Half Yearly Report

RNS Number : 2284U

F&C Global Smaller Companies PLC

19 December 2011

 



Date:                19 December 2011

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 2011

Summary of Unaudited Results

Attributable to shareholders	31 October 2011	30 April 2011	% Change
Share price	524.00p	583.50p	-10.2
Net asset value per share (debenture at nominal value)	543.98p	602.49p	-9.7
Net asset value per share (debenture at market value)	537.35p	595.82p	-9.8
Net assets	£222.4m	£241.6m	-7.9
	Half-year ended 31 October 2011	Half-year ended 31 October 2010	% Change
Revenue return per share	3.41p	2.37p	+43.9
Interim dividend per share	1.63p*	1.60p	+1.9

* Payable on 31 January 2012 to shareholders on the register at 30 December 2011.

Manager's Review

The first half of the Company's financial year has been a challenging time for equity markets. Uncertainty over the fundamental ability of a number of eurozone countries to meet their future financial liabilities was never far from the surface, and this has been the major factor behind the falls in share prices. In addition, global economic growth slowed, creating a less favourable background for company profits.

After a number of strong years, smaller company shares underperformed the market leaders as investors became more risk averse and sought refuge in larger, more liquid stocks. 

Performance and the discount

The Company's Benchmark is a blended index of the returns from the Hoare Govett UK Smaller Companies (excluding investment companies) Index (30%), and the MSCI World All Country ex UK Small Cap Index (70%). With markets falling, this delivered a total return in sterling terms of -12.2%. The net asset value per share ("NAV") total return for the period was -9.1%, so the investment portfolio held up somewhat better, helped by positive stock selection.

The share price fell by 10.2% in the period and the discount to NAV, taking the debenture at fair value and excluding current period income, rose a little to 1.9%. However, there were a number of occasions during the six month period when demand for shares in the market took the share price to a premium against the prevailing NAV.  The Company therefore issued a total of 775,000 new shares to help meet this demand.

Dividends

While stock markets have been under pressure, many companies have still been reporting improved profits and income received from the investment portfolio was comfortably up on the comparative first half of 2010. With income projected to remain strong for the remainder of the financial year, the Board has decided to increase the interim dividend by 1.9% to 1.63p per share. This will be paid on 31 January 2012 to shareholders on the register on 30 December 2011.

Economic and market background

At the start of the year, the hope was that the problems of Greece in particular could be contained and that underlying growth momentum in the developing world and the US would support the outlook for European economies and assuage market concerns about solvency. As time passed and as the impact of austerity programmes in the eurozone took its toll, investors became less confident that fiscal deficits in the affected countries would show the necessary improvement to erase the underlying fear of defaults. A ratings agency downgrade of US government debt in August following political wrangling and slower US growth data further undermined confidence. 

Equity markets sold off aggressively and analysts started to downgrade corporate profits forecasts meaningfully. During September the pressure intensified on the authorities and politicians to act and a second bail-out of Greece, a strengthening of the capitalisation of the European banks, and an enlarged eurozone stability facility were outlined in an attempt to underpin the bond markets.

The UK economy remained under pressure as government spending cuts came through and Europe slowed down. The Bank of England sanctioned a further dose of quantitative easing in an attempt to provide some form of stimulus to activity, but inflation has remained an issue and continues to undermine consumer's real disposable incomes.

Elsewhere in the world, growth has continued to be relatively robust in the key Asian and Latin American countries, though momentum has been under pressure as these economies are not immune to the slowdown elsewhere. Stock markets in countries where interest rates have been pushed up to curb inflationary pressures lagged, with China perhaps the most notable example of this.

On a global basis, companies with defensive and economically less sensitive earnings found favour as the period progressed, while more cyclical names tended to underperform as downgrades fed through.

Portfolio Performance

Stock selection across the portfolio was strong over the period, which to some extent was helped by a more defensive skew to our holdings. In all segments of the portfolio we were ahead of the relevant local small cap index.

