Annual Financial Report

RNS Number : 4346Z

Shires Income PLC

26 May 2016

 

SHIRES INCOME PLC

ANNUAL FINANCIAL RPORT FOR THE YEAR ENDED 31 MARCH 2016

The Company

Shires Income PLC ("the Company") is an investment trust. Its Ordinary shares are listed on the premium segment of the London Stock Exchange.

Investment Objective

The Company's investment objective is to provide shareholders with a high level of income, together with growth of both income and capital from a portfolio substantially invested in UK equities.

Benchmark

FTSE All-Share Index (Total Return)

Management

The investment management of the Company has been delegated by Aberdeen Fund Managers Limited ("AFML", the "AIFM" or the "Manager") to Aberdeen Asset Managers Limited ("AAML" or the "Investment Manager"). Both companies are wholly owned subsidiaries of Aberdeen Asset Management PLC.

Website

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

COMPANY OVERVIEW - FINANCIAL HIGHLIGHTS

Net asset total return A			Share price total return A
2016	-7.0%		2016	-15.4%
2015	+9.7%		2015	+4.9%
ATotal return represents capital return plus dividends reinvested			ATotal return represents capital return plus dividends reinvested
Benchmark total return A			Earning per share (revenue)
2016 2015	-3.9% +6.6%		2016 2015	12.06p  12.92p
ATotal return represents capital return plus dividends reinvested
Dividend per Ordinary share			Dividend yield
2016	12.25p		2016	6.1%
2015	12.25p		2015	4.9%

For further information, please contact:

Kenny Harper

Aberdeen Asset Managers Limited         0131 528 4000

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise.  Investors may not get back the amount they originally invested.

COMPANY OVERVIEW - CHAIRMAN'S STATEMENT

Performance

In the year to 31 March 2016 the net asset value per share decreased by 7.0% on a total return basis compared to a decline in our benchmark, the FTSE All-Share Index, of 3.9%.  While performance during the past year was disappointing, there were favorable returns in prior years and the Company remains ahead of our benchmark both over three and five years (net asset value, total return basis). The underperformance this year is due principally to stock specific issues which I cover in more detail below. The Board and Investment Manager remain focused on improving performance and shareholder returns.

As Shareholders will be aware, the year saw significant changes in investor sentiment, with concerns over global growth, particularly in emerging markets, interest rates in the United States and Europe, the asset repurchase programme and oil prices.

These factors masked the generally good results produced by the majority of corporates held within the Company's portfolio, although there are undoubtedly challenges ahead, particularly for those companies with exposure to the financial, commodities and oil and gas sectors.  On the positive side, the volatility experienced during the year offered opportunities, notably the  introduction of four new companies into the portfolio; Capita, Imperial Brands, Hansteen and Rotork.

The key reason for the underperformance during the year was the Company's exposure to the financial sector where it is overweight compared to our benchmark index, both through direct equity holdings and through the preference share portfolio. Standard Chartered was the worst performer due to disappointing trading, management change and a rights issue. Close Brothers, Schroders and Prudential also underperformed although, operationally, all three companies' results were satisfactory and their balance sheets are in good condition. Another negative area was the exposure to the mining sector, where BHP Billiton underperformed.     

In terms of positive performers, most notable amongst these were British American Tobacco and Unilever, both of which continued to deliver pleasing dividend growth, and Sage, the accounting software company, delivered another year of good results.

Earnings

The Company's revenue return for the year was 12.06p per share, compared to 12.92p per share for the previous year. Although there were some good dividend increases within the Company's portfolio, there were also some notable decreases, some of which were related to the weakness in the oil and other commodity prices, including BHP Billiton and Centrica. In addition, Standard Chartered and Tesco have cancelled their dividend payments altogether. Total investment income also fell slightly due to the expected reduction in special dividends.

Dividend

The Board is proposing an unchanged final dividend of 3.25p per share, which will be paid on 29 July 2016 to Shareholders on the register on 8 July 2016. This final dividend brings total dividends for the year to 12.25p per share, the same as in 2015, representing a dividend yield of 6.1% based on the year end share price of 202.0p per share. Subject to unforeseen circumstances it is proposed to continue to pay quarterly interim dividends of 3.00p each and the Board will decide on next year's final dividend having reviewed the full year results.

Discount

The share price fell by 15.4% on a total return basis over the year, reflecting a widening of the discount at which the Company's shares traded to their net asset value.  At the end of March 2016 the discount stood at 9.5% (on an ex-income basis), compared to 0.2% at the end of the previous year. This widening was not unusual within the investment trust sector, which has seen discounts widening from historically tight levels since the start of 2016.

Portfolio Profile and Gearing

The Company's gearing increased during the year, from 19.4% to 24.9%.  This increase is attributable to a slight increase in borrowings by £500,000 in August 2015 and also to the fall in asset value. The Board continually monitors the level of gearing and, although the absolute level looks high, I would remind Shareholders that it is deployed notionally in fixed interest securities which also bring an element of diversification to the Company's total revenue stream but with lower volatility than would be expected from an equity portfolio. This was achieved during the year, producing a small positive return.

Annual General Meeting

The Company's Annual General Meeting will be held on 6 July 2016.

Outlook

Economies in both the USA and UK continued to grow over the year. We have also seen a Conservative election victory which has resulted in the electorate being given an opportunity to vote on the UK's continued membership of the European Union. The prospect of the UK leaving the European Union has increased uncertainty in the markets and contributed to some companies delaying investment decisions. In the USA we are witnessing a highly divisive nomination process for the Republican and the Democratic presidential candidates. The outcomes of both these elections could have an effect on financial markets, global economic growth and diplomatic relations.

The markets continue to watch with much anticipation for the Federal Reserve's next upward move in interest rates and are also concerned about the strength of the European recovery and whether further stimulatory measures will be required. China continues to be the subject of much commentary given its economic growth is at its slowest rate in 25 years. This has resulted in the authorities allowing the Renminbi to devalue and this is already becoming a source of tension with US authorities. Additional uncertainty is also being created by the continuing weakness of oil and commodity prices.

With so much uncertainty, it is not surprising that markets remain volatile. As I have commented previously, the portfolio contains a broad spread of businesses with attractive medium and longer term prospects across many different industries. The investment strategy remains unchanged, with a focus on ownership of businesses with sustainable competitive advantages, reliable management teams and good corporate governance. Notwithstanding the underperformance of the portfolio during the past year and the uncertainties highlighted above, these factors continue to give the Board confidence about the future prospects for the Company.

Anthony B. Davidson

Chairman

26 May 2016

STRATEGIC REPORT - OVERVIEW OF STRATEGY

Business Model

The business of the Company is that of an investment company which qualifies as an investment trust for tax purposes.  The Directors do not envisage any change in this activity in the foreseeable future.

Investment Objective

The Company's investment objective is to provide shareholders with a high level of income, together with growth of both income and capital from a portfolio substantially invested in UK equities.

Investment Policy

In pursuit of its objective, the Company's policy is to invest principally in the ordinary shares of UK quoted companies, and in convertible and preference shares with above average yields.

The Company generates income primarily from ordinary shares, convertibles and preference shares. It also achieves income by writing call and put options on shares owned, or shares the Investment Manager would like to own. By doing so, the Company generates premium income.

Gearing

The Directors are responsible for determining the gearing strategy of the Company.  Gearing is used with the intention of enhancing long-term returns. Gearing is subject to a maximum equity gearing level of 35% of net assets at the time of draw down.  Any borrowing, except for short-term liquidity purposes, is used for investment purposes. 

Risk Diversification

In order to ensure adequate diversification, the Board sets absolute limits on maximum holdings and exposures in the portfolio from time to time. These limits do not form part of the investment policy and can be changed or over-ridden with Board approval. The current limits are disclosed under the heading "Board Investment Limits" below.   

Delivering the Investment Policy

The Directors are responsible for determining the investment objective and the investment policy of the Company, although any significant changes are required to be approved by shareholders at a general meeting. Day-to-day management of the Company's assets has been delegated, via the AIFM, to the Investment Manager, Aberdeen Asset Managers Limited.

Investment Process

The Investment Manager believes that, over the long-term, share prices reflect the underlying business fundamentals of companies and hence investments are made based on research undertaken on individual companies. This is known as a "bottom up" investment process. This process involves a disciplined evaluation of potential investments through meeting investee companies. New investments are not made without the Investment Manager having first met the management of the investee company, undertaken further analysis and written detailed notes to outline the underlying investment merits. A company's value is estimated in two stages, quality then price. Quality is defined by reference to management, business focus, balance sheet and corporate governance. Price is assessed relative to key financial ratios and business prospects.  Top-down investment factors are secondary in the Investment Manager's portfolio construction, with diversification rather than formal controls guiding stock and sector weights.

The Investment Manager's portfolios are generally run conservatively, with an emphasis on traditional buy-and-hold and top-slicing/topping up.  This approach usually results in low turnover within portfolios. 

Portfolios are managed by the Investment Manager on a team basis, with individual investment managers carrying out their own research and analysis.  All ideas are shared via formal committees and common databases, with desk heads ensuring consistency. 

Benchmark

In assessing its performance, the Company compares its returns with the returns of the FTSE All-Share Index.

Key Performance Indicators ("KPIs")

The Board uses a number of financial performance measures to assess the Company's success in achieving its objective and determining the progress of the Company in pursuing its investment policy.  The main KPIs identified by the Board in relation to the Company, which are considered at each Board meeting, are shown in the following table:

KPI	Description
Performance of net asset value ("NAV")	The Board considers the Company's NAV total return figures to be the best indicator of performance over time and this is therefore the main indicator of performance used by the Board.
Performance against benchmark index	The Board measures performance against the benchmark index - the FTSE All-Share Index.
Revenue return per Ordinary share	The Board monitors the Company's net revenue return.
Dividend per share	The Board also monitors the Company's annual dividends per Ordinary share.
Share price performance	The Board monitors the performance of the Company's share price on a total return basis.
Discount/premium to NAV	The discount/premium relative to the NAV per share represented by the share price is closely monitored by the Board.
Ongoing charges	The Board monitors the Company's operating costs carefully.

Principal Risks and Uncertainties

There are a number of risks which, if realised, could have a material adverse effect on the Company and its financial condition, performance and prospects. The principal risks and uncertainties facing the Company at the current time, together with a description of the mitigating actions the Board has taken, are set out in the table below.  The Board has carried out a robust assessment of these risks, which include those that would threaten its business model, future performance, solvency or liquidity. The principal risks associated with an investment in the Company's shares are published monthly on the Company's factsheet and they can be found in the pre-investment disclosure document ("PIDD") published by the Manager, both of which are available on the Company's website. The risks and uncertainties faced by the Company are reviewed by the Audit Committee in the form of a risk matrix and a summary of the principal risks is set out below.

Description	Mitigating Action
Investment management - underperformance of the portfolio when measured against the benchmark.	The Board meets the Manager on a regular basis and keeps investment performance under close review. Representatives of the Investment Manager attend all Board meetings and a detailed formal appraisal of the Aberdeen Group is carried out annually by the Management Engagement Committee. The Board sets, and monitors, the investment restrictions and guidelines, and receives regular reports which include performance reporting on the implementation of the investment policy, the investment process, risk management and application of the guidelines. The Board also monitors the Company's share price relative to the net asset value per share. Investment risk within the portfolio is managed in three ways: -        Adherence by the Investment Manager to the investment process in order to minimise investments in poor quality companies and/or overpaying. -        Diversification of investment - seeking to invest in a wide variety of companies with strong balance sheets and the earnings power to pay increasing dividends. In addition, investments are diversified by sector in order to reduce the risk of a single large exposure. The Company invests mainly in equities, preference shares and convertibles. -        Adherence by the Investment Manager to the investment limits set by the Board (see below). Investment in smaller companies Rather than holding a number of smaller companies' shares, the Company invests indirectly in this part of the equity market through one holding in Aberdeen Smaller Companies Income Trust PLC*, which is also managed by the Manager.  The Directors regularly review this holding (currently 6.9% of the Company's portfolio).  All of the directors of Aberdeen Smaller Companies Income Trust PLC are independent of Shires Income PLC. The Manager does not charge any management fee in respect of the amount of the Company's assets attributable to this holding. (*formerly Aberdeen Smaller Companies High Income Trust PLC)
Failure to meet the dividend growth objective - the level of the Company's dividends and future dividend growth will depend on the performance of the underlying portfolio.	The Directors review detailed income forecasts at each Board meeting. The Company has built up significant revenue reserves which can be drawn upon should there be a shortfall in revenue returns.
Widening of discount - a number of factors including the setting of an unattractive strategic proposition, changing investor demand and investment underperformance may lead to a decrease in demand for the Company's shares and a widening of the difference between the share price and the net asset value.	The Board keeps the level of discount at which the Company's shares trade as well as the investment objective and policy under review and holds an annual strategy meeting where it reviews investor relations reports and updates from the Investment Manager and the Company's Broker. The Directors are updated at each Board meeting on the composition of, and any movements in, the shareholder register.
Financial - the financial risks associated with the portfolio could result in losses to the Company.	The financial risks associated with the Company include market risk, liquidity risk and credit risk, all of which are mitigated by the Investment Manager. Further details of the steps taken to mitigate the financial risks associated with the portfolio are set out in note 16 to the financial statements.
Gearing - a fall in the value of the Company's investment portfolio could be exacerbated by the impact of gearing. It could   also result in a breach of loan covenants.	The Board sets the gearing limits within which the Investment Manager can operate. Gearing levels and compliance with loan covenants are monitored on an ongoing basis by the Manager and at regular Board meetings. In the event of a possible impending covenant breach, appropriate action would be taken to reduce borrowing levels. The financial covenants attached to the Company's borrowings currently provide for significant headroom. The maximum equity gearing level is 35% of net assets at the time of draw down, which constrains the amount of gearing that can be invested in equities which are more volatile than the fixed interest part of the portfolio. The Board and the Investment Manager keep under review options available to protect a portion of the portfolio from a sudden decline in markets.
Regulatory - failure to comply with relevant laws and regulations could result in fines, loss of reputation and potentially loss of an advantageous tax regime.	The Board and Manager monitor changes in government policy and legislation which may have an impact on the Company and the Audit Committee monitors compliance with regulations by reviewing internal control reports from the Manager. From time to time the Board employs external advisers to advise on specific matters.
Operational - the Company is dependent on third parties for the provision of all systems and services (in particular, those of the Aberdeen Group) and any control failures and gaps in their systems and  services could result in a loss or damage to the Company.	The Board receives reports from the Manager on its internal controls and risk management throughout the year and receives assurances from all its other significant service providers on at least an annual basis. Written agreements are in place with all third party service providers. The Manager monitors closely the control environments and quality of services provided by third parties, including those of the Depositary and Custodian, through service level agreements, regular meetings and key performance indicators.

