Annual Financial Report

RNS Number : 4803Q

F&C Global Smaller Companies PLC

18 June 2015

 



Date:                17 June 2015

Contact:           Peter Ewins                                                   

                        F&C Investment Business Limited                   

                        020 7628 8000                                               

F&C Global Smaller Companies PLC

Audited Statement of Results

for the year ended 30 April 2015

Summary of results

Attributable to equity shareholders	30 April 2015	30 April 2014	% Change
Net asset value (diluted) per share (debt at nominal value)	970.25p	841.78p	+15.3
Share price	980.00p	840.00p	+16.7
	Year ended 30 April 2015	Year ended 30 April 2014	% Change
Revenue return per share (basic)	10.87p	9.31p	+16.8
Dividends per share	9.65p	8.00p	+20.6
Ongoing charges (based on average net assets)*	0.79%	0.76%

*1.08% including performance fees (2014: 0.78%).

Chairman's Statement

I am pleased to be able to report on another year of progress for your Company. With interest rates remaining near record lows and yields on higher quality government and corporate bonds negligible or in some cases even negative, equities have found support among investors seeking superior returns and income.

After a number of years when smaller stocks have led the way, this year, larger stocks have performed better in most global markets. Despite this, the net asset value ("NAV") total return on a diluted basis for the year was still a healthy 16.2% and the share price total return was 17.6%. Dilution takes account of both the potential increase in net assets and the additional number of shares in issue, were the Convertible Unsecured Loan Stock issued in July 2014 to be converted into new equity. On an undiluted basis the NAV total return was 16.6%.

Ten years ago the Board adopted a blended Benchmark compiled from the weighted returns from an international small cap index and a UK smaller companies index to assess the relative performance of the Company's overall portfolio. The Benchmark is now derived from the returns of the MSCI All Country World ex UK Small Cap Index and Numis UK Smaller Companies (excluding investment companies) Index in a 70%/30% proportion, broadly reflecting the prevailing split of the investment portfolio. This produced a 14.8% total return in sterling terms, somewhat less than the Company's NAV return for the year. Over the ten years to the end of April 2015, the NAV (diluted) total return of 247.4% has far surpassed the Company's Benchmark total return of 192.2%, while the share price total return has been higher still at 309.6%.

As a consequence of the outperformance of the Benchmark in 2014/15, F&C will receive a performance fee of £983k. The Company's Ongoing Charges (including this payment and additional performance fees attached to the collective investments held) will be 1.08% for the year, or 0.79% excluding all performance fees. Transactions costs of 0.11% incurred in the management of the investment portfolio are not included in these numbers.

The Board believes that in the light of the strong short and long term track record, the fee structure remains competitive in what is an evolving environment for fund management charges. This will however, remain under close review to ensure that shareholders' interests are being protected.

With consistent incremental demand in the market for the Company's shares, the share price remained at a modest premium to the prevailing NAV through most of the year. As a consequence the Company was able to issue a further 1,909,000 new ordinary shares in the year (3.7% of the initial issued share capital) on an accretive basis for the NAV.

Dividends

I have commented in recent years on how well the underlying income has grown from the investment portfolio, and this year again we have seen very healthy increases in dividends received from our holdings, particularly from markets outside of the UK. Companies around the globe are increasingly recognising the relevance of income to their investors at a time when interest rates are so low. As a result of this, the Board is in the pleasing position of being able to propose a 27.3% increase in the final dividend this year, which together with the 2.65p interim makes a full year payment of 9.65p, some 20.6% higher than last year's level. The dividend will be paid on 14 August 2015 to those on the register on 17 July 2015. The Board's aim remains to follow a progressive dividend policy in the future, building on the record of 45 years of consecutive increases.

Economic background

The last year has seen heightened volatility from time to time on the back of geo-political issues, notably in the Middle East and Ukraine, while Greece's change of government also created uncertainty. Perhaps the most significant developments of the last year in relation to financial markets were the collapse of oil prices in the late Autumn and the move to use full blown quantitative easing ("QE") in the Eurozone.

