Final Results

RNS Number : 1482X

F&C Global Smaller Companies PLC

20 June 2008

Date: 19 June 2008

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 2008

Summary of results

Attributable to equity shareholders	30 April 2008	30 April 2007	% Change

Share price	385.00p	473.25p	-18.6

Net asset value per share (debenture at nominal value)	428.23p	512.21p	-16.4

Net asset value per share (debenture at market value)	421.05p	505.14p	-16.6

	Year ended 30 April 2008	Year ended 30 April 2007

Revenue return per share	5.54p	4.75p	+16.6

Dividends per share	4.83p	4.69p	+3.0

Total expense ratio (based on average net assets)	0.77%	0.99%

Chairman's Statement

After a number of good years, this has been a more testing one for investors. It was dominated by the most significant financial crisis of recent times, which started with losses emerging from securities linked to the US mortgage market, and spread across other credit instruments then into equity markets. Share prices were also impacted by increasing evidence of an economic slowdown in the US. These issues served to reduce the appetite of investors to take investment risks and, against this background, it is perhaps unsurprising that smaller company shares were under particular pressure.

I am disappointed in my first year as Chairman to have to tell shareholders that, after four consecutive years of increases in your Company's share price and net asset value per share ('NAV'), we gave back some of these gains during this year. At the half-year stage the NAV on a total return basis fell 3.4%. Unfortunately there was a further drop in the value of the investment portfolio in the second half of the year.

Performance

The Company's benchmark is a blended index of the returns from the Hoare Govett UK Smaller Companies Index (40%) and the MSCI World ex UK Small Cap Index (60%) ('the Benchmark'), with the proportions approximately reflecting the balance of the portfolio between the UK and the rest of the world.

Over the past year, performance has been disappointing on both an absolute and relative basis. While both the first and final quarters produced above Benchmark returns, the portfolio suffered in the middle part of the year. For the twelve months the NAV on a total return basis, fell by 15.0%, while the share price dropped by 18.6%, compared to a fall in the Benchmark of 11.8%.

Underperformance means that the Company will not be paying a performance fee in respect of the year under review, and the Manager will have to recoup the shortfall of the past year, and move ahead of this, prior to being eligible for any further performance fees. The total expense ratio ('TER'), which measures the operating costs of the Company in relation to the net assets, fell to 0.77% as a consequence of the absence of a performance fee.

While 2007/8 was not a good year when considering performance, it is sensible to take a medium to long-term perspective. This is the first year in five that we have failed to beat the Benchmark and, over the last five years, the NAV total return of 150.6% far exceeds the Benchmark return of 111.1%. The share price has done even better, increasing by 184.6% including reinvested dividends, in this period.

Dividends

Whilst the capital performance of the portfolio was disappointing, it is pleasing that the investment portfolio once again generated a good level of income. The policy of focusing on companies which have the ability to pay progressive dividends means that the Board is in a position to recommend a final dividend of 3.25p per share. This is a 2.8% increase on last year's final dividend and, including the 1.58p interim dividend, results in a 3.0% rise on the year as a whole to 4.83p, the 38th consecutive year of underlying dividend growth for your Company. The dividend will be paid on 6 August 2008 to investors on the register on 4 July 2008.

Markets and regional performance

As already stated, this was a very turbulent year in the financial world. Problems in the US housing market, with rising numbers of home-owners unable to keep up with their mortgage payments, led to losses being recorded on securities backed by the cash-flows from these mortgages. The globalisation of markets meant that these losses spread widely around the world. This in turn led to concern about the financial position of a number of banks, a much lower willingness to lend within the banking sector and the so-called 'credit crunch'.

Not surprisingly, financial stocks have been under pressure. While banking is not an area to which the Company has much direct exposure, a tightening in the lending environment has impacted across a wide corporate spectrum.

In terms of the world economy, progressive weakening in the US has been the main feature of the year. Sharp drops in house prices, combined with rising energy and consumer prices, impacted confidence despite a series of interest rate cuts. There have been signs that growth is slowing elsewhere in the world, but it has not been all doom and gloom with the Far East regional economy remaining buoyant. Asia was the only part of the world where stock markets escaped falls.

As regards your Company's geographic portfolio returns, while performance was just ahead of the local smaller companies index in Europe and close to the benchmark used to measure performance in the UK, in the rest of the world we underperformed by a wider margin.

Change to investment approach for Japan

The Board has for some time been concerned about the relative returns achieved in Japan, where our portfolio has lagged the local benchmark in four of the last five years. Several changes of portfolio manager with responsibility for Japan within F&C in recent years have failed to improve matters. It was therefore decided that a small number of third party managed collective Japanese smaller company funds would be selected by the Manager to maintain exposure to Japan in common with the approach used by the Company for the rest of Asia, and the individual Japanese company shares would be sold. The Company will pay F&C a reduced fee of 0.25% on the value of the collective funds purchased. The Board believes that shareholders will benefit from the greater levels of dedicated Japanese smaller company expertise available in other fund management houses specialising in the region. The Manager has already commenced this reorganisation.