Board Investment Limits

In order to ensure adequate diversification, the Board has set absolute limits on maximum holdings and exposures in the portfolio at the time of acquisition. These can only be over-ridden with Board approval. The current limits include the following:

-    Maximum 7.5% of total assets invested in the securities of one company (excluding Aberdeen Smaller Companies Income Trust PLC);

-    Maximum 5% of quoted investee company's ordinary shares (excluding Aberdeen Smaller Companies Income Trust PLC).

Preference shares

The Company also invests in preference shares, primarily to enhance the income generation of the Company. The majority of these investments is in large financial institutions.  Issue sizes are normally relatively small and associated low volumes of trading could give rise to a lack of liquidity. The maximum holding in preference shares is managed by the first guideline referred to above. In addition, the Company cannot hold more than 10% of any investee company's preference shares.

Traded options contracts

The Company enters into traded option contracts, also primarily to enhance the income generation of the Company. The risks associated with these option contracts are managed through the principal guidelines below, which operated in the year under review:

-     Call options written to be covered by stock;

-     Put options written to be covered by net current assets/borrowing facilities;

-     Call options not to be written on more than 100% of a holding of stock;

-     Call options not to be written on more than 30% of the UK equity portfolio;

-     Put options not to be written on more than 30% of the UK equity portfolio.

External Agencies

In addition to the services provided to the Company by the Aberdeen Group, the Board has contractually delegated to external agencies certain services, including: depositary services (which include the safekeeping of the Company's assets) (BNP Paribas Securities Services, London Branch) and share registration services (Equiniti Limited). Each of these services was entered into after full and proper consideration by the Board of the quality and cost of services offered. In addition, day-to-day accounting and administration services are provided, through delegation by the Manager, by BNP Paribas Securities Services.

Promoting the Company

The Board recognises the importance of promoting the Company to prospective investors both for improving liquidity and enhancing the value and rating of the Company's shares. The Board believes an effective way to achieve this is through subscription to and participation in the promotional programme run by the Aberdeen Group on behalf of a number of investment trusts under its management. The Company's financial contribution to the programme is matched by the Aberdeen Group.  The Aberdeen Group Head of Brand reports to the Board giving analysis of the promotional activities as well as updates on the shareholder register and any changes in the make up of that register.

The purpose of the programme is both to communicate effectively with existing shareholders and to gain new shareholders with the aim of improving liquidity and enhancing the value and rating of the Company's shares. Communicating the long-term attractions of the Company is key and therefore the Company also supports the Aberdeen Group's investor relations programme which involves regional roadshows, promotional and public relations campaigns. 

Board Diversity

The Board recognises the importance of having a range of skilled, experienced individuals with relevant knowledge in order to allow it to fulfill its obligations.  The Board also recognises the benefits, and is supportive, of the principle of diversity in its recruitment of new Board members. However, in making new appointments, the Board's overriding priority is to appoint the most appropriate candidates, regardless of gender or other forms of diversity. The Board has not therefore set any measurable objectives in relation to its diversity.  At 31 March 2016, there were three male Directors and one female Director.

Employee and Socially Responsible Policies

The Company has no employees as the Board has delegated the day-to-day management and administrative functions to the Manager. There are therefore no disclosures to be made in respect of employees. The Company's socially responsible investment policy is set out below.

Socially Responsible Investment Policy

The Board acknowledges that there are risks associated with investment in companies which fail to conduct business in a socially responsible manner and has noted the Aberdeen Group's policy on social responsibility. The Investment Manager considers social, environmental and ethical factors which may affect the performance or value of the Company's investments as part of its investment process.  In particular, the Investment Manager encourages companies in which investments are made to adhere to best practice in the area of corporate governance. It believes that this can best be achieved by entering into a dialogue with company management to encourage them, where necessary, to improve their policies in this area. The Company's ultimate objective, however, is to deliver long term growth on its investments for its shareholders. Accordingly, whilst the Investment Manager will seek to favour companies which pursue best practice in the above areas, this must not be to the detriment of the return on the investment portfolio.

Modern Slavery Act

Due to the nature of the Company's business, being a company that does not offer goods and services to customers, the Board considers that it is not within the scope of the Modern Slavery Act 2015 because it has no turnover. The Company is therefore not required to make a slavery and human trafficking statement. In any event, the Board considers the Company's supply chains, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.

Global Greenhouse Gas Emissions

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

Viability Statement

The Board considers the Company, with no fixed life, to be a long term investment vehicle but, for the purposes of this viability statement, has decided that three years is an appropriate period over which to report. The Board considers that this period reflects a balance between a longer term investment horizon and the inherent uncertainties within equity markets. 

In assessing the viability of the Company over the review period, the Directors have focused upon the following factors:

-     The principal risks and uncertainties detailed above and the steps taken to mitigate these risks.

-     The ongoing relevance of the Company's investment objective.

-     The majority of the Company's portfolio is invested in readily realisable listed securities.

-     The level of gearing is closely monitored and the financial covenants attached to the Company's borrowings provide for significant headroom.

-     The ability of the Company to refinance or repay its £20 million loan facility on, or before, its maturity in December 2017.

In making its assessment, the Board has considered that there are other matters that could have an impact on the Company's prospects or viability in the future, including a large economic shock, significant stock market volatility, and changes in regulation or investor sentiment.

Taking into account the Company's current position and the potential impact of its principal risks and uncertainties, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for a period of three years from the date of approval of this Report.

Future

Many of the non-performance related trends likely to affect the Company in the future are common across all closed ended investment companies, such as the attractiveness of investment companies as investment vehicles, the impact of regulatory changes (including MiFID II and the Packaged Retail Investment and Insurance Products regulations) and the recent changes to the pensions and savings market in the UK. These factors need to be viewed alongside the outlook for the Company, both generally and specifically, in relation to the portfolio. The Board's view on the general outlook for the Company can be found in the Chairman's Statement whilst the outlook for the portfolio is included in the Investment Manager's Review.  

Anthony B. Davidson

Chairman

26 May 2016

STRATEGIC REPORT - RESULTS

Financial Summary

	31 March 2016	31 March 2015	% change
Total investments	£85,149,000	£92,181,000	-7.6
Shareholders' funds	£68,802,000	£77,832,000	-11.6
Market capitalisation	£60,595,000	£75,594,000	-19.8
Net asset value per share	229.36p	259.46p	-11.6
Share price (mid-market)	202.00p	252.00p	-19.8
Discount to NAV	(11.9%)	(2.9%)
Discount to NAV (ex-income) A	(9.5%)	(0.2%)
Gearing
Net gearing	24.9%	19.4%
Dividend and earnings
Revenue return per share B	12.06p	12.92p	-6.7
Dividend per share C	12.25p	12.25p
Dividend cover	0.98	1.06
Revenue reserves D	£6,253,000	£6,313,000
Operating costs
Ongoing charges ratio E	0.97%	1.01%
A    Based on capital only NAV, calculated in accordance with AIC guidelines.
B    Measures the revenue earnings for the year divided by the weighted average number of Ordinary shares in issue (see Statement of Comprehensive Income).
C    The figures for dividend per share reflect the years in which they were earned (see note 8).
D    The revenue reserve figure does not take account of the third interim or final dividends amounting to £1,874,849 (2015 - £1,874,849) combined.
E    Ongoing charges ratio calculated in accordance with guidance issued by the AIC as the total of the management fee and administrative expenses divided by the average cum income net asset value throughout the year.

Performance (total return)

	1 year	3 year	5 year
	% return	% return	% return
Net asset value	-7.0	+13.8	+53.0
Share price (based on mid-market)	-15.4	+1.1	+40.6
FTSE All-Share Index	-3.9	+11.4	+31.9
All figures are for total return and assume re-investment of net dividends excluding transaction costs.

Dividends

	Rate per share	xd date	Record date	Payment date
First interim dividend	3.00p	1 October 2015	2 October 2015	30 October 2015
Second interim dividend	3.00p	7 January 2016	8 January 2016	29 January 2016
Third interim dividend	3.00p	7 April 2016	8 April 2016	29 April 2016
Proposed final dividend	3.25p	7 July 2016	8 July 2016	29 July 2016
	_______
2015/16	12.25p
	_______
First interim dividend	3.00p	1 October 2014	3 October 2014	31 October 2014
Second interim dividend	3.00p	2 January 2015	5 January 2015	30 January 2015
Third interim dividend	3.00p	2 April 2015	7 April 2015	30 April 2015
Final dividend	3.25p	2 July 2015	3 July 2015	31 July 2015
	_______
2014/15	12.25p
	_______

Ten Year Financial Record

Year to 31 March	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
Revenue available for ordinary dividends (£'000)	5,987	6,026	5,536	3,512	3,292	3,615	3,556	3,789	3,877	3,617
Per share (p)
Net revenue return	19.3	22.2	18.8	11.8	11.1	12.2	11.9	12.6	12.9	12.1
Net dividends paid/proposed	19.25	19.75	19.75	12.00	12.00	12.00	12.00	12.00	12.25	12.25
Total return	25.9	(63.4)	(112.9)	85.3	22.6	7.4	53.5	26.0	23.1	(17.8)
Net asset value	334.0	251.1	118.5	186.8	197.5	192.9	234.4	248.4	259.5	229.4
Share price (mid-market)	310.75	220.00	109.00	184.00	190.00	194.50	233.00	252.25	252.00	202.00
	_____	_____	_____	_____	_____	_____	_____	_____	_____	_____
Shareholders' funds (£m)	99.1	74.6	35.2	55.5	58.6	57.3	70.3	78.7	77.8	68.8
	_____	_____	_____	_____	_____	_____	_____	_____	_____	_____
The figures for 2011 to 2016 are for the Company only, following the dissolution of the subsidiaries in May 2011.

Cumulative Performance

Rebased to 100 at 31 March 2006

As at 31 March	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016
NAV	100.0	102.3	76.6	36.2	56.9	60.1	58.7	71.4	75.6	79.0	69.8
NAV total return A	100.0	108.8	86.6	45.2	80.0	90.2	93.9	121.4	135.2	148.3	137.9
Share price performance	100.0	99.1	70.2	34.8	58.7	60.6	62.0	74.3	80.5	80.4	64.4
Share price total return A	100.0	105.4	79.7	44.0	84.1	92.6	101.2	128.6	146.7	153.9	130.1
Benchmark performance	100.0	107.7	96.0	65.1	95.5	100.6	98.5	110.9	116.7	120.2	111.4
Benchmark total return A	100.0	111.1	102.5	72.5	110.4	120.0	121.7	142.1	154.6	164.7	158.3
NAV figures are based on Company only values following the dissolution of the subsidiaries in May 2011.
A Total return figures are based on reinvestment of net income.

STRATEGIC REPORT - MANAGER'S REVIEW

Highlights

-       Underperformance against the benchmark, reflects the difficulties experienced by emerging market and commodity orientated holdings.

-       Three and five year performance remains ahead of the benchmark.

-       Significant dividend cuts negatively impact earnings per share.  Diversified portfolio and fixed interest holdings provide resilience.