The Manager's Review within the Annual Report and Accounts will pick up on these and other macro-economic issues, but in short, the sharp fall in crude oil prices served to push further out into the future the time at which the monetary authorities in the US and elsewhere (including the UK) would need to start to move interest rates higher. The diminishing threat of higher rates provided a lift to equities globally in the second half of the financial year, and the change of policy in Europe also encouraged investors to look again at European equities on the basis that QE would lift the Eurozone economy out of the doldrums, as has been the case elsewhere where it has been deployed.

Aside from the positive influences on equity performance set out above, it is probably fair to say that economic growth data has been, in the main, lacklustre, certainly relative to expectations from six months ago. The two largest economies, the US and China, have slowed, though expectations are for the US to pick up again through the rest of 2015 as the benefits of lower oil prices on consumer behaviour come through. Japan's economy too, has been under pressure, failing to recover momentum post the increase in sales tax in Spring 2014. This was despite the combination of the Bank of Japan stepping up its on-going QE policy, and further efforts by the government to improve corporate governance and overall competitiveness. More positively, the domestic UK economy has surpassed hopes from a year ago, with unemployment falling significantly, although the country's public finances remain deeply in the red.

Despite a relatively unexciting global macro-economic backdrop, many companies have been working hard to enhance their profit margins, and equity markets have benefited from investors' willingness to pay higher multiples of earnings to acquire shares.

Portfolio performance

In the year under review, currency moves have once again had quite an impact on performance. Sterling has strengthened against the euro and yen over the last year, while in contrast, it fell in value in relation to the US dollar. The euro and yen have, perhaps predictably, been undermined by the impact of QE. The dollar rose after US QE ended, and investors started to look towards an eventual increase in interest rates.

Geographical performance (total return sterling adjusted)
for the year ended 30 April 2015
	Portfolio	Local smaller companies index
UK	13.4%	6.2%
USA	16.4%	20.7%
Continental Europe	15.5%	4.6%
Japan	36.1%	27.1%
Rest of World*	10.1%	20.8%  (Pacific ex Japan) (15.1)%  (Latin America)

Source: F&C

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

The returns measured in sterling terms, of the geographical segments of the portfolio compared to the local small cap market performance, are shown above. Despite a negative impact on sterling returns from the weakness of the yen, the Japanese portfolio has delivered by far the best returns this year, after a difficult 2013/14. While the economy did not perform as well as anticipated, a more competitive currency helped Japanese companies to deliver healthier earnings growth compared to other markets. The market was also lifted by moves by the country's largest pension fund to lift its exposure to equities at the expense of bonds. The two funds we hold to gain exposure to Japanese small caps performed very well and comfortably beat the local market return.

Returns in the US market in sterling terms benefited from the stronger dollar although companies here generally struggled to deliver much revenue growth. The Manager believes that valuations in some parts of the US market, notably in biotechnology, are looking aggressive and with this and other more risky sectors leading the market higher, our portfolio was unable to match the local small cap index this year.

While the UK and European markets were not at the forefront of gains this year, the Company's portfolios in these markets delivered strong relative outperformance. In the former we benefited from good stock selection across the sector spectrum and from a bout of takeover activity for a number of our holdings. In Europe, a focus on high quality business franchises paid off in a year where growth on the Continent has been hard to come by.

Asian small caps did quite well this year, in contrast to Latin American stocks. Some Asian markets such as India, benefited from signs that political reforms would help local competitiveness, and interest rates fell in a number of other countries as the authorities sought to stimulate growth. Latin American markets were mainly undermined by disappointing developments in Brazil. Here a business un-friendly government retained power in the Autumn election, there was a corruption scandal at the national oil company Petrobras, and the Brazilian real came under severe pressure. Our Rest of World portfolio was up by a double-digit percentage, but ideally would have had a higher exposure to some of the better performing Asian markets.

Asset allocation

As in many previous years, the weightings by country or region have not changed materially. The Manager did add to the UK weighting during the year as the team have found it easier of late to identify new opportunities in this market, while the exposure to Japan was trimmed back in light of the strong performance there. The overall contribution to relative performance from asset allocation decisions was marginally positive, with the benefit from the overweight to Japan almost cancelled out by the negative impact of being overweight in Europe and underweight to the US during the year.