Geographical performance (total return sterling adjusted)
for the half year ended 31 October 2011
	Portfolio	Local smaller companies index
UK	-9.8%	-11.5%
USA	-5.8%	-10.9%
Continental Europe	-13.3%	-23.9%
Japan	+1.8%	+1.8%
Rest of World	-8.9%	-15.2%  (Pacific ex Japan) -19.5%  (Latin America)
Source: F&C Management Limited

Outperformance in the developed markets was most marked in the European portfolio. Shares in dairy business Glanbia, which we highlighted in the Annual Report and Accounts, and confectionery business Lindt did well, the latter despite the impact of a strong Swiss franc. Events business CTS Eventim also outperformed after reporting good results. Timing is always important and, while we had been very cautious on financial stocks given the ongoing strains in the eurozone, we bought into German-based Aareal Bank and Dutch insurer Delta Lloyd late in the period, just ahead of an improvement in sentiment towards the sector. These stocks are at the more conservative end of the spectrum, and we feel are attractively valued at this point in time. One weaker performer in the period was SAF Holland, the truck parts supplier, which sold off in common with many industrial cyclicals and did not help its cause by poor communication of its news-flow.

The US portfolio also enjoyed a good period in relative terms. The better performers came from a range of sectors. Crawford, an insurance loss adjuster, was a beneficiary of the BP oil spill as legal claims administration work surged. Conn's and America's Car-Mart both benefited from better sales trends and from indications that credit related business was proving more profitable. Conference calling business Premiere Global Services rallied as new products gained traction, while Waste Connections benefited from the switch towards defensive names. On the downside, education stocks including DeVry were under pressure from weaker enrolments.  Home nursing business Amedisys suffered as health funding came under pressure and the industry was criticised by the Senate Finance Committee.

In the UK several long established holdings once again delivered good returns. Notable amongst these were translation software business SDL, which continued to benefit from the growing need from more companies to globalise their content. Within industrials Senior increased its profit guidance as a result of strong operational performance and a positive outlook for civil aerospace build rates. Galliford Try performed well as house-building margins grew and the company's construction business benefited from previous rationalisation moves. One of the better defensive stock performers was cash and carry business Booker, which again beat analyst forecasts.  Hargreaves Services, the coal-based logistics business did well, as its domestic business remained resilient and it progressed plans to expand its European operations. The worst contributor in the period was electronics business Pace, which was beset by delayed ordering from customers and disrupted by the natural disasters in Japan and Thailand. In the resources area, Eastern Platinum's production disappointed the market as industrial action in South Africa took its toll.

We use funds to gain exposure to Japan and the Rest of the World. Our three Japanese small cap funds moved more or less in line and the overall returns in sterling terms were better than in all the other markets. Japanese small cap stocks had become very cheap in the aftermath of the earthquake in March and were therefore due for a bounce.

Returns from our Rest of World portfolio comfortably out-stripped the Asian and Latin American small cap indices. In the Far East, Scottish Oriental Smaller Companies Trust and Aberdeen's small cap fund were good performers, benefiting from their skew away from weak markets such as China and Korea. Defensively orientated Utilico Emerging Markets also did well, while the separate Utilico Investments fund was lifted by a strong run-up in the value of one of its largest investments in a gold miner. We established a holding in the Advance Brazil Leblon fund, which is mainly focused on smaller stocks in this fast developing market. We have previously found it hard to find appropriate ways to tap into Latin America and, although performance since the purchase has been weak in common with the local market, we are confident that the fund managers will add value over the long term.

Asset allocation and gearing

Early in the period we added to our Japanese exposure as we felt that valuations were becoming compelling. This proved to be the right decision. Later on in the period we also decided to increase our Rest of the World exposure reflecting the general underperformance of emerging markets. We funded these moves by sales within the UK and US portfolios as these markets had been more resilient.