-       Volatility again creates opportunities for new introductions.

-       Portfolio well positioned for the longer term and any recovery in sentiment towards emerging markets.

Portfolio Strategy

We take a long term approach to investing, believing that whilst there might be volatility in the short and even medium term, share prices will ultimately reflect the fundamental value of a company.  Consequently there has been no change to our approach to the construction of the portfolio during the year under review. 

The Company's assets are invested in equities, preference shares and convertible shares.  At the year end, 69.0% of the assets were invested in equities, 26.2% in preference shares and the remainder in convertible shares and cash.

Gearing

Gearing increased during the year from 19.4% to 24.9%.  There are two factors that have affected this, firstly shareholders' funds have declined during the year and secondly net debt has increased as we have sought to take advantage of the volatility in some share prices that was present at certain times during the year.  The gearing is notionally invested in the preference share portfolio.  At the year-end these securities had a value of £24.4 million, materially in excess of net indebtedness which stood at £17.1 million.  This part of the portfolio provides a core level of high income and would, in normal conditions, be expected to be more resilient than equities in the event of a fall in the market.  This has indeed proven to be the case this year.  Whilst there were periods of volatility, in particular during the early part of 2016 when investors again focussed on the risks posed by some elements of the banking sector, this part of the portfolio demonstrated its more defensive characteristics over the full year.  An attractive income stream was received and total returns were ahead of those produced by the Company's benchmark.

Revenue Account

The following table details the Company's main sources of income over the last five years.

	2016	2015	2014	2013	2012
	%	%	%	%	%
Ordinary dividends	53.0	54.6	52.5	49.8	48.5
Preference dividends	37.7	35.0	36.1	38.2	39.6
Aberdeen Smaller Companies	4.8	4.3	4.9	5.7	5.5
Fixed interest and bank interest	0.2	0.2	0.2	0.3	0.3
Traded option premiums	4.3	5.9	6.3	6.0	6.1
	______	______	______	______	______
Total	100.0	100.0	100.0	100.0	100.0
	______	______	______	______	______
Total income (£'000s)	4,361	4,665	4,534	4,275	4,352
	______	______	______	______	______

Earnings per share have decreased by 6.7% over the year to 12.06p.  There were a number of factors that caused this.  As shareholders will be aware there have been a number of high profile dividend cuts during the period.  Several of these were related to the weakness in oil and other commodity prices.  BHP Billiton cut their distribution by 75% and Centrica reduced their dividend by 30%.  Meanwhile, Standard Chartered conducted a rights issue and passed their dividend altogether, whilst Tesco have also moved to a zero level of payout.  Timing means that the full impact of these changes will, in some cases, not be felt until the current financial year.  This is particularly the case for BHP Billiton, where all things being equal, the 2016 financial year will see a further reduction in dividends received from this investment. 

Two additional sources of pressure were the non-recurrence of the special dividend previously paid by Compass Group, though they did raise their core dividend by almost 11%.  Also there was a change in the timing but not quantum of dividend paid by Weir Group.

Lastly, there was a reduction in the amount of premium we generated from the option writing programme.  We take a fundamental approach to this activity, selling both puts and calls, with strike prices that we believe represent attractive levels to top up or top slice a holding.  We are resolute in our endeavour to avoid implicitly exchanging capital for income.  Periods of higher volatility akin to that experienced at times during the financial year can lead to higher prices being available for the options we seek to sell.  However, there is also a higher, sometimes significantly higher, risk that the share price will move sufficiently that capital losses exceed the income produced.  We do not believe that this is in shareholders' best interests.  Consequently, although it may initially appear counterintuitive, we often reduce our option writing activity during periods when volatility is pushing their prices upwards.  

Several holdings delivered pleasing levels of growth in their dividends.  Three of the companies we introduced in the prior financial year; Aveva, Elementis and Inchcape increased their dividends by more than 10%.  GlaxoSmithKline and Prudential both announced special dividends.  Wood Group, a company we highlighted in last year's report increased its dividend by 19%. Schroders and Provident Financial also registered double digit increases.  It is also worth remembering that just over one third of the Company's revenues come from fixed interest instruments, which deliver no growth in dividends but help support a higher level of earnings. 

Equities

The financial year started well with markets rising and economic recovery continuing on both sides of the Atlantic.  There was a surprise victory for the Conservative Party in the General Election and investors responded positively to this.  The oil price was still declining, impacted by excess supply and economic weakness particularly in China.  The effects of this were feeding through to underlying prices such that deflation was present in the domestic economy for the first time since 1960.  Consumers were enjoying the higher disposable incomes that resulted from reduced food and fuel prices.  However, oil price weakness did little to diminish the enthusiasm of many management teams for the product's long term prospects.  This was perhaps most clearly illustrated with Royal Dutch Shell's £47 billion recommended offer for BG Group.  Corporate confidence was still positive and this was not the only example of large scale merger and acquisition activity with Vodafone and Liberty International engaging in discussions about bringing the two companies together.  Later in the year Pfizer attempted to form the largest pharmaceutical company in the world when it bid for Allergan.  It is notable that the latter two deals eventually floundered. 

As had been the case for some time, investors believed that interest rates would rise in both the UK and US over the course of the year.  By mid-summer the Governor of the Bank of England, Mark Carney, was suggesting that the timing of a rise was moving closer.  This seemed plausible given the on-going recovery, wage growth, shrinking output gap and the impending annualisation of the fall-off in the oil price and hence the likely return of some inflationary pressure.

The declines in commodity prices were putting pressure on many emerging market economies.  Although there were, unsurprisingly, differences between countries there was a general slowing of growth and indeed some were experiencing recessions.  This was relevant for the portfolio because the UK market as a whole is more exposed than many investors appreciate to emerging market demand.  We are attracted by the positive long term prospects enjoyed by many of these countries.  Exposure to the growth opportunities available in emerging markets is a feature that we typically regard as a positive for the companies we invest in.  Therefore the portfolio also has a higher than average level of exposure to such companies and this has had an impact in the short term. What had until recently been regarded as a positive was now viewed negatively.  Where this created opportunities we sought to capitalise on them and at a minimum we endeavoured to trust our long term approach and to retain our positions even if they were impacting current performance.

In China the transition to a more consumer led stage of development was never likely to be easy and as such growth was slowing and the authorities responded with a series of interest rate cuts.  Indeed by October they would have engaged in six reductions in less than one year.  This at least served to remind investors that there were still conventional policy levers that could be pulled to support the economy.  By the summer the Chinese stock market was under intense scrutiny.  Having registered such strong gains that many commentators had spoken of a "bubble", it was now experiencing very significant declines that caused the Government to utilise a range of unconventional measures to try and mitigate further losses.  Weakness was evident in UK equity markets as well, with June the worst month for three years and August recording the worst single day's decline since March 2009.  The genesis for the sell-off in August was the surprise decision by the Peoples' Bank of China to allow the yuan to devalue against the dollar. 

There was some commentary during the first half reporting season about the number of companies that beat the market's earnings expectations.  This needed to be taken with a pinch of salt given many of these businesses had seen their profits expectations downgraded in the prior weeks.  With one or two notable exceptions, that included a Rolls Royce profit warning and Standard Chartered dividend cut the companies in the portfolio traded in line with our expectations, though the negative impact of foreign exchange on reported earnings was a recurrent theme.

By the autumn the central banks of the US, UK and Eurozone were taking divergent paths.  In the US the Federal Reserve was getting closer to raising rates though they were obviously concerned about the impact emerging market travails might have on global growth.  In the UK, although conditions suggested an increase in interest rates was possible any such move was continuously pushed into the future.  Meanwhile, in Europe, Mario Draghi and the European Central Bank were talking about the possibility of increasing the size and duration of their Quantitative Easing programme.  The differences in these economies' prospects were highlighted more clearly at the end of 2015 when the US raised interest rates by 0.25%, the first upward move for nine years.  The ECB reduced rates and expanded their stimulatory activities, both lengthening them and increasing the quantum from €60 billion to €80 billion per month.  They also made an important change to allow them to purchase debt from companies other than banks.  This was despite the region delivering growth of 1.6% for the year. 

Towards the end of 2015 the oil price accelerated its declines such that by January 2016 it had fallen below $30 a barrel, a level not seen since the early part of the prior decade.  Equity markets had a similarly disappointing start to the new year, weighed down by concerns about slowing Chinese growth, which at 6.9% for 2015 was the slowest rate for 25 years.  February brought a reversal of fortunes for equity markets and the oil price and there was an increase in investor appetite for risk, though there was a marked volatility during the month as investors sought to understand the implications of a negative interest rate policy for the banking sector.  The financial year ended with markets in a more upbeat mood and almost all of 2016's losses were recouped.  There was also something of an about turn in terms of the styles of investing that were in favour.  Value orientated propositions performed rather better than the more highly rated momentum shares, which was helpful to our performance. 

Portfolio Positioning

The portfolio is constructed in a bottom-up manner based on the fundamental analysis of the companies in question.  Sectoral overweight and underweight positions are therefore an output of the portfolio construction process rather than a determinant of which businesses we invest in. 

We continue to have less direct commodity exposure than the benchmark.  Although the quality of the businesses in the Oil & Gas and Mining sectors varies considerably they all share the characteristic of having a lack of pricing power.  Therefore we have tended to limit our investments in these companies, particularly because we also have secondary exposure to commodity prices.  This arises through an obvious source such as the overweighting towards the more capital light service companies.  It also includes companies such as Aveva, part of whose business sells software for the design of complex ships such as oil tankers and can extend right through to the likes of Standard Chartered, a bank that has significant commodity based lending and even Compass Group which is seeing reduced demand for catering services in Australian mining camps.

We are underweight the Household Goods sector because we have no holdings in the house builders.  Our thesis is a simple one, namely that we find it difficult to see how conditions can become any more favourable for these companies and yet valuations seem to us to suggest an expectation that such a scenario will materialise.  Although we have no insight as to when this cycle will turn we feel that we are closer to its end than its beginning. 

We are overweight Financial Services but we would note the very different business models and drivers employed by our investments.  Conversely, we are underweight the domestic banks where a combination of low growth, complexity and continuing increases in the regulatory burden leave us underwhelmed by their prospects.  The portfolio is also underweight the Real Estate sector on account of valuations that in the case of London based assets in particular, leave almost no scope to absorb any future increase in domestic interest rates.

We have retained the holding in the re-named Aberdeen Smaller Companies Income Trust because we believe that our approach to investing is suited to identifying opportunities in the less researched areas of the market.  The utilisation of a collective vehicle allows us to achieve a more appropriate level of diversification relative to investing directly in what can be a more volatile area of the market.

Portfolio Activity

We introduced four new holdings during the year.  Rotork is a global leader in the design and manufacture of actuators.  Actuators are required for the control of any kind of automated valve.  Their business model is one based on assembly rather than conventional manufacturing, hence the company can be thought of as having low capital intensity.  This combined with the more consolidated nature of this aspect of the overall flow control supply chain allows them to make attractive margins and returns.  They sell into a wide array of end markets and benefit from selling a critical component but one which represents a very small proportion of a project's total costs.  Typically they are a late cycle business and this has historically smoothed their navigation of difficult markets as conditions have often picked up before the impact of weakening demand has manifested itself.  The impact of the current downturn in commodity prices has been more marked creating an opportunity for us to introduce an initial holding. 

Capita is a leading provider of Business Process Outsourcing.  They typically provide white collar services, often with an IT orientation.  The market is very sizable with perhaps just 10% currently covered by third party providers.  Drivers for adoption are the cost savings that accrue for both public and private sector buyers.  These are often allied to a better quality of service for the end user.  The company secures long term contracts of seven to eight years with high levels of retention.  Whilst organic growth will be a key driver of their fortunes there is ample scope for them to engage in merger and acquisition activity as they buy new capabilities or broaden into new geographies. 

Hansteen own and manage industrial parks in the UK, Germany and Belgium.  These sites can be purchased with low levels of occupancy and rent, on high single digit yields.  Hence the management team have attractive opportunities to add value.  Therefore capital values can be increased significantly without the need for yield compression, though the potential for that remains, providing a further underpinning to valuations.  The management duo is very experienced and has significant equity stakes in the company thus providing comfort that they will maintain a balance sheet that is appropriate for a business that is inevitably exposed to the economic cycle. 

Imperial Brands is a leading international tobacco company with brands and products available in 160 countries worldwide. The company has maintained sound underlying earnings progress aided by cost savings and price increases which in turn have been helped by their brand migrations.  In June 2015 they completed the acquisition of a number of US cigarette and e-cigarette assets that were released to the market following the acquisition of Lorillard by Reynolds American. These new assets will increase Imperial's US market share to 10% and US revenues to 25%  which  is attractive in the medium term  given the scope for price increases and the relatively benign regulatory environment in the region. The group has a successful track record of cash generation which bodes well for both future debt reduction and continued dividend growth.  

