Annual Financial Report

RNS Number : 7465J

F&C Global Smaller Companies PLC

16 June 2014

 



Date:                16 June 2014

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 2014

Summary of results

Attributable to equity shareholders	30 April 2014	30 April 2013	% Change
Share price	840.00p	764.50p	+9.9
Net asset value per share (debenture at nominal value)	841.78p	756.21p	+11.3
Net asset value per share (debenture at fair market value)	840.50p	752.47p	+11.7
	Year ended 30 April 2014	Year ended 30 April 2013	% Change
Revenue return per share	9.31p	7.10p	+31.1
Dividends per share	8.00p	6.50p	+23.1
Ongoing charges (based on average net assets)*	0.76%	0.85%

*0.78% including performance fees (2013: 1.49%).

Chairman's Statement

I am pleased to be able to report that the year under review was one of further progress for your Company with the net asset value per share up 11.3% to 841.78p with the debenture valued at nominal value. The share price was up 9.9% to a record year end level of 840p, though progress in the second half of the year was more modest than the first. While there was quite a divergence between equity market returns around the world, and economic conditions have not been uniformly positive, monetary policy from the main world central banks was again supportive for share prices.

The net asset value return for the year on a total return basis, incorporating the Company's debenture at nominal value was 12.3% against 12.6% incorporating the debenture at fair market value. The Company's Benchmark is 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%), and over the year this produced a total return of 12.4%. Our returns therefore have been broadly in line with the Benchmark this year following on from three consecutive years of outperformance.

It is worth flagging that the net asset value total return delivered by the Company has surpassed all other companies within the AIC's Global sector over a ten year period to the end of April. This showed through in good demand for new shares and shareholders will recall that the Company held a General Meeting in March at which shareholders renewed the Board's share issue authorities as the original authorities had nearly been exhausted. For the vast majority of the year, the share price traded at a small premium to net asset value but ended at a 0.1% discount compared to a 1.6% premium a year earlier.

Period	3 years	5 years	10 years
NAV total return	42.7%	143.9%	235.2%
Share Price total return	48.0%	172.3%	324.7%
Benchmark	32.0%	125.5%	186.7%

Source: F&C Management Limited & Datastream.

Dividends

This was another good year in terms of investment income and lower costs. So, after a 25% rise in the interim dividend, the Board also propose the payment of a higher final dividend of 5.50p, taking the dividend for the full year to 8.00p, up 23.1%. This will be paid on 15 August 2014 to shareholders on the register on 18 July 2014. The Board's intention remains to maintain a progressive dividend in the future and the fact that the Company has a large revenue reserve in hand provides backing to this.

Market background

As already stated, the returns from equity markets diverged considerably, with the main divide being between the developed markets and emerging/developing markets. In the UK, Europe and US, share prices posted further gains. Economic growth forecasts were upgraded in the UK through the year, with strong net job creation and a recovering housing market leading to improving consumer confidence. While growth is more patchy in mainland Europe, confidence that the worst of the financial crisis was behind us led to a substantial fall in government bond yields for the peripheral countries as risk appetite revived. Faced by ongoing near zero interest rates on cash deposits, investors have chosen to direct more of their capital towards equities and other asset classes such as real estate.

The move to signal a "tapering" of quantitative easing and an eventual rise in interest rates in the US during the Summer, prompted fears of a flight of capital out of the emerging markets, and in particular those with high current account or fiscal deficits. This, combined with generally disappointing macro-economic data from China and some of the other key Asian emerging markets, heaped further pressure on some of the local currencies, worsening the equity market returns from a UK based investor's perspective.

Portfolio performance

The chart below shows the sterling total returns that were delivered by each geographic segment of the portfolio. This demonstrates how good returns were in the UK and Europe and how disappointing they were in both Japan and the Rest of World segment, which is where both Asian and Latin American markets fall in terms of the way that we report.

While the UK stock market has benefited from the improving domestic economic picture, this is not the only thing which has helped drive its outperformance. Currency moves have had more of an impact than usual this year, with sterling gaining ground across the board.

