Annual Financial Report

RNS Number : 2177H

F&C Global Smaller Companies PLC

17 June 2013

 



Date:                17 June 2013

Contact:           Peter Ewins                                                   

                        F&C Management Limited                              

                        020 7628 8000                                               

F&C Global Smaller Companies PLC

Audited Statement of Results

for the year ended 30 April 2013

Summary of results

Attributable to equity shareholders	30 April 2013	30 April 2012	% Change
Share price	764.50p	588.00p	+30.0
Net asset value per share (debenture at nominal value)	756.21p	596.35p	+26.8
Net asset value per share (debenture at market value)	752.47p	590.60p	+27.4
	Year ended 30 April 2013	Year ended 30 April 2012	% Change
Revenue return per share	7.10p	6.87p	+3.3
Dividends per share	6.50p	5.63p	+15.5
Ongoing charges (based on average net assets)*	0.85%	1.08%

*1.49% including the performance fees (2012: 1.56%). The ongoing charges figure for 2013 excludes Savings Plans expenses as, from 6 April 2013, the Company no longer incurs these costs.

Chairman's Statement

This has been another good year for your Company. As with last year, equity markets performed better in the second half as it became evident that Central Banks around the world were prepared to take drastic action to support the environment for growth. The 5.2% net asset value total return at the half way stage turned into 28.1% for the year as whole, while the share price again reached a new year-end high of 764.5p, a rise of 30% as the shares moved to a premium over the Company's net asset value ("NAV").

Once again smaller company shares did well compared to larger stocks in the UK and they were slightly ahead in the US, although elsewhere in the world relative performance was more mixed. Large exporters in Japan benefited more than small companies from a significant weakening in the yen and in some European markets, where economic conditions remained the most difficult, there was also more interest in the bigger companies. The Company's Benchmark, a blended index of the returns from the MSCI All Country World ex UK Small Cap Index (70%) and Numis UK Smaller Companies (excluding investment companies) Index (30%) produced a total return of 22.4% which meant that for the fourth year in the last five the Company's NAV delivered outperformance.

It is particularly pleasing to be able to report that our returns in each of the five geographic segments of the portfolio were ahead of the local market smaller company indices, repeating the achievement of the prior year. F&C's ability to select winning combinations of individual stocks in the US, UK and Europe, plus well managed funds for other parts of the world, has continued to deliver superior overall performance. Over three, five and ten years the NAV total returns have far exceeded the Company's Benchmark returns as shown in the table below and an investment of £100 in the Company's shares ten years ago with dividends reinvested would now be worth almost £600.

Period	3 years	5 years	10 years
NAV total return	50.2%	86.3%	359.7%
Share Price total return	70.9%	110.4%	498.8%
Benchmark	36.5%	64.8%	248.8%

Source: F&C Management Limited & Datastream

Shareholders will understand that there can be no guarantee that these levels of return will continue in what remains a challenging global environment but the strength of performance in 2012/13 means that F&C have earned a performance fee of £1.5m this year; I personally will be very pleased to authorise that payment to them, recognising as I do what it means for shareholders.

The table below shows the Ongoing Charges for this year and last, both including and excluding performance fees. The figure for 2012/13 excludes Savings Plans expenses as, from 6 April 2013, the Company no longer incurs these costs.

Ongoing charges	Excluding performance fee	With performance fee
2012/13	0.85%	1.49%
2011/12	1.08%	1.56%

Dividends

The Company's ability to pay rising dividends does of course depend upon the income that derives from our investment portfolio. Investing in companies that themselves are generally paying out more dividends has paid off once again this year, with the revenue return per share up 3.3%. Moreover, the Company's cost base should be sustainably lower following the removal of savings scheme expenses in future years. After a significant rise in the dividend at the interim stage therefore, the Board is very pleased to be able to recommend a 12.5% increase in the final payment to 4.50p per share, representing a 15.5% increase for the year as a whole. This will be the 43rd consecutive annual increase and the payment will be made on 16 August to shareholders on the register on 19 July. The Board will endeavour to reduce the disparity between future final and half-yearly dividends by paying a relatively higher interim dividend in January 2014.

Market background

Equity markets have been driven up over the last year as a consequence in the main of policy initiatives from all the major central banks. The aim of the authorities has been to bolster private sector activity by keeping monetary policy ultra-loose and by trying to encourage banks to lend and businesses to borrow.

Nearly all global equity markets rose and there is some evidence to suggest that investors have been directing a greater percentage of their assets into equities at the expense of other asset classes. In many countries the yield on cash and government bonds is below the prevailing rate of inflation, thereby offering a negative real return, hardly an attractive investment proposition.

