Annual Financial Report
ABERDEEN SMALLER COMPANIES HIGH INCOME TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2012
1. CHAIRMAN'S STATEMENT
Overview
2012 has proven to be an interesting year for smaller companies and the FTSE Small Cap (ex IT) which produced a total return of 36.3%, one of its strongest performances for many years and sharply higher than the return generated by the FTSE All Share Index of 12.3%.
Performance
I am pleased to report that the Trust delivered a Net Asset Value (NAV) total return for the full year of 32.2%. There was a small underperformance of the equity portfolio versus the equity index and this is very much what we would expect in such a rapidly rising stock market, given the Manager's quality focused bias. Over the longer term, this quality bias has increased the stability of the portfolio in more difficult market conditions and should help enhance dividend growth. It is also good to see the share price rising 50.7%. The Board have been proactive throughout the year in discussions with the Manager and the Trust's broker to improve awareness and understanding of the Trust through marketing and contact with shareholders and it is pleasing to see that the discount narrowed to 9.8% as at 31 December 2012 and that this trend continued into the new financial year.
In putting a little bit of colour to the year's performance, it is worth reminding you that, at the time of writing the interim report, markets had bounced and the Trust had returned 10.8% (on an NAV basis). We talked about the unusual market circumstances with equity and bond markets both performing at the same time. Investors continued to look for safe haven assets whilst also allocating to equity, which highlighted how polarised market opinion had become. Equity markets also faced the reality of an increasing number of profit warnings, which confirmed how fragile earnings were, although it is worth pointing out that this was at the more cyclical end of the market. There was a shift in sentiment in the second half of the year with a pick-up in investor appetite for risk which had a disproportionate benefit for smaller companies. The question which is difficult for us to answer is what specifically drove this change? Commentators have suggested that investor sentiment improved, following the statements from Mr Draghi on the Eurozone crisis while others pointed to optimism about a short-term resolution of the fiscal cliff in the U.S. helping, in particular, to drive the strong fourth quarter returns.
What we do know from market flows is that there has been a shift into equities. Government and corporate bonds are looking expensive and the strong rally in high yield and subordinated financial debt highlights the increased level of risk appetite and desire for yield. Whilst equities have had a good run, smaller companies, in particular, do not look that expensive relative to other asset classes.
Objectives
Our Trust aims to deliver a yield higher than that generally available in the smaller company equity market and also to increase dividend payments over time. The Manager achieves this dual goal in two main ways; firstly, by generating a slightly higher yield from the underlying equity portfolio and secondly, by borrowing money, currently roughly 20% of net assets, and using most of the proceeds to buy a variety of types of bonds and preference shares which offer a higher yield than equities but without dividend growth prospects.
The Board
The governance of the Company is a key matter for the Board and we have reviewed a wide range of issues at each Board meeting in a systematic way: more details are provided in the Statement of Corporate Governance. This year our annual strategy meeting focused on reviewing gearing levels, the revenue structure of the portfolio and how it can be best managed to suit our shareholder requirements. We considered the implications of RDR and how we should position our Trust to benefit from the changes in how IFAs interact with their clients and reviewed our marketing strategy. We welcomed the Manager's increased focus on the use of digital media.
Gearing
The Trust has a £10 million fully drawn loan facility with a variable rate of interest and the Board regularly review whether this remains the optimum way to secure our funding. Whilst the rate we are currently paying is attractive, now we have gearing down to 20% (31 December 2011 - 30%) we are in a good position should we see an opportunity to improve our terms or put in place fixed rate funding.
Dividend
The Board raised the fourth interim dividend to 1.55p, having kept the first three flat at 1.5p per share. This increase reflects the Board's confidence in, both, the strength of the dividend growing capacity of the companies in which we invest and the Trust's significant revenue reserves. The bond portfolio is at the shortest end of its normal range which helps protect it should there be a rise in bond yields from their current extraordinarily low levels. Portfolio decisions, taken to protect the portfolio in these uncertain times, means that the underlying yield of the portfolio, relative to its potential, is at the low end of its range. An increase in confidence in the economic outlook would offer the opportunity to raise the underlying portfolio yield.
Our Trust has built up revenue reserves over many years to protect shareholders against difficult times. The current abnormally low level of yields offered across all financial products, including cash, suggests that, for a yield investor, these difficult times are now. Therefore, the Board has decided to use a small amount of these revenue reserves to make an increase in the dividend until market conditions change and the underlying portfolio can safely generate a higher level of immediate revenue itself. It is too early to say how 2013 will evolve, especially as companies remain cautious in raising dividends ahead of earnings growth. The Board is encouraged by the Manager's comments about the dividend cover across the portfolio and the balance sheet strength of the underlying companies.
Outlook
The Board believes the portfolio is well structured to cope with the medium and longer term outlook and that the Trust continues to offer an attractive yield opportunity for our shareholders.
2. MANAGER'S REVIEW
Background
As Manager, it is always an interesting exercise to look back over the year and review how we have performed versus our expectations. Whilst the strong absolute returns delivered by the Trust are very pleasing, it is worth noting that performance is an output of the process and the work we have done to put the right building blocks in place over many years. We haven't done anything different this year to last, with our continued focus on buying the best quality companies to protect the downside, whilst also allowing them to participate in the upside. Smaller companies should be able to grow in most environments if they have the right fundamental characteristics and this year has proven that good quality companies can and will prosper despite the weak backdrop.
It is fair to say that we have been cautious about the outlook for most of the year and reading back over the conversations we were having with companies, this felt like the right stance to take. The market was not reading from the same script and despite the fairly lacklustre earnings performance, with risk appetite increasing, the FTSE Small Cap (ex IT) index returned 36.3% on a total return basis.
It is worth distinguishing between quality and cyclical or indebted companies when talking about the performance of the index. For example, not holding Enterprise Inns was the largest constituent of underperformance for the Trust after returning 266% over the year. You can also add Thomas Cook and Pace to the list of leveraged or cyclical plays which have hurt performance relative to the index. What this highlights is how extreme the risk trade has become as investors seek better returns. This is not an equity only story with high yield corporate and subordinated financial debt also having a strong rally, which similarly highlights that risk is being sought across other asset classes.
Performance
The Trust delivered a strong absolute return with gross assets rising 26.3% and net assets rising 32.2% on a total return basis (see table opposite for analysis). The asset split of the Trust does make it difficult to beat the index but this split is a function of the extra dividend yield that we deliver to our shareholders, which we know is important in a period where interest rates are low and yield is tough to find. Whilst we did lag the very strong returns of the index against our peer group (smaller companies investment trusts), we delivered top quartile performance which highlights how good a year the Trust had on a relative basis.
The equity portfolio returned 30.6% and benefitted from a strong performance from the Trust's more internationally focused companies, along with a rebound in a couple of names that had a tough 2011. Turning to the latter first, media group Wilmington have repositioned the group to a digital subscription based model, whilst also cutting costs at their legacy legal CPD business. With these restructuring costs dropping away and the delivery of subscriber growth, we have seen a sharp rebound in the share price. Wilmington also maintained their dividend throughout this transition. The second turnaround story is Mothercare which has been one of our top performers over the year. Mothercare is a good reminder of the Aberdeen process in action and the long-term buy and hold strategy that we favour. Life won't always be easy for companies, especially at the smaller end of the market, so buying a company with a strong balance sheet buys us, and in this case the Chairman and new management team, time to review and reposition the group. It is therefore nice to report that following the strong rebound this year we have trimmed our position.
|
|
Return (%) |
Weighting (%) |
Total return (%) |
|
Equities |
30.6 |
76.9 |
|
|
Convertibles |
5.7 |
2.3 |
|
|
Fixed interest |
13.6 |
10.7 |
|
|
Preference stock |
24.6 |
6.2 |
|
|
Cash |
0.0 |
3.9 |
|
|
Gross assets |
|
|
26.3 |
|
Gearing |
|
|
8.1 |
|
Expenses |
|
|
(2.6) |
|
Adjustments for bid pricing and technical differences |
|
|
0.4 |
|
Net assets |
|
|
32.2 |
Table: Analysis of total return performance
Oxford Instruments, Victrex, and Elementis were three such companies that were the beneficiary of strong overseas growth. Victrex is the leading global manufacturer of PEEK polymer (polyetheretherketone), which is a high performance thermoplastic. The group comprises two divisions: Victrex Polymer Solutions, that focuses on industrial, transport and electronics markets and Invibio Biomaterial Solutions, that concentrates on providing specialist solutions for medical device manufacturers. PEEK's advantages include high temperature and electrical performance, wear and hydrolysis resistance, mechanical stability and low flammability. The structural growth story is light weighting, which has seen Boeing replace a large number of metal parts with PEEK. Boeing's new Dreamliner has nearly a tonne of PEEK in its design and is one of many examples where Victrex are gaining certification of their product.
Performance was also aided by the takeover of Umeco by Cytec. This was the only takeover received in the year but there is also an on-going share merger taking place between AG Barr and Britvic. We have held AG Barr for a number of years and with two complementary organisations potentially being put together with a pre-announced level of cost synergies, we have seen a strong run in AG Barr's share price.
In portfolio activity we exited Halfords and Hornby during the early half of the year on concerns over the business model. Following a number of meetings with management, we became less comfortable with the strategy and market outlook. We also added two new holdings to the portfolio. The first of these was Domino Printing, who are the market leader in continuous inkjet and laser printing and occupy a top three position in their other key technologies. We also introduced Devro to the Trust, after a number of recent meetings with management. Devro is the world's leading supplier of collagen casings for food, used by customers in the production of a wide variety of sausages and other meat products. Devro is a global manufacturer with a strong market position and a solution based product. Given our caution over the outlook, we did take the opportunity in the latter part of the year to reduce a number of the Trust's top performers, including Menzies (John), Weir Group, Melrose, Restaurant Group and Bellway. The reductions were not just a reflection of performance but, for some, also the contraction in the yields.
