Half Yearly Report

RNS Number : 5248I

F&C Global Smaller Companies PLC

09 December 2015

 

Date:                9 December 2015

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 2015

Summary of Unaudited Results

Attributable to shareholders	31 October 2015	30 April 2015	% Change
Share price	965.00p	980.00p	-1.5
Net asset value per share (diluted)	948.89p	970.25p	-2.2
Net assets	£516.7m	£517.0m	-0.1
	Half-year ended 31 October 2015	Half-year ended 31 October 2014	% Change
Revenue return per share (basic)	5.24p	4.88p	+7.4
Interim dividend per share	2.90p*	2.65p	+9.4

* Payable on 29 January 2016 to shareholders on the register at 8 January 2016.

Manager's Review

Equity markets were under pressure in the first half of the financial year, undermined by predominantly weak news on the macro-economic front. The three largest global economies, the US, China and Japan, all appeared to slow down over the course of the Summer, and while Europe as a whole showed some signs of improvement, the overall level of global growth in 2015 looks set to undershoot that recorded in 2014.

Performance

After the previous year, when smaller company shares tended to lag larger stocks, in the period under review there was better relative performance at the lower market cap end of the spectrum in the UK, European and Japanese markets. However, with most markets moving lower, the Net Asset Value ("NAV") total return for the six months on a diluted basis was -1.5%, while the share price was down by 1.5% or 0.8% in total return terms. The Company's Benchmark is calculated from the returns of the MSCI World ex UK Small Cap Index and Numis UK Smaller Companies (excluding investment companies) Index in a 70%/30% proportion, broadly reflecting the geographic skew of the portfolio between international and domestic stocks. This showed a -4.0% total return in sterling terms for the six months.

A total of 1.3m new shares (2.5% of the initial share capital) were issued by the Company in the six months at a small premium to the prevailing NAV per share. The shares ended the period at a 1.7% premium to the diluted NAV (1.0% at the end of April 2015).

Dividends

Although the markets have been lacklustre and there have been some dividend cuts from a number of well-known large cap stocks, many companies held in the portfolio are still managing to deliver earnings growth, providing scope for them to increase their dividends. Revenue returns per share rose by 7.4% and reflecting this, plus a favourable outlook for income in the remainder of the year, the Board has decided to pay a 2.90p dividend, a rise of 9.4% on last year's interim distribution. This will be paid to shareholders on 29 January 2016.

Economic and market background

At the start of the period, our expectation was that the global economy would benefit from the impact of lower oil and other commodity prices on consumer spending power. While retail sales have risen in many countries, in practice the impact of this across the broader economic scene has been more muted than anticipated, particularly in relation to the US and Asia. 

Throughout the period, there was speculation around the potential timing of the long-awaited rise in US rates, with the unemployment rate in the US dropping to a multi-year low. This served to put upward pressure on the US dollar, while at the same time creating protracted weakness in a number of emerging market currencies. Those countries with fiscal deficits and a dependence on commodities within their trade, such as Brazil, were in the eye of the storm. Mounting evidence of a slowdown in China led the government  in August to engineer a depreciation of their own currency, leading to further market volatility. Perhaps unsurprisingly, sentiment towards emerging markets shares remained depressed.

While growth remains far from stellar in Europe, the economies of previously hard-hit countries like Ireland, Spain and more recently Italy, are now back on a better trajectory. The Continent's largest economy Germany is also delivering respectable growth numbers mainly driven by the consumer side, though industrial production data has slowed of late. The ongoing refugee crisis in Europe is creating major logistical and political issues in a number of countries at a local level, but the overall economic impact on the Continent as a whole at this stage has been relatively modest.

Elsewhere, Japan's economy contracted in the second quarter of 2015, with the US and wider Asian slowdowns hampering export business. Despite this set-back Japanese companies on the whole have been producing better than expected profits, helped by the more competitive level of the Yen.