Geographical performance (total return sterling adjusted)
for the year ended 30 April 2014
	Portfolio	Local smaller companies index
UK	26.6%	23.0%
USA	11.5%	11.1%
Continental Europe	21.4%	29.2%
Japan	(4.4)%	(9.4)%
Rest of World*	(8.7)%	(7.4)%  (Pacific ex Japan) (33.1)%  (Latin America)

Source: F&C Management Limited

*Performance of the Rest of World portfolio is measured against both Asian and Latin American smaller company indices.

When we look at the returns on our portfolio, it is pleasing to note that for the third consecutive year we beat the local smaller company returns in the US, UK and Japan. After two extremely strong prior years, we were unable to keep pace with the rise in the European small caps. Our portfolio of fund holdings targeting Asian, Latin American and other frontier markets was unable to buck the downward trend in these markets.

Asset allocation

In the early part of the year, we lifted our UK exposure and were overweight versus the 30% Benchmark allocation for a short while. This proved timely and we were overweight to Europe which was also the right decision, though being overweight through the year in Japan was detrimental. Enthusiasm in the markets for the more growth and expansionary economic agenda of the Abe administration was not sustained, and slower than hoped for structural reforms combined with the slowdown in the broader Asian scene held Japanese small caps back. The Manager was rightly underweight to the emerging markets in the year, though has more recently been adding to some of our fund holdings bringing us closer to neutral. The main underweight is the US, as was the case a year ago, where valuations for the market and small caps within it seem less attractive.

Geographical distribution of the investment portfolio as at 30 April 2014
North America	39.7%
UK	28.5%
Continental Europe	12.7%
Rest of World	10.3%
Japan	8.8%

Proposed Convertible Unsecured Loan Stock Issue, Gearing Policy and Growth of the Company

At the end of April 2014 the Company had no effective gearing with net cash in hand more than covering the Company's £10m debenture liability, which is due for repayment at the end of 2014. However, given the strong historic performance delivered by the Manager's investment approach and the view that the potential for good returns into the medium term is still very much intact, the Board has been considering the approach that should be taken with regard to gearing. We have concluded that regular or structural gearing through the investment cycle is appropriate to enhance shareholder returns in the future. As a result, the Board is considering the details of a possible imminent issue of up to £40m of new Convertible Unsecured Loan Stock. Should the issue be fully subscribed, the Company's effective gearing level would remain well within the Board's investment policy limit of 20% of shareholders' funds. In the event the Board decides to proceed with the issue, full details will be set out in a separate announcement to be released shortly and in a prospectus. We would need shareholder approval for the issue at a General Meeting the date and details of which would be notified to shareholders in a circular.

Fees and expenses

F&C, as Manager, is due a performance fee of £8,000. This compares to the £1.5m performance fee last year. The Board has considered whether to continue with the current base management plus performance fee approach and, for now, has decided that this remains appropriate. The greater size of the Company's asset base and the removal of F&C savings plan administration costs means that the expense ratios have moved lower this year. Transaction costs for the year, not included in the calculation of Ongoing Charges, were £527,000, representing 0.12% of the year end net asset value. The Board believes that the fee structure remains competitive in the market place.

Ongoing charges	Excluding performance fees	With performance fees
2013/14	0.76%	0.78%
2012/13	0.85%	1.49%

Ownership of the Manager

The acquisition of F&C by the Bank of Montreal completed in May bringing to an end any uncertainty over the future ownership of the investment manager of the portfolio. Corporate activity of this nature is always unsettling for those employed in the business and I would like to thank the team at F&C for the continuing high level of service. The investment and client service teams remain unchanged save for one unrelated departure from the US team and the Board remains confident that the portfolio is in good hands.

Alternative Investment Fund Managers' Directive ("AIFMD")

The AIFMD is European legislation for regulating managers of alternative investment funds. This was passed into UK law in July 2013 for the general purpose of enhancing investor protection. Investment trusts are one of a number of investment vehicles designated as alternative investment funds and which have until 22 July 2014 to comply. Although the Directive does not impose significant change to the safeguards and reporting requirements that have long been in place for investment trusts, the Company does need to appoint an Alternative Investment Fund Manager. By the time of the Annual General Meeting in July, to meet the specific requirements of the Directive the Board will have moved the management company's day-to-day responsibilities to F&C Investment Business Limited, another regulated subsidiary within F&C Asset Management plc, and will also have appointed it as the Company's Alternative Investment Fund Manager. There will not be any additional management fees as a result of the change. It is intended that JPMorgan Europe Limited will be appointed to act as depositary, which will levy charges but these are not expected to be significant.

