Half-year Report

RNS Number : 8794R

F&C Global Smaller Companies PLC

15 December 2016

 

Date:                15 December 2016

Contact:           Peter Ewins                                                   

                        F&C Investment Business Limited                   

                        020 7628 8000                                               

F&C Global Smaller Companies PLC

Unaudited statement of results

for the half-year ended 31 October 2016

SUMMARY OF UNAUDITED RESULTS FOR THE HALF-YEAR ENDED 31 OCTOBER 2016

·     Diluted Net Asset Value ("NAV") total return up 18.0%

·     Share price total return of 17.4% with share price up to 1,167p

·     Interim dividend up by 37.9% to 4.0p per ordinary share

 

Manager's Review

Peter Ewins. Lead Manager

Although your Company is a global investment trust, in the period under review it was events closer to home that probably had the most significance in driving the overall investment out-turn. The UK public's June decision to vote to leave the European Union led to an initial slump in global equities and a more protracted reverse for the value of sterling in the foreign exchange markets. With equity markets rebounding as investors reassessed the global impact of Brexit, the correction in sterling translated into an increase in the value of our overseas investment holdings. As a result, the Company's Net Asset Value ("NAV") and share price ended the period significantly higher.

Performance

Taking the dilution from the Convertible Unsecured Loan Stock into account, the NAV total return over the six months was 18.0%, while on an undiluted basis the NAV was up by 19.2%. The share price rose by 17.4% incorporating the final dividend from 2015/16, paid in August. The Company's Benchmark is calculated from the returns of the MSCI World ex UK Small Cap Index and the Numis UK Smaller Companies (excluding investment companies) Index in a 70%/30% proportion. This was up by 18.8% on a total return basis, close to the NAV and share price moves.

The Trust's share price moved between a modest premium and discount to the NAV over the six months. With lower demand for equity products from UK retail investors, the pace of share issuance slowed, but 472,819 new shares (0.9% of the initial share capital) were issued at times when the share price was at a premium to the prevailing NAV per share. The shares ended the period at a 0.2% premium to the diluted NAV (0.7% at the end of April 2016).

Dividends

For a number of years, we have seen a steady increase in the income received from the investment portfolio. The fall in sterling also has the effect of lifting the value of our foreign currency denominated dividends when translated into pounds, and revenue returns per share were up by 33.0%. Although currency markets remain somewhat choppy and it is always possible that the trend could reverse, it seems likely that the Company will again have a strong year on the income side. Therefore the Board has decided to pay an interim dividend of 4.0p compared to 2.9p last year, partially reducing the disparity between the interim and final dividends. This will be paid to shareholders on 31 January 2017.

Economic and market background

The underlying economic background continued to be one of steady, if relatively unexciting growth in most parts of the world. The US economy continued to add jobs at an encouraging rate and consumer spending rose, but the strength of the dollar served to hamper parts of the manufacturing sector. An absence of meaningful inflationary pressures led the Federal Reserve Bank under Janet Yellen to conclude that no interest rate rise was necessary.

European economies in the main continued on a similar trajectory to the previous year, with Spain recovering strongly despite political uncertainties in the country. France and Italy on the other hand saw sluggish growth in the period, with limited improvement evident on the jobs front and fears surrounding the solvency of some of the Italian banks. In Germany unemployment dropped to a historically low level as export trade continued to be helped by the general weakness of the euro.

The UK economy grew at a steady rate during the six months, confounding fears that a vote to leave the European Union would lead to an immediate move into recession. With the Bank of England cutting its base rate to just 0.25% in August, retail sales growth accelerated and this plus a lift to export sentiment from the fall in sterling helped to support growth in the short term. Uncertainty around the eventual impact of the Brexit vote however, has created difficulties for companies assessing investment plans for the future, while the early signs of rising consumer prices as a result of the fall in the pound are becoming more evident. In the UK equity market, investors sought out companies with overseas earnings, which at least initially tended to favour the larger cap part of the market at the expense of more domestically focused smaller companies.

Japan was almost a mirror image of the UK, with a strong currency and persistent consumer price weakness confounding the attempts of the government and Bank of Japan to drive deflation out of the system. The Bank is now effectively buying the equity market through its purchases of equity linked Exchange Traded Funds, alongside a longer term bond buying programme. The equity market has been held back by downgrades to corporate earnings, chiefly as a result of the rise in the yen.