Bonds
The bond portfolio also had a very good year returning 13.6% but the stand out performance came from the preference shares which returned 24.6%. This was mainly due to the rebound in the General Accident and Aviva holdings on the back of work undertaken by the holding company to improve solvency and earnings. At the half year, bond markets were experiencing a lot of volatility on the back of the Eurozone crisis. With Spain downgraded by Moody's, our holding in Telefonica, the incumbent telecom operator, weakened. We saw an opportunity with the work the company was doing to strengthen their balance sheet, whilst also disposing of non-core assets to add to our position. This worked in our favour, as we saw a strong rebound in the second half of the year. Following a strong performance, we also exited Lloyds TSB Bank 6.375% 2014 due to a tightening of the yield. Given how tight corporate yields are trading against sovereign bonds, we saw this as an opportunity to allocate to higher yielding equity. We remain of the belief that bonds are looking expensive and finding anything that is trading below par these days, without looking at financials, is difficult. The running yield of the Trust does remain attractive but we are under no illusion that sovereign yields will move out at some point and that we will see some capital loss across the bond portfolio. That said, we feel comfortable with where we are positioned and will look to be opportunistic around trading out of bonds we feel are overvalued.
Dividend
Management teams have remained cautious in raising dividends. Looking at market expectations, which can be wide ranging, dividend growth for 2013 is forecast to be high single digit. This is broadly what we have seen from companies in 2012 and we would expect this to be similar when companies release their full year updates.
Outlook
After a very strong year and a rerating of companies across the small cap market the earnings season has provided a period to take stock of company fundamentals. To date, the full year earnings season has been pretty much as expected, with most of the Trust's holdings delivering inline results. The focus of our attention has therefore been on the outlook statements, which to date have been cautious which is not a huge surprise, given the lack of visibility management teams have at this point in the year. As long term investors, we feel in a good position to look through some of the short-term noise that surround the earnings and look at the fundamental strengths of the companies we own with a three to five year time horizon. By taking this position, we see a number of opportunities to add to holdings and also to build the weights in some of the Trust's newer positions. Whilst we will do this with a degree of caution around valuations, we are still confident about the medium term prospects for smaller companies.
3. RESULTS & DIVIDENDS
Financial Highlights
|
|
31 December 2012 |
31 December 2011 |
% change |
|
Total investments |
£45,694,000 |
£38,260,000 |
+19.4 |
|
Shareholders' funds |
£37,466,000 |
£29,525,000 |
+26.9 |
|
Market capitalisation |
£33,496,000 |
£23,381,000 |
+43.3 |
|
Net asset value per share |
169.45p |
133.54p |
+26.9 |
|
Share price (mid market) |
151.50p |
105.75p |
+43.3 |
|
Discount to adjusted NAV{A} |
9.8% |
19.9% |
|
|
Net gearing{B} |
22.4% |
30.3% |
|
|
Ongoing charges ratio{C} |
1.9% |
1.9% |
|
|
|
|
|
|
|
Dividends and earnings |
|
|
|
|
Revenue return per share{D} |
5.69p |
6.01p |
-5.4 |
|
Dividends per share{E} |
6.05p |
6.00p |
+0.8 |
|
Dividend cover |
0.94 |
1.00 |
|
|
Revenue reserves{F} |
£1,927,000 |
£1,997,000 |
|
|
|
|||
|
{A} Based on IFRS NAV above reduced by dividend adjustment of 1.55p (2011 - 1.50p). |
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|
{B} Calculated in accordance with AIC guidance "Gearing Disclosures post RDR" |
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|
{C} The ongoing charges ratio has been calculated in accordance with guidance issued by the AIC as the total of investment management fees (excluding performance fees) and administrative expenses divided by the average cum income net asset value throughout the year. The figure for 2011 has been restated. |
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|
{D} Measures the revenue earnings for the year divided by the weighted average number of Ordinary shares in issue (see Statement of Comprehensive Income). |
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|
{E} The figures for dividends per share reflect the years in which they were earned (see note 7). |
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|
{F} The revenue reserve figure does not take account of the fourth interim dividend amounting to £343,000 (2011 - £332,000). |
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|
|
1 year |
3 year |
5 year |
|
|
% return |
% return |
% return |
|
Net asset value |
+32.2 |
+68.3 |
+3.4 |
|
Share price (based on mid price) |
+50.7 |
+86.7 |
+23.3 |
|
FTSE SmallCap Index (excluding Investment Companies) |
+36.3 |
+35.2 |
+10.2 |
|
FTSE All-Share Index |
+12.3 |
+24.2 |
+13.2 |
|
|
|||
|
All figures are for total return and assume re-investment of net dividends excluding transaction costs. |
|||
Dividends
|
|
Rate per share |
xd date |
Record date |
Payment date |
|
First interim dividend |
1.50p |
4 April 2012 |
10 April 2012 |
27 April 2012 |
|
Second interim dividend |
1.50p |
4 July 2012 |
6 July 2012 |
27 July 2012 |
|
Third interim dividend |
1.50p |
3 October 2012 |
5 October 2012 |
26 October 2012 |
|
Fourth interim dividend |
1.55p |
9 January 2013 |
11 January 2013 |
31 January 2013 |
|
|
___________ |
|
|
|
|
2012 |
6.05p |
|
|
|
|
|
___________ |
|
|
|
|
First interim dividend |
1.50p |
6 April 2011 |
8 April 2011 |
28 April 2011 |
|
Second interim dividend |
1.50p |
6 July 2011 |
8 July 2011 |
29 July 2011 |
|
Third interim dividend |
1.50p |
12 October 2011 |
14 October 2011 |
31 October 2011 |
|
Fourth interim dividend |
1.50p |
4 January 2012 |
6 January 2012 |
31 January 2012 |
|
|
___________ |
|
|
|
|
2011 |
6.00p |
|
|
|
|
|
___________ |
|
|
|
4. PORTFOLIO INVESTMENTS
Investment Portfolio - Ordinary Shares
|
|
Valuation |
Total |
Valuation |
|
|
2012 |
portfolio |
2011 |
|
Company |
£'000 |
% |
£'000 |
|
Wilmington |
1,581 |
3.5 |
778 |
|
Fenner |
1,514 |
3.3 |
1,375 |
|
RPC Group |
1,407 |
3.1 |
1,224 |
|
Berendsen |
1,312 |
2.9 |
709 |
|
Oxford Instruments |
1,309 |
2.9 |
1,083 |
|
Euromoney Institutional Investor |
1,288 |
2.8 |
925 |
|
Dechra Pharmaceuticals |
1,251 |
2.7 |
1,090 |
|
XP Power |
1,201 |
2.6 |
972 |
|
Bellway |
1,148 |
2.5 |
983 |
|
TT Electronics |
1,130 |
2.5 |
492 |
|
Ten largest investments |
13,141 |
28.8 |
|
|
Restaurant Group |
1,128 |
2.5 |
760 |
|
Interserve |
1,122 |
2.5 |
750 |
|
Rathbone Brothers |
1,100 |
2.4 |
647 |
|
Victrex |
1,098 |
2.4 |
743 |
|
Helical Bar |
1,071 |
2.3 |
867 |
|
BBA Aviation |
1,026 |
2.2 |
449 |
|
Morgan Sindall |
967 |
2.1 |
997 |
|
Chesnara |
952 |
2.1 |
735 |
|
Elementis |
939 |
2.1 |
554 |
|
Savills |
926 |
2.0 |
648 |
|
Twenty largest investments |
23,470 |
51.4 |
|
|
Fuller Smith & Turner 'A' |
894 |
1.9 |
844 |
|
Mothercare |
850 |
1.9 |
527 |
|
Aveva Group |
832 |
1.8 |
546 |
|
Dignity |
804 |
1.7 |
605 |
|
McBride |
761 |
1.7 |
640 |
|
Fisher James |
753 |
1.6 |
473 |
|
AG Barr |
750 |
1.6 |
613 |
|
Weir Group |
714 |
1.6 |
1,229 |
|
Numis Corporation |
674 |
1.5 |
412 |
|
Keller Group |
673 |
1.5 |
341 |
|
Thirty largest investments |
31,175 |
68.2 |
|
|
Greggs |
645 |
1.4 |
714 |
|
Robert Walters |
643 |
1.4 |
540 |
|
Intermediate Capital Group |
626 |
1.4 |
453 |
|
Bloomsbury Publishing |
619 |
1.4 |
588 |
|
Huntsworth |
531 |
1.2 |
341 |
|
Domino Printing |
525 |
1.1 |
- |
|
Devro |
494 |
1.1 |
- |
|
Menzies (John) |
466 |
1.0 |
652 |
|
Melrose |
414 |
0.9 |
840 |
|
Majestic Wine |
340 |
0.7 |
- |
|
Forty largest investments |
36,478 |
79.8 |
|
|
Chemring Group |
220 |
0.5 |
708 |
|
Total Ordinary shares |
36,698 |
80.3 |
|
Investment Portfolio - Other Investments
|
|
Valuation |
Total |
Valuation |
|
|
2012 |
portfolio |
2011 |
|
Company |
£'000 |
% |
£'000 |
|
Convertibles |
|
|
|
|
Balfour Beatty Cum Conv 10.75% |
1,098 |
2.4 |
1,116 |
|
|
___________ |
___________ |
___________ |
|
Total Convertibles |
1,098 |
2.4 |
|
|
|
___________ |
___________ |
___________ |
|
Corporate Bonds |
|
|
|
|
Society of Lloyds 6.875% 2025 |
981 |
2.1 |
918 |
|
Telecom Italia 5.625% 2015{A} |
686 |
1.5 |
620 |
|
Stagecoach Group 5.75% 2016 |
666 |
1.5 |
635 |
|
National Westminster 5.98% 2049 |
618 |
1.4 |
637 |
|
Telefonica Emisiones 5.375% 2018 |
598 |
1.3 |
556 |
|
Wales & West Utilities Finance 6.75% 2036 |
584 |
1.3 |
558 |
|
Telefonica Emisiones 5.289% 2022 |
451 |
1.0 |
- |
|
Anglian Water 6.75% 2024 |
368 |
0.8 |
375 |
|
|
___________ |
___________ |
___________ |
|
Total Corporate Bonds |
4,952 |
10.9 |
|
|
|
___________ |
___________ |
___________ |
|
Preference shares |
|
|
|
|
Aviva 8.75% |
1,141 |
2.5 |
989 |
|
General Accident 8.875% |
1,100 |
2.4 |
917 |
|
Ecclesiastical Insurance 8.625% |
705 |
1.5 |
625 |
|
|
___________ |
___________ |
___________ |
|
Total Preference shares |
2,946 |
6.4 |
|
|
|
___________ |
___________ |
___________ |
|
Total Other Investments |
8,996 |
19.7 |
|
|
|
___________ |
___________ |
___________ |
|
Total investments |
45,694 |
100.0 |
|
|
|
___________ |
___________ |
___________ |
|
|
|
|
|
|
{A}All investments are listed on the London Stock Exchange (sterling based), except those marked, which are listed on overseas exchanges based in sterling. |
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|
Distribution of Assets and Liabilities |
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|
|
||||||||
|
|
Valuation at |
Movement during the year |
Valuation at |
|||||
|
|
31 December |
|
|
|
Gains/ |
31 December |
||
|
|
2011 |
Purchases |
Sales |
Other{A} |
(losses) |
2012 |
||
|
|
£'000 |