Geographical distribution of the investment portfolio
	Portfolio weighting
	31 October 2011 %	30 April 2011 %
North America	41.3	42.3
UK	29.3	31.3
Rest of World	11.8	10.5
Continental Europe	10.8	10.3
Japan	6.8	5.6
Source: F&C Management Limited

Towards the end of the period we added to the European weighting. While this may seem counter-intuitive given the macro situation, we believe that sentiment towards European equities has become too depressed and presents us with some attractive opportunities. Part of the increase in our exposure was due to the purchase of a holding in a Russian small cap fund. Russian equities have been hit hard by the general trend to risk aversion in late Summer, and we were able to buy into a well managed closed end fund Prosperity Voskhod on a wide discount to NAV.

With markets under pressure and many uncertainties about how events in the eurozone will unfold we have not been inclined to make fuller use of our ability to gear.  The level of effective gearing at the end of the period was 2.2% compared to 2.7% at 30 April 2011.

Outlook

For now it appears likely that economic growth will remain muted at best in the UK and eurozone and sub-trend in the US.  Growth in the global economy as a whole will be lower in 2012 than in recent years. All eyes remain focused on the ultimate resolution of the eurozone's problems and, with no easy solution to hand, there is a strong possibility that equity markets will remain weak. In the circumstances, it is also possible that smaller stocks will be out of favour until there is greater clarity that the worst case scenarios being talked about will not come to pass.

At the portfolio level, we are endeavouring to focus on fundamentally sound business franchises which have a strong balance sheet and attractive cash-flow characteristics.

Peter Ewins

19 December 2011

Unaudited Condensed Income Statement

for the half-year ended 31 October	2011			2010
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
(Losses)/gains on investments	-	(21,845)	(21,845)	-	2,400	2,400
Foreign exchange (losses)/gains	(4)	(46)	(50)	1	62	63
Income	2,239	-	2,239	1,666	-	1,666
Management and performance fees	(106)	(996)	(1,102)	(92)	(277)	(369)
Other expenses	(502)	(6)	(508)	(418)	(9)	(427)
Return before finance costs and taxation	1,627	(22,893)	(21,266)	1,157	2,176	3,333
Finance costs	(145)	(436)	(581)	(145)	(434)	(579)
Return on ordinary activities before taxation	1,482	(23,329)	(21,847)	1,012	1,742	2,754
Taxation on ordinary activities	(106)	-	(106)	(60)	-	(60)
Return attributable to shareholders	1,376	(23,329)	(21,953)	952	1,742	2,694
Return per share - pence	3.41	(57.75)	(54.34)	2.37	4.34	6.71

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 2011	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 2011	10,025	23,132	16,158	184,606	7,683	241,604
Movements during the half-year ended 31 October 2011
Dividends paid	-	-	-	-	(1,403)	(1,403)
Shares issued	194	3,917	-	-	-	4,111
Return attributable to equity shareholders	-	-	-	(23,329)	1,376	(21,953)
Balance at 31 October 2011	10,219	27,049	16,158	161,277	7,656	222,359

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

Year ended 30 April 2011	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 year ended 30 April 2011
Dividends paid	-	-	-	-	(2,002)	(2,002)
Shares purchased and cancelled	(30)	-	30	(528)	-	(528)
Return attributable to equity shareholders	-	-	-	33,711	2,039	35,750
Balance at 30 April 2011	10,025	23,132	16,158	184,606	7,683	241,604

Unaudited Condensed Balance Sheet

	31 October 2011	31 October 2010	30 April 2011
	£'000s	£'000s	£'000s
Fixed assets
Investments	228,170	217,439	248,334
Current assets
Debtors	980	747	969
Cash at bank and short-term deposits	5,281	5,657	3,843
	6,261	6,404	4,812
Creditors: amounts falling due within one year	(2,072)	(4,657)	(1,542)
Net current assets	4,189	1,747	3,270
Total assets less current liabilities	232,359	219,186	251,604
Creditors: amounts falling due after more than one year
Debenture	(10,000)	(10,000)	(10,000)
Net assets	222,359	209,186	241,604
Capital and reserves
Called up share capital	10,219	10,025	10,025
Share premium account	27,049	23,132	23,132
Capital redemption reserve	16,158	16,158	16,158
Capital reserves	161,277	152,637	184,606
Revenue reserve	7,656	7,234	7,683
Total shareholders' funds	222,359	209,186	241,604
Net asset value per share - pence	543.98	521.65	602.49