There has not been a wholesale rush into equities, however, given the risks that still remain. While the European Central Bank took definitive steps to avert the threat of a collapse of the Euro last summer, it remains to be seen whether some States within the Eurozone will be able politically to last the course given the pain they are suffering from enforced policies of austerity. The UK, US and Japan also have substantial fiscal deficits and in these uncharted waters there is no certainty of what effect the scale of quantitative easing will have in the medium term, or how markets as a whole will react when Central Bank bond buying eventually winds down, which must happen sooner or later.

Political wrangling in the US over the way to address the fiscal deficit there, and the eventual imposition of mandatory spending cuts from March 2013 under so-called sequestration, were largely shrugged off by equity markets which focused more on job and housing market data which was improving. Elsewhere global economies were generally weaker than had been expected a year ago. Corporate earnings proved fairly resilient and the balance sheets of many companies globally remain strong, but unsurprisingly profits have been under more pressure for companies focused on Europe.

Portfolio performance

As already stated, our regional portfolios all recorded positive relative performance against the local small cap indices and this is illustrated in the table below. For the second consecutive year, the best returns came from Japan which recovered strongly in the second half of the period, but the largest contribution towards the outperformance against the Company's Benchmark came from the US portfolio given the scale of our investment there.

Geographical performance (total return sterling adjusted)
for the year ended 30 April 2013
	Portfolio	Local smaller companies index
UK	28.7%	24.3%
USA	29.4%	22.8%
Continental Europe	31.1%	23.6%
Japan	32.2%	26.1%
Rest of World*	24.8%	18.5%  (Pacific ex Japan) 13.9%  (Latin America)
Source: F&C Management Limited * Performance of the Rest of World portfolio is measured against both the Asian and Latin American smaller company indices.

Asset allocation

Over the course of the last year, the Manager maintained an underweight stance to the UK, while being overweight in Europe and Japan where valuations were felt to be more attractive. The fact that returns globally proved to be relatively consistent across regions, despite some material shifts in the currency markets, meant that asset allocation had a negligible effect on the overall relative performance against the benchmark.

Through the acquisition of a fund investing in frontier markets the portfolio now has a modest exposure to Africa and the Middle East, though in overall terms the Manager has been relatively cautious on the outlook for emerging markets.

Geographical distribution of the investment portfolio and benchmark
	30 April 2013		30 April 2012
	Investment portfolio	Benchmark	Investment portfolio	Benchmark
North America	40.4%	41.5%	39.8%	42.2%
UK	27.5%	30.0%	29.0%	30.0%
Continental Europe	12.0%	9.0%	10.8%	8.9%
Rest of World	11.7%	12.1%	12.6%	11.9%
Japan	8.4%	7.4%	7.8%	7.0%
Source: F&C Management Limited

Gearing

The Company was modestly geared in the first two thirds of the year, but the Manager's cautious view on the prospects for further gains meant that net cash has been held over the last few months.

Share issuance

With good demand for the Company's shares in the market, a total of 3,592,112 new shares were issued at a small premium to the prevailing NAV per share and a further 630,000 new shares have been issued since the year end. The larger size of the Company, with the market capitalisation reaching a record year end level of £343.8m, is very positive as liquidity in the Company's shares is enhanced and the fixed costs of running the Company are spread over a larger capital base. The Board will seek to renew its share issue and buy-back authorities at the AGM to maintain that market liquidity and to moderate the level of the premium or discount at which the shares trade in relation to the NAV per share.

Board constitution

Your Board remains committed to the highest standards of corporate governance and has complied with the relevant guidance throughout the year which in our case is the AIC Code. The Board has a policy of having only a minority of directors who have served beyond nine years, although it is currently only Dr Franz Leibenfrost to whom that applies. As required by the AIC Code he therefore stands for re-election annually; Les Cullen and Jane Tozer will retire by rotation at the AGM and will stand for re-election. Dr Leibenfrost has indicated that he will retire at the annual general meeting in 2014 and so later this year we will commence the process of seeking a new director; it will not be easy to find someone who brings all that Dr Leibenfrost does to the table.

Outlook

The technical factors that have provoked the recent market surge could persist for some time yet and corporate balance sheets remain healthy providing scope for many companies to invest in organic or acquisitive development. Consensus expectations are for global GDP growth in 2013 to be broadly the same as in 2012. However, equity valuation metrics now look relatively extended and there has been increased volatility in the markets more recently.