Geographical distribution of the investment portfolio as at 30 April 2015
North America	40.2%
UK	29.6%
Continental Europe	11.5%
Rest of World	11.0%
Japan	7.7%

Gearing

The Board believes that the use of structural, or on-going, leverage, is likely to be beneficial over the long term for investors, and as a consequence in July 2014 the Company issued £40m of 3.5% Convertible Unsecured Loan Stock. The Manager immediately deployed the proceeds of this issue into the markets, and NAV returns in the year were enhanced as a result given the further advance in share prices post July 2014. The £10m 11.5% debenture was repaid on 31 December 2014. The Company ended the period with effective gearing of 4.8%.

The Board and Corporate Governance

The Board has continued to work closely with our Manager on a number of fronts. As highlighted in my report last year, F&C was taken over by Bank of Montreal ("BMO") in May 2014. The Board has reappointed the Manager for another year and welcomes the stability and broadening of investment expertise that BMO will add. We will continue to monitor all aspects of the Manager's performance.

The Alternative Investment Fund Managers Directive became effective during the year and F&C Investment Business Limited was appointed as Alternative Investment Fund Manager. JPMorgan Europe Limited was appointed as the depositary and when entering into this agreement, we also reviewed the safe custody agreement. Your Board remains committed to the highest standards of corporate governance and has complied with the relevant guidance throughout the year.

We are sorry to lose two excellent longstanding Directors in Mark White, who resigned in February 2015, and Les Cullen who will retire immediately following the 2015 Annual General Meeting. I wish to thank them both for their valuable contributions over the years, with a special mention for Les for his scrutiny and efficiency as chairman of the Audit & Management Engagement Committee. Jo Dixon, who was appointed to the Board in February 2015, will take on that very important role. Two further appointments have been made since the year end; Anja Balfour and David Stileman, both of whom joined on 1 June 2015. Our three new Directors will help ensure that your Board continues to have the right level of investment knowledge, business and financial skills and experience for the future success of your Company.

The new Directors will stand for election at the Annual General Meeting. Jane Tozer and I have been Directors for more than nine years and will therefore stand for re-election, as will Andrew Adcock who shortly will have served for eight years. In line with corporate governance best practice all the Directors will stand for re-election annually in future.

Annual General Meeting

I look forward to seeing shareholders at our Annual General Meeting on 23 July 2015 at the Chartered Accountants Hall, when our lead manager Peter Ewins will present his overview of the year and his thoughts for our portfolio going forward. It will give me the opportunity to introduce our new Directors in person and thank our retiring Directors for their contribution. I hope to see many shareholders there.

Outlook

It is clear that QE and ultra-low interest rates have lifted financial markets in the last few years and the risk is that this could be the year when the rates cycle turns in the US and potentially elsewhere including the UK. This could cause renewed volatility for both bonds and shares. However, most commentators expect only a slow and modest move up in rates given the ongoing low inflation on a global basis, so there may be less impact on equities than some fear. The Board takes encouragement from the number of new holdings recently identified and remains of the belief that it will still be possible to add value through a successful approach to stock-picking in the small cap universe in the future.

Anthony Townsend

Chairman

17 June 2015

Principal Risks and Changes in the Year

Most of the Company's principal risks are market-related and no different from those of other investment trusts investing primarily in listed markets.

The principal ongoing risks and uncertainties currently faced by the Company, which may vary in significance from time to time, and the controls and actions to mitigate those risks, are described below

Security and operational issues

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

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

Actions taken in the year: As part of its annual assessment, the Board has reviewed and is satisfied with F&C's controls and risk management structure. The Board welcomed the acquisition of F&C by BMO in May 2014 F&C has, since acquisition by BMO, further strengthened its Compliance, Risk and Internal Audit functions and continues to invest in IT security. The Board is satisfied that the acquisition of F&C by BMO has not diluted the emphasis of the group on the Company's business and has not resulted in the loss of staff key to the Company's operations or in a reduction of systems capability or other resources. The investment management agreement with F&C was fully revised during the year to reflect its new responsibilities under AIFMD.