On the domestic front, the UK economy has continued to grow faster than the other major developed countries' economies. With inflation negligible and unemployment down to 5.5%, the rising number of people in employment now have a higher level of real disposable income and consumer spending has been strong. Less positively, the manufacturing side of the economy came under pressure during the period as sterling's strength versus the euro hit exports to the Continent.

Portfolio performance

We look at the performance of the fund across five sub-portfolios. In four of the five; the US, UK, Europe and Rest of World, we did better than the local small cap indices as shown in the following table.

Geographical performance (total return sterling adjusted)
for the half year ended 31 October 2015
	Portfolio	Local smaller companies index
US	-1.0%	-4.6%
UK	+4.5%	+1.2%
Continental Europe	-1.7%	-2.1%
Japan	-5.0%	+1.2%
Rest of World	-13.2%	-15.3%  (Pacific ex Japan) -22.0%  (Latin America)
Source: F&C Investment Business Limited

The best performance came from the UK portfolio. Helped by the general economic environment, a number of our consumer based stocks led the way. JD Sports Fashion's core sports business is still taking market share in the UK, and the company is now moving to open stores in Continental Europe. Vertu Motors once again benefited from the strong UK car market and the management team's skill in enhancing returns from acquired dealerships. Topps Tiles shares rose as sales benefited from more spending on home improvements.

After more than doubling in the second half of the previous financial year, the share price of tonics and mixers supplier Fevertree Drinks surged again. The company upgraded profits guidance with first half sales up by 62%. Shares in Rank, rose by almost 50%. A new management team has moved to augment the online side of the bingo and casino business, taking advantage of the company's strong cash-flow characteristics. Elsewhere, online logistics services company Clipper Logistics was in favour, as it won a number of new contracts, most notably to serve John Lewis's "Click and Collect" service. 

The other positive feature of the period for our UK portfolio was a high level of takeover activity following on from a busy period in the previous year. Anite, Innovation Group and Phoenix IT in the software and services sector, together with business process outsourcer Xchanging, media services company Chime Communications and electronics company HellermannTyton, all fell prey to bids.

Of the weaker performers in the UK, companies exposed to the oil price again stood out, with Hunting, James Fisher and Pressure Technologies all forced to downgrade guidance. Faroe Petroleum dropped after announcing disappointing exploration results in the North Sea. Other companies to flag poor results included collectables business Stanley Gibbons, equipment supplier Speedy Hire and specialist care business Cambian.

The US portfolio performed well relative to the local market. The global insurance sector has seen a bout of consolidation in response to weaker insurance rates, and one of our largest holdings HCC Insurance received an attractive offer from a larger Japanese based peer. Our other sector holdings, notably ProAssurance, also posted strong share price performance. In addition within financials, bank shares performed well as the market looked ahead to the potential for rising interest rates to lift margins. We increased our weighting to regional banks by buying two new holdings, and Sterling Bancorp performed particularly well as its earnings benefited from a combination of solid loan growth and cost-cutting.

A number of services businesses did well over the period, processing servicing business Total System Services was a positive contributor as it added Bank of America as a new customer, while a new holding in CDW Corp paid off as the company's IT distribution business serving the US mid-market performed better than expected.

Long standing holding Atlantic Tele-Network rose as the market applauded good progress made by the company in deploying surplus capital. We decided to sell the holding in retailer Conn's after a run-up in the company's shares with results showing signs of improvement, a decision subsequently vindicated by weaker trading news later in the period.

Relative performance in the US was also helped by an underweight stance towards energy stocks, with only one oil producer Carrizo Oil and Gas, being held in the period. Genesee & Wyoming the railroad operator did however, suffer from lower oil sector related activity, while Summit Materials shares fell on concern about the oil-dependent Texas economy. Payment processor WEX directly exposed to fuel prices was also hit, serving to illustrate how the impact of the collapse in oil prices resonates across more than just the oil producers or service stocks. Other stocks which performed poorly in the US were HMS Holdings, which lost a contract in New Jersey, Pernix Therapeutics, where a product launch was delayed, and America's Car-Mart, where credit performance deteriorated.

