOSING BALANCE	415	247

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

Notes to the Financial Statements

For the year ended 30 June 2018

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' issued in November 2014 and updated in February 2018 with consequential amendments. 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 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.

(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 Companyʼs 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 for SETS stocks 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.

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 Companyʼs 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 Companyʼs 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 Companyʼs 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 Companyʼs 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 were 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, was derived from the difference between the issue proceeds of the CULS and the fair value assigned to the liability. The liability component was subsequently measured at amortised cost using the effective interest rate and the equity component remained unchanged.

The interest expense on the CULS was 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 any CULS, equity was issued and the liability component was derecognised. The original equity component recognised at inception remained in equity. No gain or loss was recognised on conversion.

When any CULS were repurchased for cancellation, the fair value of the liability at the redemption date was compared to its carrying amount, giving rise to a gain or loss on redemption that was recognised through profit or loss. The amount of consideration allocated to equity was recognised in equity with no gain or loss being recognised.

On maturity of the remaining CULS on 31 March 2018, equity was issued and the liability component was derecognised. The original equity component recognised at inception was removed from equity. All gains and losses were recognised on maturity.

(l) Judgements and key sources of estimation uncertainty

Disclosure is required of judgements and estimates made by management in applying the accounting policies that have a significant effect on the Financial Statements. There are no significant estimates of judgement which impact these Financial Statements.

(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.

(n) Bank borrowing

Interest bearing bank loans and overdrafts are recorded initially at fair value, being the proceeds received, net of direct issue costs. They are subsequently measured at amortised cost. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the Statement of Comprehensive Income using the straight line method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.

2. Income

	2018 £'000	2017 £'000
Income from investments
UK dividend income	5,113	4,628
Overseas dividend income	1,117	789
Special dividends	489	269
	6,719	5,686
Other income
Interest from AAA-rated money market funds	46	26
	46	26
Total income	6,765	5,712

3. Investment management fee

	2018 £'000	2017 £'000
Investment management fee	3,079	2,499
Charged to capital reserve	(2,309)	(1,874)
	770	625

The balance due to Standard Life Investments (Corporate Funds) Limited at the year end was £829,000 (2017: £673,000).

For further details see note 19 Transactions with the Manager.

4. Administrative expenses

	2018 £'000	2017 £'000
Secretarial fees	180	180
Directors' fees	104	104
Auditor's remuneration:
fees payable to the Company's auditor for the audit of the Company's annual accounts excluding VAT	22	-
Outgoing auditor	-	22
VAT on audit fees	4	4
Registrar's fees	40	33
Professional fees	95	58
Custody fees	17	15
Depositary fees	73	58
Other expenses	187	95
	722	569

The balance due to the Company Secretary at the year end was £44,593 (2017: £44,877).

There were no capital expenses incurred in 2018 (2017: £16,000).

The increase in Professional fees is attributable to costs associated with the maturity of the 3.5% Convertible Unsecured Loan Stock 2018 (CULS), arranging the new loan facility application and the recruitment of a new Non-Executive Director.

Other expenses in 2018 includes £39,000 relating to the issue of new shares arising as a result of the maturity of the CULS and in 2017 included a credit of £50,000 in relation to prior year accruals for marketing expenditure.

5. Finance costs

	2018 £'000	2017 £'000
Notional interest on 3.5% Convertible Unsecured Loan Stock 2018	292	546
Effective Interest Rate	75	102
Amortisation of 3.5% Convertible Unsecured Loan Stock 2018 issue expenses	54	72
Bank loan interest	317	-
Non-utilisation fees	71	-
Amortisation of loan arrangement expenses	20	-
	829	720
Charged to capital reserve	(622)	(540)
Charged to revenue reserve	207	180

6. Taxation

	2018			2017
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
(a) Analysis of charge for year
Overseas taxation	-	-	-	-	-	-

(b) Provision for deferred taxation

At 30 June 2018, the Company had unutilised management expenses and loan relationship losses of £56,035,000

(2017: £52,059,000). 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.

UK corporation tax at a rate of 19.00% (2017: effective rate 19.75%).

The differences are explained below.