As usual in the small cap spectrum though there are anomalies to exploit. While it is hard to beat the market continually, the Board remains confident that F&C's small cap team will be able to identify some exciting new opportunities.

Anthony Townsend

Chairman

17 June 2013

Principal Risks

The principal risks and uncertainties faced by the Company, and the Board's mitigation approach, are described below:

Risk description: Strategy and Policy

An inappropriate investment strategy could result in poor returns for shareholders and a widening of the discount of the share price to the NAV per share.

Mitigation: The Board regularly reviews strategy and considers its policy on the allocation of assets between geographic regions and industrial sectors, gearing, currency exposure and the balance between quoted and unquoted stocks.

Risk description: Management resource, stability and controls

The Manager is the main service provider and its failure to continue operating effectively could put in jeopardy the business of the Company. The quality of the management team is also a crucial factor in delivering good performance and loss of the Manager's key staff could affect investment returns.

Mitigation: The Board meets regularly with the senior management of the Manager and its Internal Audit function, and has access to publicly available information indicative of its financial position and performance. The Manager develops its recruitment and remuneration packages in order to retain key staff, has training and development programmes in place and undertakes succession planning. The management contract can be moved at short notice.

Risk description: Service providers

Administrative errors or control failures by or between service providers could be damaging to the interests of investors and the Company.

Mitigation: The Board receives regular reports from the Manager on its oversight of service providers which, for the administration of the F&C savings plans, includes audit site visits; monthly technical compliance monitoring; monthly service delivery meetings; quarterly financial crime prevention forums; and the detailed review and investigation of breaches and complaints. Arrangements are also in place to mitigate other service provider risks, including those relating to safe custody.

Statement of Directors' Responsibilities in Respect of the Financial Statements

In accordance with Chapter 4 of the Disclosure and Transparency Rules the Directors confirm, in respect of the annual report for the year ended 30 April 2013 of which this statement of results is an extract, that to the best of their knowledge:

·      the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      the annual report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces; and

·      the annual report includes details on related party transactions.

On behalf of the Board

Anthony Townsend

Chairman

17 June 2013

Income Statement

for the year ended 30 April	2013			2012
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains/(losses) on investments	-	71,859	71,859	-	(57)	(57)
Foreign exchange gains/(losses)	1	(2)	(1)	(6)	(83)	(89)
Income	4,834	-	4,834	4,530	-	4,530
Management fee	(262)	(785)	(1,047)	(217)	(651)	(868)
Performance fee	-	(1,477)	(1,477)	-	(893)	(893)
Other expenses	(1,010)	(17)	(1,027)	(981)	(10)	(991)
Net return before finance costs and taxation	3,563	69,578	73,141	3,326	(1,694)	1,632
Finance costs	(288)	(864)	(1,152)	(289)	(866)	(1,155)
Net return on ordinary activities before taxation	3,275	68,714	71,989	3,037	(2,560)	477
Taxation on ordinary activities	(231)	-	(231)	(238)	-	(238)
Net return attributable to equity shareholders	3,044	68,714	71,758	2,799	(2,560)	239
Return per share - pence	7.10	160.38	167.48	6.87	(6.28)	0.59

The total column of this statement is the profit and loss account of the Company.

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

A statement of total recognised gains and losses is not required as all gains and losses of the Company have been reflected in the above statement.

Reconciliation of Movements in Shareholders' Funds

for the year ended 30 April 2013		Share	Capital			Total
	Share	premium	redemption	Capital	Revenue	shareholders'
	capital	account	reserve	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 1 May 2012	10,345	29,818	16,158	182,046	8,409	246,776
Movements during the year ended 30 April 2013
Dividends paid	-	-	-	-	(2,533)	(2,533)
Shares issued	898	23,191	-	-	-	24,089
Net return attributable to equity shareholders	-	-	-	68,714	3,044	71,758
Balance at 30 April 2013	11,243	53,009	16,158	250,760	8,920	340,090

for the year ended 30 April 2012		Share	Capital			Total
	Share	premium	redemption	Capital	Revenue	shareholders'
	capital	account	reserve	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 1 May 2011	10,025	23,132	16,158	184,606	7,683	241,604
Movements during the year ended 30 April 2012
Dividends paid	-	-	-	-	(2,073)	(2,073)
Shares issued	320	6,686	-	-	-	7,006
Net return attributable to equity shareholders	-	-	-	(2,560)	2,799	239
Balance at 30 April 2012	10,345	29,818	16,158	182,046	8,409	246,776