Three holdings were exited.  Land Securities was sold as we felt that valuations of London prime real estate were becoming increasingly stretched, especially given a belief that interest rates would eventually begin to rise.  In addition the proceeds partially funded the introduction of Hansteen and Imperial Brands.  We inherited a small holding in South 32 when it was spun out of BHP Billiton.  Although we understood the rationale for the deal from the parent's perspective, namely that it would allow them to focus all their efforts on a more concentrated portfolio of tier one assets, the flip side of the equation was that the assets being spun out were of a more diverse nature and quality.  Accordingly, we sold this holding and re-invested the proceeds into BHP.  BG group was bid for by Royal Dutch Shell.  We believe that the transaction made sense for Shell, bringing them significant additional exposure to deep water and integrated gas, two areas they were seeking to grow.   BG brought a production profile, portfolio of LNG assets and exploration capabilities that could be regarded as first class. Two thirds of the price was funded with equity which allowed the company to maintain a suitably strong balance sheet.  There were also opportunities to leverage their scale to drive cost savings, and indeed the expected cost synergies rose markedly as the deal progressed.  For BG it allowed a crystallisation of value at a time of very high levels of uncertainty about the oil price.  This was a pressing matter for the company given the amount of capital they had recently invested.

We participated in the placing conducted by GKN to help finance their purchase of Fokker Technologies.  The business will fit into their aerospace division and with a conservative estimation of the potential synergies the returns should exceed their cost of capital by next year.  We also supported Standard Chartered with their £3.3 billion rights issue conducted at the end of 2015.  The purpose was to get the bank's capital ratios to a position of strength to provide protection in the face of regulatory uncertainty.  The company also further restructuring with significant headcount reductions and an aim to decrease risk weighted assets by £100 billion. 

In more general portfolio activity we continued to build two of the holdings we introduced last year; Ultra Electronics and Elementis.  We took profits in Associated British Foods after it had performed strongly.  We also top sliced the holding in Tesco which saw some recovery in in its share price as the restructuring implemented by Dave Lewis began to show signs of gaining traction.  We are cognisant of the lack of income produced by this investment and have therefore limited the size of the holding.  We also top sliced the holding in Cobham where we increasingly came to the view that whilst their acquisition of Aeroflex made strategic sense the company was now overly indebted.  Indeed since the year end we have exited this position. 

Investment Performance Analysis

In the year to the end of March 2016, the total return on net assets was -7.0% compared to our benchmark, the FTSE All-Share Index which returned -3.9%.

Two related themes were evident in the portfolio over the year.  As commodity prices and in particular the oil price declined precipitously, so the share prices of many companies with both direct and indirect exposure fell.  A large number of emerging markets have economies that have significant reliance on commodities and this allied to fears about rising US interest rates caused weakness in stocks that have exposure to them. 

We highlighted the difficulties faced by Standard Chartered in last year's Investment Manager's Review and these have continued this year.  The company is having to transition from a strategy that prioritised growth to one that focusses on cost control and profitability at a time when credit conditions are deteriorating and the regulatory burden is increasing.  The share price fell markedly over the year and they also conducted a rights issue to give them flexibility to make the changes that are required.  We believe the valuation to be cheap for a business that is expected to deliver growth over the long term.  Exposure to commodity prices led to disappointing share price performances from BHP Billiton and Weir Group.  In both cases we see potential for a recovery in earnings as these companies focus on adjusting their cost bases at a time when demand is broadly stable.  Any such improvement would be expected to feed through into the share prices.  Although troublesome for the companies concerned, the declines in commodity prices were not universally a negative for the portfolio.  For instance our relative performance was boosted by our underweight exposure to the oil majors.  A similar dynamic was evident amongst the mining companies in aggregate. 

Rolls Royce issued a number of profit warnings during the year as the company struggled with weak demand in its marine business coupled with a problematic switch between engine programmes in its civil aerospace operations.  The latter issue caused a decline in profits from the well established existing engine the Trent 700. Meanwhile the ramp up of sales for the Trent 7000, the replacement engine, is taking longer than anticipated.  Exacerbating the issue is a change to accounting that will see a slower rate of recognition of profits on the new engines when compared to the old model.  Over time this will lead to a better quality of earnings but it is causing short term pain.  As the installed base of the Trent 7000 grows so the company will build a very large annuity like stream of aftermarket revenues and cashflows that we believe offer some attractive long term prospects.

After a good year in the prior period, education provider Pearson had a much more turbulent 2015 as it struggled with weaker than expected demand in the United States.  The business has announced a sizeable restructuring which has been well received by the market and offers some underpinning to the declining share price, though we won't see the full benefits till 2018.

Other companies that experienced a tough year were Prudential, Schroders and Close Brothers.  Although trading was in line with expectations, Prudential's share price fell as investors worried about the prospects for its Asian growth engine.  Schroders share price mirrored but also magnified the declines in equity markets, whilst Close Brothers indicated a slowing of loan growth in their countercyclical SME focussed bank.  We interpret that as evidence that the business is being run as we expect with management showing restraint when returns start to weaken.

There were positives in the portfolio as well.  Sage is a provider of accountancy software.  They have a relatively new management team who have been driving margin progression whilst also moving the business to one that is more cloud based.  Both actions position the company well for the future and the share price has responded strongly.  Unilever has bucked the trend that saw emerging market exposure move out of favour.  Their long term growth prospects, driven by a portfolio of powerful brands and strong distribution boosted by opportunities to continually drive margins forward have been increasingly recognised by investors.  British American Tobacco is a good example of the kind of steady almost bond like proxy that has found favour with many investors during the year.  With oligopolistic positions that confer pricing power, a focus on value over volume, emerging market exposures, and good cash flows that deliver above market levels of dividend, the business looks well set for the future. 

Croda the speciality chemicals company has had a good year as their strategy of expanding the portfolio of faster growing new and protected products whilst also focussing on the more rapidly growing smaller customers in developing markets.  The business has a strong balance sheet and was able to announce a special dividend during the year.

Whilst it is dangerous to generalise, small companies as a group typically have a greater orientation to the domestic economy and a lower level of commodity exposure than their larger counterparts.  These features were viewed positively over the year and small companies outperformed the benchmark.  Consequently the portfolio benefitted from its investment in Aberdeen Smaller Companies Income Trust.

The portfolio is constructed to deliver growth in both capital and earnings over the long term.  Whilst we accept that performance was behind that of the benchmark last year we take heart from the fact that it is ahead of the benchmark over both three and five years.  Capital and earnings growth are unlikely to progress either smoothly or in line with each other.  We are however very aware of the desirability of growth in the portfolio's earnings. 

Prospects

Prospects for the global economy appear to be just the right side of the 3% growth long held to be the level required to stave off a global recession.  China will be central to the achievement or otherwise of this target.  The key question is whether China can avoid a hard landing.  With an expectation of growth of 6.2% in 2016 this looks achievable but it is worth remembering that these forecasts have been steadily trending downwards for some time.  The Chinese authorities have tilted policy away from reform and towards fiscal stimulus and for the time being this looks set to support growth.  However, in the event that this is unsuccessful there is the potential that the authorities will seek to boost the economy with a further devaluation of the renminbi, this in turn would add to deflationary pressures in developed markets.  Positively they do retain conventional policy levers that can be used to address further economic weakness. 

The US delivered disappointing growth in early 2016.  However, the fundamentals still look sound, despite the impact of a strong currency, sluggish global demand and subdued oil and gas spending.  The Federal Reserve is indicating that the interest rate cycle is likely to be shallower than originally anticipated, with no further increases in interest rates expected until late this year.  Investors still have no real idea how markets will respond to a tightening interest rate cycle.

In the UK the recovery is continuing and forecasts have recently been revised marginally upwards.  However the economy is regarded as sufficiently fragile that the timing of interest rate increases keeps being pushed further out.  Sterling has weakened in response to the announcement of the referendum on membership of the European Union.  That has in conjunction with an upturn in commodity prices, wage growth and a decline in spare capacity resulted in a pick-up in inflation expectations for 2016.  However, these still remain very low for this year it seems likely that any increase in interest rates is still some way away.  Indeed some commentators are now suggesting that there will be no change until 2019.  The uncertainty caused by the  referendum is also unhelpful in the context of both investor and corporate sentiment.  However, companies are reporting that though life is difficult they are coping.  Although the oil price has bounced from its lows, profits from commodity producers are still under pressure.   This has led to a further downgrade to forecast earnings for the domestic economy, such that despite expectations for Gross Domestic Product growth holding steady at near 2% we face a fifth consecutive year of negative aggregate earnings growth.

The European recovery remains on track, though it needs to be remembered just how much stimulus is being required to deliver expansion that is still far from inspiring.  Indeed, with the risks seemingly weighted to the downside there remains the possibility that additional stimulus will be required.

Emerging markets have shown some recovery aided by improving commodity prices and the belief that developed market interest rates will rise even more slowly than previously thought.

With so much uncertainty it is not surprising that markets are volatile, though the extent of some share price moves has been greater than might have been anticipated.

Equity valuations appear quite full, multiples are towards the upper end of a normal range whilst expectations for profit growth are more muted.  Yields do though provide some support especially when equities are compared to other asset classes.  As we have said previously we believe that our portfolio of high quality businesses will prosper over the long term though the short term direction of the markets is as ever difficult to divine. 

Aberdeen Asset Managers Limited

26 May 2016

PORTFOLIO - ORDINARY SHARES

AS AT 31 MARCH 2016

	Valuation	Total	Valuation
	2016	portfolio	2015
Company	£'000	%	£'000
Aberdeen Smaller Companies Income Trust	5,866	6.9	6,124
British American Tobacco	3,395	4.0	2,896
Unilever	2,869	3.4	2,702
Royal Dutch Shell 'B'	2,839	3.3	3,063
AstraZeneca	2,556	3.0	3,030
GlaxoSmithKline	2,485	2.9	2,721
Vodafone	2,170	2.6	2,163
Chesnara	2,152	2.5	2,238
HSBC Holdings	2,129	2.5	2,589
Prudential	2,043	2.4	2,625
Ten largest investments	28,504	33.5
Centrica	2,008	2.4	2,452
Sage Group	1,912	2.2	1,675
National Grid	1,757	2.1	1,928
Pearson	1,662	2.0	2,351
Close Brothers	1,628	1.9	2,011
Compass	1,537	1.8	1,467
BP	1,520	1.8	1,895
BHP Billiton	1,487	1.7	2,328
Schroders	1,436	1.7	2,150
Inmarsat	1,349	1.6	1,268
Twenty largest investments	44,800	52.7
Standard Chartered	1,210	1.4	2,095
Wood Group (John)	1,175	1.4	972
Imperial Brands	1,043	1.2	-
Croda International	1,003	1.2	986
Provident Financial	993	1.2	1,118
Experian	971	1.1	726
Tesco	961	1.1	1,451
Rolls Royce	941	1.1	1,058
Inchcape	919	1.1	413
GKN	904	1.1	1,112
Thirty largest investments	54,920	64.6
Cobham	829	1.0	1,883
Elementis	783	0.9	155
Rotork	749	0.9	-
Ultra Electronic Holdings	704	0.8	405
Weir Group	643	0.8	987
Associated British Foods	636	0.7	676
Aveva	583	0.7	548
Capita	531	0.6	-
Hansteen	292	0.3	-
Royal Dutch Shell 'A'	47	0.1	-
Total Ordinary shares	60,717	71.4

INVESTMENT PORTFOLIO - OTHER INVESTMENTS

AS AT 31 MARCH 2016

	Valuation	Total	Valuation
	2016	portfolio	2015
Company	£'000	%	£'000
Convertibles
Premier Farnell 89.2p Cum Conv	778	0.9	774
Balfour Beatty Cum Conv 10.75%	552	0.7	572
Total Convertibles	1,330	1.6
Preference shares
Ecclesiastical Insurance Office 8 5/8%	5,661	6.6	5,851
Royal & Sun Alliance 7 3/8%	5,003	5.9	5,340
General Accident 7.875%	4,364	5.1	4,683
Santander 10.375%	4,123	4.8	4,039
Standard Chartered 8.25%	3,099	3.6	3,583
R.E.A. Holdings 9%	852	1.0	1,206
Total Preference shares	23,102	27.0
Total other investments	24,432	28.6
Total investments	85,149	100.0
Purchases and/or sales effected during the year result in 2015 and 2016 values not being directly comparable.