	2018			2017
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net profit on ordinary activities before taxation	5,066	70,525	75,591	4,338	82,099	86,437
Corporation tax at an effective rate of 19.00% (2017: 19.75%)	962	13,400	14,362	857	16,215	17,072
Effects of:
Non-taxable UK dividend income	(1,068)	-	(1,068)	(944)	-	(944)
Non-taxable overseas dividends	(114)	-	(114)	(120)	-	(120)
Expenses not deductible for tax purposes	1	-	1	-	-	-
Excess management expenses and loan relationship losses	219	557	776	207	477	684
Other Capital returns (e.g. gains on investments not subject to tax)	-	(13,957)	(13,957)	-	(16,692)	(16,692)
Total tax charge	-	-	-	-	-	-

7. Dividends

	2018 £'000	2017 £'000
Amounts recognised as distributions to equity holders in the period:
2017 final dividend of 5.20p per share (2016: 5.20p) paid on 30 October 2017	3,549	3,504
2018 interim dividend of 1.50p per share (2017: 1.50p) paid on 6 April 2018	1,038	1,010
	4,587	4,514

The proposed 2018 final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these Financial Statements.

We set out below the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Section 1158 - 1159 of the Corporation Taxes Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £5,066,000 (2017: £4,338,000).

	2018 £'000	2017 £'000
2018 interim dividend of 1.50p per share (2017 - 1.50p) paid on 6 April 2018	1,038	1,010
2018 final dividend of 5.50p per share (2017 - 5.20p) payable on 31 October 2018	4,049	3,549
	5,087	4,559

The amount payable for the proposed final dividend is based on the Ordinary Shares in issue as the date of approval of this report, 23 August 2018, which satisfies the requirement of Section 1159 Corporation Tax Act 2010.

Dividends have been paid out of revenue reserves.

8. Return per Ordinary Share

	2018		2017
	p	£'000	p	£'000
Basic
Revenue return	7.24	5,066	6.42	4,338
Capital return	100.82	70,525	121.50	82,099
Total return	108.06	75,591	127.92	86,437

Weighted average number of Ordinary Shares in issue		69,951,113		67,569,244

Diluted
Revenue return	7.00	5,171	6.07	4,487
Capital return	95.94	70,841	111.60	82,545
Total return	102.94	76,012	117.67	87,032

Weighted average number of Ordinary Shares in issue		73,837,630		73,965,603

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 3.5% Convertible Unsecured Loan Stock 2018 (CULS) pro-rated for the period in which the CULS were active. The calculations indicate that the exercise of CULS would result in an increase in the weighted average number of Ordinary Shares of 3,886,517 (2017: 6,396,359) to 73,837,630 (2017: 73,965,603) Ordinary Shares.

Where dilution occurs, the net returns are adjusted for items relating to the CULS. Total earnings for the period are tested for dilution. Once dilution has been determined individual revenue and capital earnings are adjusted. CULS finance costs for the period £367,000 (2017: £648,000) and previously unamortised issues expenses £54,000 (2017: £53,000) are reversed.

9. Investments

	2018 £'000	2017 £'000
Fair value through profit or loss
Opening fair value	329,587	248,945
Opening fair value gains on investments held	(153,348)	(87,267)
Opening book cost	176,239	161,678
Additions at cost	71,918	56,680
Disposals - proceeds	(50,767)	(60,567)
- realised gains on sales	20,422	18,448
Closing book cost	217,812	176,239
Closing fair value gains on investments held	206,382	153,348
Closing fair value	424,194	329,587
Gains on investments
Realised gains on sales	20,422	18,448
Increase in fair value gains on investments held	53,034	66,081
Net gains on investments held at fair value	73,456	84,529

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:

	2018 £'000	2017 £'000
Purchases	263	212
Sales	41	48
	304	260

10. Debtors

	2018 £'000	2017 £'000
Amounts due from brokers	-	10
Dividends receivable	1,133	934
Tax recoverable	6	6
Other debtors	22	14
	1,161	964

11. Creditors: amounts falling due within one year

	2018 £'000	2017 £'000
Amounts payable to brokers	1,155	57
Interest payable	97	134
Investment management fee payable	829	673
Sundry creditors	184	164
	2,265	1,028