While China continues to become steadily more important as an economic force, this was a relatively quieter period in terms of news-flow from the country. Economic data here is never entirely consistent with the evidence on the ground, but it does appear that the authorities have largely been successful in keeping growth going at a relatively stable pace. However, the overall level of debt in the country remains a concern. Elsewhere in Asia, the news has been a little more encouraging and emerging markets as a whole generated greater interest from investors. Latin American equity markets were strong ahead of, and post, the impeachment of the former Brazilian President Rousseff, but it is early days to see whether the change in administration will lead to a meaningful improvement in terms of governance and overall economic performance.

Portfolio performance

With the Brexit news causing volatility, uncertainty around the outlook for oil prices as OPEC attempted to rein in production and mixed signals from different members of the US Federal Reserve's Open Market Committee on the outlook for interest rates, this was a tricky period to manage any investment portfolio. The chart below shows that our UK, US and European portfolios all ended up behind the local small cap indices. In all places we were comfortably in positive territory, albeit the bulk of the four overseas portfolio rises were as a consequence of the fall in sterling. The best returns came from our Japanese portfolio which beat the MSCI Japan Small Cap Index, while our Asian centric Rest of World portfolio produced a return that surpassed the MSCI Asia ex Japan Small Cap Index, even if it did lag the returns from Latin American small caps.

Geographical performance (total return sterling adjusted)
for the half-year ended 31 October 2016
	Portfolio	Local smaller companies index
US	+25.0%	+27.3%
UK	+3.5%	+4.6%
Continental Europe	+13.9%	+19.8%
Japan	+33.5%	+29.7%
Rest of World	+27.5%	+24.5%  (Pacific ex Japan) +39.6%  (Latin America)
Source: F&C

Returns, while strong in the US, could have been better here if we had had a higher allocation to technology stocks, which were in favour. Stock selection within both technology and financials also undermined our relative performance. In the former area Safeguard Scientific's shares were weak as the company's portfolio of healthcare and technology investments failed to progress as fast as expected, while travel software business Sabre Corp reported disappointing results. In the financials, Hallmark Financial Services lagged the market as insurance stocks fell out of favour. In the Real Estate sector, we were hit by a sudden slump in the shares of prison operator Geo Group when the Department of Justice announced that it was to gradually phase out the use of private prisons.

Foodservices company Chefs' Warehouse was weak as the company delivered poor results following a mis-handled acquisition. Golf and country club operator Clubcorp also fell, in part due to a move away from more highly leveraged stocks, a trend that we saw in other markets in the period.

There were a number of good US performers to report on however. Two stocks were taken over by larger peers. These were bank Cardinal Financial and luxury home builder WCI Communities. There was also interest shown in two of our other holdings, The Andersons and Microsemi, and both shares performed well. In the consumer sphere America's Carmart rose 53.7% as competition in the market appears to be easing. Vail Resorts continued to perform well, helped by the positively received acquisition of Whistler in Canada.

Other winners were from a range of areas. Payments processor Total System Services did well as the outlook for North American organic growth brightened, while data protection and information management software company Commvault Systems rose as its turnaround gained traction. Advisory and services company ICF International benefited from better execution in its commercial business segment. Shares in managed care company Wellcare rose as forecasts moved higher on the back of better margins, while communications services business Zayo was up as new installations rose.

The UK small cap market initially fell heavily post Brexit, but there was a quick recovery as overseas earners profit expectations were upgraded. From a sector perspective our relative performance was held back by being underweight in mining stocks. We did add to our exposure here during the period, but not before commodity price rises and weak sterling had driven the sector sharply higher.

There were several individual stocks which struggled, most notably Laird. This electronics components company reported disappointing sales and margins, as business with its largest customer failed to meet projected levels,a situation compounded by management change and higher than ideal financial leverage. The Brexit news led to weakness in retail shares, with Topps Tiles among the largest fallers. Vertu Motors also dropped as signs emerged that new car sales were plateauing. Real estate stocks were mainly lower, particularly in the case with companies exposed to London given uncertainty about the outlook for tenant demand in the office market and fears that residential property prices would fall. Our holdings in development companies U&I Group and St Modwen Properties both fell back but we added on the weakness. Separately, sports agency business TLA Worldwide dropped 31.5% after a takeover approach was not consummated.

We did well in the healthcare sector, where several animal related businesses including Dechra Pharmaceuticals, Genus and Eco Animal Health produced encouraging results. Speciality pharmaceuticals and clinical services business Clinigen, was another positive contributor in the sector. The outstanding performance of premium tonics supplier Fevertree Drinks continued, with the shares up by 57.8%. The company announced a further upgrade to sales and profit expectations and its UK sales now look set to approximately double in 2016 on the back of enhanced distribution. We participated in several new IPOs in the period, with chocolate retailer Hotel Chocolat and media business Ascential, the pick of these in terms of their early performance.

