Half Yearly Report

RNS Number : 0896Y

F&C Global Smaller Companies PLC

16 December 2010

 



Date:                16 December 2010

Contact:           Peter Ewins                                                   

                        F&C Management Limited                              

                        020 7628 8000                                               

F&C Global Smaller Companies PLC

Unaudited statement of results

for the half-year ended 31 October 2010

Summary of Unaudited Results

Attributable to shareholders	31 October 2010	30 April 2010	% Change
Share price	493.00p	461.00p	+6.9
Net asset value per share (debenture at nominal value)	521.65p	518.10p	+0.7
Net asset value per share (debenture at market value)	513.35p	510.14p	+0.6
Net assets	£209.2m	£208.4m	+0.4
	Half-year ended 31 October 2010	Half-year ended 31 October 2009	% Change
Revenue return per share	2.37p	1.91p	+24.1
Interim dividend per share	1.60p*	1.60p	-

* Payable on 31 January 2011 to shareholders on the register at 31 December 2010.

Manager's Review

After strong performance through the last financial year, share prices fell back in the early part of the period under review as fears about the fiscal position of several euro zone countries combined with indications of a growth slowdown in the US began to undermine investor sentiment. However, markets rallied later on in the period as the risk of a near-term sovereign bond default moderated, economic recovery in most parts of the world continued to gain traction and the US authorities prepared to take further action to bolster growth.

Performance and the discount

Smaller company shares followed the overall market trends. The Company's net asset value ("NAV") per share, on a total return basis and taking the debenture at nominal value, ended the period up by 1.4%, more than recovering the 8.2% drop in the first three months. Following the change implemented with effect from the start of this financial year, the Company's Benchmark is now a blended index of the returns from the Hoare Govett UK Smaller Companies (excluding investment companies) Index (30%) and the MSCI All Country World ex UK Small Cap Index (70%). This delivered a total return in sterling terms of 1.5%, marginally ahead of the rise in the Company's NAV.

Taking the NAV with the debenture at market value and excluding current period income, the discount to NAV at which the shares stood at the period end was 3.5%, well below the 9.0% discount at the end of April. The discount narrowed mainly in response to strong demand for the Company's shares through the F&C savings schemes. This meant that the share price rose by 6.9%, finishing the period near to its all time high. The Board will continue to monitor the level of the discount in the context of its share buyback policy, but the high underlying demand for the Company's shares and the lower prevailing discount level meant that only 120,000 shares (0.3% of the starting share capital) were bought in and cancelled during the period.

Dividends

The overall environment for corporate profits has improved on the back of economic recovery and fewer companies were forced to cut their dividend payments than was the case during the recessionary period. At this stage however, the total revenue that will be received from the portfolio over the full financial year of course remains uncertain and the Board has decided to pay an unchanged interim dividend of 1.6p per share. The interim dividend will be paid on 31 January 2011 to shareholders on the register at 31 December 2010.

Economic and market background

With most economies having moved out of recession, the question going into the new financial year was the extent to which the momentum of recovery could be sustained in the different parts of the world. In very broad terms, over the last six months the pace of growth in the US proved disappointing and its labour market remained weak. Recently this has prompted the Federal Reserve to instigate a new phase of Quantitative Easing ("QE"). This policy effectively consists of increasing the money supply through the purchase of government bonds in an attempt to stimulate bank lending and keep market interest rates low.

In contrast to the US, a number of European economies, most notably Germany, did better than was anticipated as their exports benefited from high demand. However, some of the so called "peripheral" European economies, including Greece, Ireland and Portugal, struggled against the background of hefty fiscal austerity programmes as they sought to get their government finances back under control. The bailout of Greece in the late summer by the International Monetary Fund and the EU and the launch of a 440 billion euro European financial stability facility for the wider eurozone, reduced fears of a wholesale financial crisis and contributed to the global equity market rally.

In the UK, GDP data indicated a pickup in the pace of the recovery despite the new coalition government outlining plans for a sharp fiscal squeeze in the coming years. It remains to be seen how resilient the domestic economy is to the cut-backs in government spending and to the tax rises announced which will really start to impact in earnest from early 2011, but many UK companies are benefiting from growth elsewhere in the world and the domestic stock market outperformed most others in the period.

Elsewhere, robust growth in Asia persisted and, with interest rates in the West remaining at near zero, more capital was attracted to the region, lifting stock markets. The rapid pace of economic development, combined with inflation in the form of higher property, food and commodity prices, led to interest rate rises in a number of countries in the region including the power-houses China, India and Australia. Japan's economy is also recovering but the rise of the yen against the dollar and other currencies is making life hard for the country's exporters. Elsewhere, Brazil's economy is thriving as it is about to move into an exciting period of exploiting its substantial oil reserves and Latin American markets as a whole performed strongly.