12. 3.5% Convertible Unsecured Loan Stock 2018

	Nominal amount £'000	Liability Component £'000	Equity Component £'000
As at 30 June 2018
Opening balance	13,254	13,125	1,470
Conversion of 3.5% Convertible Unsecured Loan Stock 2018 into Ordinary Shares	(2,202)	(2,202)	-
Maturity of 3.5% Convertible Unsecured Loan Stock 2018 into Ordinary Shares	(11,052)	(11,052)	(1,470)
Effective interest rate adjustments on 3.5% Convertible Unsecured Loan Stock 2018	-	75	-
Amortisation	-	54	-
Closing balance	-	-	-

	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

On 8 October 2017 the Company converted £2,201,462 (10 October 2016: £898,071) nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 into 927,892 (2017: 378,514) Ordinary Shares. Also on 11 April 2018 (13 April 2017) the Company converted £11,052,427 (2017: £2,124,852) nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 into 4,658,405 (2017: 895,583) Ordinary Shares following the maturity date 31 March 2018.

As at 30 June 2018, there was £nil (2017: £13,253,889) nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 in issue. The loan stock was previously 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 was paid on the 3.5% Convertible Unsecured Loan Stock 2018 on 30 September and 31 March each year.

13. Creditors: amounts falling due after more than one year

	2018 £'000	2017 £'000
Bank loan	25,000	-
Unamortised loan arrangement expenses	(210)	-
	24,790	-

During the year the Company entered into a £45 million unsecured loan facility agreement arranged with Royal Bank of Scotland International Ltd. The facilities consist of a five year fixed-rate term loan facility of £25 million (the "Term Loan") and a five year revolving credit facility of £20 million (the "RCF"). The Term Loan has a maturity date of 31 October 2022 and the RCF has a maturity date of 12 September 2018.

The Company had drawn down £10 million of the Term Loan on 1 November 2017, at an interest rate of 2.349%. On 10 April 2018, the Company had drawn down a further £15 million of the Term Loan also at an interest rate of 2.349%. £15 million of the RCF was drawn between 12 December 2017 and 11 April 2018. The RCF was undrawn at the year end.

The terms of the unsecured loan facility agreement contain covenants that the minimum net asset must not be less than £140 million, the percentage of borrowings against the nets assets shall not exceed 30%, and the portfolio contains a minimum of thirty eligible investments (investments made in accordance with the Companyʼs investment policy).

The fair value of the Term Loan as at 30 June 2018 was £26,467,000, the value being calculated per the disclosure in note 18.

14. Called up share capital

	2018 £'000	2017 £'000
Authorised:
	37,500	37,500
Issued and fully paid:
73,837,630 (2017 - 68,251,333) Ordinary Shares of 25p each - equity	18,459	17,063
Held in treasury:
2,447,950 (2017 - 3,375,842) Ordinary Shares of 25p each - equity	612	844
	19,071	17,907

	2018 Ordinary shares Number	2017 Ordinary shares Number
Opening balance	68,251,333	67,421,054
Conversion of CULS	5,586,297	1,274,097
Share buybacks	-	(443,818)
Closing balance	73,837,630	68,251,333

During the year the Company issued 927,892 Ordinary Shares from Treasury following the receipt of elections to convert by holders of the Companyʼs 3.5% Convertible Unsecured Loan Stock 2018 in October 2017. The Company also issued 4,658,405 new Ordinary Shares following the maturity of the Companyʼs 3.5% Convertible Unsecured Loan Stock 2018 in April 2018.

During the year the Company repurchased nil (2017: 443,818) Ordinary Shares to Treasury.

15. Net asset value per share

Total shareholdersʼ funds have been calculated in accordance with the provisions of applicable accounting standards. The analysis of total shareholdersʼ 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.

	2018	2017
Net asset value per share
Net assets attributable (£000s)	408,274	324,016
Number of Ordinary Shares in issue at year end (excluding shares held in treasury)	73,837,630	68,251,333
Net asset value per share	552.93p	474.74p
Diluted net asset value per share
Net assets attributable (£000)	408,274	337,141
Potential number of Ordinary Shares in issue at year end (excluding shares held in treasury)	73,837,630	73,837,699
Diluted net asset value per share	552.93p	456.60p

16. Financial instruments

The Companyʼs 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 Companyʼs 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 Managerʼs 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 Companyʼs 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 Shareholdersʼ funds of changes - both positive and negative - in the value of the portfolio.