Distribution of Assets and Liabilities

			Movement during the year
	Valuation at					Gains/	Valuation at
	31 March 2015		Purchases	Sales	Other	(losses)	31 March 2016
	£'000	%	£'000	£'000	£'000	£'000	£'000	%
Listed investments
Ordinary shares	66,133	85.0	6,465	(4,879)	-	(7,002)	60,717	88.2
Convertibles	1,346	1.7	-	-	(10)	(6)	1,330	1.9
Preference shares	24,702	31.7	-	-	(83)	(1,517)	23,102	33.6
	_______	______	_______	______	_____	_______	_______	_____
Total investments	92,181	118.4	6,465	(4,879)	(93)	(8,525)	85,149	123.7
Current assets	4,418	5.7					2,877	4.2
Current liabilities	(8,767)	(11.3)					(9,224)	(13.4)
Non current liabilities	(10,000)	(12.8)					(10,000)	(14.5)
	_______	______					_______	_____
Net assets	77,832	100.0					68,802	100.0
	_______	______					_______	_____
NAV per Ordinary share	259.5p						229.4p
	_______						_______

DIRECTORS' REPORT (EXTRACT)

The Directors present their report and audited financial statements for the year ended 31 March 2016.

Results and Dividends

The financial statements for the year ended 31 March 2016 are contained below. Dividends paid and proposed for the year amounted to 12.25p per Ordinary share.

First, second and third interim dividends for the year, each of 3.0p per Ordinary share, were paid on 30 October 2015, 29 January 2016 and 29 April 2016 respectively. The Directors recommend a final dividend of 3.25p per Ordinary share, payable on 29 July 2016 to shareholders on the register on 8 July 2016. The ex-dividend date is 7 July 2016. Under International Financial Reporting Standards ("IFRS") the third interim and final dividends will be accounted for in the financial year ended 31 March 2017. A resolution in respect of the final dividend will be proposed at the forthcoming Annual General Meeting.

Investment Trust Status

The Company is registered as a public limited company (registered in England and Wales No. 00386561) and is an investment company within the meaning of Section 833 of the Companies Act 2006. The Company is approved by HM Revenue & Customs as an investment trust within the meaning of Section 1158 of the Corporation Tax Act 2010 and the ongoing requirements of Part 2 Chapter 3 Statutory Instrument 2011/2999 for all financial years commencing on or after 1 April 2012.  The Directors are of the opinion that the Company has conducted its affairs for the year ended 31 March 2016 so as to enable it to comply with the ongoing requirements for investment trust status.

Individual Savings Accounts

The Company has conducted its affairs in such a way as to satisfy the requirements as a qualifying security for Individual Savings Accounts. The Directors intend that the Company will continue to conduct its affairs in this manner.

Capital Structure

The issued Ordinary share capital at 31 March 2016 consisted of 29,997,580 Ordinary shares of 50p each and 50,000 3.5% Cumulative Preference Shares of £1 each. There have been no changes in the Company's issued share capital subsequent to the year end and up to the date of this Report.

Each Ordinary and Cumulative Preference share carries one vote at general meetings of the Company.

The Cumulative Preference Shares carry a right to receive a fixed rate of dividend and, on a winding up of the Company, to the payment of such fixed cumulative preferential dividends to the date of such winding up and to the repayment of the capital paid up on such shares in priority to any payment to the holders of the Ordinary shares.

The Ordinary shares, excluding any treasury shares, carry a right to receive dividends and, on a winding up or other return of capital, after meeting the liabilities of the Company, the surplus assets will be paid to Ordinary shareholders in proportion to their shareholdings.

There are no restrictions on the transfer of Ordinary or Cumulative Preference shares in the Company other than certain restrictions which may from time to time be imposed by law.

Management Agreement

The Company has appointed Aberdeen Fund Managers Limited ("AFML"), a wholly owned subsidiary of Aberdeen Asset Management PLC, as its alternative investment fund manager. AFML has been appointed to provide investment management, risk management, administration and company secretarial services to the Company as well as to carry out promotional activities.  The Company's portfolio is managed by Aberdeen Asset Managers Limited ("AAML") by way of a group delegation agreement in place between AFML and AAML.  In addition, AFML has delegated the provision of promotional activities to AAML and administrative and secretarial services to Aberdeen Asset Management PLC. Fees payable in relation to promotional activities carried out by Aberdeen are shown in note 4 to the financial statements.

The management fee, details of which are shown in note 3 to the financial statements, is calculated on a monthly basis at 0.45% per annum up to £100 million and 0.40% per annum over £100 million, by reference to the net assets of the Company and any borrowings with a maturity of one year or more, and excluding commonly managed funds. The management agreement is terminable on not less than six months' notice. In the event of termination by the Company on less than the agreed notice period, compensation is payable to the Manager in lieu of the unexpired notice period.

The terms and conditions of the Manager's appointment and its performance are reviewed by the Management Engagement Committee on an annual basis.

Substantial Interests

As at 31 March 2016, the following interests in the issued Ordinary share capital of the Company had been disclosed in accordance with the requirements of the FCA's Disclosure and Transparency Rules:

Shareholder	Number of Ordinary shares held	% of Ordinary shares held
Aberdeen Asset Managers Limited Retail PlansA	4,542,133	15.1

^A Non-beneficial interest

There have been no changes notified to the Company since the year end as at the date of approval of this Report.

Directors

Mr D. P. Kidd retired as a Director on 8 July 2015.

All Directors are considered by the Board to be independent of the Company and the Manager and free of any material relationship with the Manager. Each Director has the requisite high level and range of business and financial experience which enables the Board to provide clear and effective leadership and proper governance of the Company.

Mr A. S. Robson is a non-executive director of Witan Pacific Investment Trust PLC ("WPC"). WPC's executive manager is Witan Investment Services Limited. WPC operates a multi-manager structure, and Aberdeen Asset Management Asia Limited, part of the Aberdeen Group, manages a part of WPC's assets. Despite his consequent involvement in two investment trusts (including this one) where Aberdeen has an investment management relationship, the remainder of the Board is unanimous in its opinion that Mr Robson remains independent in his role as a Director of the Company. 

Directors attended scheduled Board and Committee meetings during the year ended 31 March 2016 as shown in the following table (with their eligibility to attend the relevant meetings in brackets).

Director	Board Meetings	Audit Committee  Meetings	Management  Engagement  Committee Meetings	Nomination Committee Meetings
A. B. Davidson	5 (5)	3 (3)	1 (1)	1(1)
M. Glen	5 (5)	3 (3)	1 (1)	1(1)
D. P. KiddA	2 (2)	1 (1)	-	-
A. S. Robson	5 (5)	3 (3)	1 (1)	1(1)
R. Talbut	5 (5)	3 (3)	1 (1)	1(1)

^A Retired 8 July 2015

The Board meets more frequently when business needs require.

Ms M. Glen retires by rotation at the Annual General Meeting and, having served for more than nine years, Mr A. B. Davidson will also retire at the Annual General Meeting. Being eligible, both Ms Glen and Mr Davidson offer themselves for re-appointment.

The Board believes that Mr Davidson and Ms Glen remain independent of the Manager and free from any relationship which could materially interfere with the exercise of their judgement on issues of strategy, performance, resources and standards of conduct and confirms that, following a formal performance evaluation, their performance continues to be effective and demonstrates commitment to the role. The Board therefore recommends the re-appointment of Mr Davidson and Ms Glen at the Annual General Meeting.

Directors' and Officers' Liability Insurance

The Company maintains insurance in respect of Directors' and Officers' liabilities in relation to their acts on behalf of the Company. In addition, the Company has entered into a separate deed of indemnity with each of the Directors reflecting the scope of the indemnity in the Articles of Association. Under the Articles of Association, each Director is entitled to be indemnified out of the assets of the Company to the extent permitted by law against any loss or liability incurred by him or her in the execution of his or her duties in relation to the affairs of the Company. 

Management of Conflicts of Interest

The Board has a procedure in place to deal with a situation where a Director has a conflict of interest. As part of this process, each Director prepares a list of other positions held and all other conflict situations that may need to be authorised either in relation to the Director concerned or his or her connected persons. The Board considers each Director's situation and decides whether to approve any conflict, taking into consideration what is in the best interests of the Company and whether the Director's ability to act in accordance with his or her wider duties is affected. Each Director is required to notify the Company Secretary of any potential, or actual, conflict situations that will need authorising by the Board. Authorisations given by the Board are reviewed at each Board meeting.

No Director has a service contract with the Company although all Directors are issued with letters of appointment. There were no contracts during, or at the end of the year, in which any Director was interested.

The Board takes a zero-tolerance approach to bribery and has adopted appropriate procedures designed to prevent bribery. The Manager also takes a zero-tolerance approach and has its own detailed policy and procedures in place to prevent bribery and corruption.

Corporate Governance

The Company is committed to high standards of corporate governance. The Board is accountable to the Company's shareholders for good governance and this statement describes how the Company has applied the principles identified in the UK Corporate Governance Code (the "UK Code"), as published in September 2014 and effective for financial years commencing on or after 1 October 2014,  which is available on the Financial Reporting Council's website: frc.org.uk 

The Board has also considered the principles and recommendations of the AIC Code of Corporate Governance (the "AIC Code") by reference to the AIC Corporate Governance Guide for investment Companies (the "AIC Guide"). The AIC Code, as explained by the AIC Guide, addresses all the principles set out in the UK Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to investment trusts. The AIC Code and AIC Guide are available on the AIC's website: theaic.co.uk

The Board considers that reporting in accordance with the principles and recommendations of the AIC Code, and by reference to the AIC Guide (which incorporates the UK Code), will provide better information to shareholders.

The Board confirms that, during the year, the Company complied with the recommendations of the AIC Code and the relevant provisions of the UK Code, except as set out below.

The UK Code includes provisions relating to:

-      the role of the chief executive (A.1.2);

-      executive directors' remuneration (D.1.1 and D.1.2);

-      the need for an internal audit function (C.3.6).

For the reasons set out in the AIC Guide, and as explained in the UK Code, the Board considers that these provisions are not relevant to the position of the Company, being an externally managed investment company. In particular, all of the Company's day-to-day management and administrative functions are outsourced to third parties. As a result, the Company has no executive directors, employees or internal operations. The Company has therefore not reported further in respect of these provisions. The Company is also non-compliant with Provision A.4.1 of the UK Code which states that the Board should appoint a Senior Independent Director. The Board has considered whether a Senior Independent Director should be appointed and has concluded that, given the size of the Board and the fact that it is comprised entirely of non-executive Directors, this is unnecessary at the present time. However the Chairman of the Audit Committee leads the evaluation of the Chairman and may be contacted by shareholders if they have any concerns that cannot be resolved through discussions with the Chairman.

The full text of the Company's Corporate Governance Statement will be made available on its website.

Going Concern

The Company's assets comprise mainly readily realisable securities which can be sold to meet funding commitments if necessary. The Board has set limits for borrowing and regularly reviews actual exposures, cash flow projections and compliance with banking covenants. Borrowings of £20 million are committed to the Company until 19 December 2017. The Directors believe that the Company has adequate resources to continue in operational existence for the foreseeable future and has the ability to meet its financial obligations as they fall due for a period of at least twelve months from the date of approval of this Report. For these reasons, they continue to adopt the going concern basis of accounting in preparing the financial statements.

Accountability and Audit

Each Director confirms that, so far as he or she is aware, there is no relevant audit information of which the Company's auditor is unaware, and they have taken all the steps that they could reasonably be expected to have taken as Directors in order to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

Independent Auditor

Following a formal tender process conducted during the year, the Board has decided to appoint Ernst & Young LLP as the Company's auditor, in place of KPMG LLP, for the audit of the financial statements for the year ending 31 March 2017. The Board will therefore place resolutions before the Annual General Meeting to appoint Ernst & Young LLP as auditor for the ensuing year and to authorise the Directors to determine its remuneration.

Stewardship and Proxy Voting

The purpose of the FRC's UK Stewardship Code is to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and assist institutional investors with the efficient exercise of their governance responsibilities. The FRC is encouraging institutional investors to make a statement of their commitment to the Stewardship Code. 

The Board has delegated responsibility for actively monitoring the activities of portfolio companies to the Manager who has in turn delegated this responsibility to the Investment Manager. The Board has reviewed and accepts the Investment Manager's corporate governance principles, which may be found on its website, at: aberdeen-asset.com/doc.nsf/Lit/LegalDocumentationGroupCorporateGovernancePrinciples. These principles set out the Investment Manager's framework on corporate governance, proxy voting and shareholder engagement in relation to the companies in which the Investment Manager has invested or is considering investing. The Board has also reviewed the Investment Manager's Disclosure Response to the UK Stewardship Code, which appears on its website at the web-address given above.

The Investment Manager is responsible for reviewing, on a regular basis, the annual reports, circulars and other publications produced by portfolio companies and for attending company meetings. The Investment Manager, in the absence of explicit instruction from the Board, is empowered to use discretion in the exercise of the Company's voting rights.

The Board recognises and supports the Aberdeen Group's policy of active engagement with investee companies and the voting of all of the shares held by the Company. The Board receives regular reports on the exercise of the Company's voting rights and discusses any issues arising with the Investment Manager. It is the Board's view that having an active voting policy and a process for monitoring the Investment Manager's exercise of those votes, especially in relation to controversial issues, aids the efficient exercise of the Company's governance responsibilities.