Within stock markets, companies delivering earnings upgrades on the back of cyclical recovery and those felt to offer secular growth have tended to be in favour, though defensive stocks had done better in the early part of the period when confidence had been under pressure.

Portfolio performance

Performance on a regional basis is shown in the table below, comparing the local portfolios to the most relevant local smaller company indices. This shows that we were ahead in the UK, Europe and Pacific excluding Japan but behind in the US and Japan. It also illustrates that there were large differences in the markets' performance over this relatively short period.

Geographical performance (total return)
	Portfolio %	Local smaller companies index %
UK	14.7	6.7
USA	-9.5	-5.4
Europe (ex UK)	5.4	3.9
Japan	-11.0	-8.4
Asia Pacific (ex Japan)	17.0	7.6
Source: F&C Management Limited

The best absolute and relative performance came in Asia where, as for Japan, we use third party managed smaller company funds. In the six months we were helped by good stock selection within The Scottish Oriental Smaller Companies Trust and Utilico Emerging Markets. The Japanese portfolio underperformed against a weak local market as the performance of AXA Framlington Japan Smaller Companies proved disappointing.

It was a good period for the UK portfolio, with a number of familiar names again benefiting performance, including software businesses SDL and Craneware, and emerging markets focused fund manager City of London Investment Group. Other winners included speciality chemicals business Elementis, capital equipment supplier Renishaw and recruitment company Robert Walters, all of which have seen a cyclical upturn in demand. Takeovers of Chloride, Shed Media and Spice at good premia to the pre-bid share price levels also helped. On the downside, a number of companies exposed to the looming government spending cutbacks suffered and the Company's holdings in Healthcare Locums, Hill and Smith and Connaught were hit, though fortunately we did manage to sell out of the latter before its ultimate demise into administration. Veterinary practice operator CVS was a weak performer as its business proved less resilient to consumer spending pressures than we had expected.

We also outperformed in Continental Europe. The best individual contribution to this came from oil storage business Rubis, which benefited from strong demand for the use of its facilities, partly due to speculators betting on an increase in oil prices. Luxury accessories business Tod's enjoyed a period of strong sales, while speciality materials business Lanxess gained as its end markets improved and it benefited from consolidating a number of acquisitions. Partners Group, the private equity business, did well on positive fund flow news, while Davide Campari, the spirits business, was re-rated as corporate transactions in the spirits market had a positive read through to the valuation of the company. On the downside, Irish software business Norkom fell as it warned of delays in signing new licences, while Acino also dropped after losing a generic pharmaceutical manufacturing contract. Other holdings under pressure included sanitary-ware business Joyou and train signalling equipment company Ansaldo STS, the latter suffering from fears of reduced spending on infrastructure projects in fiscally stretched countries.

In the US, after two strong years, we were unable to match the Russell 2000 Index over the period. Within financials we were hurt by falls in United Community Banks, whose capital position came under pressure from continuing weakness in the housing market, and Crawford & Co, the loss adjusting business, which was hampered by abnormally low claims activity. Elsewhere health care business Amedisys was undermined by a series of investigations into its business practices and the sector as a whole, while regulatory pressures combined with weak news from peers also hurt Career Education. There were a number of good performers however, including GT Solar, lifted by improving demand for solar power equipment and Genesee and Wyoming, the train-line operator, which was boosted by news of an attractive Australian acquisition. In addition, Intrepid Potash is benefiting from improved demand for fertilisers from the agricultural community, while orders at financial software business ACI Worldwide have improved.

Asset allocation and gearing

There were no major changes in regional weightings, though currency movements can conceal what we have been doing within the portfolio in underlying trading terms. We were net investors in the US late in the period after this market lagged the others and the dollar fell back as the markets started to anticipate a further expansion in the US money supply through QE.

Geographical distribution of the investment portfolio
	Portfolio weighting
	31 October 2010 %	30 April 2010 %
North America	40.8	43.3
UK	33.7	33.5
Continental Europe	9.8	9.1
Japan	5.0	5.4
Rest of World	10.7	8.7
Source: F&C Management Limited

We also added to the Asian weighting, though with the benefit of hindsight we could have been more aggressive on this front as this region, and emerging markets in general, remained in vogue. The poor performance of the portfolio and the market in Japan was disappointing, though fortunately we were underweight relative to the Benchmark. Maintaining a high weighting to the UK market proved to be right over this period, though it is worth making the point that many of the portfolio's better performers were benefiting from growth in overseas business streams.