As at 30 June 2018, the Company had drawn down £25 million (2017: £nil) of the £45 million (2017: £nil) unsecured loan facility agreement arranged with Royal Bank of Scotland International Ltd. The facilities consist of a five year fixed-rate term loan facility of £25 million and a five year revolving credit facility of £20 million.

The 3.5% Convertible Unsecured Loan Stock 2018 was issued by the Company at a fixed cost until its maturity. It was carried in the Companyʼs 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 2018
Assets
AAA-rated money market funds	-	0.62	-	9,559
Cash deposits	-	-	-	415
Total assets	-	-	-	9,974
Liabilities
Bank loan	4.33	2.35	25,000	-
Total liabilities	-	-	25,000	-

	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	-

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 2018 and net assets would increase / decrease by £100,000 (2017: increase / decrease by £76,000). This is mainly attributable to the Companyʼs 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 on 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 2018 would have increased / decreased by £42,419,000 (2017 - increase / decrease of £32,959,000). 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 Companyʼs assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. The maturity of the Companyʼs 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 2018
Bank loan	27,548	148	439	26,961
3.5% Convertible Unsecured Loan Stock 2018	-	-	-	-
	27,548	148	439	26,961

	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	-

(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:

	2018		2017
	Statement of Financial Position £'000	Maximum exposure £'000	Statement of Financial Position £'000	Maximum exposure £'000
Current assets
Debtors	1,161	1,161	964	964
AAA-rated money markets funds	9,559	9,559	7,371	7,371
Cash and short term deposits	415	415	247	247
	11,135	11,135	8,582	8,582

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

17. 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:

	2018 £'000	2017 £'000
Equity
Equity share capital	19,071	17,907
Reserves	389,203	306,109
Liabilities
Bank loan	24,790
3.5% Convertible Unsecured Loan Stock 2018	-	13,125
	433,064	337,141

The Company's gearing comprises of the following:

	2018 £'000	2017 £'000
3.5% Convertible Unsecured Loan Stock 2018	-	13,125
Bank loan	24,790	-
Cash and AAA-rated money market funds	(9,974)	(7,618)
Net debt	14,816	5,507
Net assets	408,274	324,016
Gearing (%)	3.6	1.7

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.

18. 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 Companyʼs investments are in quoted equities (2017 - 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 (2018: £424,194,000; 2017: £329,587,000) have therefore been deemed as Level 1.

The Company's 3.5% Convertible Unsecured Loan Stock 2018 were actively traded on a recognised stock exchange. The fair value of the CULS (2018: £Nil; 2017: £22,267,000) was therefore deemed Level 1 prior to maturity.

The fair value of borrowings as at 30 June 2018 has been estimated at £26,467,000 (carrying value per Statement of Financial Position: £24,790,000) using the interest rate swap valuation technique. Under the fair value hierarchy in accordance with FRS 102, these borrowings can be classified at Level 2.

19. Transactions with the Manager

The Company has an agreement with Standard Life Investments (Corporate Funds) Limited ('SLI') for the provision of management services.

The fee is chargeable 25% to revenue and 75% to capital. 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' notice.

20. 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 Directorsʼ Remuneration Report in the Annual Report. The Directorsʼ shareholdings are 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 2017 have been delivered to the Registrar of Companies. The statutory accounts for the years ended 30 June 2017 and 30 June 2018 received an audit report which was unqualified, did not include a reference to any matters to which the auditors 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 2018 have been approved and audited but will not be filed with the Registrar of Companies until after the Company's Annual General Meeting which will be held at 12.30pm on Thursday, 25 October 2018 at the offices of Aberdeen Standard Investments, Bow Bells House, 1 Bread Street, London, EC4M 9HH.

The Annual Report will be posted to shareholders in September 2018 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

Press Manager, Aberdeen Standard Investments Tel: 0131 245 3409

Evan Bruce-Gardyne

Client Director, Investment Trusts, Aberdeen Standard Investments Tel: 0131 245 0571

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

FR SEFFUDFASEIA

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