Supervision of third party service providers, including State Street and IFDS, has been maintained throughout the year by F&C and includes assurances regarding IT security and cyber-attack prevention. The Company's Depositary commenced its duties under AIFMD requirements, including those relating to security over the Company's assets, in July 2014. The Depositary has provided quarterly reports to the Board evidencing the Manager's and Board's satisfactory controls over, and ownership of, assets.

No change in overall risk in year.

Investment Performance

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

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

Actions taken in the year: The Board, through its review process, did not identify any specific new actions required to mitigate performance risks. During the year structural gearing was increased to 4.8% through the issue of £40m listed CULS, providing a long-term modest borrowing "facility" which has the potential to convert into ordinary shares and hence not to require repayment. The Lead Manager's Review on pages 10 to 20 of the Report and Accounts explains the changes in the year in the portfolio.

No change in overall risk in year.

Discount/premium to NAV

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

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

Actions taken in the year: The share price traded at a small premium to net asset value for most of the year and 1,909,000 shares were issued during the period to satisfy demand and maintain a manageable level of premium to net asset value. Most of these shares were issued to private investors through F&C's Investor Plans, expanding the shareholder base.

The Board has proposed an increase in full year dividends.

The Lead Manager continued to present on the Company to a range of existing and prospective investors to maintain interest in the Company.

No change in overall risk in year.

Statement of Directors' Responsibilities in Respect of the Financial Statements

In accordance with Chapter 4 of the Disclosure and Transparency Rules the Directors confirm, in respect of the annual report for the year ended 30 April 2015 of which this statement of results is an extract, that to the best of their knowledge:

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

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

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

On behalf of the Board

Anthony Townsend

Chairman

17 June 2015

Income Statement

for the year ended 30 April	2015			2014
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains on investments	-	69,146	69,146	-	41,451	41,451
Foreign exchange gains/(losses)	8	483	491	5	(633)	(628)
Income	7,786	-	7,786	5,876	-	5,876
Management fee	(436)	(1,307)	(1,743)	(371)	(1,112)	(1,483)
Performance fee	-	(983)	(983)	-	(8)	(8)
Other expenses	(777)	(24)	(801)	(543)	(28)	(571)
Net return before finance costs and taxation	6,581	67,315	76,896	4,967	39,670	44,637
Finance costs	(533)	(1,598)	(2,131)	(288)	(862)	(1,150)
Net return on ordinary activities before taxation	6,048	65,717	71,765	4,679	38,808	43,487
Taxation on ordinary activities	(389)	-	(389)	(218)	-	(218)
Net return attributable to equity shareholders	5,659	65,717	71,376	4,461	38,808	43,269
Return per share (basic) - pence	10.87	126.22	137.09	9.31	81.01	90.32
Return per share (diluted) - pence*	n/a	121.02	131.90	n/a	n/a	n/a

n/a - there is no dilution applicable

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 2015	Called up	Share	Capital	Equity			Total
	share	premium	redemption	component	Capital	Revenue	shareholders'
	capital	account	reserve	of CULS	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 April 2014	12,803	102,460	16,158	-	289,568	10,097	431,086
Movements during the year ended 30 April 2015
Dividends paid	-	-	-	-	-	(4,223)	(4,223)
Convertible Unsecured Loan Stock ("CULS")	-	-	-	1,339	-	-	1,339
Issue costs of equity component of CULS	-	-	-	(27)	-	-	(27)
Shares issued	478	16,934	-	-	-	-	17,412
Return attributable to equity shareholders	-	-	-	-	65,717	5,659	71,376
Balance at 30 April 2015	13,281	119,394	16,158	1,312	355,285	11,533	516,963

for the year ended 30 April 2014	Called up	Share	Capital				Total
	share	premium	redemption		Capital	Revenue	shareholders'
	capital	account	reserve		reserves	reserve	funds
	£'000s	£'000s	£'000s		£'000s	£'000s	£'000s
Balance at 30 April 2013	11,243	53,009	16,158		250,760	8,920	340,090
Movements during the year ended 30 April 2014
Dividends paid	-	-	-		-	(3,284)	(3,284)
Shares issued	1,560	49,451	-		-	-	51,011
Return attributable to equity shareholders	-	-	-		38,808	4,461	43,269
Balance at 30 April 2014	12,803	102,460	16,158		289,568	10,097	431,086