Elsewhere on the UK portfolio our holding in John Laing Group, which originates, invests in and manages infrastructure projects around the world, was another good performer. The company confirmed progress on its new project pipeline and on disposals of completed project investments. The largest overall positive contributor in the period in the UK was Craneware. Scottish based, this company serves the US hospitals marketplace, supplying software which saves customers money and enables compliance with an ever-stricter cost reimbursement regime. The shares rose by 55% as profits beat expectations, and visibility is good, stemming from a high level of recurring revenues.

We had a tough half year in Europe. One of the main reasons for this was our exposure to a number of Irish listed stocks, which suffered in the aftermath of Brexit given the strong trading links between the two countries. Agronomy services company Origin Enterprises, was particularly weak as poor weather conditions in the Spring placed pressure on its key selling season for crop protection advice and products. Performance nutrition and specialist dairy ingredients supplier Glanbia was also down although the company produced solid results and held guidance for its full year.

Elsewhere in Spain two of our more cyclical holdings Mediaset and Atresmedia fell out of favour as advertising growth slowed. We were pleased however that these companies' management teams proactively managed their cost bases to protect profitability. Another Spanish based company Viscofan, fell back as sales of its sausage skins stalled, while Italian fund management business Azimut was weak as the market fretted about signs of increased pressure on fee structures.

Although Azimut was an exception, a number of our better European performers were found in the financial sectors. Shares in Norwegian based life insurance and pensions business Storebrand rose 24.7%, as solvency metrics improved, helped by an upturn in bond yields, and dividend payments are to be resumed. In the same country, Sparebank jumped as fears over bad loans diminished on the back of the uptick in the oil price. Aareal Bank was another strong performer as results impressed the market. While it was generally a tougher time for industrials, truck equipment supplier Interpump announced good results with the company's diversification moves paying off. Flooring business Forbo, also produced solid figures. Business equipment supplier Takkt was another winner, helped by additional interest from brokers as results continued to be good.

The Japanese small cap market performed well as sentiment towards Asian markets as a whole improved and the yen surged. Our holding in the Eastspring Investments Japan Smaller Companies Fund handsomely beat the local market. The fund uses a value based approach and during the period benefited from a turn in sentiment away from some of the more highly rated defensive sectors. Some of the fund's holdings also benefited from the indirect buying of the equity market by the Bank of Japan mentioned above.

The Rest of the World fund holdings were all up by more than 20% in sterling terms during the six months. The Scottish Oriental Smaller Companies Trust was the best performer, helped by a moderation in its discount. The Australian New Horizons Fund also did well as several of its technology and healthcare stock holdings progressed, and the Australian dollar was helpfully strong as commodity prices bounced. During the period we introduced a new holding in the Pinebridge Asia ex Japan Small Cap Fund. This is run by an experienced small cap manager backed by a good team of sector analysts and performed well immediately post the purchase of our holding.

Asset allocation and gearing

We entered the current year underweight compared to the Benchmark in terms of sterling exposure and this proved to be a positive for relative performance in the period. Over the course of the six months however, we decided to put some more cash into the UK market following its relative underperformance. Given the amount by which the UK lagged the other parts of the world, this is not evident in the period end weighting shown in the table below.

Geographical distribution of the investment portfolio
	Portfolio weighting
	31 October 2016 %	30 April 2016 %
North America	42.9	42.3
UK	25.5	29.3
Rest of World	12.3	9.0
Continental Europe	10.8	11.9
Japan	8.5	7.5
Source: F&C

The other main decision we made was to look to add to our Asian exposure after a long period of time when we had been underweight. A number of Asian countries have made progress on the fiscal side, and in some places such as India there has been scope for interest rate reductions. Monetary policy in the US however, is of key importance in driving capital flows in and out of the emerging markets, and a "lower for longer" view in relation to US rates was positive for both Asian and Latin American equities in the period.

In overall terms asset allocation made a small positive contribution in the period, and being geared was also helpful as the markets rose. The Board's policy is to maintain leverage on a strategic basis, and the Company ended the six months with effective gearing of 4.4% (4.7% at the end of April 2016).

Outlook

Rarely can political developments have been so important for markets, Since the end of the period, we have had the result from the US election, which like the Brexit vote confounded the predictions of most observers. It is too early to tell what eventual impact the new President and administration will have on the markets, not least because definitive policy debate was not the main focus of the election campaign. However, the initial view in the markets has been that a more fiscally aggressive approach through increased infrastructure investment by Mr Trump could lead to faster economic growth in the near term and an earlier and more significant move-up in US rates than might otherwise have been the case. As regards Brexit, it will be some time (even years) before the terms of the UK's exit from the EU are concluded and political developments elsewhere in Europe will need to be monitored.