% |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
% |
|
Listed investments |
|
|
|
|
|
|
|
|
|
Ordinary shares |
29,656 |
100.5 |
5,282 |
(5,829) |
- |
7,589 |
36,698 |
98.0 |
|
Convertibles |
1,116 |
3.8 |
- |
- |
- |
(18) |
1,098 |
2.9 |
|
Corporate bonds |
4,957 |
16.8 |
387 |
(722) |
(40) |
370 |
4,952 |
13.2 |
|
Other fixed interest |
2,531 |
8.6 |
- |
- |
- |
415 |
2,946 |
7.9 |
|
|
________ |
________ |
________ |
________ |
________ |
________ |
________ |
________ |
|
|
38,260 |
129.7 |
5,669 |
(6,551) |
(40) |
8,356 |
45,694 |
122.0 |
|
|
________ |
________ |
________ |
________ |
________ |
________ |
________ |
________ |
|
Current assets |
1,429 |
4.8 |
|
|
|
|
1,965 |
5.2 |
|
Current liabilities |
(164) |
(0.6) |
|
|
|
|
(193) |
(0.5) |
|
Long-term loan |
(10,000) |
(33.9) |
|
|
|
|
(10,000) |
(26.7) |
|
|
________ |
________ |
|
|
|
|
________ |
________ |
|
Net assets |
29,525 |
100.0 |
|
|
|
|
37,466 |
100.0 |
|
|
________ |
________ |
|
|
|
|
________ |
________ |
|
Net asset value per Ordinary share |
133.5p |
|
|
|
|
|
169.5p |
|
|
|
________ |
|
|
|
|
|
________ |
|
|
|
|
|
|
|
|
|
|
|
|
{A} Amortisation adjustment of £40,000 (see note 2). |
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5. BUSINESS REVIEW
Status of the Company
The Company, which was incorporated in 1992, is registered as a public limited company and is an investment company within the meaning of Section 833 of the Companies Act 2006. The Company's registration number is SC137448.
The Company has received approval of investment trust status from HM Revenue & Customs for all accounting periods up to and including 31 December 2011. The Company has subsequently continued to conduct its affairs for the year ended 31 December 2012 so as to be able to obtain approval as an investment trust in accordance with Chapter 4 of Part 24 of the Corporation Tax Act 2010 and the Investment Trust (Approved Company) (Tax) Regulations 2011 for that year, although approval for the period would be subject to review were there to be any enquiry under the Corporation Tax Self Assessment regime.
The Company has conducted its affairs so as to satisfy the requirements as a qualifying security for Individual Savings Accounts. The Directors intend that the Company will continue to conduct its affairs in this manner.
Activities
The Company is an investment trust. Its subsidiary undertaking, Shirescot Securities Limited, which was an investment dealing company, was dissolved on 6 January 2012.
Review of Performance and Outlook
An outline of the Company's performance, market background, investment activity and portfolio strategy during the year under review, as well as the investment outlook, is provided in the Chairman's Statement and Manager's Review. A comprehensive analysis of the portfolio is provided in the portfolio of investments and distribution of assets and liabilities.
Monitoring performance
Key performance indicators ("KPIs") are shown in the financial information. These KPIs include the net asset value total return, share price total return, and the premium/(discount) at which the shares trade.
The Board also considers the marketing and promotion of the Company, including effective communications with shareholders. The future strategic direction and development of the Company is discussed frequently as part of Board meeting agendas.
Principal Risks and Uncertainties
The principal risks facing the Company relate to the Company's investment activities and include market risk (comprising interest rate risk and other price risk), liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 15 to the financial statements.
Investment Policy
The Company invests in equities, bonds and preference shares. Investment in corporate bonds and preference shares is primarily to enhance the income generation of the Company. The investment risk within the portfolio is managed by the diversification of the overall portfolio and by the Manager adhering to various guidelines set by the Board. The Board regularly reviews the guidelines to ensure they remain appropriate and Board approval is required before any exceptions are permitted.
Gearing is used with the intention of enhancing long-term returns. The Company's gearing is currently in the form of bank borrowing. The bank borrowing comprises a £10 million three year revolving credit facility which commenced on 23 July 2010 and which was fully drawn at the period end.
The risk of the gearing is also managed by investing in corporate bonds, the vast majority of which are investment grade and preference shares of large financial institutions.
Investment Risk
The Directors are responsible for determining the investment policy and the investment objectives of the Company, while the day-to-day management of the Company's assets has been delegated to the Manager. The Manager invests in equities, bonds and preference shares, following their investment processes.
Equity Investment Process
The equity investment process is active and bottom-up, based on disciplined evaluation of companies through direct visits by fund managers. Stock selection is the major source of added value, concentrating on quality first, then value. Top-down investment factors are secondary in the equity portfolio construction, with diversification rather than formal controls guiding stock and sector weights. However, the exposure to equities is limited by investment guidelines drawn up by the Board in conjunction with the Manager.
These include:
· Maximum equity gearing of 110% of Net Asset Value
· Maximum 5% of investee companies' ordinary shares
· Maximum 5% of the Company's total assets invested in the securities of one company
· No unquoted investments
Fixed Income Investment Process
The fixed income investment process is an active investment style which identifies value between individual securities. This is achieved by combining bottom-up security selection with a top-down investment approach. Investments in corporate bonds and preference shares are also managed by investment guidelines drawn up by the Board in conjunction with the Manager which include:
· Fixed income securities not to exceed 60% of shareholders' funds
· No holding in a single fixed interest security to exceed 5% of the total bond issue of the investee company
· Maximum acquisition cost of an investment grade bond - £1 million
· Maximum acquisition cost of non-investment grade bond - £500,000
ABERDEEN SMALLER COMPANIES HIGH INCOME TRUSTPLC
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
|
|
|
Year ended |
Year ended |
||||
|
|
|
31 December 2012 |
31 December 2011 |
||||
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
Notes |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
Gains and losses on investments |
|
|
|
|
|
|
|
|
Gains/(losses) on investments at fair value |
9 |
- |
8,356 |
8,356 |
- |
(4,654) |
(4,654) |
|
|
|
|
|
|
|
|
|
|
Revenue |
2 |
|
|
|
|
|
|
|
Dividend income |
|
1,486 |
- |
1,486 |
1,522 |
- |
1,522 |
|
Interest income from investments |
|
392 |
(40) |
352 |
410 |
(65) |
345 |
|
Other income |
|
2 |
- |
2 |
4 |
- |
4 |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
|
|
1,880 |
8,316 |
10,196 |
1,936 |
(4,719) |
(2,783) |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
Investment management fee |
3 |
(164) |
(164) |
(328) |
(162) |
(162) |
(324) |
|
Other administrative expenses |
4 |
(318) |
- |
(318) |
(304) |
- |
(304) |
|
Finance costs of borrowings |
5 |
(141) |
(141) |
(282) |
(141) |
(141) |
(282) |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
Profit/(loss) before tax |
|
1,257 |
8,011 |
9,268 |
1,329 |
(5,022) |
(3,693) |
|
Tax expense |
6 |
- |
- |
- |
- |
- |
- |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
Profit/(loss) attributable to equity holders |
8 |
1,257 |
8,011 |
9,268 |
1,329 |
(5,022) |
(3,693) |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
|
|
Earnings/(loss) per Ordinary share (pence) |
8 |
5.69 |
36.23 |
41.92 |
6.01 |
(22.71) |
(16.70) |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
|
|
The total column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRS. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies. All items in the above statement derive from continuing operations. |
|||||||
|
The Company does not have any income or expense that is not included in profit for the year, and therefore the "Profit/(loss) attributable to equity holders " is also the "Total comprehensive income attributable to equity holders" as defined in IAS 1 (revised). |
|||||||
|
The prior year's figures include the financial statements of Shirescot Securities Limited (note10). |
|||||||
|
All of the profit and comprehensive income are attributable to the equity holders of the Company. |
|||||||
|
All items in the above statement derive from continuing operations. |
|||||||
|
The accompanying notes are an integral part of these financial statements. |
|||||||
ABERDEEN SMALLER COMPANIES HIGH INCOME TRUST PLC
Balance Sheets
|
|
|
As at |
As at |
|
|
|
31 December |
31 December |
|
|
|
2012 |
2011 |
|
|
Notes |
£'000 |
£'000 |
|
Non-current assets |
|
|
|
|
Ordinary shares |
|
36,698 |
29,656 |
|
Convertibles |
|
1,098 |
1,116 |
|
Corporate bonds |
|
4,952 |
4,957 |
|
Other fixed interest |
|
2,946 |
2,531 |
|
|
|
_______ |
_______ |
|
Securities at fair value |
9 |
45,694 |
38,260 |
|
|
|
|
|
|
Current assets |
|
|
|
|
Cash and cash equivalents |
|
1,602 |
1,049 |
|
Other receivables |
11 |
363 |
380 |
|
|
|
_______ |
_______ |
|
|
|
1,965 |
1,429 |
|
|
|
_______ |
_______ |
|
Current liabilities |
|
|
|
|
Long-term loan |
12 |
(10,000) |
- |
|
Trade and other payables |
|
(193) |
(164) |
|
|
|
_______ |
_______ |
|
|
|
(10,193) |
(164) |
|
|
|
_______ |
_______ |
|
Net current assets |
|
(8,228) |
1,265 |
|
|
|
_______ |
_______ |
|
Total assets less current liabilities |
|
37,466 |
39,525 |
|
|
|
_______ |
_______ |
|
Non-current liabilities |
|
|
|
|
Long-term loan |