Balance Sheet

at 30 April		2015		2014
	£'000s	£'000s	£'000s	£'000s
Fixed assets
Investments		548,639		425,344
Current assets
Debtors	4,086		3,574
Cash at bank and short-term deposits	13,502		16,705
	17,588		20,279
Creditors: amounts falling due within one year
Creditors	(11,135)		(4,537)
Debenture	-		(10,000)
	(11,135)		(14,537)
Net current assets		6,453		5,742
Total assets less current liabilities		555,092		431,086
Creditors: amounts falling due after more than one year
Convertible Unsecured Loan Stock ("CULS")		(38,129)		-
Net assets		516,963		431,086
Capital and reserves
Share capital		13,281		12,803
Share premium account	119,394		102,460
Capital redemption reserve	16,158		16,158
Equity component of CULS	1,312		-
Capital reserves	355,285		289,568
Revenue reserve	11,533		10,097
		503,682		418,283
Total shareholders' funds		516,963		431,086
Net asset value per share (basic) - pence		973.11		841.78
Net asset value per share (diluted) - pence		970.25		n/a

n/a - there is no dilution applicable

Cash Flow Statement

for the year ended 30 April		2015		2014
	£'000s	£'000s	£'000s	£'000s
Operating activities
Investment income received	6,920		5,062
Interest received	21		49
Other revenue	5		-
Management fee paid to the management company	(1,716)		(1,458)
Performance fee paid to the management Company	(8)		(1,478)
Directors' fees paid	(146)		(155)
Other payments	(617)		(637)
Net cash inflow from operating activities		4,459		1,383
Servicing of finance
Interest paid	(1,850)		(1,150)
Cash outflow from servicing of finance		(1,850)		(1,150)
Financial investment
Purchases of equities and other investments	(223,013)		(173,123)
Sales of equities and other investments	173,737		122,218
Other capital charges and credits	(25)		(26)
Net cash outflow from financial investment		(49,301)		(50,931)
Equity dividends paid		(4,223)		(3,284)
Net cash outflow before use of liquid resources and financing		(50,915)		(53,982)
Financing
CULS issued	40,000		-
Issue costs of CULS	(795)		-
Debenture repaid	(10,000)		-
Shares issued	18,016		50,544
Cash inflow from financing		47,221		50,544
Decrease in cash		(3,694)		(3,438)

Notes

1    Dividend

The Directors recommend a final dividend in respect of the year ended 30 April 2015 of 7.00p per share, payable on 14 August 2015 to all shareholders on the register at close of business on 17 July 2015. The recommended final dividend is subject to approval by shareholders at the annual general meeting.

2    Financial Risk Management

The Company is an investment company, listed on the London Stock Exchange, and conducts its affairs so as to qualify in the United Kingdom (UK) as an investment trust under the provisions of section 1158 of the Corporation Tax Act 2010. In so qualifying, the Company is exempted in the UK from corporation tax on capital gains on its portfolio of fixed asset investments.

The Company invests in smaller companies worldwide in order to secure a high total return. In pursuing the objective, the Company is exposed to financial risks which could result in a reduction of either or both of the value of the net assets and the profits available for distribution by way of dividend. These financial risks are principally related to the market (currency movements, interest rate changes and security price movements), liquidity and credit. The Board, together with the Manager, is responsible for the Company's risk management.

The full details of financial risks are contained in note 27 of the report and accounts.

3    Annual general meeting

The annual general meeting will be held at the Chartered Accountants' Hall, One Moorgate Place, London EC2R 6EA on 23 July 2015 at 12 noon.

4    Report and accounts

This statement was approved by the Board on 17 June 2015. It is not the Company's statutory accounts. The statutory accounts for the financial year ended 30 April 2015 have been approved and audited, and received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report. The statutory accounts for the financial year ended 30 April 2014 received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report.

The report and accounts for the year ended 30 April 2015 will be posted to shareholders and made available on the website www.fandcglobalsmallers.com. Copies may also be obtained from the Company's registered office, Exchange House, Primrose Street, London EC2A 2NY.

By order of the Board

F&C Investment Business Limited, Secretary

Exchange House, Primrose Street, London EC2A 2NY

17 June 2015

 

END

 

 

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