We were ahead of the small cap benchmark in Europe, with the largest positive contribution coming from Gerresheimer. This company sold a capital intensive glass tube manufacturing business and reinvested in a high quality US packaging business, moves which were well received by the market. Economic recovery in Ireland lifted the results of ferry operator Irish Continental Group, and the company acquired some container vessels at an attractive price.

Christian Hansen, the ingredients business, which we have held for a number of years, again delivered good results with margins better than expected. Structured financial products company Leonteq announced new partnerships which should deliver further good growth in the future, and the company is now looking to exploit its technological lead by way of licensing deals. Online betting company Betsson is operating in a consolidating market-place, and the company completed a well-received deal of its own in the period in Georgia. Other companies to produce pleasing results included sports equipment and clothing company Amer Sports and recycling/sorting machine supplier Tomra.

A number of the weaker European performers were found in the financial sectors. EFG International in private banking, disappointed with its cost/income ratio and weak new business figures in its first half. Shares in Sparebank were hit by rising loss provisioning as the oil price started to impact across the Norwegian economy, while in asset management Italian based company Azimut suffered as the country's regulators moved to investigate performance fee structures across the industry. Shares in Bolsas Y Mercados, the Spanish stock market operator, pulled back as volumes fell at a time of regulatory change.

Some of the more cyclical industrial stocks held on the portfolio, such as semi-conductor equipment supplier ASM International, underperformed as peers signalled a slowdown. Automotive component suppliers SHW and Elringklinger were hit in the main by stock specific issues and we sold the holdings. Origin Enterprises, the agronomy and agricultural supplies business flagged a squeeze on its profits as a result of seasonal issues and pressure on farm incomes. We added to our holding as we feel positive in relation to the potential further geographic expansion opportunity for the company, notwithstanding the near term challenge to earnings.

We obtain exposure to Japanese and Rest of World small caps by holding a limited number of specialist small cap orientated funds. After an excellent performance in the previous year, our Japanese performance was worse than the MSCI Japan Small Cap Index. Aberdeen's Japanese small cap fund was a weak performer in the six months, with some of the fund's holdings suffering from their exposure to emerging markets, and weak stock selection in consumer sectors. We switched our holding in M&G's Japanese smaller companies fund for a position in the Eastspring Japanese smaller companies fund. Eastspring's fund managers had been managing M&G's fund but this arrangement ceased during the period, and we wished to retain exposure to the same core team who have done well in recent years.

On the Rest of World side, we are investing in funds that invest in smaller company stocks in Asian, Latin American, Middle Eastern and African markets. Over this period, these markets were generally on the back-foot. The Chinese stock market set the tone for wider Asia, with a collapse in early summer prompting some naive policy moves from the authorities. A large proportion of Chinese small cap shares were suspended for a number of days during the worst of the turmoil. While our underlying fund holdings collectively have an underweight exposure to China, other local markets were not immune, and with regional currencies falling versus sterling, the overall return was worse than in all other parts of the fund. Having said this, we benefited from discount narrowing on our holdings in the Scottish Oriental Smaller Companies and Utilico Emerging Markets trusts, and so in overall terms our Rest of World portfolio held up better than both the Asian and Latin American small cap indices.

Asset allocation and gearing

The following table shows the weighting of the portfolio by region and the table above highlights the positioning versus the overall Benchmark. We aim to adjust geographic weightings at the right time to benefit overall performance and over the first half of this year, asset allocation made a small positive contribution to relative performance.

Geographical distribution of the investment portfolio
	Portfolio weighting
	31 October 2015 %	30 April 2015 %
North America	40.9	40.2
UK	30.4	29.6
Continental Europe	12.0	11.5
Rest of World	9.3	11.0
Japan	7.4	7.7
Source: F&C Investment Business Limited

As a consequence of the better performance of the UK portfolio and the acquisition of some new holdings, our domestic weighting rose to over 30% during the first half of the year. We are still finding some interesting companies to invest in on the UK market and participated in a number of IPOs in the period. We also added to the US weighting later in the period after identifying a number of new opportunities in this market. We retained an overweight position in Europe but new ideas were harder to find on the continent.