|
- |
(10,000) |
|
|
|
_______ |
_______ |
|
Net assets |
|
37,466 |
29,525 |
|
|
|
_______ |
_______ |
|
Issued capital and reserves attributable to equity holders |
|
|
|
|
Called-up share capital |
13 |
11,055 |
11,055 |
|
Share premium account |
|
11,892 |
11,892 |
|
Capital redemption reserve |
|
2,032 |
2,032 |
|
Retained earnings: |
|
|
|
|
Capital reserve |
14 |
10,560 |
2,549 |
|
Revenue reserve |
14 |
1,927 |
1,997 |
|
|
|
_______ |
_______ |
|
|
|
37,466 |
29,525 |
|
|
|
_______ |
_______ |
|
Net asset value per Ordinary share (pence) |
8 |
169.45 |
133.54 |
ABERDEEN SMALLER COMPANIES HIGH INCOME TRUST PLC
Statement of Changes in Equity
|
Year ended 31 December 2012 |
|
|
|
|
|
|
|
|
|
|
|
Share |
Capital |
|
|
|
|
|
|
Share |
premium |
redemption |
Capital |
Revenue |
|
|
|
|
capital |
account |
reserve |
reserve |
reserve |
Total |
|
|
Notes |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
As at 31 December 2011 |
|
11,055 |
11,892 |
2,032 |
2,549 |
1,997 |
29,525 |
|
Revenue profit for the year |
|
- |
- |
- |
- |
1,257 |
1,257 |
|
Capital profits for the year |
|
- |
- |
- |
8,011 |
- |
8,011 |
|
Equity dividends |
7 |
- |
- |
- |
- |
(1,327) |
(1,327) |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
As at 31 December 2012 |
|
11,055 |
11,892 |
2,032 |
10,560 |
1,927 |
37,466 |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
|
|
Year ended 31 December 2011 |
|
|
|
|
|
|
|
|
|
|
|
Share |
Capital |
|
|
|
|
|
|
Share |
premium |
redemption |
Capital |
Revenue |
|
|
|
|
capital |
account |
reserve |
reserve |
reserve |
Total |
|
|
Notes |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
As at 31 December 2010 |
|
11,055 |
11,892 |
2,032 |
7,571 |
2,137 |
34,687 |
|
Current year transfer of subsidiary undertaking's reserves |
10 |
- |
- |
- |
142 |
(142) |
- |
|
Revenue profit for the year |
|
- |
- |
- |
- |
1,329 |
1,329 |
|
Capital losses for the year |
|
- |
- |
- |
(5,022) |
- |
(5,022) |
|
Dissolution of subsidiary undertaking |
|
- |
- |
- |
(142) |
- |
(142) |
|
Equity dividends |
7 |
- |
- |
- |
- |
(1,327) |
(1,327) |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
As at 31 December 2011 |
|
11,055 |
11,892 |
2,032 |
2,549 |
1,997 |
29,525 |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
|
|
The revenue reserve represents the amount of the Company's reserves distributable by way of dividend. |
|||||||
|
The accompanying notes are an integral part of the financial statements. |
|||||||
ABERDEEN SMALLER COMPANIES HIGH INCOME TRUST PLC
Cash Flow Statement
|
|
Year ended |
Year ended |
||
|
|
31 December 2012 |
31 December 2011 |
||
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|
Cash flows from operating activities |
|
|
|
|
|
Investment income received |
|
1,932 |
|
1,872 |
|
Deposit interest received |
|
- |
|
2 |
|
Investment management fee paid |
|
(316) |
|
(330) |
|
Other cash expenses |
|
(298) |
|
(274) |
|
|
|
_______ |
|
_______ |
|
Cash generated from operations |
|
1,318 |
|
1,270 |
|
|
|
|
|
|
|
Interest paid |
|
(269) |
|
(281) |
|
|
|
_______ |
|
_______ |
|
Net cash inflows from operating activities |
|
1,049 |
|
989 |
|
|
|
_______ |
|
_______ |
|
Cash flows from investing activities |
|
|
|
|
|
Purchases of investments |
(5,669) |
|
(8,178) |
|
|
Sales of investments |
6,500 |
|
8,013 |
|
|
|
_______ |
|
_______ |
|
|
Net cash inflow/(outflow) from investing activities |
|
831 |
|
(165) |
|
|
|
_______ |
|
_______ |
|
Cash flows from financing activities |
|
|
|
|
|
Equity dividends paid |
|
(1,327) |
|
(1,327) |
|
|
|
_______ |
|
_______ |
|
Net cash outflow from financing activities |
|
(1,327) |
|
(1,327) |
|
|
|
_______ |
|
_______ |
|
Net increase/(decrease) in cash and cash equivalents |
|
553 |
|
(503) |
|
|
|
|
|
|
|
Cash and cash equivalents at start of year |
|
1,049 |
|
1,552 |
|
|
|
_______ |
|
_______ |
|
Cash and cash equivalents at end of year |
|
1,602 |
|
1,049 |
|
|
|
_______ |
|
_______ |
ABERDEEN SMALLER COMPANIES HIGH INCOME TRUST PLC
YEAR ENDED 31 DECEMBER 2012
NOTES TO THE FINANCIAL STATEMENTS
|
1. |
Accounting policies |
||
|
|
(a) |
Basis of accounting |
|
|
|
|
The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRSs) which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), and International Accounting Standards and International Financial Reporting Interpretations Committee interpretations approved by the International Accounting Standards Committee ("IASC") that remain in effect, and to the extent that they have been adopted by the European Union. |
|
|
|
|
|
|
|
|
|
The financial statements have been prepared under the historical cost convention as modified to include the revaluation of securities held at fair value and on the assumption that approval as an investment trust will continue to be granted. The principal accounting policies adopted are set out below. These policies have been applied consistently throughout the year. Where presentational guidance set out in the Statement of Recommended Practice ("SORP") for investment trusts issued by the Association of Investment Companies is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP except as referred to in paragraph (d) and (h) below. The effects on capital and revenue of the items involving departures from the SORP are set out in note 16. |
|
|
|
|
|
|
|
|
|
The subsidiary company was wound up during the year and therefore consolidated accounts are no longer required to be prepared. Further information can be found in note 10. |
|
|
|
|
|
|
|
|
|
In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income. Additionally, the net revenue of the Company is the measure the Directors believe appropriate in assessing its compliance with certain requirements set out in Sections 1158 - 1159 of the Corporation Tax Act 2010. |
|
|
|
|
|
|
|
|
|
At the date of authorisation of these financial statements, the following Standards and Interpretations were in issue but not yet effective: |
|
|
|
|
- |
Amendments to IFRS 7 - Disclosures: Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after 1 January 2013). |
|
|
|
- |
Amendments to IFRS 10 - Definition of Investment Entity (early adoption permitted) (effective for annual periods beginning on or after 1 January 2014). |
|
|
|
- |
IFRS 9 - Financial Instruments: Classification and Measurement (effective for annual periods beginning on or after 1 January 2015). |
|
|
|
- |
IFRS 10 - Consolidated Financial Statements (early adoption permitted) (effective for annual periods beginning on or after 1 January 2013). |
|
|
|
- |
IFRS 11 - Joint Arrangements (early adoption permitted) (effective for annual periods beginning on or after 1 January 2013). |
|
|
|
- |
IFRS 12 - Disclosure of Interests in Other Entities (early adoption permitted) (effective for annual periods beginning on or after 1 January 2013). |
|
|
|
- |
IFRS 13 - Fair Value Measurement (effective for annual periods beginning on or after 1 January 2013). |
|
|
|
- |
Annual Improvements and Amendments to IFRS (2009-2011) - IFRS 1 First-time Adoption of International Financial Reporting Standards, IAS 1 Presentation of Financial Statements, IAS 16 Property, Plant and Equipment, IAS 32 Financial Instruments: Presentation, IAS 34 Interim Financial Reporting. (effective for annual periods beginning on or after 1 January 2013). |
|
|
|
- |
Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities: Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12) (effective for annual periods beginning on or after 1 January 2013). |
|
|
|
- |
Amendments to IAS 19 - Employee Benefits (effective for annual periods on or after 1 January 2013). |
|
|
|
- |
IAS 27 - Separate Financial Statements (early adoption permitted) (effective for annual periods beginning on or after 1 January 2013). |
|
|
|
- |
IAS 28 - Investments in Associates and Joint Ventures (early adoption permitted) (effective 1 January 2013). |
|
|
|
- |
Amendments to IAS 32 - Offsetting Financial Assets and Financial Liabilities (effective for annual periods beginning on or after 1 January 2014). |
|
|
|
|
|
|
|
|
The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material financial impact on the financial statements of the Company. The Company concludes however that certain additional disclosures may be necessary on their application. |
|
|
|
|
|
|
|
|
(b) |
Investments |
|
|
|
|
Investments have been designated upon initial recognition at fair value through profit or loss. Investments are recognised and de-recognised at trade date where a purchase or sale is under a contract whose terms require delivery within the time frame established by the market concerned, and are initially measured at fair value. Subsequent to initial recognition, investments are valued at fair value. For listed investments, this is deemed to be bid market prices or closing prices for SETS stocks sourced from The London Stock Exchange. SETS is the London Stock Exchange's electronic trading service for UK securities including all the FTSE All-Share Index constituents. |
|
|
|
|
|
|
|
|
|
Gains and losses arising from the changes in fair value are included in net profit or loss for the period as a capital item. Transaction costs are treated as a capital cost. |
|
|
|
|
|
|
|
|
|
No investments were held in the dealing subsidiary undertaking in either the current or previous year, prior to the subsidiary undertaking's dissolution on 6 January 2012. |
|
|
|
|
|
|
|
|
(c) |
Income |
|
|
|
|
Dividend income from equity investments including preference shares which have a discretionary dividend is recognised when the shareholders' rights to receive payment have been established, normally the ex-dividend date. |
|
|
|
|
|
|
|
|
|
