Annual Financial Report

RNS Number : 8622Q

Aberdeen Smaller Co's High Inc Tst

03 March 2016

 

ABERDEEN SMALLER COMPANIES HIGH INCOME TRUST PLC

 

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2015

STRATEGIC REPORT 

1.       COMPANY OVERVIEW AND FINANCIAL HIGHLIGHTS

Launched in March 1992, Aberdeen Smaller Companies High Income Trust PLC (the "Company") is an investment company with its Ordinary shares listed on the premium segment of the London Stock Exchange. The Company is an investment trust and aims to attract long term private and institutional investors wanting to benefit from the income and capital growth prospects of UK smaller companies.

The Company is governed by a Board of Directors, all of whom are independent, and has no employees. Like other investment companies, the Company outsources its investment management and administration to an investment management group, the Aberdeen Asset Management group of companies, and other third party providers. The Company does not have a fixed life.

Financial Highlights

Net asset value total return 2015		FTSE SmallCap Index (excluding Investment Companies) 2015
+13.4%		+13.0%
2014: -2.1%		2014: -2.7%
Share price total return 2015		Earnings per share (revenue) 2015
+20.4%		7.54p
2014: -14.9%		2014: 7.14p
Dividend per share 2015
6.65p
2014: 6.45p

2.       OVERVIEW OF STRATEGY

Business Model

The business of the Company is that of an investment company which seeks to qualify as an investment trust for UK capital gains tax purposes.

The Company aims to attract long term private and institutional investors wanting to benefit from the income and capital growth prospects of smaller companies. The Directors do not envisage any change in this activity in the foreseeable future.

Investment Objective

The objective of the Company is to provide a high and growing dividend and capital growth from a portfolio invested principally in the ordinary shares of smaller UK companies and UK fixed income securities.

Investment Policy

The Company invests in equities, corporate bonds and preference shares. The primary objective of the Company is to invest in the equity shares of smaller companies listed on a regulated UK stock market in order to gain growth in dividends and capital. The Company employs gearing with the primary intention of enhancing income and to a lesser extent, long-term total returns. The majority of the additional funds raised by gearing are invested in investment grade corporate bonds and preference shares.

The level of gearing varies with opportunities in the market and the Board adopts a prudent approach to the use of gearing. The total level of gearing will not exceed 25% of the Company's net assets, at the time it is instigated, and within that gearing limit, the equity portfolio gearing will not exceed 10%, at the time it is instigated.

The investment risk within the portfolio is managed through a diversified portfolio of equities, corporate bonds and preference shares. The Company does not invest in securities that are unquoted at the time of investment. A maximum of 5% of the Company's total assets can be invested in the securities of one company at the time of purchase and the Company invests no more than 15% of its total assets in other listed investment companies (including investment trusts).

Benchmark

FTSE SmallCap Index - excluding Investment Companies (total return).

Management

The Board has appointed Aberdeen Fund Managers Limited ("AFML" or "the Manager") to act as the alternative investment fund manager. 

The Company's portfolio is managed on a day-to-day basis by Aberdeen Asset Managers Limited ("AAML" or "the Investment Manager") by way of a delegation agreement in place between AFML and AAML.

Delivering the Investment Policy

Equity Investment Process

The equity investment process is active and  bottom-up, based on a  disciplined evaluation of companies through direct visits by the Manager. Stock selection is the major source of added value, concentrating on company quality first, then value.

Great emphasis is placed on understanding the business and understanding how it should be valued. New investments are not made without the Manager having first met management of the investee company, undertaken further analysis and written detailed notes to outline the underlying investment merits. Top-down investment factors are secondary in the equity portfolio construction, with diversification rather than formal controls guiding stock and sector weights.

Fixed Income Investment Process 

The fixed income investment process is an active investment style which identifies value between individual securities.

This is achieved by combining bottom-up security selection with a top-down investment approach. Investments in corporate bonds and preference shares are also managed by investment guidelines drawn up by the Board in conjunction with the Investment  Manager which include:

·      No holding in a single fixed interest security to exceed 5% of the total bond issue of the investee company

·      Maximum acquisition cost of an investment grade bond is £1 million and of an non-investment grade bond is £500,000

Key Performance Indicators ("KPIs")

The Board uses a number of financial performance measures to assess the Company's success in achieving its objective and determining the progress of the Company in pursuing its investment policy.  The main KPIs identified by the Board in relation to the Company which are considered at each Board meeting are as follows:

KPI	Description
Performance of net asset value  against the benchmark Index	The Board considers the Company's net asset value total return figures to be the best indicator of performance over time and is therefore the main indicator of performance used by the Board. The Board measures performance against the benchmark index - the FTSE SmallCap Index (excluding Investment Companies). The Board also monitors performance relative to competitor investment trusts over a range of time periods, taking into consideration the differing investment policies and objectives employed by those companies.
Revenue return and dividend growth	The Board monitors the Company's net revenue return and dividend growth through the receipt of detailed income forecasts and considers the level of income at each meeting.  The Company aims to grow the dividend at a level above inflation.
Share price performance	The Board monitors the performance of the Company's share price on a total return basis.
Discount/premium to net asset value	The discount/premium relative to the net asset value per share represented by the share price is closely monitored by the Board.