Balance Sheet

at 30 April		2013		2012
	£'000s	£'000s	£'000s	£'000s
Fixed assets
Investments		334,036		252,184
Current assets
Debtors	2,372		2,007
Cash at bank	20,771		5,550
	23,143		7,557
Creditors: amounts falling due within one year
Creditors	(7,089)		(2,965)
Net current assets		16,054		4,592
Total assets less current liabilities		350,090		256,776
Creditors: amounts falling due after more than one year
Debenture		(10,000)		(10,000)
Net assets		340,090		246,776
Capital and reserves
Share capital		11,243		10,345
Share premium account	53,009		29,818
Capital redemption reserve	16,158		16,158
Capital reserves	250,760		182,046
Revenue reserve	8,920		8,409
		328,847		236,431
Total shareholders' funds		340,090		246,776
Net asset value per share - pence		756.21		596.35

Cash Flow Statement

for the year ended 30 April		2013		2012
	£'000s	£'000s	£'000s	£'000s
Operating activities
Investment income received	4,526		3,914
Interest received	23		11
Underwriting commission	-		16
Management fee paid to the management  company	(1,096)		(786)
Performance fee paid to the management company	(892)		-
Directors' fees paid	(149)		(148)
Other payments	(710)		(811)
Net cash inflow from operating activities		1,702		2,196
Servicing of finance
Interest paid	(1,152)		(1,152)
Cash outflow from servicing of finance		(1,152)		(1,152)
Financial investment
Purchases of equities and other investments	(97,240)		(73,926)
Sales of equities and other investments	90,752		69,752
Other capital charges and credits	(17)		(13)
Net cash outflow from financial investment		(6,505)		(4,187)
Equity dividends paid		(2,533)		(2,073)
Net cash outflow before use of liquid resources and financing		(8,488)		(5,216)
Management of liquid resources
Decrease in short-term deposits		-		-
Financing
Shares issued	23,710		7,006
Cash inflow from financing		23,710		7,006
Increase in cash		15,222		1,790

Notes

1   Return per ordinary share

Revenue return

The revenue return per share is based on the net revenue return attributable to equity shareholders of £3,044,000 profit (2012: £2,799,000 profit).

Capital return

The capital return per share is based on the net capital return attributable to equity shareholders of £68,714,000 profit (2012: £2,560,000 loss).

Weighted average ordinary shares in issue

Both the revenue and capital returns per share are based on a weighted average of 42,845,491 ordinary shares in issue during the year (2012: 40,734,282).

2    Dividend

The Directors recommend a final dividend in respect of the year ended 30 April 2013 of 4.50p per share, payable on 16 August 2013 to all shareholders on the register at close of business on 19 July 2013. The recommended final dividend is subject to approval by shareholders at the annual general meeting.

3    Financial Risk Management

The Company is an investment company, listed on the London Stock Exchange, and conducts its affairs so as to qualify in the United Kingdom (UK) as an investment trust under the provisions of section 1158 of the Corporation Tax Act 2010. In so qualifying, the Company is exempted in the UK from corporation tax on capital gains on its portfolio of fixed asset investments.

The Company invests in smaller companies worldwide in order to secure a high total return. In pursuing the objective, the Company is exposed to financial risks which could result in a reduction of either or both of the value of the net assets and the profits available for distribution by way of dividend. These financial risks are principally related to the market (currency movements, interest rate changes and security price movements), liquidity and credit. The Board, together with the Manager, is responsible for the Company's risk management. The Directors' policies and processes for managing the financial risks are set out in (a), (b) and (c) below.

The accounting policies which govern the reported Balance Sheet carrying values of the underlying financial assets and liabilities, as well as the related income and expenditure, are in compliance with UK accounting standards and best practice, and include the valuation of financial assets and liabilities at fair value, except as noted in (d) below in respect of the debenture stock. The Company does not make use of hedge accounting rules.

(a) Market risks

The fair value of equity and other financial securities held in the Company's portfolio fluctuates with changes in market prices. Prices are themselves affected by movements in currencies and interest rates and by other financial issues, including the market perception of future risks. The Board sets policies for managing these risks within the Company's objective and meets regularly to review full, timely and relevant information on investment performance and financial results. The Manager assesses exposure to market risks when making each investment decision and monitors ongoing market risk within the portfolio.

The Company's other assets and liabilities may be denominated in currencies other than sterling and may also be exposed to interest rate risks. The Manager and the Board regularly monitor these risks. Borrowings are limited to amounts and currencies commensurate with the portfolio's exposure to those currencies, thereby limiting the Company's exposure to future changes in exchange rates. Gearing may be short or long-term, in sterling and foreign currencies, and enables the Company to take a long-term view of the countries and markets in which it is invested without having to be concerned about short-term volatility.