After very strong performance in the Japanese small cap market in 2014/15, we moved to trim our exposure here. Japanese small caps no longer look compellingly cheap compared to those in other markets and the technical boost to the market from pension fund buying of equities may largely have played out. We remained underweight to the Rest of the World markets as we monitored developments in China and the other key emerging markets. Our overall impression is that margins are under pressure for a lot of Asian based businesses, and valuations for the better quality franchises look reasonably full in the region. Latin America as a whole is a loser from commodity price weakness and we are not looking to have significant exposure to this region in the near term.

We invested the in-coming monies from share issues broadly as they were received, and gearing therefore ended the period little changed at 4.4% (4.8% at 30 April 2015). The Board's policy is to be geared at all times, barring extreme circumstances, to enhance shareholder returns over the long term.

Outlook

The near term outlook for markets is uncertain given the potential headwind from higher US interest rates, and we are conscious of this in terms of our sector allocation strategy. There are signs that industrial production is slowing around the world, but consumer spending remains generally encouraging.

As ever, our focus is more on the individual stock level, and we still see good potential growth from the investment portfolio in the future.

 

Peter Ewins

9 December 2015 

Unaudited Condensed Income Statement

for the half-year ended 31 October	2015			2014
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
(Losses)/gains on investments	-	(9,666)	(9,666)	-	19,753	19,753
Foreign exchange gains/(losses)	5	59	64	(2)	273	271
Income	3,876	-	3,876	3,503	-	3,503
Management and performance fees	(246)	(2,044)	(2,290)	(208)	(1,577)	(1,785)
Other expenses	(362)	(9)	(371)	(362)	(14)	(376)
Net return before finance costs and taxation	3,273	(11,660)	(8,387)	2,931	18,435	21,366
Finance costs	(214)	(642)	(856)	(255)	(765)	(1,020)
Net return on ordinary activities before taxation	3,059	(12,302)	(9,243)	2,676	17,670	20,346
Taxation on ordinary activities	(241)	-	(241)	(157)	-	(157)
Net return attributable to equity shareholders	2,818	(12,302)	(9,484)	2,519	17,670	20,189
Return per share (basic) - pence	5.24	(22.88)	(17.64)	4.88	34.21	39.09
Return per share (diluted) - pence	5.24	(22.88)	(17.64)	4.88	33.50	38.39

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 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 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	-	-	-	-	-	(3,748)	(3,748)
Shares issued	332	12,637	-	(4)	-	-	12,965
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

Half-year ended 31 October 2014	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 half-year ended 31 October 2014
Dividends paid	-	-	-	-	-	(2,839)	(2,839)
Convertible Unsecured Loan Stock ("CULS") issued	-	-	-	1,339	-	-	1,339
Issue costs of equity component of CULS	-	-	-	(27)	-	-	(27)
Shares issued	176	5,891	-	-	-	-	6,067
Net return attributable to equity shareholders	-	-	-	-	17,670	2,519	20,189
Balance at 31 October 2014	12,979	108,351	16,158	1,312	307,238	9,777	455,815

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)
CULS issued	-	-	-	1,339	-	-	1,339
Issue costs of equity component of CULS	-	-	-	(27)	-	-	(27)
Shares issued	478	16,934	-		-	-	17,412
Net 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

