Annual Financial Report

RNS Number : 6369I

F&C Global Smaller Companies PLC

21 June 2017

 

Date:                21 June 2017

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 2017

Financial highlights

Strong performance with 28.4% diluted Net Asset Value ("NAV") total return

The diluted NAV rose to 1,263.52p from 994.50p.

Share price total return of 28.5%

The share price rose for the eighth consecutive year ending at 1,273p.

Dividend of 12.25 pence - 47th consecutive annual increase

We recognise the importance of a rising dividend in real terms. The total dividend for the year is 12.25 pence, an increase of 14.5%.

Shares ended the year at a premium of 0.8%

For most of the year the share price traded at a premium to the diluted NAV.

 

Chairman's Statement

Political surprises dominated the headlines in the year under review, but despite the uncertainties created, it turned out to be a profitable time for investors in equities. This is the fifth consecutive year where both the net asset value ("NAV") and share price have risen, and the NAV growth was the second best of the last decade. While this was partly due to the weakness of sterling following the Brexit vote, most stock markets around the world were comfortably up in local currency terms as interest rates remained low, and corporate earnings trends showed signs of improvement.

This was a good year on a global basis for small cap stocks, which more than held their own against the larger companies, doing particularly well in the US. The Company's Benchmark is a blended index of the returns from the MSCI All Country World ex UK Small Cap Index and the Numis UK Smaller Companies (ex investment companies) Index in a 70%/30% proportion, and this delivered a total return in sterling terms of 30.4%. The NAV total return was close to this at 29.9% and with the value of the portfolio rising, dilution from the Convertible Unsecured Loan Stock ("CULS") issue meant that the NAV return on a diluted basis was 28.4%. The share price rose by 27.2% to 1,273p, delivering a total return of 28.5% taking account of reinvested dividends.

The NAV and share price returns remain comfortably ahead of the Benchmark over the last decade while on a 25 year view (see pages 86 and 87 of the Report and Accounts) the Company's shares are up nearly 12 fold excluding dividend reinvestment, and almost 18 fold if the dividends paid out had all been reinvested as received.

The shares traded through the year at close to NAV, ending at a 0.8% premium to the diluted cum-income NAV. While investment trust share prices will never precisely track the portfolio performance, maintaining the relative stability of the relationship between the Company's share price and NAV remains a priority for the Board, so once again we will be seeking the usual powers to issue and buyback shares at the Annual General Meeting. During the year 1,723,871 shares (3.1% of the initial share capital) were issued, some of which were as a consequence of two CULS conversions.

Ongoing charges for the year edged down to 0.84% (2016:0.85%) excluding performance fees and were 0.86% (2016:0.85%) including performance fees. The performance fees here relate to our investment in a number of collective funds which themselves pay performance fees. Following the change to the management fee arrangements last year we no longer pay a performance fee to the Manager, F&C.

Dividends

There was good growth in dividends from the portfolio and the fall in the pound enhanced the sterling value of the income derived from our overseas investments, lifting diluted revenue returns per share up 17.1%. The Board is therefore recommending a final dividend payment of 8.25p per share, up 5.8% on last year's payment, making a total dividend for the year of 12.25p per share, up 14.5%. This will be the 47th consecutive year of growth, and the 6th year in a row of double-digit percentage increases. The final dividend will be paid on 11 August 2017 to shareholders on the register on 14 July 2017.

Portfolio performance

All parts of the portfolio, as shown in the table below, produced strong returns. At the market level, US small caps led the way with stocks here lifted by the perception that the new administration under Donald Trump would enact sweeping tax reform, supportive for both the consumer and corporate sectors. There were also hopes that US growth would be enhanced by greater spending on infrastructure projects. Although oil prices have recently fallen in spite of OPEC's attempt to curb the output of crude oil, the Federal Reserve Bank increased US interest rates twice in a precautionary move against the potential revival of inflationary pressures.