Currencies, asset allocation and gearing

Currency movements are important to a global trust as they affect the value of the portfolio which is measured in sterling terms to derive the NAV. The Board regularly reviews the foreign exchange outlook in the context of the strategy for asset allocation and borrowing.

In last year's report and accounts we highlighted how strong sterling had been in relation to other major currencies. This year, however, we have seen a dramatic reversal in the attitude towards sterling. In part this reflects the view that the UK is more vulnerable to the problems in the financial markets than other countries given the City's importance to the economy. There are signs that the UK housing market is under significant pressure and that consumer confidence is faltering. Sterling weakened over the year, particularly against the euro and yen, and this increased the sterling value of our international holdings.

While we were overweight in the UK in the first half of the year, the Manager's view that sterling was likely to be under pressure prompted a material reduction in our exposure in the second half. Other asset allocation changes of note were an increase in exposure to the US and a reduction in the Japanese market. Over the course of the year, asset allocation decisions failed to add value. One reason for this was a strong initial rise in Asian markets, where the Company was underweight early in the year.

The ability to use gearing to enhance returns is one of the fundamental attractions of the investment trust structure. However, gearing is only worthwhile when markets are rising and we therefore kept gearing low during the year. At the end of April 2008 effective gearing stood at 3.3% of net assets.

Change of sector

The Association of Investment Companies ('AIC') has historically included your Company in its global smaller companies sector. Following a number of other trusts changing their mandates, your Company became the only trust in this category.

The Board has been concerned about the limited coverage of the Company by investment trust analysts. Attention tends to be directed to areas where there are a number of investment trusts to compare and, whilst analysts are able to compare your Company with other UK smaller company trusts, we believe that the AIC global growth sector is a more suitable peer group as it includes a number of trusts exposed to mid and smaller company stocks around the globe. This sector is more widely followed as it includes some of the largest investment trusts in the market.

The Board therefore requested that your Company move sectors, and I am pleased that this request was approved and the Company was transferred into the AIC global growth sector on 30 April 2008. I would like to make it clear that this change of sector in no way alters the Company's objective. We will remain focused on investing in smaller companies aiming for long-term growth on a total return basis.

Discount and buybacks

Since the Tender Offer in December 2005, the Board has pursued an active policy of share buybacks with the aim being to keep the discount to NAV (including the debenture at market value but excluding current period income) close to 5% in normal market conditions.

Volatile market conditions in large parts of the year under review made it harder to manage the buyback strategy as the NAV itself became more volatile. Nevertheless, in line with the commitment to protect shareholders interests, the Company bought in 6.1% of its shares, adding 2.9p to the NAV in the process. At the end of the year, the discount on the targeted basis was 7.7%, somewhat higher than at the end of the prior year.

The Board believes that having a low discount target, combined with regular buyback activity, has kept the discount tighter than would otherwise have been the case, and significantly lower than most other smaller company investment trusts. While the discount has been wider than the 5% target, there is a delicate balance to be struck between maintaining a 'hard' maximum level of discount to protect shareholders wishing to sell and efficient management of the portfolio in the interests of longer term investors.

The Company's change of categorisation to the AIC's global growth sector mentioned earlier, should lead investors to look at the discount in the context of this new peer group, which would be advantageous since trusts in this sector have tended to be on lower discounts than smaller company trusts.

At the annual general meeting ('AGM'), we will again seek shareholder approval to buyback up to 14.99% of the issued share capital, with the option of holding shares bought back in treasury. As previously, it is likely that shares bought in will be immediately cancelled, which will enhance NAV. Any shares held in treasury would only be re-issued at a premium to NAV.

Marketing

Shareholder numbers rose by over 3,000 during the year, highlighting the success of the wide-ranging marketing effort undertaken during the year. F&C used direct mailings and online advertising in order to promote investment, as well as including details of the Company in its more general marketing activities. We intend to remain on the front foot in terms of marketing over the coming year and advertising and mailing campaigns, which some of you may have seen, have already been undertaken by the Manager since the year end.

VAT

As reported at the half-year stage, progress in legal proceedings has been made in relation to the issue of VAT on investment management fees previously paid by your Company. At this stage, while uncertainties remain over the precise amount and the timing of recovery of previously paid VAT, the Board believes that it is appropriate to recognise £1m as recoverable in the accounts. It is possible that a further less material amount could be recovered in due course, but prudence dictates that we wait for further developments.