Unaudited Condensed Balance Sheet

	31 October 2015	31 October 2014	30 April 2015
	£'000s	£'000s	£'000s
Fixed assets
Investments	546,545	496,343	548,639
Current assets
Debtors	1,645	418	4,086
Cash at bank and short-term deposits	15,368	9,722	13,502
	17,013	10,140	17,588
Creditors: amounts falling due within one year
Creditors	(8,624)	(2,679)	(11,135)
Debenture	-	(10,000)	-
	(8,624)	(12,679)	(11,135)
Net current assets/(liabilities)	8,389	(2,539)	6,453
Total assets less current liabilities	554,934	493,804	555,092
Creditors: amounts falling due after more than one year
Convertible Unsecured Loan Stock ("CULS")	(38,238)	(37,989)	(38,129)
Net assets	516,696	455,815	516,963
Capital and reserves
Called up share capital	13,613	12,979	13,281
Share premium account	132,031	108,351	119,394
Capital redemption reserve	16,158	16,158	16,158
Equity component of CULS	1,308	1,312	1,312
Capital reserves	342,983	307,238	355,285
Revenue reserve	10,603	9,777	11,533
Total shareholders' funds	516,696	455,815	516,963
Net asset value per share (basic) - pence	948.89	877.98	973.11
Net asset value per share (diluted) - pence	948.11	877.98	970.25

Unaudited Condensed Statement of Cash Flows

	Half-year ended	Half-year ended
	31 October 2015	31 October 2014
	£'000s	£'000s
Net cash flows from operating activities	1,135	1,916
Investing activities
Purchases of investments	(122,172)	(118,091)
Sales of investments	113,516	65,660
Other capital charges	(10)	(18)
Cash flows from investing activities	(8,666)	(52,449)
Cash flows before financing activities	(7,531)	(50,533)
Financing activities
Ordinary dividends paid	(3,748)	(2,839)
CULS issued	-	40,000
Issue costs of CULS	-	(795)
Proceeds from issue of shares	13,081	6,913
Cash flows from financing activities	9,333	43,279
Net movement in cash and cash equivalents	1,802	(7,254)
Cash and cash equivalents at the beginning of the period	13,502	16,705
Effect of movement in foreign exchange	64	271
Cash and cash equivalents at the end of the period	15,368	9,722
Represented by:
Cash at bank and short-term deposits	15,368	9,722
*Restated to comply with FRS 102 on Statements of Cash Flows (see note 1)

Unaudited Notes on the Condensed Accounts

1    Significant accounting policies

For the period ended 31 October 2015 (and the year ending 30 April 2016), the Company is applying for the first time, FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland, which forms part of the revised Generally Accepted Accounting Practice (New UK GAAP) issued by the Financial Reporting Council (FRC) in 2012 and 2013.

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, FRS 102, FRS 104 Interim Financial Reporting 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.

As a result of the first time adoption of New UK GAAP and the revised SORP, comparative amounts and presentation formats have been amended where required. The net return attributable to ordinary shareholders and total shareholders' funds remain unchanged from under old UK GAAP basis, as reported in the preceding annual and interim reports. The Statement of Cash Flows has been restated to reflect presentational changes required under FRS 102 and does not include any other material changes.

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 2015. However, the references to prior individual FRSs should now be taken to reference FRS 102.

2    Dividend

The Directors have declared an interim dividend in respect of the year ended 30 April 2016 of 2.90p per share, payable on 29 January 2016 to all shareholders on the register at close of business on 8 January 2016. The amount of this dividend will be £1,587,000 based on 54,715,619 shares in issue at 7 December 2015. This amount has not been accrued in the results for the half-year ended 31 October 2015.

3    Results

The results for the half-year ended 31 October 2015 and 31 October 2014, 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 2015; 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 2015 are an extract from those accounts.

The report and accounts for the half-year ended 31 October 2015 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

9 December 2015

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. The Board analyses these under three main categories: the security of assets; investment performance; and the deviation of the share price from the underlying net asset value per share. These risks are described in more detail under the heading "Principal risks and changes in the year" within the strategic report in the Company's annual report for the year ended 30 April 2015. They have not changed materially since the date of that report and are not expected to change materially for the remaining six months of the Company's financial year.

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

9 December 2015

 

END

 

 

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