Stewardship and ESG

The Board is aware of its duty to act in the interests of the Company. The Board supports the Aberdeen Group, a signatory to the UNPRI (United Nations Principles for Responsible Investment), in considering holistically the material risks posed by each investment, both from a financial and an ESG (environmental, social and corporate governance) perspective. The Investment Manager takes into account all the risks and opportunities presented by potential and current holdings as part of its determination of the quality of each investment. The Investment Manager also considers the extent to which investments consider risks and opportunities when setting its targets, remuneration and company strategy. The Investment Manager engages with investee companies on their material risks and opportunities and actively encourages them to adhere to best practice in managing their material issues. The Company's ultimate objective is to deliver superior investment returns for its shareholders and the consideration of the key risks and opportunities of the holdings in the portfolio is a vital part of the Investment Manager's due diligence and stewardship practice. 

Relations with Shareholders

The Directors place a great deal of importance on communication with shareholders. Shareholders and investors may obtain up to date information on the Company through its website and the Manager's information service. The Annual Report is widely distributed to other parties who have an interest in the Company's performance. 

The Board's policy is to communicate directly with shareholders and their representative bodies without the involvement of the management group (including the Company Secretary or the Manager) in situations where direct communication is required and representatives from the Board meet with major shareholders on an annual basis in order to gauge their views.

In addition, the Company Secretary only acts on behalf of the Board, not the Manager, and there is no filtering of communication. At each Board meeting the Board receives full details of any communication from shareholders to which the Chairman responds personally as appropriate.

It is the Company's aim is to give at least 20 working days' notice to shareholders of the Annual General Meeting. As recommended by the AIC Code, the Company makes available the proxy votes cast at general meetings.

All shareholders have the opportunity to put questions to the Board at the Annual General Meeting and a presentation from the Investment Manager will cover the investment performance and strategy during the financial year and the outlook for the year ahead. The Board hopes that as many shareholders as possible will be able to attend the meeting.

Annual General Meeting

The Annual General Meeting will be held at the offices of Aberdeen Asset Management PLC, Bow Bells House, 1 Bread Street, London EC4M 9HH on Wednesday 6 July 2016 at 12 noon.

By order of the Board

Aberdeen Asset Management PLC

Company Secretary

40 Princes Street

Edinburgh EH2 2BY

26 May 2016

STATEMENT OF COMPREHENSIVE INCOME

		Year ended			Year ended
		31 March 2016			31 March 2015
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
(Losses)/gains on investments at fair value	10	-	(8,533)	(8,533)	-	3,470	3,470
Income
Dividend income		3,422	-	3,422	3,737	-	3,737
Interest income/(expense)		588	(93)	495	578	(93)	485
Stock dividends		153	-	153	65	-	65
Traded option premiums		186	-	186	275	-	275
Money market interest		7	-	7	10	-	10
Underwriting commission		5	-	5	-	-	-
		_______	_______	______	_______	_______	_______
	2	4,361	(8,626)	(4,265)	4,665	3,377	8,042
		_______	_______	______	_______	_______	_______
Expenses
Management fee	3	(190)	(190)	(380)	(198)	(198)	(396)
Other administrative expenses	4	(370)	-	(370)	(384)	-	(384)
Finance costs of borrowings	6	(169)	(169)	(338)	(164)	(163)	(327)
		_______	_______	______	_______	_______	_______
		(729)	(359)	(1,088)	(746)	(361)	(1,107)
		_______	_______	______	_______	_______	_______
Profit before taxation		3,632	(8,985)	(5,353)	3,919	3,016	6,935
Taxation	7	(15)	15	-	(42)	32	(10)
		_______	_______	______	_______	_______	_______
Profit/(loss) attributable to equity holders of the Company		3,617	(8,970)	(5,353)	3,877	3,048	6,925
		_______	_______	______	_______	_______	_______
Earnings per Ordinary share (pence)	9	12.06	(29.90)	(17.84)	12.92	10.16	23.08
		_______	_______	______	_______	_______	_______
The Company does not have any income or expense that is not included in profit for the year, and therefore the "Profit for the year" is also the "Total comprehensive income for the year", as defined in IAS 1 (revised).
The total column of this statement represents the Statement of Comprehensive Income of the Company, prepared in accordance with IFRS. The revenue and capital columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.
All items in the above statement derive from continuing operations.
The accompanying notes are an integral part of these financial statements.

BALANCE SHEET

		As at	As at
		31 March 2016	31 March 2015
	Notes	£'000	£'000
Non-current assets
Ordinary shares		60,717	66,133
Convertibles		1,330	1,346
Other fixed interest		23,102	24,702
		__________	__________
Securities at fair value	10	85,149	92,181
		__________	__________
Current assets
Other receivables	11	1,004	1,016
Cash and cash equivalents		1,873	3,402
		__________	__________
		2,877	4,418
		__________	__________
Creditors: amounts falling due within one year
Trade and other payables		(224)	(267)
Short-term borrowings		(9,000)	(8,500)
		__________	__________
	12	(9,224)	(8,767)
		__________	__________
Net current liabilities		(6,347)	(4,349)
		__________	__________
Total assets less current liabilities		78,802	87,832
Non-current liabilities
Long-term borrowings	12	(10,000)	(10,000)
		__________	__________
Net assets		68,802	77,832
		__________	__________
Issued capital and reserves attributable to equity holders
Called-up share capital	13	15,049	15,049
Share premium account	14	19,308	19,308
Capital reserve	15	28,192	37,162
Revenue reserve	15	6,253	6,313
		__________	__________
Equity shareholders' funds		68,802	77,832
		__________	__________
Net asset value per Ordinary share (pence)	9	229.36	259.46
		__________	__________

STATEMENT OF CHANGES IN EQUITY

Year ended 31 March 2016
		Share		Retained
	Share	premium	Capital	revenue
	capital	account	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000
As at 31 March 2015	15,049	19,308	37,162	6,313	77,832
Revenue profit for the year	-	-	-	3,617	3,617
Capital loss for the year	-	-	(8,970)	-	(8,970)
Equity dividends (see note 8)	-	-	-	(3,677)	(3,677)
	_________	__________	_________	________	_________
As at 31 March 2016	15,049	19,308	28,192	6,253	68,802
	_________	__________	_________	________	_________
Year ended 31 March 2015
		Share		Retained
	Share	premium	Capital	revenue
	capital	account	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000
As at 31 March 2014	15,049	19,308	34,114	6,031	74,502
Revenue profit for the year	-	-	-	3,877	3,877
Capital profit for the year	-	-	3,048	-	3,048
Equity dividends (see note 8)	-	-	-	(3,595)	(3,595)
	_________	__________	_________	________	_________
As at 31 March 2015	15,049	19,308	37,162	6,313	77,832
	_________	__________	_________	________	_________
The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.
The accompanying notes are an integral part of these financial statements.

CASH FLOW STATEMENT

	Year ended		Year ended
	31 March 2016		31 March 2015
	£'000	£'000	£'000	£'000
Net cash inflow from operating activities
Investment income received		3,907		4,201
Stock dividends		153		65
Traded option premiums		194		259
Money market interest received		7		11
Underwriting commission		5		-
Management fee paid		(390)		(391)
Other cash expenses		(391)		(399)
		________		________
Cash generated from operations		3,485		3,746
Interest paid		(342)		(318)
Overseas tax recoverable		(1)		(5)
		________		________
Net cash inflows from operating activities		3,142		3,423
		________		________
Cash flows from investing activities
Purchases of investments	(6,526)		(8,461)
Sales of investments	5,032		7,630
	________		________
Net cash outflow from investing activities		(1,494)		(831)
		________		________
Cash flows from financing activities
Equity dividends paid	(3,677)		(3,595)
	________		________
Net cash outflow from financing activities		(3,677)		(3,595)
		________		________
Decrease in cash and cash equivalents		(2,029)		(1,003)
		________		________
Reconciliation of net cash flow to movements in cash and cash equivalents
Decrease in cash and cash equivalents as above		(2,029)		(1,003)
Net cash and cash equivalents at start of year		(5,098)		(4,095)
		________		________
Net cash and cash equivalents at end of year		(7,127)		(5,098)
		________		________
Net cash and cash equivalents comprise:
Cash and cash equivalents		1,873		3,402
Short-term borrowings		(9,000)		(8,500)
		________		________
		(7,127)		(5,098)
		________		________

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31 March 2016

1.	Accounting policies
	(a)	Basis of accounting
		The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), and International Accounting Standards and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee ("IASC") that remain in effect, and to the extent that they have been adopted by the European Union.
		The financial statements have been prepared under the historical cost convention, as modified to include the revaluation of investments and in line with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts'. The Directors have sought to prepare the financial statements on a basis consistent with the recommendations of the SORP except as referred to in paragraph (c) below. The financial statements 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 this is appropriate for the reasons outlined in the Directors' Report.
		In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income. Additionally, the net revenue of the Company is the measure the Directors believe appropriate in assessing the Company's compliance with certain requirements set out in Sections 1158-1159 of the Corporation Tax Act 2010.
		At the date of authorisation of these financial statements, various Standards, amendments to Standards and Interpretations which have not been applied to these financial statements, were in issue but were not yet effective (and in some cases, had not yet been adopted by the EU). These have not been applied to these financial statements.
		Standards issued but not yet effective
		At the date of authorisation of these financial statements, the following Standards and Interpretations were in issue but not yet effective:
		IFRS 9 - Financial Instruments (effective 1 January 2018)
		IAS 7 - Amendments to Statement of Cash Flows for the disclosure initiative (effective 1 January 2017)
		Investment Entities - Amendments to IFRS 10, IFRS 12 & IAS 28 (effective 1 January 2016, however, this has not yet been endorsed for use in the European Union)
		IFRS 15 - Revenue from Contracts with Customers (effective 1 January 2018)
		IFRS 16 - Leases (effective 1 January 2018)
	(b)	Investments
		All investments have been designated upon initial recognition at fair value through profit or loss. This is because all investments are considered to form part of a group of financial assets which is evaluated on a fair value basis. Investments are recognised or derecognised on the trade date where a purchase or sale is under a contract whose terms require delivery within the timeframe established by the market concerned. Proceeds are measured at fair value which is regarded as the proceeds of sales less any transaction costs.
		The fair value of the financial instruments is based on their quoted bid price at the Balance Sheet date, without deduction for any estimated future selling costs.
		Changes in the value of investments held at fair value through profit or loss and gains and losses on disposal are recognised in the Statement of Comprehensive Income as "Gains/(losses) on investments". Also included within this caption are transaction costs in relation to the purchase or sale of investments, including the difference between the purchase price of an investment and its bid price at the date of purchase.
	(c)	Income
		Dividend income from equity investments which includes all ordinary shares and also preference shares classified as equity instruments is accounted for when the shareholders' rights to receive payment have been established, normally the ex-dividend date.
		Interest from debt securities, which include preference shares classified as debt instruments, is accounted for on an effective interest rate basis. Any write-off of the premium or discount on acquisition as a result of using this basis is allocated against capital reserve. The SORP recommends that such a write-off should be allocated against revenue. The Directors believe this treatment is not appropriate for a high yielding investment trust which frequently buys and sells debt securities, and believe any premium or discount included in the price of such an investment is a capital item.
		Traded option contracts are restricted to writing out-of-the-money options with a view to generating income. Premiums received on traded option contracts are recognised as income evenly over the period from the date they are written to the date when they expire or are exercised or assigned. Gains and losses on the underlying shares acquired or disposed of as a result of options exercised are included in the capital account. Unexpired traded option contracts at the year end are accounted for at their fair value.
		Interest from deposits is dealt with on an effective interest basis.
		Underwriting commission is recognised when the underwriting services are provided and is taken to revenue, unless any shares underwritten are required to be taken up, in which case the proportionate commission received is deducted from the cost of the investment.
	(d)	Expenses
		All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Statement of Comprehensive Income, all expenses have been presented as revenue items except those where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. Accordingly the management fee and finance costs have been allocated 50% to revenue and 50% to capital, in order to reflect the Directors' expected long-term view of the nature of the investment returns of the Company.
	(e)	Borrowings
		Short-term borrowings, which comprise interest bearing bank loans and overdrafts, are initially recognised at cost, being the fair value of the consideration received, net of any issue expenses. The finance costs, being the difference between the net proceeds of borrowings and the total amount of payments that require to be made in respect of those borrowings, accrue evenly over the life of the borrowings.
		Long-term borrowings of the Company are stated at the amount of the net proceeds immediately after issue plus cumulative finance costs less cumulative payments made in respect of the debt. The finance costs of such borrowings are accounted for on an accruals basis using the effective interest rate method
		The finance costs borrowings are accounted for on an accruals basis and are charged 50% to revenue and 50% to capital in the Income Statement to reflect the Company's investment policy and prospective income and capital growth.
	(f)	Taxation
		The tax payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Statement of Comprehensive Income because it excludes items of income or expenditure that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company has no liability for current tax.
		Deferred tax is provided in full on temporary differences which result in an obligation at the Balance Sheet date to pay more tax, or a right to pay less tax, at a future date at rates expected to apply when they crystallise, based on current tax rates and law. Temporary differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in financial statements. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered.
	(g)	Foreign currencies
		Transactions involving foreign currencies are converted at the rate ruling at the time of the transaction. Assets and liabilities in foreign currencies are translated at the closing rates of exchange at the Balance Sheet date. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in capital reserve or the revenue account as appropriate.