Interest from debt securities which include preference shares which do not have a discretionary dividend are accounted for on an effective yield basis. Any write off of the premium or discount on acquisition as a result of using this basis is allocated against capital reserve. The SORP recommends that such a write off should be allocated against revenue. The Directors believe this treatment is not appropriate for a high yielding investment trust which frequently trades in debt securities and believe any premium or discount paid for such an investment is a capital item. |
|
|
|
|
|
|
|
|
|
Interest receivable on AAA rated money market funds and short term deposits are accounted for on an accruals basis. |
|
|
|
|
|
|
|
|
|
Underwriting commission is taken to revenue, unless any shares underwritten are required to be taken up, in which case the proportionate commission received is deducted from the cost of the investment. |
|
|
|
|
|
|
|
|
(d) |
Expenses |
|
|
|
|
All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Statement of Comprehensive Income, all expenses have been presented as revenue items except those where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. Accordingly the investment management fee and finance costs have been allocated 50% to revenue and 50% to capital, in order to reflect the Directors expected long-term view of the nature of the investment returns of the Company. |
|
|
|
|
|
|
|
|
(e) |
Bank borrowings |
|
|
|
|
Interest-bearing bank loans and overdrafts are recorded at the proceeds received. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the Statement of Comprehensive Income using the effective interest rate method. |
|
|
|
|
|
|
|
|
(f) |
Finance costs and long-term borrowings |
|
|
|
|
Long-term borrowings are stated at the amount of the proceeds of issue net of expenses. The finance costs, being the difference between the net proceeds of borrowing and the total amount of payments that require to be made in respect of that borrowing, accrue evenly over the life of the borrowing and are allocated between capital and revenue. |
|
|
|
|
|
|
|
|
|
Finance costs have been allocated 50% to revenue and 50% to capital in the Statement of Comprehensive Income, in order to reflect the Directors expected long-term view of the nature of the investment returns of the Company. |
|
|
|
|
|
|
|
|
(g) |
Taxation |
|
|
|
|
The tax payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the Statement of Comprehensive Income because it excludes items of income or expenditure that are taxable or deductible in other years and it further excludes items that are never taxable or deductible (see note 6 for a more detailed explanation). The Company has no liability for current tax. |
|
|
|
|
|
|
|
|
|
Deferred tax is provided in full on timing differences which result in an obligation at the Balance Sheet date to pay more tax, or a right to pay less tax, at a future date at rates expected to apply when they crystallise, based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in financial statements. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. |
|
|
|
|
|
|
|
|
|
The SORP requires that a transfer should be made from income to capital equivalent to the tax value of any management expenses that arise in capital but are utilised against revenue. The Directors consider that this requirement is not appropriate for an investment trust with an objective to provide a high and growing dividend that does not generate a corporation tax liability. Given there is only one class of shareholder and hence overall the net effect of such a transfer to the net asset value of the shares is nil no such transfer has been made. |
|
|
|
|
|
|
|
|
(h) |
Foreign currencies |
|
|
|
|
Transactions involving foreign currencies are converted at the rate ruling at the time of the transaction. Assets and liabilities in foreign currencies are translated at the closing rates of exchange at the Balance Sheet date. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in capital reserve or the revenue account as appropriate. |
|
|
|
|
2012 |
2011 |
|
2. |
Income |
£'000 |
£'000 |
|
|
Income from investments |
|
|
|
|
Dividend income from UK equity securities |
1,399 |
1,441 |
|
|
Dividend income from overseas equity securities |
58 |
42 |
|
|
Interest income from investments |
392 |
410 |
|
|
Stock dividends |
29 |
39 |
|
|
|
_______ |
_______ |
|
|
|
1,878 |
1,932 |
|
|
|
_______ |
_______ |
|
|
Other income |
|
|
|
|
Underwriting commission |
2 |
4 |
|
|
|
_______ |
_______ |
|
|
Total revenue income |
1,880 |
1,936 |
|
|
|
_______ |
_______ |
|
|
|
|
|
|
|
As per note 1 (d), the Company amortises the premium or discount on acquisition on debt securities against unrealised capital reserve. For 2012 this represented £40,000 (2011 - £65,000) which has been reflected in the capital column of the Statement of Comprehensive Income. |
||
|
|
|
2012 |
2011 |
||||
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
3. |
Investment management fee |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
Investment management fee |
164 |
164 |
328 |
162 |
162 |
324 |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
|
|
|
For the year ended 31 December 2012 management and secretarial services were provided by Aberdeen Asset Managers Limited. The fee is at an annual rate of 0.75%, calculated monthly and paid quarterly. The fee is allocated 50% to capital and 50% to revenue. |
||||||
|
|
|
2012 |
2011 |
|
4. |
Other administrative expenses |
£'000 |
£'000 |
|
|
Directors' remuneration - fees as Directors |
96 |
97 |
|
|
Fees payable to auditors and associates: |
|
|
|
|
fees payable to the Company's auditors for the audit of the annual accounts |
21 |
21 |
|
|
Marketing fees |
35 |
35 |
|
|
Legal and professional fees |
16 |
15 |
|
|
Registrars fees |
13 |
15 |
|
|
Printing and postage |
14 |
13 |
|
|
Broker fees |
41 |
30 |
|
|
Directors & Officers' liability insurance |
7 |
8 |
|
|
Trade subscriptions |
25 |
23 |
|
|
Other management expenses |
50 |
47 |
|
|
|
_______ |
_______ |
|
|
|
318 |
304 |
|
|
|
_______ |
_______ |
|
|
|
|
|
|
|
Marketing expenses of £35,000 (2011 - £35,000) were paid to the Manager in respect of marketing and promotion of the Company. |
||
|
|
|
||
|
|
The Company had no employees during the year (2011 - nil). No pension contributions were paid for Directors (2011 - £nil). Further details on Directors' Remuneration can be found in the Directors Remuneration Report. |
||
|
|
|
2012 |
2011 |
||||
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
5. |
Finance costs and borrowings |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
Bank loans |
141 |
141 |
282 |
141 |
141 |
282 |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
6. |
Taxation |
||||||
|
|
Management expenses arising on revenue items this year were sufficient to offset against taxable revenue. In accordance with accounting policy 1(g) no amount (2011 - £nil) has been credited to capital and charged to revenue as a notional corporation tax item. |
||||||
|
|
|
||||||
|
|
At 31 December 2012, the Company had net surplus management expenses and loan relationship deficits of £9,589,000 (2011 - £8,965,000) in respect of which a deferred tax asset has not been recognised. This is because the Company is not expected to generate taxable income in a future period in excess of the deductible expenses and deficits of that future period and, accordingly, it is unlikely that the Company will be able to reduce future tax liabilities through the use of existing surplus expenses and loan relationship deficits. |
||||||
|
|
|
||||||
|
|
The UK corporation tax rate was 26% until 31 March 2012 and 24% from 1 April 2012 giving an effective rate of 24.5% (2011 - effective rate of 26.5%). The tax assessed for the year is lower than the rate of corporation tax. The differences are explained below: |
||||||
|
|
|
||||||
|
|
|
2012 |
2011 |
||||
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
Profit/(loss) before tax |
1,257 |
8,011 |
9,268 |
1,329 |
(5,022) |
(3,693) |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
|
Taxation of return on ordinary activities at the standard rate of corporation tax |
308 |
1,963 |
2,271 |
352 |
(1,331) |
(979) |
|
|
Effects of: |
|
|
|
|
|
|
|
|
UK dividend income not liable to further tax |
(364) |
- |
(364) |
(405) |
- |
(405) |
|
|
Capital (gains)/losses disallowed for the purposes of corporation tax |
- |
(2,038) |
(2,038) |
- |
1,251 |
1,251 |
|
|
Income not subject to tax |
(21) |
- |
(21) |
(22) |
- |
(22) |
|
|
Excess management expenses not utilised |
77 |
75 |
152 |
75 |
109 |
184 |
|
|
Adjustment to prior year management expenses not utilised |
- |
- |
- |
- |
(29) |
(29) |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
|
Taxation charge for the year |
- |
- |
- |
- |
- |
- |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
|
|
2012 |
2011 |
|
7. |
Dividends |
£'000 |
£'000 |
|
|
Amounts recognised as distributions to equity holders in the period: |
|
|
|
|
Fourth interim dividend for the year ended 31 December 2011 of 1.50p (2010 - 1.50p) per share |
332 |
332 |
|
|
Three interim dividends for the year ended 31 December 2012 totalling 4.50p (2011 - 4.50p) per share |
995 |
995 |
|
|
|
_______ |
_______ |
|
|
|
1,327 |
1,327 |
|
|
|
_______ |
_______ |
|
|
|
|
|
|
|
The fourth interim dividend of 1.55p per share, declared on 24 December 2012 and paid on 31 January 2013, has not been included as a liability in these financial statements. |
||
|
|
|
||
|
|
We also set out below the total dividends payable in respect of the financial year, which is the basis on which the requirements of Sections 1158-1159 of the Corporation Tax Act 2010 are considered: |
||
|
|
|
|
|
|
|
|
2012 |
2011 |
|
|
|
£'000 |
£'000 |
|
|
Three interim dividends for the year ended 31 December 2012 totalling 4.50p (2011 - 4.50p) per share |
995 |
995 |
|
|
Fourth interim dividend for the year ended 31 December 2012 of 1.55p (2011 - 1.50p) per share |
343 |
332 |
|
|
|
_______ |
_______ |
|
|
|
1,338 |
1,327 |
|
|
|
_______ |
_______ |
|
|
|
2012 |
2011 |
|
8. |
Return and net asset value per share |
£'000 |
£'000 |
|
|
The returns per share are based on the following figures: |