Growth in Europe improved, driving greater interest in small cap stocks geared into the local economies. UK small cap shares shrugged off initial Brexit driven falls, with the domestic economy proving more resilient than expected after the referendum. The UK consumer continued to spend and there has been some benefit to exporters from the weaker pound. Japanese small cap shares performed well again following a strong 2015/16, with the Bank of Japan continuing to engage in quantitative easing, and we saw better returns at last from Asian and Latin American small caps. These markets recovered after initially falling after the US election on fears that protectionist policies from the new administration could impact upon trade with the US. China's economy continued to rebalance towards consumer orientated growth, but the pace of expansion in the level of outstanding debt in the country continues to be somewhat alarming.

Geographical performance (total return sterling adjusted)
for the year ended 30 April 2017
	Portfolio	Local smaller companies index
UK	24.2%	22.0%
US	32.1%	42.2%
Europe	28.9%	32.6%
Japan	33.2%	29.2%
Rest of World*	28.1%	27.0%  (Pacific ex Japan) 37.6%  (Latin America)

Source: F&C

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

In terms of the relative performance of the sub-portfolios, a better second half in the UK meant that this part of the fund beat the local market for a seventh consecutive year. Our Japanese fund portfolio was comfortably ahead of the MSCI Japan Small Cap Index, with a bias towards value stocks helpful. Performance in the Rest of the World portfolio, which is predominantly focused on Asian funds was also respectable, slightly surpassing the Asian small cap benchmark return, although Latin American small cap markets did better still.

In Europe and the US, our portfolios were unable to keep pace with the indices. The more marked underperformance in the latter market was partly due to under-representation in the technology sector which was in favour and also from having less exposure to the smallest market cap stocks which led the rally in the US market following the election. Full details on the background to performance is contained in the Managers Review on pages 11 to 20 of the Report and Accounts.

Asset Allocation

Geographical distribution of the investment portfolio as at 30 April 2017
North America	40.7% (42.3%)
UK	27.5% (29.3%)
Europe	12.3% (11.9%)
Rest of World	11.1% (9.0%)
Japan	8.4% (7.5%)

The percentages in brackets are as at 30 April 2016

Source: F&C

With political developments creating periods of volatility in the equity and foreign exchange markets, it was difficult to have high conviction over the right stance to take from an allocation point of view. We did however, benefit from being underweight to sterling based assets, with the UK market return lagging the other markets, and from being overweight for the bulk of the period in the US.

Over the first half of the year, we increased our investments in the Far East. While the US election result caused some disquiet amongst investors in these markets, there has more recently been a bounce in sentiment towards emerging markets as a whole.

Through the second half of the year, the Manager decided to reduce exposure back to neutral versus Benchmark in the US after the post-election surge. It is felt that global investors are likely to look more favourably on European-centric stocks in the coming period given the improved local economic outlook. Following the recent Dutch and French election results, we added to our European weighting.

Gearing

The Board believes that the use of a moderate level of structural gearing is likely to be beneficial over the long term. Taking account of the CULS and net cash held in the normal course of portfolio management, effective net gearing was 3.4% at the end of the year, down from 4.4% at the half year stage.

The extent of gearing capacity created by the CULS is now less significant than at the time of the issue in 2014 as a consequence of the growth of the Company's net assets and some early conversions of the loan stock into equity. The Board is therefore reviewing potential options to take on additional borrowing facilities. Such facilities would only be deployed on a measured basis given the extent of recent market returns.

The Board

There have been no changes to the Board during the year and, notwithstanding the Company's Articles of Association, all the Directors will stand for re-election by shareholders at the Annual General Meeting.

Annual General Meeting

The Annual General Meeting of the Company this year will be held at Pewterers Hall, Oat Lane, London EC2V 7DE on Thursday 27 July 2017 at 12 noon, and we hope as many shareholders as possible will attend. As usual there will be a detailed portfolio review by our Lead Manager. A map of the venue is included in the Notice of Annual General Meeting on page 81 of the Report and Accounts.