New Zealand Stock Exchange Listing

The Company has had a secondary listing on the New Zealand Stock Exchange for many years. The Board has decided to cancel the listing in view of a decline in the number of shareholders on the register. The listing will cease on 27 June 2014.

The Board and corporate governance

In line with best practice and for the first time, shareholders will be asked to approve the Directors' Remuneration Policy at the Annual General Meeting. Jane Tozer and I have now passed nine years' service and will therefore be standing for re-election at the meeting, while Franz Leibenfrost will retire from the Board having given just over 15 years' service to the Company. Franz has brought a valuable international perspective to our Board discussions and has maintained a keen interest in the Company throughout his time as a Director; he has been a delightful colleague to work with and on behalf of his Board colleagues and shareholders alike I would like to thank him for all the years of diligent service he has given us. We wish him all the best for the future. We will be looking to appoint a new Director in the coming months.

Outlook

As markets rise, it becomes harder by definition to be as confident about the prospect for further near term progression. Nevertheless, the Board feels that the medium term prospects for growth in a global smaller company mandate remains bright, continuing to offer the potential for investors to gain exposure to some of the best equity growth stories of the future.

Anthony Townsend

Chairman

16 June 2014

Principal risks and uncertainties and risk management

The Board applies the principles detailed in the internal control guidance issued by the Financial Reporting Council, and has established an ongoing process designed to meet the particular needs of the Company in managing the risks and uncertainties to which it is exposed.

The Board analyses the principal risks and uncertainties faced by the Company under three main categories: the security of assets: investment performance; and the deviation of the share price to the underlying net asset value per share. These are described below and in note 3 to this Statement of Results.

Security and operational issues

Risk description: loss of assets or other damage to the interests of investors and the Company could arise due to poor systems and physical access security, operational errors, control failures or regulatory failures by or between service providers, including the Manager.

Mitigation: The Board receives regular reports from the Manager in respect of its own control and regulatory environment and on its oversight of service providers including arrangements that are in place for the safe custody of the assets, the administration of the F&C savings plans and to protect against cyber attacks. Audit assurance reports prepared by leading audit firms on each of the key service providers are reviewed annually by the Board. A depositary will be appointed under the AIFMD to enhance the protection of the Company's assets.

Investment performance issues

Risk description: an inappropriate investment strategy or policy, or ineffective implementation, could result in poor returns for shareholders.

Mitigation: The Board regularly reviews overall strategy and in considering investment policy reviews regular reports from the Manager: on stock selection; asset allocation; gearing; currency exposure and investment performance. The Board meets regularly with the senior management of the Manager, which structures its recruitment and remuneration packages in order to retain and enhance the quality of the management team. Assurances have been received from the Manager's new owner, Bank of Montreal, as to their continuing support for the Manager's key staff, operations and policies. The management contract can be moved at short notice

Discount/Premium to Net Asset Value

Risk Description: A significant share price discount or premium to the Company's net asset value per share, or related volatility, could lead to high levels of uncertainty or speculation and the potential to reduce investor confidence.

Mitigation: The Board has established share buyback and share issue policies in order to moderate the level of share price premium or discount to the net asset value per share and related volatility and seeks shareholder approval each year for the necessary powers to implement these policies.

The Company's assets consist mainly of listed equities and its principle risks, opportunities and rewards are therefore mainly market related. The Company aims to spread the risk of stock market investment by diversifying investment exposure over a wide range of stocks. Investment is made around the globe in markets, sectors and companies which it is believed will reward shareholders by achieving the Company's objective of securing a high total return.

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 2014 of which this statement of results is an extract, that to the best of their knowledge:

·      the financial statements have been prepared in accordance with applicable UK generally accepted accounting standards, on a going concern basis and give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      the Strategic Report includes a fair review of the development and performance of the Company and the important events that have occurred during the financial year and their impact on the financial statements, including a description of the principal risks and uncertainties for the forthcoming financial year; and

·      the financial statements and the Directors' Report include details on related party transactions.