|
|
|
|
Revenue return |
1,257 |
1,329 |
|
|
Capital return |
8,011 |
(5,022) |
|
|
|
_______ |
_______ |
|
|
Net return |
9,268 |
(3,693) |
|
|
|
_______ |
_______ |
|
|
Weighted average number of shares in issue |
22,109,765 |
22,109,765 |
|
|
|
___________ |
___________ |
|
|
|
|
|
|
|
The net asset value per share is based on net assets attributable to shareholders of £37,466,000 (2011 - £29,525,000) and on the 22,109,765 (2011 - 22,109,765) shares in issue at 31 December 2012. |
||
|
|
|
2012 |
2011 |
|
9. |
Non-current assets - securities at fair value |
£'000 |
£'000 |
|
|
Listed on recognised stock exchanges: |
|
|
|
|
United Kingdom |
45,008 |
37,640 |
|
|
Overseas |
686 |
620 |
|
|
|
_______ |
_______ |
|
|
|
45,694 |
38,260 |
|
|
|
_______ |
_______ |
|
|
|
|
|
|
|
|
2012 |
2011 |
|
|
|
£'000 |
£'000 |
|
|
Cost at 31 December 2011 |
36,363 |
36,203 |
|
|
Investment holdings gains at 31 December 2011 |
1,897 |
6,611 |
|
|
|
_______ |
_______ |
|
|
Fair value at 31 December 2011 |
38,260 |
42,814 |
|
|
Purchases |
5,669 |
8,178 |
|
|
Amortised cost adjustments to fixed interest securities |
(40) |
(65) |
|
|
Sales - proceeds |
(6,551) |
(8,013) |
|
|
Sales - net gains |
896 |
60 |
|
|
Movement in investment holdings gains/(losses) during the year |
7,460 |
(4,714) |
|
|
|
_______ |
_______ |
|
|
Valuation at 31 December 2012 |
45,694 |
38,260 |
|
|
|
_______ |
_______ |
|
|
Cost at 31 December 2012 |
36,337 |
36,363 |
|
|
Investment holdings gains at 31 December 2012 |
9,357 |
1,897 |
|
|
|
_______ |
_______ |
|
|
Fair value at 31 December 2012 |
45,694 |
38,260 |
|
|
|
_______ |
_______ |
|
|
|
|
|
|
|
For an analysis of investments between equity and fixed interest securities and for detailed interest rates, see above. |
||
|
|
|
|
|
|
|
|
2012 |
2011 |
|
|
Gains/(losses) on investments |
£'000 |
£'000 |
|
|
Net realised gains on sales |
896 |
60 |
|
|
Movement in fair value |
7,460 |
(4,714) |
|
|
|
_______ |
_______ |
|
|
Gains/(losses) on investments |
8,356 |
(4,654) |
|
|
|
_______ |
_______ |
|
|
The total transaction costs on the purchases and sales in the year were £30,000 (2011 - £44,000) and £7,000 (2011 - £7,000) respectively. |
||
|
|
|
||
|
|
All investments are categorised as held at fair value through profit and loss. |
||
|
10. |
Subsidiary undertaking |
|
|
On 2 September 2011 the Company applied to Companies House to dissolve Shirescot Securities Limited. The Company owned the whole of the issued ordinary share capital of its sole subsidiary undertaking, an investment dealing company registered in Scotland. The subsidiary undertaking was formally dissolved on 6 January 2012. |
|
|
|
|
|
At the date of dissolution and at 31 December 2011, Shirescot Securities Limited had net liabilities of £nil. The inter-company balance was extinguished during the year ended 31 December 2011 and written off against the Company's capital reserve. |
|
|
|
2012 |
2011 |
|
11. |
Other receivables |
£'000 |
£'000 |
|
|
Due from brokers |
51 |
- |
|
|
Accrued income & prepayments |
302 |
354 |
|
|
Other debtors |
10 |
26 |
|
|
|
_______ |
_______ |
|
|
|
363 |
380 |
|
|
|
_______ |
_______ |
|
|
None of the above amounts are overdue. |
|
|
|
|
|
2012 |
2011 |
|
12. |
Loan at fair value |
£'000 |
£'000 |
|
|
Bank loan included at amortised cost |
10,000 |
10,000 |
|
|
|
_______ |
_______ |
|
|
Bank loan |
|
|
|
|
The Company has a three year facility of £10 million with National Australia Bank, which was drawn down in full on 29 July 2010 and rolled over monthly hence. On 30 November 2012 the loan was rolled over for 2 months at a rate of 2.52% per annum. The loan has subsequently been rolled over on 31 January 2013 at a rate of 2.5025% until 28 February 2013. |
||
|
|
|
||
|
|
The Directors are of the opinion that the fair value of the bank loan at 31 December 2012 is not materially different from the book value. |
||
|
|
|
Ordinary shares |
|
|
|
|
of 50 pence each |
|
|
13. |
Called-up share capital |
Number |
£'000 |
|
|
Allotted and fully paid |
|
|
|
|
At 31 December 2012 and 31 December 2011 |
22,109,765 |
11,055 |
|
|
|
___________ |
_________ |
|
|
|
||
|
|
The objective of the Company is to provide a high and growing dividend and capital growth from a portfolio invested principally in the ordinary shares of smaller UK companies and UK fixed income securities. |
||
|
|
|
||
|
|
The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance. |
||
|
|
|
||
|
|
The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes: |
||
|
|
· the planned level of gearing, which takes account of the Investment Manager's views on the market; |
||
|
|
· the level of equity shares in issue; and |
||
|
|
· the extent to which revenue in excess of that which is required to be distributed should be retained. |
||
|
|
|
||
|
|
The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period. |
||
|
|
|
||
|
|
The Company does not have any externally imposed capital requirements. |
||
|
|
|
2012 |
2011 |
|
14. |
Retained earnings |
£'000 |
£'000 |
|
|
Capital reserve |
|
|
|
|
At 1 January 2012 |
2,549 |
7,571 |
|
|
Transfer of subsidiary undertaking's reserves |
- |
142 |
|
|
Net gains on sales of investments during the year |
896 |
60 |
|
|
Movement in investment holdings gains/(losses) during the year |
7,460 |
(4,714) |
|
|
Dissolution of subsidiary undertaking |
- |
(142) |
|
|
Amortised cost adjustment relating to capital |
(40) |
(65) |
|
|
Finance costs of borrowings (note 5) |
(141) |
(141) |
|
|
Investment management fee |
(164) |
(162) |
|
|
|
_______ |
_______ |
|
|
At 31 December 2012 |
10,560 |
2,549 |
|
|
|
_______ |
_______ |
|
|
|
|
|
|
|
The capital reserve includes investment holding gains amounting to £9,357,000 (2011 - £1,897,000), as disclosed in note 9. |
||
|
|
|
|
|
|
|
|
2012 |
2011 |
|
|
Revenue reserve |
£'000 |
£'000 |
|
|
At 1 January 2012 |
1,997 |
2,137 |
|
|
Transfer of subsidiary undertaking's reserves |
- |
(142) |
|
|
Revenue return |
1,257 |
1,329 |
|
|
Dividends paid |
(1,327) |
(1,327) |
|
|
|
_______ |
_______ |
|
|
At 31 December 2012 |
1,927 |
1,997 |
|
|
|
_______ |
_______ |
|
|
|
|
|
|
|
The subsidiary undertaking's revenue reserves were reclassified as capital and subsequently written off on its dissolution. |
||
|
15. |
Risk management, financial assets and liabilities |
|||||||||||||||
|
|
Risk management |
|||||||||||||||
|
|
The Company's objective of providing a high and growing dividend with capital growth is addressed by investing in smaller UK market capitalisation equities to provide growth in capital and income and in fixed income securities to provide a high level of income. |
|||||||||||||||
|
|
|
|||||||||||||||
|
|
The impact of security price volatility is reduced by diversification. Diversification is by type of security - ordinary shares, preference shares, convertibles and corporate fixed interest - and by investment in the stocks and shares of companies in a range of industrial, commercial and financial sectors. The management of the portfolio is conducted according to investment guidelines, established by the Board after discussion with the Managers, which specify the limits within which the Manager is authorised to act. |
|||||||||||||||
|
|
|
|||||||||||||||
|
|
The Manager has a dedicated investment management process, as disclosed in the Directors' Report, which ensures that the investment objective is achieved. Stock selection procedures are in place based on the active portfolio management and identification of stocks. The portfolio is reviewed on a periodic basis by a Senior Investment Manager and also by the Manager's Investment Committee. |
|||||||||||||||
|
|
|
|||||||||||||||
|
|
The Company's Manager has an independent Investment Risk department for reviewing the investment risk parameters of all core equity, balanced, fixed income and alternative asset classes on a regular basis. The department reports to the Manager's Performance Review Committee which is chaired by the Manager's Chief Investment Officer. The department's responsibility is to review and monitor ex-ante (predicted) portfolio risk and style characteristics using best practice, industry standard multi-factor models. |
|||||||||||||||
|
|
|
|||||||||||||||
|
|
Additionally, the Manager's Compliance department continually monitor the Company's investment and borrowing powers and report to the Manager's Risk Management Committee. |
|||||||||||||||
|
|
|
|||||||||||||||
|
|
The Manager has a Business Risk department to consolidate risk management functions. The department is responsible for supporting management in the efficient identification of risk and resolution of control issues. The department incorporates Operational Risk, Breaches and Errors Risk Control Management, Counterparty Risk, and the Procedures and Business Control teams. The Head of Front Office risk reports directly to the Manager's Group Head of Risk. |
|||||||||||||||
|
|
|
|||||||||||||||
|
|
Financial assets and liabilities |
|||||||||||||||
|
|
The Company's financial assets include investments, cash at bank and short-term debtors. Financial liabilities consist of bank loans and overdrafts, other short-term creditors and a long term creditor arising from a fixed rate term loan. |
|||||||||||||||
|
|
|
|||||||||||||||
|
|
The main risks the Company faces from its financial instruments are (i) market risk (comprising interest rate risk and other price risk), (ii) liquidity risk and (iii) credit risk. The Company has no exposure to foreign currency risk as it does not hold any foreign currency assets or have exposure to any foreign currency liabilities. |
|||||||||||||||
|
|
|
|||||||||||||||
|
|
The Company is subject to interest rate risk because bond yields are linked to underlying bank rates or equivalents, and its short-term borrowings and cash resources carry interest at floating rates. The interest rate profile is managed as part of the overall investment strategy of the Company. |