Principal Risks and Uncertainties

There are a number of risks which, if realised, could have a material adverse effect on the Company and its financial condition, performance and prospects. The Board has identified the principal risks and uncertainties facing the Company at the current time in the table below together with a description of the mitigating actions it has taken. The Board has carried out a robust assessment of these risks, which include those that would threaten its business model, future performance, solvency or liquidity. The principal risks associated with an investment in the Company's shares are published monthly on the Company's factsheet or they can be found in the pre-investment disclosure document ("PIDD") published by the Manager, both of which are on the Company's website. The risks and uncertainties faced by the Company are reviewed annually by the Audit Committee in the form of a risk matrix and heat map and a summary of the principal risks is set out below.

Description	Mitigating Action
Investment portfolio management Investing outside of the investment restrictions and guidelines set by the Board could result in poor performance and inability to meet the Company's objectives, as well as a widening discount.	The Board is responsible for ensuring that the investment policy is met.  The day-to-day management of the Company's assets has been delegated to the Manager under investment guidelines determined by the Board. The Board regularly reviews these guidelines to ensure they remain appropriate and monitors compliance with the guidelines through regular reports from the Manager, including performance reporting. The Board also monitors the Company's share price relative to the net asset value per share.
Gearing Risk Gearing has the effect of accentuating market falls and market gains. The ability of the Company to meet its financial obligations, or an increase in the level of gearing, could result in the Company becoming over-geared or unable to take advantage of potential opportunities and result in a loss of value to the Company's shares.	The Board monitors the Company's actual gearing levels (including equity gearing) in relation to the Company's assets and liabilities and reviews the Company's compliance with the principal loan covenants. In addition, AFML, as alternative investment fund manager, has set an overall leverage limit of 2.0x on a commitment basis (2.5x on a gross notional basis) and includes updates in its reports to the Board.  The Company's gearing currently in place is a £10 million facility comprised of a £5 million 3 year fixed rate and a £5 million 5 year variable rate.  The facility commenced in April 2015 and at the year end £7 million was drawn down.
Income and Dividend Risk The ability of the Company to pay dividends and any future dividend growth will depend primarily on the level of income generated from its investments and the timing of receipt of such income by the Company and the size of the Company's revenue reserves.  Accordingly there is no guarantee that the Company's dividend objective will continue to be met.	The Board monitors this risk through the receipt of detailed income forecasts and considers the level of income at each Board meeting and the Manager has developed detailed and sophisticated models for forecasting and monitoring dividend payments.

Promoting the Company

The Board recognises the importance of promoting the Company to prospective investors both for improving liquidity and enhancing the value and rating of the Company's shares. The Board believes an effective way to achieve this is through subscription to and participation in the promotional programme run by the Aberdeen Group on behalf of a number of investment trusts under its management. The Company's financial contribution to the programme is matched by the Aberdeen Group.  The Aberdeen Group Head of Brand reports quarterly to the Board giving analysis of the promotional activities as well as updates on the shareholder register and any changes in the composition of that register.

The purpose of the programme is both to communicate effectively with existing shareholders and to gain new shareholders with the aim of improving liquidity and enhancing the value and rating of the Company's shares. Communicating the long-term attractions of the Company is key and therefore the Company also supports the Aberdeen Group's investor relations programme which involves regional roadshows, promotional and public relations campaigns. 

Duration

The Company does not have a fixed life. However, the Company's Articles of Association require that an ordinary resolution is proposed at every fifth Annual General Meeting to allow the Company to continue as an investment trust for a further five year period. The present five year mandate expires in 2020 and a vote on continuation will be proposed at the Annual General Meeting to be held in 2020.

Board Diversity

The Board recognises the importance of having a range of skilled, experienced individuals with the appropriate knowledge represented on the Board in order to allow the Board to fulfill its obligations. The Board also recognises the benefits, and is supportive, of the principle of diversity in its recruitment of new board members.  At 31 December 2015, the Board consisted of three males and one female. 

Environmental, Social and Human Rights Issues

The Company has no employees as the Board has delegated day to day management and administrative functions to Aberdeen Fund Managers Limited. There are therefore no disclosures to be made in respect of employees. The Company's socially responsible investment policy is outlined below.