The relatively positive outlook for corporate earnings, with most economies in recovery mode and interest rates remaining ultra-low in the UK, US and Europe, led the Board to use the Company's gearing and, having started the period with net cash, the Company ended it 3.8% geared.

Outlook

The eventual impact of the QE programme in the US and similar actions elsewhere on economies, inflation and currencies remains the subject of much debate but to date it has helped financial markets as a whole. There is still a clear risk that other eurozone countries are forced to seek financial assistance, while doubts remain about the ability of a number to service their burgeoning debts in the future. However, the current consensus expectation of more than 3% growth in the world economy in 2011 is supportive for equity markets for the period ahead. In overall terms, smaller company shares have done well in recent times as investors have recognised their solid financial performance through the downturn and their gearing into the recovery. If the macro-economic environment develops as anticipated then this could continue, particularly if merger and acquisition activity at the lower end of the market capitalisation range increases.

Peter Ewins

16 December 2010

Unaudited Condensed Income Statement

for the half-year ended 31 October	2010			2009
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains on investments	-	2,400	2,400	-	28,224	28,224
Foreign exchange gains/(losses)	1	62	63	-	(166)	(166)
Income	1,666	-	1,666	1,558	-	1,558
Management and performance fees	(92)	(277)	(369)	(84)	(197)	(281)
Other expenses	(418)	(9)	(427)	(429)	(13)	(442)
Return before finance costs and taxation	1,157	2,176	3,333	1,045	27,848	28,893
Finance costs	(145)	(434)	(579)	(174)	(406)	(580)
Return on ordinary activities before taxation	1,012	1,742	2,754	871	27,442	28,313
Taxation on ordinary activities	(60)	-	(60)	(72)	(2)	(74)
Return attributable to shareholders	952	1,742	2,694	799	27,440	28,239
Return per share - pence	2.37	4.34	6.71	1.91	65.63	67.54

The total column of this statement is the profit and loss account of the Company. The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

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.

Unaudited Condensed Reconciliation of Movements in Shareholders' Funds

Half-year ended 31 October 2010	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 2010	10,055	23,132	16,128	151,423	7,646	208,384
Movements during the half-year ended 31 October 2010
Dividends paid	-	-	-	-	(1,364)	(1,364)
Shares purchased and cancelled	(30)	-	30	(528)	-	(528)
Return attributable to equity shareholders	-	-	-	1,742	952	2,694
Balance at 31 October 2010	10,025	23,132	16,158	152,637	7,234	209,186

Half-year ended 31 October 2009	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 2009	10,479	23,132	15,704	94,022	7,657	150,994
Movements during the half-year ended 31 October 2009
Dividends paid	-	-	-	-	(1,376)	(1,376)
Shares purchased and cancelled	(63)	-	63	(915)	-	(915)
Return attributable to equity shareholders	-	-	-	27,440	799	28,239
Balance at 31 October 2009	10,416	23,132	15,767	120,547	7,080	176,942

Year ended 30 April 2010	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 2009	10,479	23,132	15,704	94,022	7,657	150,994
Movements during the year ended 30 April 2010
Dividends paid	-	-	-	-	(2,027)	(2,027)
Shares purchased and cancelled	(424)	-	424	(6,591)	-	(6,591)
Return attributable to equity shareholders	-	-	-	63,992	2,016	66,008
Balance at 30 April 2010	10,055	23,132	16,128	151,423	7,646	208,384

Unaudited Condensed Balance Sheet

	31 October 2010	31 October 2009	30 April 2010
	£'000s	£'000s	£'000s
Fixed assets
Investments	217,439	180,424	202,279
Current assets
Debtors	747	1,418	6,216
Cash at bank and short-term deposits	5,657	7,914	12,963
	6,404	9,332	19,179
Creditors: amounts falling due within one year	(4,657)	(2,814)	(3,074)
Net current assets	1,747	6,518	16,105
Total assets less current liabilities	219,186	186,942	218,384
Creditors: amounts falling due after more than one year
Debenture	(10,000)	(10,000)	(10,000)
Net assets	209,186	176,942	208,384
Capital and reserves
Called up share capital	10,025	10,416	10,055
Share premium account	23,132	23,132	23,132
Capital redemption reserve	16,158	15,767	16,128
Capital reserves	152,637	120,547	151,423
Revenue reserve	7,234	7,080	7,646
Total shareholders' funds	209,186	176,942	208,384
Net asset value per share - pence	521.65	424.67	518.10