|||||||||||||||
|
|
|
|||||||||||||||
|
|
(i) |
Market risk |
||||||||||||||
|
|
|
The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk and other price risk. |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
|
Interest rate risk |
||||||||||||||
|
|
|
Interest rate movements may affect: |
||||||||||||||
|
|
|
- |
the fair value of the investments in fixed interest rate securities; |
|||||||||||||
|
|
|
- |
the level of income receivable on cash deposits; |
|||||||||||||
|
|
|
- |
interest payable on the Company's variable rate borrowings. |
|||||||||||||
|
|
|
|
||||||||||||||
|
|
|
The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions. |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
|
The Board reviews on a regular basis the values of the fixed interest rate securities. |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
|
Interest rate profile |
||||||||||||||
|
|
|
The interest rate risk profile of the portfolio of financial assets and liabilities (excluding ordinary shares and convertibles) at the Balance Sheet date was as follows: |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
|
|
Weighted average |
|
|
|
|
|||||||||
|
|
|
|
period for which |
average |
|
|
Non |
|||||||||
|
|
|
|
rate is fixed |
rate |
rate |
rate |
bearing |
|||||||||
|
|
|
As at 31 December 2012 |
Years |
% |
£'000 |
£'000 |
£'000 |
|||||||||
|
|
|
Assets |
|
|
|
|
|
|||||||||
|
|
|
UK corporate bonds |
8.71 |
6.13 |
4,952 |
- |
- |
|||||||||
|
|
|
UK preference shares |
- |
7.26 |
2,946 |
- |
- |
|||||||||
|
|
|
Cash |
- |
- |
- |
1,602 |
- |
|||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
|||||||||
|
|
|
Total assets |
- |
- |
7,898 |
1,602 |
- |
|||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
|||||||||
|
|
|
Liabilities |
|
|
|
|
|
|||||||||
|
|
|
Long-term bank loan |
0.08 |
2.52 |
(10,000) |
- |
- |
|||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
|||||||||
|
|
|
Total liabilities |
- |
- |
(10,000) |
- |
- |
|||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
|||||||||
|
|
|
Total |
- |
- |
(2,102) |
1,602 |
- |
|||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
|||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
Weighted average |
|
|
|
|
|||||||||
|
|
|
|
period for which |
average |
|
|
Non |
|||||||||
|
|
|
|
rate is fixed |
rate |
rate |
rate |
bearing |
|||||||||
|
|
|
As at 31 December 2011 |
Years |
% |
£'000 |
£'000 |
£'000 |
|||||||||
|
|
|
Assets |
|
|
|
|
|
|||||||||
|
|
|
UK corporate bonds |
8.93 |
6.62 |
4,957 |
- |
- |
|||||||||
|
|
|
UK preference shares |
- |
8.45 |
2,531 |
- |
- |
|||||||||
|
|
|
Cash |
- |
- |
- |
1,049 |
- |
|||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
|||||||||
|
|
|
Total assets |
- |
- |
7,488 |
1,049 |
- |
|||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
|||||||||
|
|
|
Liabilities |
|
|
|
|
|
|||||||||
|
|
|
Long-term bank loan |
0.08 |
2.86 |
(10,000) |
- |
- |
|||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
|||||||||
|
|
|
Total liabilities |
- |
- |
(10,000) |
- |
- |
|||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
|||||||||
|
|
|
Total |
- |
- |
(2,512) |
1,049 |
- |
|||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
|||||||||
|
|
|
|
||||||||||||||
|
|
|
The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average interest rate on bank loan is based on the interest rate payable, weighted by the total value of the loan. The maturity date of the Company's loan is shown in note 12 to the financial statements. |
||||||||||||||
|
|
|
The cash assets consist of cash deposits on call earning interest at prevailing market rates. |
||||||||||||||
|
|
|
Short-term debtors and creditors have been excluded from the above tables. |
||||||||||||||
|
|
|
All financial liabilities are measured at amortised cost. |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
|
Maturity profile |
||||||||||||||
|
|
|
The maturity profile of the Company's financial assets and liabilities at the Balance Sheet date was as follows: |
||||||||||||||
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
More than |
||||||||
|
|
|
|
1 year |
1-2 years |
2-3 years |
3-4 years |
4-5 years |
5 years |
||||||||
|
|
|
At 31 December 2012 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
||||||||
|
|
|
Fixed rate |
|
|
|
|
|
|
||||||||
|
|
|
UK corporate bonds |
618 |
- |
686 |
666 |
- |
2,982 |
||||||||
|
|
|
Bank loan |
(10,000) |
- |
- |
- |
- |
- |
||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
||||||||
|
|
|
|
(9,382) |
- |
686 |
666 |
- |
2,982 |
||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
||||||||
|
|
|
Floating rate |
|
|
|
|
|
|
||||||||
|
|
|
Cash |
1,602 |
- |
- |
- |
- |
- |
||||||||
|
|
|
Total |
(7,780) |
- |
686 |
666 |
- |
2,982 |
||||||||
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
More than |
||||||||
|
|
|
|
1 year |
1-2 years |
2-3 years |
3-4 years |
4-5 years |
5 years |
||||||||
|
|
|
At 31 December 2011 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
||||||||
|
|
|
Fixed rate |
|
|
|
|
|
|
||||||||
|
|
|
UK corporate bonds |
637 |
- |
297 |
620 |
635 |
2,768 |
||||||||
|
|
|
Bank loan |
- |
(10,000) |
- |
- |
- |
- |
||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
||||||||
|
|
|
|
637 |
(10,000) |
297 |
620 |
635 |
2,768 |
||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
||||||||
|
|
|
Floating rate |
|
|
|
|
|
|
||||||||
|
|
|
Cash |
1,049 |
- |
- |
- |
- |
- |
||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
||||||||
|
|
|
Total |
1,686 |
(10,000) |
297 |
620 |
635 |
2,768 |
||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
||||||||
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
The maturity table above excludes the value of holdings in UK irredeemable preference shares held at the year end, which equated to £2,946,000 (2011 - £2,531,000). |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
|
Interest rate sensitivity |
||||||||||||||
|
|
|
The sensitivity analysis below have been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the Balance Sheet date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates. |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
|
If interest rates had been 100 basis points higher and all other variables were held constant, the Company's: |
||||||||||||||
|
|
|
- |
profit before tax for the year ended 31 December 2012 would decrease by £84,000 (2011 - £90,000 restated). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances and long term loan. These figures have been calculated based on cash positions and long term loan at each year end; and |
|||||||||||||
|
|
|
- |
profit before tax for the year ended 31 December 2012 would decrease by £193,000 (2011 - £258,000). This is also mainly attributable to the Company's exposure to interest rates on its fixed interest securities. This is based on a Value at Risk ('VaR') calculated at a 99% confidence level. |
|||||||||||||
|
|
|
|
||||||||||||||
|
|
|
If interest rates had been 100 basis points lower and all other variables were held constant, the Company's: |
||||||||||||||
|
|
|
- |
profit before tax for the year ended 31 December 2012 would increase by £84,000 (2011 - £90,000 restated). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances and long term loan. These figures have been calculated based on cash positions and long term loan at each year end; and |
|||||||||||||
|
|
|
- |
profit before tax for the year ended 31 December 2012 would increase by £193,000 (2011 - £258,000). This is also mainly attributable to the Company's exposure to interest rates on its fixed interest securities. This is based on a Value at Risk ('VaR') calculated at a 99% confidence level. |
|||||||||||||
|
|
|
|
||||||||||||||
|
|
|
In the opinion of the Directors, the above sensitivity analyses would not necessarily reflect the year as a whole, since the level of exposure changes frequently as part of the interest rate risk management process used to meet the Company's objectives. The risk parameters used will also fluctuate depending on the current market perception. |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
|
Other price risk |
||||||||||||||
|
|
|
Other price risks (ie changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments. |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
|
It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular sector. The allocation of assets to specific sectors and the stock selection process, both act to reduce market risk. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy. All of the investments held by the Company are listed on the London Stock Exchange, with the exception of its holding in Telecom Italia 5.625% 2015, which is traded on Clearstream in Luxembourg. |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
|
Other price sensitivity |
||||||||||||||
|
|
|
If market prices at the Balance Sheet date had been 10% higher while all other variables remained constant, the profit before tax attributable to ordinary shareholders for the year ended 31 December 2012 would have increased by £3,780,000 (2011 - £3,077,000). If market prices at the Balance Sheet date had been 10% lower while all other variables remained constant, the profit before tax attributable to ordinary shareholders for the year ended 31 December 2012 would have decreased by £3,780,000 (2011 - £3,077,000).This is based on the Company's equity portfolio and convertibles held at each year end. |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
(ii) |
Liquidity risk |
||||||||||||||
|
|
|
This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
|
Liquidity risk is not considered to be significant as the Company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the use of loan and overdraft facilities (note 12). |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
(iii) |
Credit risk |
||||||||||||||
|
|
|