Electronic communications

Arrangements have been made to allow shareholders to access the annual report via the website and, for those holding their shares directly on the Company's main share register, to lodge their proxy vote online. We intend that similar arrangements for investors through the various F&C savings plans will be implemented as soon as those plans permit.

F&C savings plan proportional voting

F&C has modified its arrangements under which investors in its savings plans vote at shareholder meetings, including the upcoming AGM to which I look forward to welcoming as many of you as can make it. It is intended that the nominee company, which holds 42% of the Company's share capital on behalf of such investors, will vote the shares held on behalf of plan holders who have not returned their voting directions in the same proportions as those who have. Plan holders do have the option of excluding their shares from the proportional voting arrangements if they wish.

Outlook

The impact of the tightening in the availability of credit is starting to impact across a wider spectrum, and it is not yet clear whether the series of interest rate cuts in the US will succeed in turning round the world's largest economy. Continuing increases in oil and other commodity prices are a major factor at present and unless reversed, these will constrain growth around the world. Another concern is that inflation is on the rise. In the UK context this threatens the Bank of England's ability to reduce interest rates to support growth; indeed some analysts are now anticipating rate rises here and elsewhere.

Smaller company shares do best when confidence is rising, and the extent to which they can bounce back in the financial new year will be driven by some of these macro issues. However, the fact remains that individual smaller companies can continue to do well even when times are tough, and it is the Manager's job to identify attractively placed and valued stocks no matter what the macroeconomic background.

Anthony Townsend

Chairman

19 June 2008

Principal Risks

The Company's assets consist mainly of listed securities and its principal risks are therefore market related. The key risks faced by the Company include; investment strategy, investment management resources, regulatory, operational and financial. These risks, which have not changed materially since the annual report for the year ended 30 April 2007, and the way in which they are managed, are described in more detail in the annual report for the year ended 30 April 2008. The report will be available on the website www.fandcglobalsmallers.com at the beginning of July 2008.

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge, in respect of the annual report for the year ended 30 April 2008, of which this statement of results is an extract:

the financial statements have been prepared in accordance with applicable UK 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 annual report includes a fair review of the important events that have occurred during the financial year and of the principal risks and uncertainties and their impact on the financial statements; and
the annual report includes details on related party transactions.

On behalf of the Board

Anthony Townsend

Chairman

19 June 2008

Income Statement

for the year ended 30 April	2008			2007
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s

(Losses)/gains on investments	-	(38,996)	(38,996)	-	21,112	21,112
Foreign exchange losses	(4)	(188)	(192)	(3)	(101)	(104)
Income	3,848	-	3,848	3,978	-	3,978
Management fee	(252)	(590)	(842)	(280)	(654)	(934)
Performance fee	-	-	-	-	(566)	(566)
Recoverable VAT	500	500	1,000	-	-	-
Other expenses	(807)	(35)	(842)	(714)	(54)	(768)
Net return before finance costs and taxation	3,285	(39,309)	(36,024)	2,981	19,737	22,718
Finance costs	(347)	(808)	(1,155)	(348)	(812)	(1,160)
Net return on ordinary activities before taxation	2,938	(40,117)	(37,179)	2,633	18,925	21,558
Taxation on ordinary activities	(428)	226	(202)	(363)	114	(249)
Net return attributable to equity shareholders	2,510	(39,891)	(37,381)	2,270	19,039	21,309

Return per share - pence	5.54	(88.09)	(82.55)	4.75	39.79	44.54

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 2008		Share	Capital			Total equity
	Share	premium	redemption	Capital	Revenue	shareholders'
	capital	account	reserve	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s

Balance at 30 April 2007	11,693	23,132	14,490	183,286	6,973	239,574
Movements during the year ended 30 April 2008
Dividends paid	-	-	-	-	(2,161)	(2,161)
Shares purchased and cancelled	(712)	-	712	(11,932)	-	(11,932)
Net return attributable to equity shareholders	-	-	-	(39,891)	2,510	(37,381)
Balance at 30 April 2008	10,981	23,132	15,202	131,463	7,322	188,100

for the year ended 30 April 2007		Share	Capital			Total equity
	Share	premium	redemption	Capital	Revenue	shareholders'
	capital	account	reserve	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s

Balance at 30 April 2006	12,088	23,132	14,095	170,960	7,377	227,652
Movements during the year ended 30 April 2007
Dividends paid	-	-	-	-	(2,674)	(2,674)
Shares purchased and cancelled	(395)	-	395	(6,713)	-	(6,713)
Net return attributable to equity shareholders	-	-	-	19,039	2,270	21,309
Balance at 30 April 2007	11,693	23,132	14,490	183,286	6,973	239,574

Balance Sheet

at 30 April		2008		2007
	£'000s	£'000s	£'000s	£'000s
Fixed assets
Investments		194,453		246,970
Current assets
Debtors	2,849		3,050
Taxation recoverable	21		19
Cash at bank and short-term deposits	5,822		5,548
	8,692		8,617

