Annual Financial Report

RNS Number : 0076C

F&C Global Smaller Companies PLC

23 June 2016

 

Date:                23 June 2016

Contact:           Peter Ewins                                                   

                        F&C Investment Business Limited                   

                        020 7628 8000                                               

F&C Global Smaller Companies PLC

Audited Statement of Results

for the year ended 30 April 2016

Financial highlights

Strong performance with 3.5% Net Asset Value ("NAV") total return

The diluted NAV rose to 994.50p. The total return of 3.5% beat the benchmark which returned 1.3%.

Share price total return of 3.2%

The share price ended the year at 1001p and over ten years has risen by 157.3%, the equivalent of 9.9% per annum.

Dividend of 10.70 pence - 46th consecutive annual increase

We recognise the importance of a rising dividend in real terms. The total dividend for the year is 10.70 pence, an increase of 10.9%.

Shares ended the year at a premium of 0.7%

For most of the year the share price traded at a premium to NAV at a time when other trusts have seen more volatility in their discount.

Chairman's Statement

An improved last quarter showing from the investment portfolio after weakness in the first six months and early in 2016, meant that for the fourth year in a row the Net Asset Value ("NAV") and share price ended the year in positive return territory. Equity markets recovered as the view took hold that interest rates in the US would not move up materially in the near term while rising commodity prices later in the period were also taken positively as an indicator that the world economy was not heading into a deflationary decline.

As a globally spread fund, with the majority of investments denominated in currencies other than sterling, weakness in the pound during the last few months was beneficial to our results. I am pleased to be able to say that the Company's resilient performance has resulted in it winning the What Investment Global Investment Trust of the year award for 2016.

The NAV total return for the year was 3.5% on a diluted basis taking account of the Convertible Unsecured Loan Stock ("CULS") and 3.6% undiluted, with the share price returning 3.2%.

The Company's Benchmark, which is a 70%/30% blend of the MSCI All Country World ex UK Small Cap Index and Numis UK Smaller Companies Index, returned 1.3%.

Although there has been pressure on the ratings of some investment trusts, the Company's shares spent most of the year trading at a small premium to the prevailing NAV, and a total of 2,276,000 new shares (4.3% of the initial share capital) were issued to meet demand from new and existing investors. The shares ended the year at a 0.7% premium to the diluted cum-income NAV. We will use our buyback powers if necessary to help maintain a stable relationship between the NAV and share price.

Dividends

Steady underlying dividend growth across the fund continued to be evident in the year. Diluted revenue per share rose by 8.4% despite lower special dividends from stocks held in the portfolio. Expenses fell in the year mainly because the previous year's costs had included one-off fees relating to the issue of Convertible Unsecured Loan Stock in 2014.

The Board is therefore proposing a final dividend of 7.80 pence per share, which together with the interim 2.90 pence per share makes a full year payment of 10.70 pence. This is 10.9% higher than last year and is the 46th consecutive year in which the dividend has risen. Payment will be made on 12 August 2016 to those on the register on 15 July 2016.

Economic background

Interest rate movements are often key drivers for stock markets, and much attention in the year surrounded the outlook for rates in the US. Although growth in the US economy eased back in the second half, the Federal Reserve Bank eventually decided to raise rates for the first time in nearly a decade by 0.25% just before Christmas as a pre-emptive strike against the potential threat of inflation. Elsewhere, Central Banks were generally in easing mode, and we now even have the phenomenon of negative interest rates in a number of countries. These are meant to encourage the financial sector to use its capacity to lend more to the wider economy. In many places however, demand for credit remains suppressed and banks are also under regulatory pressure to build their capital strength so have been reluctant to expand their loan books too aggressively.

Commodity price weakness driven in large part by a slowdown in demand from China, continued to be a major feature. Brent crude prices slumped to below $30 a barrel at the start of 2016, but have bounced back more recently as the markets have started to anticipate the supply response. Lower oil prices were expected to boost the global economy by encouraging extra retail spending, but consumers in most nations have remained cautious in using this windfall.