Outlook

After such a strong year, it is reasonable to expect a period of consolidation in the near term. Many stocks are trading at record valuation levels, raising question marks over the potential for further upside, particularly at a time when US interest rates are forecast to continue to rise. The markets will be watching to see if tax reforms are deliverable by the Trump administration, together with how the debate over trade policy evolves. The implications of the general election result in relation to the Brexit process are as yet unclear, but heightened political uncertainty is unwelcome for markets. The Board remains of the belief that a broadly diversified, actively managed investment trust can still deliver good returns over the medium term from the attractive and dynamic global small cap asset class.

Anthony Townsend
Chairman
20 June 2017

Principal Risks and Future Prospects

The principal risks, both perceived and observed, together with 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 as well as the threats to security over the Company's assets may vary in significance from time to time. These principal risks are unchanged from those reported last year. 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: Errors, fraud or control failures at service providers or loss of data through business continuity failure or cyber attacks could damage reputation or investors' interests or result in loss. Recent high profile cyber incidents, affecting institutions globally, indicate an increasing risk of attack.

Increased in the year under review

Mitigation: The Board receives regular control reports from the Manager covering risk and compliance and IT security, including oversight of the Custodian and other third party service providers. The Board has access to F&C's Head of Business Risk and BMO's Group Information Security Officer, International 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 Audit and Management Engagement Committee has agreed to implement, in 2017, a new risk management framework, as provided by the Manager which aligns with its parent company, BMO. The framework is designed to enhance controls over and monitoring of the Company's risk management process. Satisfactory supervision of third party service providers was maintained throughout the year by F&C and included assurances over IT security and cyber threats. The Depositary reported to the Board quarterly on its oversight of custody of investments and cash and raised no matters of concern for the Company.

Investment Performance

Principal Risk: An inappropriate business 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 reports from the Manager at each Board meeting. The effectiveness of the marketing strategy is also reviewed regularly. The Manager structures its recruitment and remuneration packages in order to retain and enhance the quality of the management team. The Manager's appointment can be terminated at six months' notice.

Actions taken in the year: The Board has reviewed F&C's controls and risk management structure as part of its annual assessment. The Company's CULS debt was reduced in the year as a consequence of conversion of 4,205,641 CULS into ordinary shares (see note 14 on the Report and Accounts). Gearing provided by the CULS contributed positively to performance in the year, as described in the Chairman's Statement. The Lead Manager's review on pages 11 to 20 of the Report and Accounts explains the changes to the portfolio in the year.

Discount/premium to NAV

Principal Risk: A significant share price discount or premium to the Company's diluted 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 discount or premium to the diluted 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 Company's share price traded at a premium to diluted NAV for most of the year. Shares were issued regularly at a moderate premium to diluted NAV to satisfy demand from investors. Marketing campaigns throughout the year included advertising across financial and price comparison websites of the various investment wrapper products through which the Company's shares can be bought. The Board has proposed an above inflation increase in the full year dividend.

Five Year Horizon

Through a series of connected stress tests over the five years commencing 1 May 2017, the Board assessed the risks of:

• Potential illiquidity of the Company's portfolio

• The effects of any substantial future falls in investment values and income receipts on the ability to repay the CULS and potential breach of CULS covenants

• Significant falls in income on the ability to continue paying steadily-rising dividends and maintaining adequate reserves and the 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 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 4.1.12 of the Disclosure Guidance and Transparency Rules the Directors confirm, in respect of the annual report for the year ended 30 April 2017 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 it faces;