		2016	2015
2.	Income	£'000	£'000
	Income from listed investments
	Dividend income	3,422	3,737
	Interest income from investments	587	577
	Money market interest	7	10
	Stock dividend	153	65
		________	________
		4,169	4,389
		________	________
	Other income from investment activity
	Deposit interest	1	1
	Traded option premiums	186	275
	Underwriting commission	5	-
		________	________
		192	276
		________	________
	Total income	4,361	4,665
		________	________
		2016	2015
	Total income comprises:	£'000	£'000
	Dividends and interest from investments	4,169	4,389
	Deposit interest	1	1
	Other income from investment activity	191	275
		________	________
	Total income	4,361	4,665
		________	________
	All dividend income was received from UK companies. The amount of £(93,000) (2015 - £(93,000)) included in the capital column of Investment Income represents the write off of the premium or discount on acquisition of debt securities referred to in note 1(c).

		2016			2015
		Revenue	Capital	Total	Revenue	Capital	Total
3.	Management fees	£'000	£'000	£'000	£'000	£'000	£'000
	Management fees	190	190	380	198	198	396
		________	________	________	________	________	________
	Management and secretarial services are provided by Aberdeen Fund Managers Limited ("AFML").
	The management fee is based on 0.45% per annum up to £100 million and 0.40% per annum over £100 million, by reference to the net assets of the Company and any borrowings with a maturity of one year or more, and excluding commonly managed funds, calculated monthly and paid quarterly. The fee is allocated 50% to revenue and 50% to capital. The agreement is terminable on not less than six month's notice. The total of the fees paid and payable during the year to 31 March 2016 was £380,000 (2015 - £396,000) and the balance due to AFML at the year end was £91,000 (2015 - £101,000). The Company held an interest in a commonly managed investment trust Aberdeen Smaller Companies Income Trust PLC in the portfolio during the year to 31 March 2016 (2015 - same). The value attributable to this holding is excluded from the calculation of management fee payable by the Company.

		2016	2015
4.	Administrative expenses	£'000	£'000
	Directors' remuneration	101	93
	Audit fees (net of VAT)	19	18
	Promotional activities	89	84
	Professional fees	-	53
	Directors' & Officers' liability insurance	10	10
	Trade subscriptions	26	25
	Share Plan costs	21	16
	Registrars fees	43	32
	Printing, postage and stationery	24	26
	Other administrative expenses	37	27
		________	________
		370	384
		________	________
	The management agreement with AFML also provides for the provision of promotional activities, which AFML has delegated to Aberdeen Asset Managers Limited. The total fees paid and payable under the management agreement in relation to promotional activities were £89,000 (2015 - £84,000). The Company's management agreement with AFML also provides for the provision of company secretarial and administration services to the Company; no separate fee is charged to the Company in respect of these services, which have been delegated to Aberdeen Asset Management PLC.

5.	Directors' remuneration
	The Company had no employees during the year (2015 - nil). No pension contributions were paid for Directors (2015 - £nil).

		2016			2015
		Revenue	Capital	Total	Revenue	Capital	Total
6.	Finance costs and borrowings	£'000	£'000	£'000	£'000	£'000	£'000
	Bank loans and overdrafts repayable within five years	169	169	338	164	163	327
		______	______	______	______	______	______

			2016			2015
			Revenue	Capital	Total	Revenue	Capital	Total
7.	Taxation		£'000	£'000	£'000	£'000	£'000	£'000
	(a)	Analysis of the charge for the year
		UK corporation tax	15	(15)	-	32	(32)	-
		Overseas tax	-	-	-	10	-	10
			______	______	______	______	______	______
		Total current tax	15	(15)	-	42	(32)	10
			______	______	______	______	______	______
	(b)	Factors affecting the tax charge for the year
		The tax assessed for the year is lower than the effective rate of corporation tax in the UK. The differences are explained in the reconciliation below:
			2016			2015
			Revenue	Capital	Total	Revenue	Capital	Total
			£'000	£'000	£'000	£'000	£'000	£'000
		Profit before taxation	3,632	(8,985)	(5,353)	3,919	3,016	6,935
			______	______	______	______	______	______
		Corporation tax at an effective rate of 20% (2015 - 21%)	726	(1,797)	(1,071)	823	633	1,456
		Effects of:
		UK dividend income not liable to further tax	(676)	-	(676)	(755)	-	(755)
		Non-taxable stock dividends	(31)	-	(31)	(13)	-	(13)
		Expenses not utilised	-	56	56	-	43	43
		Overseas withholding tax	-	-	-	10	-	10
		Non-taxable overseas dividends	(4)	-	(4)	(23)	-	(23)
		Gains on investments not taxable	-	1,707	1,707	-	(729)	(729)
		Disallowed expenses	-	19	19	-	21	21
			______	______	______	______	______	______
			15	(15)	-	42	(32)	10
			______	______	______	______	______	______
		At 31 March 2016 the Company had surplus management expenses and loan relationship debits with a tax value of £4,713,000 (2015 - £4,652,000) in respect of which a deferred tax asset has not been recognised. This is because the Company is not expected to generate taxable income in a future period in excess of the deductible expenses of that future period and, accordingly, it is unlikely that the Company will be able to reduce future tax liabilities through the use of existing surplus expenses.

		2016	2015
8.	Dividends	£'000	£'000
	Amounts recognised as distributions to equity holders in the period:
	Third interim dividend for the year ended 31 March 2015 of 3.00p (2014 - 3.00p) per share	900	900
	Final dividend for the year ended 31 March 2015 of 3.25p (2014 - 3.00p) per share	975	900
	First two interim dividends for the year ended 31 March 2016 totalling 6.00p (2015 - 6.00p) per share	1,800	1,800
	Refund of unclaimed dividends from previous periods	-	(7)
		______	______
		3,675	3,593
		______	______
	3.5% Cumulative Preference shares	2	2
		______	______
	Total	3,677	3,595
		______	______
	The third interim dividend of 3.0p for the year to 31 March 2016 paid on 29 April 2016 and the proposed final dividend of 3.25p for the year to 31 March 2016 payable on 29 July 2016 have not been included as liabilities in these financial statements.
	Set out below are the total ordinary dividends payable in respect of the financial year, which is the basis on which the requirements of Sections 1158-1159 of the Corporation Tax Act 2010 are considered:
		2016	2015
		£'000	£'000
	Three interim dividends for the year ended 31 March 2016 totalling 9.00p (2015 - 9.00p) per share	2,700	2,700
	Proposed final dividend for the year ended 31 March 2016 of 3.25p (2015 - 3.25p) per share	975	975
		______	______
		3,675	3,675
		______	______

9.	Return and net asset value per share
	The gains per share are based on the following figures:
		2016	2015
		£'000	£'000
	Revenue return	3,617	3,877
	Capital return	(8,970)	3,048
		______	______
	Net return	(5,353)	6,925
		______	______
	Weighted average number of Ordinary shares	29,997,580	29,997,580
		_________	_________
	Net asset value per Ordinary share is based on net assets attributable to Ordinary shareholders of £68,802,000 (2015 - £77,832,000) and on the 29,997,580 (2015 - 29,997,580) Ordinary shares in issue at 31 March 2016.

						2016	2015
10.	Non-current assets - Securities at fair value					£'000	£'000
	Listed on recognised stock exchanges:
	United Kingdom					85,149	92,181
						______	______
			2016			2015
			Listed		Listed	Restricted
			investments		investments	investments	Total
			£'000		£'000	£'000	£'000
	Cost at 31 March 2015		74,095		71,547	139	71,686
	Investment holdings gains/(losses)		18,086		16,288	(139)	16,149
			______		______	______	______
	Fair value at 31 March 2015		92,181		87,835	-	87,835
	Purchases		6,465		8,587	-	8,587
	Sales - proceeds		(4,879)		(7,630)	-	(7,630)
	Sales - net realised gains/(losses)		1,060		1,683	(139)	1,544
	Amortised cost adjustments to debt securities{A}		(93)		(93)	-	(93)
	Fair value movement in the year		(9,585)		1,799	139	1,938
			______		______	______	______
	Fair value at 31 March 2016		85,149		92,181	-	92,181
			______		______	______	______
	{A} Charged to capital.
						2016	2015
						£'000	£'000
	Cost at 31 March 2016					76,648	74,094
	Investment holdings gains					8,501	18,087
						______	______
	Fair value at 31 March 2016					85,149	92,181
						______	______
						2016	2015
	(Losses)/gains on investments					£'000	£'000
	Net realised gains on sales of investments					1,225	1,685
	Call options exercised					(165)	(141)
						______	______
	Net realised gains on sales					1,060	1,544
	Movement in fair value of investments					(9,501)	2,043
	Put options assigned					(84)	(105)
	Movement in appreciation of traded options held					(8)	(12)
						______	______
						(8,533)	3,470
						______	______
	The cost of the exercising of call options and the assigning of put options is the difference between the market price of the underlying shares and the strike price of the options. The premiums earned on options expired, exercised or assigned of £186,000 (2015 - £275,000) have been dealt with in the revenue account.
	The movement in the fair value of traded option contracts has been calculated in accordance with the accounting policy stated in note 1(c) and has been charged to the capital reserve.
	As at 31 March 2016, the Company had pledged collateral equal to nil% (2015 - nil%) of the market value of the traded options in accordance with standard commercial practice. The carrying amount of financial assets pledged equated to £nil (2015 - £nil) all in the form of securities. The collateral position is monitored on a daily basis.
	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 on the purchases and sales of investments in the year was £30,000 (2015 - £53,000).
	All investments are categorised as held at fair value through profit and loss and were designated as such upon initial recognition.
	At 31 March 2016 the Company held the following investments comprising more than 3% of the class of share capital held:
								Class
		Country of		Number of		Class of		held
	Company	incorporation		shares held		shares held		%
	Aberdeen Smaller Companies Income Trust PLC	Scotland		3,120,476		ordinary		14.1
	Ecclesiastical Insurance Office	England		4,240,000		8 5/8% cum pref		4.0
	Royal & Sun Alliance	England		4,350,000		7 3/8% cum pref		3.5
	General Accident	Scotland		3,548,000		7.875% cum pref		3.2

		2016	2015
11.	Other receivables	£'000	£'000
	Accrued income and prepayments	985	1,005
	Option contract premium	19	11
		______	______
		1,004	1,016
		______	______
	None of the above amounts are overdue.

		2016	2015
12.	Current liabilities	£'000	£'000
	Short-term bank loan	9,000	8,500
	Option contracts	36	11
	Other creditors	188	256
		______	______
		9,224	8,767
		______	______
	Included above are the following amounts owed to AFML for management and secretarial services and for the promotion of the Company.
		2016	2015
		£'000	£'000
	Other creditors	113	123
		______	______
		2016	2015
	Non-current liabilities	£'000	£'000
	Long-term bank loan	10,000	10,000
		______	______
	The Company currently has an agreement with Scotiabank Europe PLC to provide a loan facility to 19 December 2017 for up to £20,000,000. Of this amount, a £10,000,000 fixed rate loan facility was drawn down on 19 December 2014 at a rate of 2.103% per annum.  This rate is fixed until 19 December 2017.  In addition, at the year end £9,000,000 had been drawn down at an all-in interest rate of 1.41931% per annum, maturing on 29 April 2016. At the date of signing this Report the amount drawn down was unchanged at £9,000,000 with an all-in interest rate of 1.41342%, maturing on 31 May 2016.
	The terms of the Scotiabank Europe PLC facility contain a covenant that gross borrowings may not exceed one-third of adjusted net assets and that the adjusted net asset value must not be less than £37 million. The Company has met this covenant since inception of the agreement until the date of this Report.

		2016		2015
13.	Called up share capital	Number	£'000	Number	£'000
	Allotted, called up and fully paid
	Ordinary shares of 50 pence each	29,997,580	14,999	29,997,580	14,999
	3.5% Cumulative Preference shares of £1 each	50,000	50	50,000	50
			______		______
			15,049		15,049
			______		______

		2016	2015
14.	Share premium account	£'000	£'000
	At 31 March 2016 and 2015	19,308	19,308
		______	______

		2016	2015
15.	Retained earnings	£'000	£'000
	Capital reserve
	At 31 March 2015	37,162	34,114
	Net gains on sales of investments during year	1,060	1,544
	Movement in fair value gains on investments	(9,585)	1,938
	Amortised cost adjustment charged to capital	(93)	(93)
	Management fees	(190)	(198)
	Interest on bank loans and overdrafts repayable within five years	(169)	(163)
	Tax relief obtained by expenses capitalised	15	32
	Traded options	(8)	(12)
		______	______
	At 31 March 2016	28,192	37,162
		______	______
		2016	2015
	Revenue reserve	£'000	£'000
	At 31 March 2015	6,313	6,031
	Revenue	3,617	3,877
	Dividends paid	(3,677)	(3,595)
		______	______
	At 31 March 2016	6,253	6,313
		______	______

16.