In the UK, the economy grew satisfactorily in 2015, with domestic consumption benefiting from a strong labour market. Continental European economies continued to stage a recovery, though the refugee crisis and renewed fragility in parts of the banking sector undermined confidence in the latter stages of the period. As a result, the European Central Bank stepped up its market intervention with interest rates cut once again and the scale of quantitative easing increased. The Bank of Japan, seeking to lift its sluggish domestic economy and reach its targeted 2% inflation rate, moved to impose negative interest rates on some commercial bank deposits in January.

Asian and Latin American economies were mixed with on the one hand some countries like India doing relatively well. Others with a high dependence on commodities trade, such as Brazil, moved into deep recession. China, increasingly important now in a global sense, reported a modest slowdown in overall growth, with signs of stress apparent in a number of export dependent sectors where capacity has been expanded too much.

Portfolio performance

Currency moves had a larger than usual impact on the performance of the fund this year. The US dollar was strong as the markets anticipated higher US rates, but it pulled back later on as expectations of further rises faded. As often in times of uncertainty, the yen appreciated, despite the Bank of Japan's move on rates. Weakness in sterling took hold late in the year as the government called for a poll on the UK's membership of the EU, and opinion polls indicated uncertainty around the eventual outcome.

Geographical performance (total return sterling adjusted)
for the year ended 30 April 2016
	Portfolio	Local smaller companies index
UK	7.6%	1.8%
USA	6.7%	(1.3)%
Continental Europe	1.6%	5.7%
Japan	3.1%	12.1%
Rest of World*	(9.3)%	(9.9)%  (Pacific ex Japan) (7.1)%  (Latin America)

Source: F&C

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

Invariably however, it is stock selection that will define whether it has been a good year or a bad year. The table above highlights the returns from the five parts of the portfolio compared to the local small cap markets. Representing more than 70% of our assets, stock-picking in the US and UK will always be key to the overall out-turn, and we were well ahead in both countries. Although we were behind in Europe and more markedly in Japan, this followed strong relative performance in these markets in 2014/15. Returns in the Rest of World segment, incorporating our fund holdings targeting the Pacific ex Japan and Latin American markets, were once again disappointing compared to elsewhere, as sentiment to emerging markets as a whole remained fragile.

Asset Allocation

Geographical distribution of the investment portfolio as at 30 April 2016
North America	42.3% (40.2%)
UK	29.3% (29.6%)
Continental Europe	11.9% (11.5%)
Rest of World	9.0% (11.0%)
Japan	7.5% (7.7%)

The percentages in brackets are as at 30 April 2015

Source: F&C

The year end asset allocation by geographic exposure did not change much from a year ago. In the first half of the year, the UK weighting rose to over 30% reflecting a good flow of new investment opportunities being identified, but it drifted lower near the end of the period as the Manager took action to reflect the risk of sterling weakness ahead of the EU referendum. We moved overweight compared to the Benchmark in North America during the second half of the year, taking the view that the market could be something of a safe haven given the possibility of higher US interest rates coming through. In contrast, we took some money out of our Japanese funds and moved slightly underweight on the basis that the relative outperformance of the market had gone far enough. Exposure to the Rest of World (predominantly Asian markets) dropped, mainly as a consequence of the weak market performance. In overall terms our asset allocation positioning during the year added some value against the Benchmark, with the decisions to be underweight to the Rest of the World and overweight in Europe proving the right calls.

Gearing

The Board believes that the use of a moderate level of structural, or on-going, leverage, is likely to be beneficial over the long term as market levels appreciate. Taking account of the Convertible Unsecured Loan Stock and net cash held in the normal course of portfolio management, effective gearing was relatively stable through the year, ending it at 4.7%.