Unaudited Condensed Cash Flow Statement

	Half-year ended	Half-year ended
	31 October 2010	31 October 2009
	£'000s	£'000s
Net cash inflow from operating activities	677	652
Cash outflow from servicing of finance	(574)	(574)
Net cash (outflow)/inflow from financial investment	(5,338)	4,442
Equity dividends paid	(1,364)	(1,376)
Net cash (outflow)/inflow before use of liquid resources and financing	(6,599)	3,144
Movement in short-term deposits	-	-
Net cash outflow from financing	(737)	(998)
(Decrease)/increase in cash	(7,336)	2,146
Reconciliation of net cash flow to movement in net debt
(Decrease)/increase in cash	(7,336)	2,146
Movement in short-term deposits	-	-
Movement in net debt resulting from cash flows	(7,336)	2,146
Foreign exchange movement	30	(157)
Movement in net debt	(7,306)	1,989
Net cash/(debt) brought forward	2,963	(4,075)
Net debt carried forward	(4,343)	(2,086)
Represented by:
Cash at bank	5,657	7,914
Short-term deposits	-	-
	5,657	7,914
Debenture	(10,000)	(10,000)
	(4,343)	(2,086)

Unaudited Notes on the Condensed Accounts

1    Significant accounting policies

These financial statements have been prepared on the basis of the accounting policies set out in the Company's financial statements at 30 April 2010. These accounting policies are expected to be followed throughout the year ending 30 April 2011. With effect from 1 May 2010, and as disclosed in the financial statements to 30 April 2010, 75% of management fees and finance costs are allocated to capital reserve (previously 70%), reflecting the Board's changed expectation of the long-term split of returns from the investment portfolio. In accordance with accounting standards, prior period comparative figures have not been restated.

2    Return per share

	Half-year ended	Half-year ended
	31 October 2010	31 October 2009
Revenue return per share - pence	2.37	1.91
Revenue return attributable to shareholders - £'000s	952	799
Capital return per share - pence	4.34	65.63
Capital return attributable to shareholders - £'000s	1,742	27,440
Weighted average number of ordinary shares in issue during the period	40,120,662	41,809,635

3    Dividends

Dividends on ordinary shares	Register date	Payment date	Half-year ended 31 October 2010 £'000s	Half-year ended 31 October 2009 £'000s
Final for the year ended 30 April 2010 of 3.40p	25 Jun 2010	6 Aug 2010	1,364	-
Final for the year ended 30 April 2009 of 3.29p	3 Jul 2009	6 Aug 2009	-	1,376
			1,364	1,376

The Directors have declared an interim dividend in respect of the year ending 30 April 2011 of 1.60p per share, payable on 31 January 2011 to all shareholders on the register at close of business on 31 December 2010. The amount of this dividend will be £642,000 based on 40,100,990 shares in issue at 14 December 2010. This amount has not been accrued in the results for the half-year ended 31 October 2010.

4    Results

The results for the half-year ended 31 October 2010 and 31 October 2009, which are unaudited, 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 2010; the report of the auditors thereon was unqualified and did not contain a statement under Section 498 of the Companies Act 2006. The abridged financial statements shown above for the year ended 30 April 2010 are an extract from those accounts.

5    Report and accounts

The report and accounts for the half-year ended 31 October 2010 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 Management Limited, Secretary

Exchange House, Primrose Street, London EC2A 2NY

16 December 2010

Directors' Statement of Principal Risks and Uncertainties

The Company's assets consist mainly of listed equities and its principal risks are therefore market related. The large number of investments held, together with the geographic and sector diversity of the portfolio, enables the Company to spread its risk with regard to liquidity, market volatility, currency movements and revenue streams.

Other key risks faced by the Company relate to investment strategy, management and resources, regulatory issues, operational matters, financial controls, counterparty failure and custody of assets.  These risks, and the way in which they are managed, are described in more detail under the heading "Principal risks" within the Directors' Report and Business Review contained within the Company's annual report for the year ended 30 April 2010.  The Company's principal risks and uncertainties 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. 

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 report and accounts for the half-year ended 31 October 2010 of which this statement is an extract, that to the best of their knowledge:

·              the condensed set of financial statements has been prepared in accordance with applicable UK accounting standards and gives a true and fair view of the assets, liabilities, financial position and return of the Company;

·              the half-yearly report includes a fair review of the 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; and

·              the half-yearly report includes details on related party transactions.

On behalf of the Board

Anthony Townsend

Chairman

16 December 2010

 

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