Changed perceptions around the outlook for growth and interest rates have already led to some sharp swings in sentiment towards individual stock market sectors, with areas like real estate, perceived bond-like areas such as consumer staple or utility companies, and technology shares falling out of favour. Areas of the market that may benefit from rising government spending, such as resources plus selected industrials and construction companies have been more in vogue. Emerging markets dependent on selling into the US have lagged in the aftermath of the election mainly on the premise that the new administration is likely to be protectionist.

We will continue to monitor global economic and political developments however, it is important in small cap investing to remain focused on the micro-level individual company fundamentals. We also intend to retain a broadly spread investment portfolio that can hopefully deliver a solid return to investors in the coming period.

 

Unaudited Condensed Income Statement

for the half-year ended 31 October	2016			2015
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains/(losses) on investments	-	102,523	102,523	-	(9,666)	(9,666)
Foreign exchange gains	48	1,403	1,451	5	59	64
Income	5,133	-	5,133	3,876	-	3,876
Management and performance fees	(378)	(1,136)	(1,514)	(246)	(2,044)	(2,290)
Other expenses	(372)	(11)	(383)	(362)	(9)	(371)
Net return before finance costs and taxation	4,431	102,779	107,210	3,273	(11,660)	(8,387)
Finance costs	(222)	(665)	(887)	(214)	(642)	(856)
Net return on ordinary activities before taxation	4,209	102,114	106,323	3,059	(12,302)	(9,243)
Taxation on ordinary activities	(329)	-	(329)	(241)	-	(241)
Net return attributable to shareholders	3,880	102,114	105,994	2,818	(12,302)	(9,484)
Return per share (basic) - pence	6.97	183.42	190.39	5.24	(22.88)	(17.64)
Return per share (diluted) - pence	6.86	172.03	178.89	5.24	(22.88)	(17.64)

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.

 

Unaudited Condensed Statement of Changes in Equity

Half-year ended 31 October 2016		Share	Capital	Equity			Total
	Share	premium	redemption	component	Capital	Revenue	shareholders'
	capital	account	reserve	of CULS	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 April 2016	13,853	141,046	16,158	1,307	368,185	12,643	553,192
Movements during the half-year ended 31 October 2016
Dividends paid Conversion of Convertible Unsecured Loan Stock ("CULS")	- 1	- 47	- -	- (1)	- -	(4,334) -	(4,334) 47
Shares issued	117	4,955	-	-	-	-	5,072
Net return attributable to equity shareholders	-	-	-	-	102,114	3,880	105,994
Balance at 31 October 2016	13,971	146,048	16,158	1,306	470,299	12,189	659,971

Half-year ended 31 October 2015		Share	Capital	Equity			Total
	Share	premium	redemption	component	Capital	Revenue	shareholders'
	capital	account	reserve	of CULS	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 April 2015	13,281	119,394	16,158	1,312	355,285	11,533	516,963
Movements during the half-year ended 31 October 2015
Dividends paid Conversion of Convertible Unsecured Loan Stock ("CULS")	- 2	- 82	- -	- (4)	- -	(3,748) -	(3,748) 80
Shares issued	330	12,555	-	-	-	-	12,885
Net return attributable to equity shareholders	-	-	-	-	(12,302)	2,818	(9,484)
Balance at 31 October 2015	13,613	132,031	16,158	1,308	342,983	10,603	516,696

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

 

Unaudited Condensed Balance Sheet

	31 October 2016	31 October 2015	30 April 2016
	£'000s	£'000s	£'000s
Fixed assets
Investments	688,877	546,545	581,611
Current assets
Debtors	3,792	1,645	2,529
Cash at bank and short-term deposits	12,410	15,368	12,249
	16,202	17,013	14,778
Creditors: amounts falling due within one year
Creditors	(6,556)	(8,624)	(4,787)
Net current assets	9,646	8,389	9,991
Total assets less current liabilities	698,523	554,934	591,602
Creditors: amounts falling due after more than one year
Convertible Unsecured Loan Stock ("CULS")	(38,552)	(38,238)	(38,410)
Net assets	659,971	516,696	553,192
Capital and reserves
Share capital	13,971	13,613	13,853
Share premium account	146,048	132,031	141,046
Capital redemption reserve	16,158	16,158	16,158
Equity component of CULS	1,306	1,308	1,307
Capital reserves	470,299	342,983	368,185
Revenue reserve	12,189	10,603	12,643
Total shareholders' funds	659,971	516,696	553,192
Net asset value per share (basic) - pence	1,180.96	948.89	998.34
Net asset value per share (diluted) - pence	1,165.08	948.11	994.50