Change to management fee arrangements

The Company has, for the last ten years, paid fees to the Manager, F&C, on both an ad-valorem and performance basis. The performance element of the fee related to the Company's NAV return compared to that of the Benchmark. Over this time, the NAV has risen by 132.8% compared to a 104.3% rise from the Benchmark (both in total return terms) and F&C have earned a performance fee on six occasions, including in each of the last four years. For 2015/16, a performance fee of £1.3m is due to be paid as a result of the outperformance delivered in the year.

Since 2006, there have been many changes within the funds market place and the Board has regularly reviewed whether a performance fee based structure remains appropriate. Having traditionally been more expensive for retail investors, open ended funds such as unit trusts or OEICs, have tended to cut their fee rates in recent years, while there has been a move away from the use of performance fees by investment trusts amid a general trend towards simplification.

F&C Global Smaller Companies' base management fees have been 0.4% for that part of the investment portfolio invested in individual company equities and 0.25% for the collective funds used mainly to gain exposure to Japanese and Asian markets. F&C to this point, have had the opportunity to earn additional remuneration through the performance fee structure whereby they received 10% of the excess performance compared to the Benchmark.

The Board, after careful consideration and discussion with F&C, has concluded that there is merit in reducing the complexity around the costs of investing in your Company by, with effect from 1 May 2016, removing the performance fee and increasing the base fee on individual holdings to 0.55%, and the fee on the collectives to 0.275%. Based on the end of year split of assets this translates into approximately a 0.50% blended management fee payable to F&C which should, depending on the geographic split of assets and the extent to which collectives are used, remain fairly constant going forward. No further performance fees will be paid to F&C, and as a result the volatility around fund charges will be reduced.

The Board appreciates the increasing focus on fund costs and believes that the revised fee arrangement will position the Company very competitively relative to alternative options. Had the proposed new fee structure been in place in 2015/16, fees payable to F&C would have been £658,000 lower. Incorporating the new fee structure, the ongoing charges ratio is 0.85%.

The Board and corporate governance

The three new directors who joined the Board in 2015 have settled in very well and the Board continues to have the right level of investment knowledge, business and financial skills and experience for the future success of your Company.

Your Board remains committed to the highest standards of corporate governance. Jane Tozer and I have been Directors for more than nine years and, as reported last year, all the Directors will now stand for re-election annually regardless of their length of tenure in line with corporate governance best practice.

Outlook

Equities struggled to advance over the last year in part due to lacklustre corporate earnings numbers pretty much around the globe. However, low and now in some places, negative bank interest rates, plus compressed government and corporate bond yields, provide investors with few attractive alternative options. Although there is uncertainty around the up-coming EU referendum, the Board continues to be optimistic that the Company can continue to deliver on its objective to shareholders over the medium term.

Anthony Townsend
Chairman
22 June 2016

Principal Risks and Future Prospects

The principal risks and their mitigations are described below. Note 26 on the Report and Accounts details the Financial Risk Management of the Company. The risks that affect the Company's ongoing operations may vary in significance from time to time. The principal risks identified as most relevant to the assessment of the Company's future prospects and viability were those relating to inappropriate business strategy, potential investment portfolio under-performance and its effect on share price discount/premium and dividends, as well as threats to security over the Company's assets.

Security and operational issues

Principal Risk: 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, fraud or control failures at service providers or loss of data through increasing levels of cyber-threats or business continuity failure could damage reputation or investors' interests or result in loss.

Increased in the year under review

Mitigation: The Board receives regular control reports from the Manager covering risk and compliance including oversight of third party service providers. The Board has access to F&C's Head of Business Risk and requires any significant issues directly relevant to the Company to be reported immediately. The Depositary is specifically liable for loss of any of the Company's securities and cash held in custody.

Actions taken in the year: The Manager continues to strengthen its Risk, Compliance and Internal Control functions as part of the integration of its operations with BMO. IT security includes continuous updates of firewalls and annual third party penetration testing. Supervision of third party service providers has been maintained by F&C and includes assurances regarding IT security and cyber-threat. The Depositary oversees custody of investments and cash and reports to the Company in accordance with the AIFMD.