Financial instruments

Risk management

The Company's investment activities expose it to various types of financial risk associated with the financial instruments and markets in which it invests. The Company's financial instruments comprise 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 may from time to time use FTSE options for protection of the loss of value to the portfolio at modest cost.

Subject to Board approval, the Company also has the ability to enter into derivative transactions, in the form of traded options, for the purpose of enhancing income returns and portfolio management. During the year, the Company entered into certain derivative contracts.  As disclosed in note 2, the premium received and fair value changes in respect of options written in the year were £186,000. Positions closed during the year realised a loss of £249,000. The largest position in derivative contracts held during the year at any given time was £85,000 (2015 - £108,000). The Company had open positions in derivative contracts at 31 March 2016 valued at a liability of £36,000 as disclosed in note 12.

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

Risk management framework

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

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

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

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

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

Risk management

The main risks the Company faces from its financial instruments are (i) market risk (comprising interest rate risk, currency risk and price risk), (ii) liquidity risk and (iii) credit risk. The Company has minimal exposure to foreign currency risk as it holds only a small amount of foreign currency assets and has no exposure to any foreign currency liabilities.

(i)

Market risk

The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk and other price risk.

Interest rate risk

Interest rate movements may affect:

-       the fair value of the investments in fixed interest rate securities;

-       the level of income receivable on cash deposits; and

-       interest payable on the Company's variable rate borrowings.

Management of the risk

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.

The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. Borrowings comprise fixed rate, revolving, and uncommitted facilities. The fixed rate facilities are used to finance opportunities at low rates and, the revolving and uncommitted facilities to provide flexibility in the short-term. Current bank covenant guidelines state that the gross borrowings will not exceed one-third of adjusted net assets.

The Board reviews on a regular basis the values of the fixed interest rate securities.

Interest rate profile

The interest rate risk profile of the portfolio of financial assets and liabilities (excluding ordinary shares and convertibles) at the Balance Sheet date was as follows:

Weighted

average

period

Weighted

for which

average

Non-

rate is

interest

Fixed

Floating

interest

fixed

rate

rate

rate

bearing

As at 31 March 2016

Years

%

£'000

£'000

£'000

Assets

UK irredeemable preference shares

-

8.49

23,102

-

-

Cash and cash equivalents

-

0.32

-

1,873

-

______

______

______

______

______

Total assets

-

-

23,102

1,873

-

______

______

______

______

______

Liabilities

Short-term bank loan

0.08

1.42

(9,000)

-

-

Long-term bank loan

1.72

2.10

(10,000)

-

-

______

______

______

______

______

Total liabilities

-

-

(19,000)

-

-

______

______

______

______

______

Weighted

average

period

Weighted

for which

average

Non-

rate is

interest

Fixed

Floating

interest

fixed

rate

rate

rate

bearing

As at 31 March 2015

Years

%

£'000

£'000

£'000

Assets

UK irredeemable preference shares

-

8.46

24,702

-

-

Cash and cash equivalents

-

0.25

-

3,402

-

______

______

______

______

______

Total assets

-

-

24,702

3,402

-

______

______

______

______

______

Liabilities

Short-term bank loan

0.08

1.41

(8,500)

-

-

Long-term bank loan

2.72

2.10

(10,000)

-

-

______

______

______

______

______

Total liabilities

-

-

(18,500)

-

-

______

______

______

______

______

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

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

The UK irredeemable preference shares assets have no maturity date.

Short-term debtors and creditors (with the exception of bank loans) have been excluded from the above tables.

Maturity profile

The maturity profile of the Company's financial assets and financial liabilities (excluding convertibles) at the Balance Sheet date was as follows:

Within

Within

More than

1 year

1-5 years

5 years

At 31 March 2016

£'000

£'000

£'000

Fixed rate

UK irredeemable preference shares

-

-

23,102

Short-term bank loan

(9,000)

-

-

Long-term bank loan

-

(10,000)

-

______

______

______

(9,000)

(10,000)

23,102

______

______

______

Floating rate

Cash and cash equivalents

1,873

-

-

______

______

______

Total

(7,127)

(10,000)

23,102

______

______

______

Within

Within

More than

1 year

1-5 years

5 years

At 31 March 2015

£'000

£'000

£'000

Fixed rate

UK irredeemable preference shares

-

-

24,702

Short-term bank loan

8,500

-

-

Long-term bank loan

-

(10,000)

-

______

______

______

8,500

(10,000)

24,702

______

______

______

Floating rate

Cash and cash equivalents

3,402

-

-

______

______

______

Total

(5,098)

(10,000)

24,702

______

______

______

Interest rate sensitivity

The sensitivity analyses below have been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the Balance Sheet date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.

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

-       profit before tax for the year ended 31 March 2016 would increase/decrease by £19,000 (2015 - £34,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances. These figures have been calculated based on cash positions at each year end.

-       profit before tax for the year ended 31 March 2016 would increase/decrease by £1,547,000 (2015 - increase/decrease by £469,000). This is mainly attributable to the Company's exposure to interest rates on its fixed interest securities. This is based on a Value at Risk ('VaR') calculated at a 99% confidence level.

In the opinion of the Directors, the above sensitivity analyses are not representative of the year as a whole, since the level of exposure changes frequently as part of the interest rate risk management process used to meet the Company's objectives. The risk parameters used will also fluctuate depending on the current market perception.

Price risk

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

Management of the risk

It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular sector. The allocation of assets to specific sectors and the stock selection process both act to reduce market risk. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy. The investments held by the Company are listed on the London Stock Exchange.

Price sensitivity

If market prices at the Balance Sheet date had been 10% higher or lower while all other variables remained constant, the profit before tax attributable to Ordinary shareholders for the year ended 31 March 2016 would have increased/decreased by £6,072,000 (2015 - increase/decrease of £6,613,000). 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.

Management of the risk

Liquidity risk is not considered to be significant as the Company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary.

Short-term flexibility is achieved through the use of loan facilities, details of which can be found in note 12. Under the terms of the loan facility, the Manager provides the lender with loan covenant reports on a monthly basis, to provide the lender with assurance that the terms of the facility are not being breached. The Manager will also review the credit rating of a lender on a regular basis.

The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. Borrowings comprise a revolving loan facility and a fixed term loan facility. The Board has imposed a maximum equity gearing of 35% of net assets at the time of draw down which constrains the amount of gearing that can be invested in equities which are more volatile than the fixed interest part of the portfolio. Details of borrowings at 31 March 2016 are shown in note 12.

Liquidity risk exposure

At 31 March 2016 the Company's bank loans amounted to £19,000,000 (2015 - £18,500,000).

(iii)

Credit risk

This is the risk of failure of the counterparty to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss.

Management of the risk

-       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;

-       investments in quoted bonds are made across a variety of industry sectors so as to avoid concentrations of credit risk;

-       transactions involving derivatives are entered into only with investment banks, the credit rating of which is taken into account so as to minimise the risk to the Company of default;

-       investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the 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 daily basis. In addition, both stock and cash reconciliations to Custodian's records are performed on a daily basis to ensure discrepancies are investigated on a timely basis. The Aberdeen Group's Compliance department carries out periodic reviews of the Custodian's operations and reports its finding to the Aberdeen Group's Risk Management Committee and to the Board of the Company. This review will also include checks on the maintenance and security of investments held;

-       transactions involving derivatives, structured notes and other arrangements wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest are subject to rigorous assessment by the Investment Manager of the credit worthiness of that counterparty. The Company's aggregate exposure to each such counterparty is monitored regularly by the Board; and

-       cash is held only with reputable banks with high quality external credit enhancements.

It is the Investment Manager's policy to trade only with A- and above (Long Term rated) and A-1/P-1 (Short Term rated) counterparties.

None of the Company's financial assets is secured by collateral or other credit enhancements.

Credit risk exposure

In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit risk at 31 March 2016 was as follows:

2016

2015

Balance

Maximum

Balance

Maximum

Sheet

exposure

Sheet

exposure

£'000

£'000

£'000

£'000

Non-current assets

Securities at fair value through profit or loss

85,149

85,149

92,181

92,181

Current assets

Trade and other receivables

19

19

11

11

Accrued income

985

985

1,005

1,005

Cash and cash equivalents

1,873

1,873

3,402

3,402

______

______

______

______

88,026

88,026

96,599

96,599

______

______

______

______

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

Fair value of financial assets and liabilities

The book value of cash at bank and bank loans and overdrafts included in these financial statements approximates to fair value because of their short-term maturity. Investments held as dealing investments are valued at fair value. The carrying values of fixed asset investments are stated at their fair values, which have been determined with reference to quoted market prices. Traded options contracts are valued at fair value which have been determined with reference to quoted market values of the contracts. The contracts are tradeable on a recognised exchange. For all other short-term debtors and creditors, their book values approximates to fair values because of their short-term maturity.

17.	Fair value hierarchy
	IFRS 7 'Financial Instruments: Disclosures' require an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:
	Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
	Level 2: inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly (ie as prices) or indirectly (ie derived from prices); and
	Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
	The financial assets and liabilities measured at fair value in the statement of financial position are grouped into the fair value hierarchy at 31 March 2016 as follows:
				Level 1	Level 2	Level 3	Total
			Note	£'000	£'000	£'000	£'000
	Financial assets at fair value through profit or loss
	Quoted investments		a)	85,149	-	-	85,149
	Financial liabilities at fair value through profit or loss
	Derivatives		b)	(35)	(1)	-	(36)
				______	______	______	______
	Net fair value			85,114	(1)	-	85,113
				______	______	______	______
				Level 1	Level 2	Level 3	Total
	As at 31 March 2015		Note	£'000	£'000	£'000	£'000
	Financial assets at fair value through profit or loss
	Quoted investments		a)	92,181	-	-	92,181
	Financial liabilities at fair value through profit or loss
	Derivatives		b)	(9)	(2)	-	(11)
				______	______	______	______
	Net fair value			92,172	(2)	-	92,170
				______	______	______	______
	a)	Quoted investments
		The fair value of the Company's quoted investments has been determined by reference to their quoted bid prices at the reporting date. Quoted investments included in Fair Value Level 1 are actively traded on recognised stock exchanges.
	b)	Derivatives
		The fair value of the Company's investments in Exchange Traded Options has been determined using observable market inputs on an exchange traded basis and therefore has been classed as Level 1.
		The fair value of the Company's investments in Over the Counter Options has been determined using observable market inputs other than quoted prices included within Level 2.

18.	Capital management policies and procedures
	The Company's capital management objectives are:
	-       to ensure that the Company will be able to continue as a going concern; and
	-       to maximise the return to its equity shareholders through an appropriate balance of equity capital and debt.
	The capital of the Company consists of equity, comprising issued capital, reserves and retained earnings.
	The Board monitors and reviews the broad structure of the Company's capital. This review includes the nature and planned level of gearing, which takes account of the Investment Manager's views on the market and the extent to which revenue in excess of that which is required to be distributed should be retained. The Company is not subject to any externally imposed capital requirements.

19.	Related party transactions
	Fees payable during the year to the Directors and their interests in shares of the Company will be  disclosed within the Directors' Remuneration Report.

20.	Transactions with the Manager
	The Company has an agreement with Aberdeen Fund Managers Limited for the provision of management, secretarial, accounting and administration services and for the carrying out of promotional activities in relation to the Company. Details of transactions during the year and balances outstanding at the year end disclosed in notes 3 and 4.

Additional Notes to Annual Financial Report

The Annual General Meeting will be held on 6 July 2016 at 12 noon at Bow Bells House, 1 Bread Street, London EC4M 9HH.

The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 31 March 2016 are an abridged version of the Company's full accounts, which have been approved and audited with an unqualified report. The 2015 and 2016 statutory accounts received unqualified reports from the Company's auditor and did not include any reference to matters to which the auditor drew attention by way of emphasis without qualifying the reports, and did not contain a statement under s.498 of the Companies Act 2006. The financial information for 2015 is derived from the statutory accounts for 2015 which have been delivered to the Registrar of Companies. The 2016 accounts will be filed with the Registrar of Companies in due course.

The Annual Report and Accounts will be posted to shareholders in June 2016 and copies will be available from the registered office of the Manager and on the Company's website, www.shiresincome.co.uk.*

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise.  Investors may not get back the amount they originally invested.

* Neither the Company's website nor the content of any website accessible from hyperlinks on the Company's website (or any other website) is (or is deemed to be) incorporated into, or forms (or is deemed to form) part of this announcement.

 

END

 

 

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