Socially Responsible Investment Policy

The Board acknowledges that there are risks associated with investment in companies which fail to conduct business in a socially responsible manner and has noted the Aberdeen Group's policy on social responsibility. The Investment Manager considers social, environmental and ethical factors which may affect the performance or value of the Company's investments as part of its investment process.  In particular, the Investment Manager encourages companies in which investments are made to adhere to best practice in the area of corporate governance. It believes that this can best be achieved by entering into a dialogue with company management to encourage them, where necessary, to improve their policies in this area. The Company's ultimate objective, however, is to deliver long term growth on its investments for its shareholders. Accordingly, whilst the Investment Manager will seek to favour companies which pursue best practice in the above areas, this must not be to the detriment of the return on the investment portfolio.

Global Greenhouse Gas Emissions

The Company has no greenhouse gas emissions to report from the operations of its business, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013.

Viability Statement

The Company does not have a formal fixed period strategic plan but the Board formally considers risks and strategy at least annually. The Board considers the Company, with no fixed life, to be a long term investment vehicle, but for the purposes of this viability statement has decided that a period of three years is an appropriate period over which to report. The Board considers that this period reflects a balance between looking out over a long term horizon and the inherent uncertainties of looking out further than three years.

In assessing the viability of the Company over the review period the Directors have focused upon the following factors:

·       The principal risks detailed in the Strategic Report and the steps taken to mitigate these risks.

·       The ongoing relevance of the Company's investment objective in the current environment.

·       The Company is invested in readily realisable listed securities.

·       The level of gearing is closely monitored.

Accordingly, taking into account the Company's current position and the potential impact of its principal risks and uncertainties, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for a period of three years from the date of this Report. In making this assessment, the Board has considered that matters such as significant economic or stock market volatility, a substantial reduction in the liquidity of the portfolio, or changes in investor sentiment could have an impact on its assessment of the Company's prospects and viability in the future.

Future

Many of the non-performance related trends likely to affect the Company in the future are common across all closed ended investment companies, such as the attractiveness of investment companies as investment vehicles, the impact of regulatory changes (including MiFID II and the Packaged Retail Investment and Insurance Products regulations) and the recent changes to the pensions and savings market in the UK.  These factors need to be viewed alongside the outlook for the Company, both generally and specifically, in relation to the portfolio. The Board's view on the general outlook for the Company can be found in the Chairman's Statement whilst the Investment Manager's views on the outlook for the portfolio are included in the Investment Manager's Report.

Carolan Dobson

Chairman

2 March 2016

3.       CHAIRMAN'S STATEMENT

Performance

I am pleased to report a good year for the Trust, in another year of volatile stockmarkets and the Trust's net asset value (NAV) on a total return basis increased by 13.4% over the twelve months to 31 December 2015.  This compares with a rise in the FTSE SmallCap (excluding investment companies) Index of 13.0%. The narrowing of the discount, to 13.6% at the year-end, resulted in an increase of 16.6% in the share price.

In the UK, smaller companies outperformed mid-cap equities and significantly outperformed large-cap equities, as represented by the FTSE 100 Index, which fell by 1.3%. Global equity markets also struggled to deliver positive returns with emerging markets the worst affected as investors were reminded that these markets have historically been more volatile and risky. Against this backdrop 2015 was a good year of performance for the Company.

Our earnings rose by 5.5%, and, supported by this, the Board has already declared four interim dividends, totalling 6.65p (2014 - 6.45p) representing an increase of 3.1% on last year. We are pleased that our Trust has delivered another year of double digit total return for our shareholders.

Fixed Income Portfolio

The Board and Managers have been concerned for some years about the pricing distortions created in the corporate bond markets by governments' interventions in the broader fixed interest markets through their Quantitative Easing Programmes and the sustained low level of interest rates. By last year, these policies had been operating for so long, that the premium an investor gained for buying more risky assets had become too low to compensate for the additional risk and absolute yields had become unattractively low.

Accordingly, your Trust has been steadily reducing its holdings in corporate bonds and our current exposure at 3.3% of total assets is the lowest for many years.

Income from corporate bonds is an important source of revenue to support our dividends and our managers have had to work hard and skilfully to make up this lost revenue without straining other areas of our portfolio. What few corporate bonds remain in our portfolio are in aggregate of short duration and good quality companies. This protected our portfolio in a period of bond market volatility and the return over the year was positive at 1%.

When yields become more attractive we will look to rebuild some of our corporate bond position.