Investment Performance

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

Unchanged throughout the year under review.

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; investment performance and the cost of running the Company. 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. The management contract can be moved at short

Actions taken in the year: The Board, through its review process, did not identify any specific new actions required to mitigate performance risks. Loan interest costs were much lower following the repayment of a long-term debenture at the end of 2014. The Company's issue of CULS provides a long-term modest "borrowing" facility which has the potential to convert into ordinary shares and hence not to require repayment. The Lead Manager's Review on pages 13 to 22 of the Report and Accounts explains the changes in the year in the portfolio.

Discount/premium to NAV

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

Unchanged throughout the year under review.

Mitigation: The Board has established share buyback and share issue policies, together with a dividend policy, in order to moderate the level of share price premium or discount to the NAV per share and related volatility and seeks shareholder approval each year for the necessary powers to implement these policies.

Actions taken in the year: The share price traded at a small premium to NAV for the majority of the year and shares continued to be issued to satisfy demand and help moderate the level of premium to NAV. The Board has proposed an increase in full year dividends.

Five Year Horizon

When considering the Company's future prospects and risks, the Board assessed and evaluated the following areas through a series of stress tests:

• potential illiquidity of the Company's portfolio; and

• the effects of any substantial future falls in investment values and income receipts; on the ability to repay the CULS; on potential breach of CULS covenants; and on the maintenance of dividend payments and retention of investors.

Based on its assessment and evaluation of the Company's future prospects, the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the coming five years. This period is consistent with advice, provided by many investment advisers, that investors should invest in equities for a minimum of five years. The Company's business model, strategy and the embedded characteristics have helped define and maintain the stability of the Company over many decades. The Board expects this to continue over the next five years and many more to come.

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 2016 of which this statement of results is an extract, to the best of their knowledge that:

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

·      the Strategic 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 they face;

·      the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy; and

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

On behalf of the Board

Anthony Townsend

Chairman

22 June 2016

Income Statement

for the year ended 30 April	2016			2015
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains on investments	-	16,820	16,820	-	69,146	69,146
Foreign exchange gains	17	217	234	8	483	491
Income	8,486	-	8,486	7,786	-	7,786
Management fee	(498)	(1,495)	(1,993)	(436)	(1,307)	(1,743)
Performance fee	-	(1,314)	(1,314)	-	(983)	(983)
Other expenses	(618)	(22)	(640)	(777)	(24)	(801)
Net return before finance costs and taxation	7,387	14,206	21,593	6,581	67,315	73,896
Finance costs	(435)	(1,306)	(1,741)	(533)	(1,598)	(2,131)
Net return on ordinary activities before taxation	6,952	12,900	19,852	6,048	65,717	71,765
Taxation on ordinary activities	(500)	-	(500)	(389)	-	(389)
Net return attributable to equity shareholders	6,452	12,900	19,352	5,659	65,717	71,376
Return per share (basic) - pence	11.86	23.72	35.58	10.87	126.22	137.09
Return per share (diluted) - pence	11.78	23.72	35.58	10.87	121.02	131.90

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.

Statement of Changes in Equity

for the year ended 30 April 2016
		Share	Capital	Equity			Total
	Share	premium	redemption	component	Capital	Revenue	shareholders'
	capital	account	reserve	of CULS	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 April 2015	13,281	119,394	16,158	1,312	355,285	11,533	516,963
Movements during the year ended 30 April 2016
Dividends paid	-	-	-	-	-	(5,342)	(5,342)
Shares issued	569	21,555	-	-	-	-	22,124
Conversion of Convertible Unsecured Loan Stock ("CULS")	3	97	-	(5)	-	-	95
Net return attributable to equity shareholders	-	-	-	-	12,900	6,452	19,352
Balance at 30 April 2016	13,853	141,046	16,158	1,307	368,185	12,643	553,192