This is failure of the counter party to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss. |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
|
The Company considers credit risk not to be significant as it is actively managed as follows: |
||||||||||||||
|
|
|
- |
where the Manager makes an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Company of default; |
|||||||||||||
|
|
|
- |
investments in quoted bonds are made across a variety of industry sectors so as to avoid concentrations of credit risk; |
|||||||||||||
|
|
|
- |
transactions involving derivatives are entered into only with investment banks, the credit rating of which is taken into account so as to minimise the risk to the Company of default; |
|||||||||||||
|
|
|
- |
investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the Manager, and limits are set on the amount that may be due from any one broker; |
|||||||||||||
|
|
|
- |
the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the review of failed trade reports on a daily basis. In addition, both stock and cash reconciliations to the custodian's records are performed on a daily basis to ensure discrepancies are investigated on a timely basis. The Manager's Compliance department carries out periodic reviews of the Custodian's operations and reports its finding to the Manager's Risk Management Committee. |
|||||||||||||
|
|
|
- |
transactions involving derivatives, structured notes and other arrangements wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest are subject to rigorous assessment by the Manager of the credit worthiness of that counterparty. The Company's aggregate exposure to each such counterparty is monitored regularly by the Board. The Company does not currently use derivatives. The Manager requires the Board's approval to implement the use of derivatives; |
|||||||||||||
|
|
|
- |
cash is held only with reputable banks with high quality external credit enhancements. |
|||||||||||||
|
|
|
|
||||||||||||||
|
|
|
None of the Company's financial assets are secured by collateral or other credit enhancements. |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
|
Credit risk exposure
|
||||||||||||||
|
|
|
In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit risk at 31 December was as follows: |
||||||||||||||
|
|
|
|
|
|
|
|
||||||||||
|
|
|
|
2012 |
|
2011 |
|
||||||||||
|
|
|
|
Balance |
Maximum |
Balance |
Maximum |
||||||||||
|
|
|
|
Sheet |
exposure |
Sheet |
exposure |
||||||||||
|
|
|
|
£'000 |
£'000 |
£'000 |
£'000 |
||||||||||
|
|
|
Non-current assets |
|
|
|
|
||||||||||
|
|
|
Securities at fair value through profit or loss |
45,694 |
45,694 |
38,260 |
38,260 |
||||||||||
|
|
|
|
|
|
|
|
||||||||||
|
|
|
Current assets |
|
|
|
|
||||||||||
|
|
|
Trade and other receivables |
61 |
61 |
26 |
26 |
||||||||||
|
|
|
Accrued income |
302 |
302 |
354 |
354 |
||||||||||
|
|
|
Cash and cash equivalents |
1,602 |
1,602 |
1,049 |
1,049 |
||||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
||||||||||
|
|
|
|
47,659 |
47,659 |
39,689 |
39,689 |
||||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
||||||||||
|
|
|
|
|
|
|
|
||||||||||
|
|
|
None of the Company's financial assets is past due or impaired. |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
|
Fair value of financial assets and liabilities |
||||||||||||||
|
|
|
The fair value of the short term loan is shown above. The book value of cash at bank and bank loans and overdrafts included in these financial statements approximate to fair value because of their short-term maturity. Investments held as dealing investments are valued at fair value. The carrying values of fixed asset investments are stated at their fair values, which have been determined with reference to quoted market prices. For details of bond maturities and interest rates. For all other short-term debtors and creditors, their book values approximate to fair values because of their short-term maturity. |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
|
Gearing |
||||||||||||||
|
|
|
The Company has in place a £10 million unsecured loan. The Company augments this from time to time with short-term borrowings so that greater returns to shareholders may be generated from the capital stock thus enlarged. Although this gearing increases the opportunity for gain, it also increases the risk of loss in falling markets. The risk of increased gearing is managed by retaining the flexibility to reduce short term borrowings as appropriate. |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
|
Gearing is also restricted by the various covenants applicable to the different borrowings. The unsecured loan contains a clause which stipulates that total borrowings cannot exceed 40% of adjusted assets. As at 31 December 2012 the reported ratio was 21.0% (2011 - 25.2%). |
||||||||||||||
|
|
|
|
||||||||||||||
|
|
|
There is a second short term borrowing facility with another major bank for £1 million. In respect of this lender, the Company's net asset value must not fall below £10 million. As at 31 December 2012 the net asset value stood at £37.5 million (2011 - £29.5 million). |
||||||||||||||
|
16. |
Income enhancement |
||||
|
|
The SORP recommends that debt securities are accounted for on an effective yield basis with the associated adjustment being allocated to revenue. The Company has decided to allocate this adjustment to capital as explained in note 1(c). The effect of this treatment on revenue and capital is set out below. |
||||
|
|
|
||||
|
|
As explained in note 1(g) revenue may utilise surplus management expenses that have arisen in capital but does not compensate capital for this tax effect as recommended by the SORP. |
||||
|
|
|
||||
|
|
The effect of these income enhancement strategies on capital and income is summarised in the table below. There is a risk with these strategies that capital will be eroded unless the charges to capital are covered by gains elsewhere in the portfolio, and this is managed by investing in a portfolio of shares which in the long run is expected to provide adequate capital growth to absorb the effective yield adjustment while paying growing dividends which contribute to the pursuit of the Company's objectives. |
||||
|
|
|
||||
|
|
In following this strategy, the Directors recognise that there is only one class of shareholder. |
||||
|
|
|
||||
|
|
|
2012 |
2011 |
||
|
|
|
Income |
Capital |
Income |
Capital |
|
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|
|
Finance costs arising on bank loan finance |
(71) |
(71) |
(71) |
(71) |
|
|
Return on corresponding investments |
152 |
185 |
161 |
(56) |
|
|
Amortised cost adjustment charged to capital on debt securities |
40 |
(40) |
65 |
(65) |
|
|
|
_______ |
_______ |
_______ |
_______ |
|
|
|
121 |
74 |
155 |
(192) |
|
|
|
_______ |
_______ |
_______ |
_______ |
|
17. |
Fair value hierarchy |
||||||
|
|
Under IFRS 7 'Financial Instruments: Disclosures' an entity is required to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: |
||||||
|
|
- |
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; |
|||||
|
|
- |
Level 2: inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly (ie as prices) or indirectly (ie derived from prices); and |
|||||
|
|
- |
Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). |
|||||
|
|
|
|
|||||
|
|
The financial assets and liabilities measured at fair value in the statement of financial position are grouped into the fair value hierarchy at 31 December 2012 as follows: |
||||||
|
|
|
||||||
|
|
|
|
Level 1 |
Level 2 |
Level 3 |
Total |
|
|
|
|
Note |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
Financial assets at fair value through profit or loss |
|
|
|
|
|
|
|
|
Quoted equities |
a) |
39,644 |
- |
- |
39,644 |
|
|
|
Quoted bonds |
b) |
6,050 |
- |
- |
6,050 |
|
|
|
|
|
_______ |
_______ |
_______ |
_______ |
|
|
|
Total |
|
45,694 |
- |
- |
45,694 |
|
|
|
|
|
_______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
|
|
|
|
As at 31 December 2011 |
|
|
|
|
|
|
|
|
|
|
Level 1 |
Level 2 |
Level 3 |
Total |
|
|
|
|
Note |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
Financial assets at fair value through profit or loss |
|
|
|
|
|
|
|
|
Quoted equities |
a) |
32,187 |
- |
- |
32,187 |
|
|
|
Quoted bonds |
b) |
6,073 |
- |
- |
6,073 |
|
|
|
|
|
_______ |
_______ |
_______ |
_______ |
|
|
|
Total |
|
38,260 |
- |
- |
38,260 |
|
|
|
|
|
_______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
|
|
|
|
a) |
Quoted equities |
|||||
|
|
|
The fair value of the Group's investments in quoted equities have been determined by reference to their quoted bid prices at the reporting date. Quoted equities included in Fair Value Level 1 are actively traded on recognised stock exchanges. |
|||||
|
|
b) |
Quoted bonds |
|||||
|
|
|
The fair value of the Group's investments in Corporate quoted bonds has been determined by reference to their quoted bid prices at the reporting date. |
|||||
Additional Notes to the Annual Financial Report
This Annual Financial Report announcement is not the Company's statutory accounts for the year ended 31 December 2012. The statutory accounts for the year ended 31 December 2012 received an audit report which was unqualified.
The statutory accounts for the financial year ended 31 December 2012 were approved by the Directors on 7 March 2013 but will not be filed with the Registrar of Companies until after the Company's Annual General Meeting which is to be held at 12 noon on 17 April 2013 at Bow Bells House, One Bread Street, London EC4M 9HH.
The Annual Report will be posted to shareholders in March 2013 and additional copies will be available from the Manager (Investor Helpline - Tel. 0845 60 24 247) or by download from the Company's webpage
(www.aberdeensmallercompanies.co.uk)
Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.
For Aberdeen Smaller Companies High Income Trust PLC
Aberdeen Asset Management PLC, Secretaries
This information is provided by RNS
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