On behalf of the Board

Anthony Townsend

Chairman

16 June 2014

Income Statement

for the year ended 30 April	2014			2013
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains on investments	-	41,451	41,451	-	71,859	71,859
Foreign exchange gains/(losses)	5	(633)	(628)	1	(2)	(1)
Income	5,876	-	5,876	4,834	-	4,834
Management fee	(371)	(1,112)	(1,483)	(262)	(785)	(1,047)
Performance fee	-	(8)	(8)	-	(1,477)	(1,477)
Other expenses	(543)	(28)	(571)	(1,010)	(17)	(1,027)
Net return before finance costs and taxation	4,967	39,670	44,637	3,563	69,578	73,141
Finance costs	(288)	(862)	(1,150)	(288)	(864)	(1,152)
Net return on ordinary activities before taxation	4,679	38,808	43,487	3,275	68,714	71,989
Taxation on ordinary activities	(218)	-	(218)	(231)	-	(231)
Net return attributable to equity shareholders	4,461	38,808	43,269	3,044	68,714	71,758
Return per share - pence	9.31	81.01	90.32	7.10	160.38	167.48

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 2014		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 2013	11,243	53,009	16,158	250,760	8,920	340,090
Movements during the year ended 30 April 2014
Dividends paid	-	-	-	-	(3,284)	(3,284)
Shares issued	1,560	49,451	-	-	-	51,011
Net return attributable to equity shareholders	-	-	-	38,808	4,461	43,269
Balance at 30 April 2014	12,803	102,460	16,158	289,568	10,097	431,086

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

Balance Sheet

at 30 April		2014		2013
	£'000s	£'000s	£'000s	£'000s
Fixed assets
Investments		425,344		334,036
Current assets
Debtors	3,574		2,372
Cash at bank and short-term deposits	16,705		20,771
	20,279		23,143
Creditors: amounts falling due within one year
Creditors	(4,537)		(7,089)
Debenture	(10,000)		-
	(14,537)		(7,089)
Net current assets		5,742		16,054
Total assets less current liabilities		431,086		350,090
Creditors: amounts falling due after more than one year
Debenture		-		(10,000)
Net assets		431,086		340,090
Capital and reserves
Share capital		12,803		11,243
Share premium account	102,460		53,009
Capital redemption reserve	16,158		16,158
Capital reserves	289,568		250,760
Revenue reserve	10,097		8,920
		418,283		328,847
Total shareholders' funds		431,086		340,090
Net asset value per share - pence		841.78		756.21

Cash Flow Statement

for the year ended 30 April		2014		2013
	£'000s	£'000s	£'000s	£'000s
Operating activities
Investment income received	5,062		4,526
Interest received	49		23
Management fee paid to the management company	(1,458)		(1,096)
Performance fee paid to the management company	(1,478)		(892)
Directors' fees paid	(155)		(149)
Other payments	(637)		(710)
Net cash inflow from operating activities		1,383		1,702
Servicing of finance
Interest paid	(1,150)		(1,152)
Cash outflow from servicing of finance		(1,150)		(1,152)
Financial investment
Purchases of equities and other investments	(173,123)		(97,240)
Sales of equities and other investments	122,218		90,752
Other capital charges and credits	(26)		(17)
Net cash outflow from financial investment		(50,931)		(6,505)
Equity dividends paid		(3,284)		(2,533)
Net cash outflow before use of liquid resources and financing		(53,982)		(8,488)
Financing
Shares issued	50,544		23,710
Cash inflow from financing		50,544		23,710
(Decrease)/increase in cash		(3,438)		15,222

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 £4,461,000 profit (2013: £3,044,000 profit).

Capital return

The capital return per share is based on the net capital return attributable to equity shareholders of £38,808,000 profit (2013: £68,714,000 profit).

Weighted average ordinary shares in issue

Both the revenue and capital returns per share are based on a weighted average of 47,903,986 ordinary shares in issue during the year (2013: 42,845,491).

2    Dividend

The Directors recommend a final dividend in respect of the year ended 30 April 2014 of 5.50p per share, payable on 15 August 2014 to all shareholders on the register at close of business on 18 July 2014. 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 full details of financial risks are contained in note 25 of the report and accounts.

4    Annual general meeting

The annual general meeting will be held at the Chartered Accountants' Hall, One Moorgate Place, London EC2R 6EA on 24 July 2014 at 12 noon.

5    Report and accounts

The report and accounts for the year ended 30 April 2014 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

16 June 2014

 

END

 

 

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