for the year ended 30 April 2015
		Share	Capital	Equity			Total
	Share	premium	redemption	component	Capital	Revenue	shareholders'
	capital	account	reserve	of CULS	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 April 2014	12,803	102,460	16,158	-	289,568	10,097	431,086
Movements during the year ended 30 April 2015
Dividends paid	-	-	-	-	-	(4,223)	(4,223)
CULS	-	-	-	1,339	-	-	1,339
Issue costs of equity component of CULS	-	-	-	(27)	-	-	(27)
Shares issued	477	16,889	-	-	-	-	17,366
Conversion of CULS	1	45	-	-	-	-	46
Net return attributable to equity shareholders	-	-	-	-	65,717	5,659	71,376
Balance at 30 April 2015	13,281	119,394	16,158	1,312	355,285	11,533	516,963

Balance Sheet

at 30 April		2016		2015
	£'000s	£'000s	£'000s	£'000s
Fixed assets
Investments		581,611		548,639
Current assets
Debtors	2,529		4,086
Cash at bank and short-term deposits	12,249		13,502
	14,778		17,588
Creditors: amounts falling due within one year
Creditors	(4,787)		(11,135)
Net current assets		9,991		6,453
Total assets less current liabilities		591,602		555,092
Creditors: amounts falling due after more than one year
Convertible Unsecured Loan Stock		(38,410)		(38,129)
Net assets		553,192		516,963
Capital and reserves
Share capital		13,853		13,281
Share premium account	141,046		119,394
Capital redemption reserve	16,158		16,158
Equity component of CULS	1,307		1,312
Capital reserves	368,185		355,285
Revenue reserve	12,643		11,533
		539,339		503,682
Total shareholders' funds		553,192		516,963
Net asset value per share (basic) - pence		998.34		973.11
Net asset value per share (diluted) - pence		994.50		970.25

Statement of Cash Flows

for the year ended 30 April			2016	2015
			£'000s	£'000s
Cash flows from operating activities			2,617	2,609
Investing activities
Purchases of  investments			(227,066)	(223,013)
Sales of investments			206,005	173,737
Other capital charges			(21)	(25)
Cash flows from investing activities			(21,082)	(49,301)
Cash flows before financing activities			(18,465)	(46,692)
Financing activities
Ordinary dividends paid			(5,342)	(4,223)
CULS issued			-	40,000
Issue costs of CULS			-	(795)
Debenture repaid			-	(10,000)
Proceeds from issue of shares			22,320	18,016
Cash flows from financing activities			16,978	42,998
Net movement in cash and cash equivalents			(1,487)	(3,694)
Cash and cash equivalents at the beginning of the year			13,502	16,705
Effect of movement in foreign exchange			234	491
Cash and cash equivalents at the end of the year			12,249	13,502
Represented by:
Cash at bank and short-term deposits			12,249	13,502

Notes

1    Dividend

The Directors recommend a final dividend in respect of the year ended 30 April 2016 of 7.80p per share, payable on 12 August 2016 to all shareholders on the register at close of business on 15 July 2016. The recommended final dividend is subject to approval by shareholders at the annual general meeting.

2    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 26 on the report and accounts.

3    Annual general meeting

The annual general meeting will be held at the Chartered Accountants' Hall, One Moorgate Place, London EC2R 6EA on 28 July 2016 at 12 noon.

4    Report and accounts

This statement was approved by the Board on 22 June 2016. It is not the Company's statutory accounts. The statutory accounts for the financial year ended 30 April 2016 have been approved and audited, and received an independent auditors' report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report. The statutory accounts for the financial year ended 30 April 2015 received an independent auditors' report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report.

The report and accounts for the year ended 30 April 2016 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 Investment Business Limited, Secretary

Exchange House, Primrose Street, London EC2A 2NY

22 June 2016

 

END

 

 

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