The Board regularly monitors the effects on net revenue of interest earned on deposits and paid on gearing.

(b) Liquidity risk exposure

The Company is required to raise funds to meet commitments associated with financial instruments and share buybacks. These funds may be raised either through the realisation of assets or through increased borrowing. The risk of the Company not having sufficient liquidity at any time is not considered by the Board to be significant, given: the large number of quoted investments held in the Company's portfolio (200 at 30 April 2013); the liquid nature of the portfolio of investments; the industrial and geographical diversity of the portfolio; and the existence of ongoing overdraft and loan facility agreements. Cash balances are held with reputable banks, usually on overnight deposit. The Company does not normally invest in derivative products. The Manager reviews liquidity at the time of making each investment decision. The Board reviews liquidity exposure at each meeting.

The 11.5% debenture stock is governed by a trust deed and is redeemable in 2014 or at an earlier date or dates at the Company's behest. The Board does not therefore consider the repayment of the debenture stock as a likely short-term liquidity issue.

(c) Credit risk and counterparty exposure

The Company is exposed to potential failure by counterparties to deliver securities for which the Company has paid, or to pay for securities which the Company has delivered. Such transactions must be settled on the basis of delivery against payment (except where local market conditions do not permit).

Responsibility for the approval, limit setting and monitoring of counterparties is delegated to the Manager and a list of approved counterparties is periodically reviewed by the Board. Counterparties are selected based on a combination of criteria, including credit rating, balance sheet strength and membership of a relevant regulatory body. The rate of default in the past has been negligible. Cash and deposits are held with reputable banks.

The Company has an ongoing contract with its custodian for the provision of custody services. The contract is reviewed periodically. Details of securities held in custody on behalf of the Company are received and reconciled monthly. The custodian has a lien over the securities in the account, enabling it to sell or otherwise realise the securities in satisfaction of charges due under the agreement.

To the extent that F&C Management Limited ("F&C") carries out management and administrative duties (or causes similar duties to be carried out by third parties) on the Company's behalf, the Company is exposed to counterparty risk. The Board assesses this risk continuously through regular meetings with the management of F&C (including the Fund Manager) and with F&C's internal audit function. In reaching its conclusions, the Board also reviews F&C's parent group's annual audit and assurance faculty report.

The Company had no credit-rated bonds or similar securities or derivatives in its portfolio at the year end (2012: none) and does not normally invest in them. None of the Company's financial liabilities are past their due date or impaired.

(d) Fair values of financial assets and liabilities

The assets and liabilities of the Company are, in the opinion of the Directors, reflected in the Balance Sheet at fair value, or at a reasonable approximation thereof, except for the debenture which is carried at par value. The fair value of the debenture, based on a comparable UK gilt, was £11,681,000 (2012: £12,380,000).

Unquoted investments, including partnership investments, are valued based on professional assumptions and advice that is not wholly supported by prices from current market transactions or by observable market data. The Directors make use of recognised valuation techniques and may take account of recent arm's length transactions in the same or similar investments. With respect specifically to investments in partnerships, the Directors rely on valuations of the underlying unlisted investments as supplied by the managers of those partnerships. The Directors regularly review the principles applied by the managers to those valuations to ensure they comply with the Company's accounting policies and with fair value principles.

(e) Capital risk management

The objective of the Company is stated as being to invest in smaller companies worldwide in order to secure a high total return. In pursuing this long-term objective, the Board has a responsibility for ensuring the Company's ability to continue as a going concern. It must therefore maintain an optimal capital structure through varying market conditions. This involves the ability to: issue and buy back share capital within limits set by the shareholders in general meeting; borrow monies in the short and long term; and pay dividends to shareholders out of current year revenue earnings as well as out of brought forward revenue reserves.

4    Annual general meeting

The annual general meeting will be held at the Chartered Accountants' Hall, One Moorgate Place, London EC2R 6EA on 25 July 2013 at 12 noon.

5    Report and accounts

The report and accounts for the year ended 30 April 2013 will be posted to shareholders and made available on the website www.fandcglobalsmallers.com. Copies may also be obtained from the Company's registered office, Exchange House, Primrose Street, London EC2A 2NY.

By order of the Board

F&C Management Limited, Secretary

Exchange House, Primrose Street, London EC2A 2NY

17 June 2013

 

END

 

 

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