·      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

20 June 2017

Income Statement

for the year ended 30 April	2017			2016
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains on investments	-	162,084	162,084	-	16,820	16,820
Foreign exchange gains	47	1,050	1,097	17	217	234
Income	10,416	-	10,416	8,486	-	8,486
Management fee	(815)	(2,447)	(3,262)	(498)	(1,495)	(1,993)
Performance fee	-	-	-	-	(1,314)	(1,314)
Other expenses	(701)	(22)	(723)	(618)	(22)	(640)
Net return before finance costs and taxation	8,947	160,665	169,612	7,387	14,206	21,593
Finance costs	(442)	(1,327)	(1,769)	(435)	(1,306)	(1,741)
Net return on ordinary activities before taxation	8,505	159,338	167,843	6,952	12,900	19,852
Taxation on ordinary activities	(666)	-	(666)	(500)	-	(500)
Net return attributable to equity shareholders	7,839	159,338	167,177	6,452	12,900	19,352
Return per share (basic) - pence	13.99	284.39	298.38	11.86	23.72	35.58
Return per share (diluted) - pence	13.80	267.79	281.59	11.78	23.72	35.58

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 comprehensive income is not required as all income and expenses of the Company have been reflected in the above statement.

Statement of Changes in Equity

for the year ended 30 April 2017
	Called up	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 2016	13,853	141,046	16,158	1,307	368,185	12,643	553,192
Movements during the year ended 30 April 2017
Dividends paid	-	-	-	-	-	(6,577)	(6,577)
Shares issued	323	15,079	-	-	-	-	15,402
Conversion of Convertible Unsecured Loan Stock ("CULS")	108	4,118	-	(138)	-	-	4,088
Net return attributable to equity shareholders	-	-	-	-	159,338	7,839	167,177
Balance at 30 April 2017	14,284	160,243	16,158	1,169	527,523	13,905	733,282

for the year ended 30 April 2016
	Called up	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

 

Balance Sheet

at 30 April		2017		2016
	£'000s	£'000s	£'000s	£'000s
Fixed assets
Investments		761,269		581,611
Current assets
Debtors	4,462		2,529
Cash at bank and short-term deposits	10,061		12,249
	14,523		14,778
Creditors: amounts falling due within one year
Creditors	(7,813)		(4,787)
Net current assets		6,710		9,991
Total assets less current liabilities		767,979		591,602
Creditors: amounts falling due after more than one year
Convertible Unsecured Loan Stock ("CULS")		(34,697)		(38,410)
Net assets		733,282		553,192
Capital and reserves
Called up share capital		14,284		13,853
Share premium account	160,243		141,046
Capital redemption reserve	16,158		16,158
Equity component of CULS	1,169		1,307
Capital reserves	527,523		368,185
Revenue reserve	13,905		12,643
		718,998		539,339
Total shareholders' funds		733,282		553,192
Net asset value per share (basic) - pence		1,283.42		998.34
Net asset value per share (diluted) - pence		1,263.52		994.50

Statement of Cash Flows

for the year ended 30 April			2017	2016
			£'000s	£'000s
Cash inflows from operating activities			3,452	2,617
Investing activities
Purchases of  investments			(238,411)	(227,066)
Sales of investments			222,867	206,005
Other capital charges			(18)	(21)
Cash outflows from investing activities			(15,562)	(21,082)
Cash outflows before financing activities			(12,110)	(18,465)
Financing activities
Ordinary dividends paid			(6,577)	(5,342)
Proceeds from issue of shares			15,402	22,320
Cash inflows from financing activities			8,825	16,978
Net movement in cash and cash equivalents			(3,285)	(1,487)
Cash and cash equivalents at the beginning of the year			12,249	13,502
Effect of movement in foreign exchange			1,097	234
Cash and cash equivalents at the end of the year			10,061	12,249
Represented by:
Cash at bank and short-term deposits			10,061	12,249

 

Notes

1    Dividend

The Directors recommend a final dividend in respect of the year ended 30 April 2017 of 8.25p per share, payable on 11 August 2017 to all shareholders on the register at close of business on 14 July 2017. 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 Pewterers Hall, Oat Lane, London EC2V 7DE on 27 July 2017 at 12 noon.

4    Report and Accounts

This statement was approved by the Board on 20 June 2017. It is not the Company's statutory accounts. The statutory accounts for the financial year ended 30 April 2017 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 2016 also 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 2017 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

20 June 2017

 

END

 

 

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