Unaudited Condensed Cash Flow Statement

	Half-year ended	Half-year ended
	31 October 2011	31 October 2010
	£'000s	£'000s
Net cash inflow from operating activities	1,166	677
Cash outflow from servicing of finance	(576)	(574)
Net cash outflow from financial investment	(1,614)	(5,338)
Equity dividends paid	(1,403)	(1,364)
Net cash outflow before use of liquid resources and financing	(2,427)	(6,599)
Movement in short-term deposits	-	-
Net cash inflow/(outflow) from financing	3,916	(737)
Increase/(decrease) in cash	1,489	(7,336)
Reconciliation of net cash flow to movement in net debt
Increase/(decrease) in cash	1,489	(7,336)
Movement in short-term deposits	-	-
Movement in net debt resulting from cash flows	1,489	(7,336)
Foreign exchange movement	(51)	30
Movement in net debt	1,438	(7,306)
Net (debt)/cash brought forward	(6,157)	2,963
Net debt carried forward	(4,719)	(4,343)
Represented by:
Cash at bank	5,281	5,657
Short-term deposits	-	-
	5,281	5,657
Debenture	(10,000)	(10,000)
	(4,719)	(4,343)

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 2011. These accounting policies are expected to be followed throughout the year ending 30 April 2012.

2    Return per share

	Half-year ended	Half-year ended
	31 October 2011	31 October 2010
Revenue return per share - pence	3.41	2.37
Revenue return attributable to shareholders - £'000s	1,376	952
Capital return per share - pence	(57.75)	4.34
Capital return attributable to shareholders - £'000s	(23,329)	1,742
Weighted average number of ordinary shares in issue during the period	40,397,864	40,120,662

3    Dividends

Dividends on ordinary shares	Register date	Payment date	Half-year ended 31 October 2011 £'000s	Half-year ended 31 October 2010 £'000s
Final for the year ended 30 April 2011 of 3.50p	1 Jul 2011	8 Aug 2011	1,403	-
Final for the year ended 30 April 2010 of 3.40p	25 Jun 2010	6 Aug 2010	-	1,364
			1,403	1,364

The Directors have declared an interim dividend in respect of the year ending 30 April 2012 of 1.63p per share, payable on 31 January 2012 to all shareholders on the register at close of business on 30 December 2011. The amount of this dividend will be £669,000 based on 41,050,990 shares in issue at 15 December 2011. This amount has not been accrued in the results for the half-year ended 31 October 2011.

4    Management and performance fees

There have been no changes to the terms of the management and performance fee agreements with F&C Management Limited, which are set out in detail in the Report and Accounts to 30 April 2011. Management fees have been allocated 75% to capital reserves in accordance with accounting policies. A performance fee of £677,000, allocated 100% to capital reserves in accordance with accounting policies, has been accrued in the period to 31 October 2011 as the Company's net asset value per share outperformed the Benchmark in the period by more than the underperformance brought forward from prior periods (half-year ended 31 October 2010: £nil and year ended 30 April 2011: £nil).

5    Results

The results for the half-year ended 31 October 2011 and 31 October 2010, 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 2011; 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 2011 are an extract from those accounts.

6    Report and accounts

The report and accounts for the half-year ended 31 October 2011 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

19 December 2011

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.

In addition to the risks arising from the ongoing global financial instability, 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 and their management" within the Directors' Report and Business Review contained within the Company's annual report for the year ended 30 April 2011.  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 2011 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

19 December 2011

 

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