 

Unaudited Condensed Statement of Cash Flows

	Half-year ended	Half-year ended
	31 October 2016	31 October 2015
	£'000s	£'000s
Cash flows from operating activities	1,781	1,135
Investing activities
Purchases of investments	(101,464)	(122,172)
Sales of investments	97,666	113,516
Other capital charges	(11)	(10)
Cash flows from investing activities	(3,809)	(8,666)
Cash flows before financing activities	(2,028)	(7,531)
Financing activities
Ordinary dividends paid	(4,334)	(3,748)
Proceeds from issue of shares	5,072	13,081
Cash flows from financing activities	738	9,333
Net movement in cash and cash equivalents	(1,290)	1,802
Cash and cash equivalents at the beginning of the period	12,249	13,502
Effect of movement in foreign exchange	1,451	64
Cash and cash equivalents at the end of the period	12,410	15,368
Represented by:
Cash at bank and short-term deposits	12,410	15,368

 

Unaudited Notes on the Condensed Accounts

1    Significant accounting policies

These condensed financial statements have been prepared on a going concern basis in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority, FRS102, Interim Financial Reporting (FRS104) issued by the FRC in March 2015 and the revised Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts"(SORP) issued by the AIC in November 2014.

The accounting policies applied for the condensed set of financial statements are set out in the Company's annual report for the year ended 30 April 2016.

2    Dividend

The Directors have declared an interim dividend in respect of the year ended 30 April 2017 of 4.0p per share, payable on 31 January 2017 to all shareholders on the register at close of business on 6 January 2017. The amount of this dividend will be £2,240,000 based on 55,989,022 shares in issue at 12 December 2016. This amount has not been accrued in the results for the half-year ended 31 October 2016.

3    Results

The results for the half-year ended 31 October 2016 and 31 October 2015, which are unaudited and which have not been reviewed by the Company's auditors pursuant to the Auditing Practices Board guidance on 'Review of Interim Financial Information', constitute non-statutory accounts within the meaning of Section 434 of the Companies Act 2006. The latest published accounts which have been delivered to the Registrar of Companies are for the year ended 30 April 2016; the report of the auditors thereon was unqualified and did not contain a statement under Section 498 of the Companies Act 2006. The condensed financial statements shown above for the year ended 30 April 2016 are an extract from those accounts.

The report and accounts for the half-year ended 31 October 2016 will be posted to shareholders and made available on the website www.fandcglobalsmallers.com shortly. 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

14 December 2016

 

Directors' Statement of Principal Risks and Uncertainties

Most of the Company's principal risks and uncertainties are market related and no different from those of other investment trusts investing primarily in listed equities. They are described in more detail under the heading "Principal risks and future prospects" within the strategic report in the Company's annual report for the year ended 30 April 2016. They have not changed materially since the date of that report and are not expected to change materially for the remainder of the Company's financial year.

The risks include having an inappropriate strategy in relation to investor needs; failure on the part of the Manager to continue to operate effectively; unfavourable markets or inappropriate asset allocation, sector and stock selection and currency exposure leading to investment underperformance and its effect on share price discount/premium and dividends.  Also included are risks in relation to errors, fraud or control failures at service providers, or loss of data through cyber-threats or business continuity failure.  The longer-term implications of Brexit are as yet unknown, but as noted in the Manager's Review, the Company has benefited in the short term from the recent weakness in Sterling.

Statement of Directors' Responsibilities in Respect of the Half-Yearly Financial Report

In accordance with Chapter 4 of the Disclosure and Transparency Rules the Directors confirm that to the best of their knowledge:

·       the condensed set of financial statements has been prepared in accordance with applicable UK Accounting Standards on a going concern basis, and gives a true and fair view of the assets, liabilities, financial position and net return of the Company;

·       the half-yearly report includes a fair review of the development and performance of the Company and important events that have occurred during the first six months of the financial year and their impact on the financial statements;

·       the Directors' Statement of Principal Risks and Uncertainties shown above is a fair review of the principal risks and uncertainties for the remainder of the financial year;

·       the half-yearly report includes details on related party transactions that have taken place in the first six months of the financial year; and

On behalf of the Board

Anthony Townsend

Chairman

14 December 2016

 

END

 

 

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