Creditors: amounts falling due within one year
Other	(5,045)		(6,013)
	(5,045)		(6,013)
Net current assets		3,647		2,604
Total assets less current liabilities		198,100		249,574
Creditors: amounts falling due after more than one year
Debenture		(10,000)		(10,000)
Net assets		188,100		239,574
Capital and reserves
Share capital		10,981		11,693
Share premium account	23,132		23,132
Capital redemption reserve	15,202		14,490
Capital reserves	131,463		183,286
Revenue reserve	7,322		6,973
		177,119		227,881
Total shareholders' funds - equity		188,100		239,574

Net asset value per share - pence		428.23		512.21

Cash Flow Statement

for the year ended 30 April		2008		2007
	£'000s	£'000s	£'000s	£'000s
Operating activities
Investment income received	3,171		3,215
Interest received	258		215
Stock lending fees received	37		86
Underwriting commission received	3		-
Management fee paid to the management company	(860)		(899)
Performance fee 2007 paid to the management company	(524)		-
Directors' fees paid	(134)		(119)
Other payments	(705)		(344)
Net cash inflow from operating activities		1,246		2,154
Servicing of finance
Interest paid	(1,154)		(1,168)
Cash outflow from servicing of finance		(1,154)		(1,168)
Financial investment
Purchases of equities and other investments	(98,138)		(99,982)
Sales of equities and other investments	111,749		114,532
Other capital charges and credits	(35)		(66)
Net cash inflow from financial investment		13,576		14,484
Equity dividends paid		(2,161)		(2,674)
Net cash inflow before use of liquid resources and financing		11,507		12,796
Management of liquid resources
Decrease/(increase) in short-term deposits		2,000		(1,000)
Financing
Loans repaid	-		(3,000)
Shares purchased and cancelled	(11,045)		(6,595)
Cash outflow from financing		(11,045)		(9,595)
Increase in cash		2,462		2,201

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 £2,510,000 profit (2007: £2,270,000 profit).

Capital return

The capital return per share is based on the net capital return attributable to equity shareholders of £39,891,000 loss (2007: £19,039,000 profit).

Weighted average ordinary shares in issue

Both the revenue and capital returns per share are based on a weighted average of 45,282,575 ordinary shares in issue during the year (2007: 47,845,186).

2 Dividend

The Directors recommend a final dividend in respect of the year ended 30 April 2008 of 3.25p per share, payable on 6 August 2008 to all shareholders on the register at close of business on 4 July 2008. The recommended final dividend is subject to approval by shareholders at the annual general meeting.

3 Recoverable VAT

			2008			2007
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Recoverable in respect of management fees	500	458	958	-	-	-
Recoverable in respect of performance fees	-	42	42	-	-	-
	500	500	1,000	-	-	-

The Association of Investment Companies and JPMorgan Claverhouse Investment Trust lodged a joint appeal in 2004 for the payment of management and performance fees ('fees') by investment trusts to be treated as exempt from VAT. In June 2007 the European Court of Justice ('ECJ') found in favour of the appellants, declaring that investment trusts should be treated as special investment funds and thus exempted from VAT on fees and HM Revenue & Customs ('HMRC') later announced it would not appeal the decision. As a consequence no VAT has been paid by the Company on management and performance fees since September 2007. A separate decision by the House of Lords on the Condé Nast case in January 2008, ruling that the imposition of a three year capping by HMRC was invalid, was also not contested by HMRC.

The amounts recoverable by the Manager on behalf of the Company, and the timing of the recoveries, are dependent upon negotiations between the Manager and HMRC, on the one hand, and between the Manager and the Company on the other. Taking into account HMRC's acceptance of the ECJ and Condé Nast decisions, the Directors believe that the negotiations with the Manager have reached a position of clarity such that the Company is virtually certain of recovering at least £1m of VAT via the Manager in respect of the relevant periods. This sum has been recognised as a separate item within the Income Statement in the current year. It has been allocated between revenue and capital returns in accordance with the accounting policies applicable to allocation of fees at the time the VAT was suffered.

The Directors are unable to state with any degree of certainty the extent to which they believe amounts, including any related interest receipts, in excess of the £1m will be recovered via the Manager.

4 Annual general meeting

The annual general meeting will be held at the Chartered Accountants' Hall, One Moorgate Place, London EC2 on 31 July 2008 at 12 noon.

5 Report and accounts

The report and accounts for the year ended 30 April 2008 will be posted to shareholders and made available on the website www.fandcglobalsmallers.com at the beginning of July 2008. Copies may also be obtained from the Company's registered office, Exchange House, Primrose Street, London EC2A 2NY.