A more attractively priced source of fixed income can still be found in the preference share market. However, these bonds are very scarce and our Trust has built up its position in this area steadily over the years and now holds 5.4% of total assets in this area. Performance was strong over the year with a total return of 9.6% from the Trust's preference shares.

Equity Portfolio

The Trust's equity portfolio has risen strongly over the year with a total return of 14.3%.  Due to this and the reductions in the bond portfolio, equity assets now account for 84.7% of our total assets.

Smaller companies do not have the same geographical exposure as some of their large cap peers which benefitted their performance through 2015. The domestic UK backdrop has clearly been supportive for the portfolio with the UK comfortably the largest geographical exposure for the Trust in terms of underlying revenues. 2015 was not an easy year but the Manager's focus upon quality companies that enjoy niche competitive positions coupled with strong balance sheets, has once again delivered. This focus protected the downside in 2014 and has outperformed on the upside in 2015.

Overview

The global backdrop has certainly been volatile, with Central Bank policy, interest rates, currencies and commodities all taking centre stage at different times throughout the year. In the U.S., the interest rate rise was expected to signal that the economy was improving but, instead, it seems to have had the opposite impact with plenty written about the reversing growth trend. China has fuelled the rhetoric over slowing global growth and certainly remains at the forefront of investor thinking.

The falling oil price, and the collapse of global commodity prices in general, have also been fuelling the fire. The headlines stress the negatives of these movements but what is clear is that most areas of the market benefit from cheaper energy. Indeed, the collapse in the oil price has been estimated to be a bigger stimulus to the global economy than quantitative easing.

Strategy and Style Review

The Board reviews a range of topics at our meetings including the gearing and debt structure which we spoke about in late 2014 and early 2015. We have always been proactive on the work we do with our Manager to better understand the dynamics that drive the portfolio. As a Board it is sometimes too easy to look at past performance and delivery and simply to extrapolate this across future years. Over the last few years we have conducted a deeper dive into the portfolio's characteristics and whether these are aligned with the Manager's investment process. We review this at each meeting and are encouraged with results. The Manager's returns have been particularly strong in down markets and whilst they sometimes lag rising markets this has not hindered the performance over the year, or the longer-term, which is what you might have expected. There is also a slight bias to growth over value. The Manager seeks to buy quality companies that add value, own intellectual property and ultimately have pricing power to defend their returns.

We have also looked at the yield dynamics within the portfolio, as we have always given the Manager scope to invest across the yield spectrum. We are mindful that sometimes we may be tilting the portfolio to favour either growth or income to the detriment of the other. The line between income and growth is fine so we seek to make sure that, where we might be sacrificing income for growth, that we were being appropriately rewarded. By screening the top and bottom fifteen yielders (most of the portfolio) we have isolated the returns the Manager has delivered. Again we were happy that we are seeing significantly better returns at the lower end of the yield spectrum but this has been well balanced with reasonable capital and income growth from the higher yielding names in the Trust.

The Board finds this work helpful in making decisions proactively to help deal with the vagaries of markets. It is also information that is fundamental to setting our dividend policy.

Dividend

As reported above, the revenue return per share increased by 5.6% to 7.54p for the year to 31 December 2015 (2014 - 7.14p). The Board have declared four interim dividends during the year ended 31 December 2015 making a total dividend of 6.65p (2014 - 6.45p).  The dividend increase of 3.1% continues the Board's plan to deliver steady dividend growth.  Although the yield on the Trust has reduced slightly, due to the strong share price performance, to 3.1%, it remains at a premium to the yield of the FTSE SmallCap (excluding investment companies) Index of 2.8%. 

Gearing

At the year-end equity gearing remained at around the same level (95%) that we reported at the interim stage i.e. we were slightly ungeared to equities. Overall the net gearing position (borrowings less cash against net assets) has lowered over the year and stood at 7.2% at the year-end.  We repaid a further £1 million of the floating rate facility and now have £2 million of the £5 million facility drawn. The main reason for this being that we see very little value in bond markets at present and, with another two bonds redeemed this year, we have not sought to replace them at yields that we felt unattractive. As a Board we have been very cautious in our bond portfolio and have no desire to take on further risk; we will wait for yields to move back to more normalised levels in their own time.

The lack of yield on offer in bond markets pulls together a lot of the comments that I have made above around the yield backdrop and the current portfolio positioning. Everything is correlated and with central banks driving down yields investors' attention shifted towards equity markets, driving up prices (and valuations) and pushing dividend yields down. Our Trust has benefitted from both of these developments and reduced our risk positions into market rises. We continue to retain our relatively conservative strategy and caution over both bond and equity market valuations.

Change of Name

The Board have considered the name of the Company and whether it reflects the objective of the Trust.  Although the Trust delivers a yield at a premium to its benchmark index, the dividend yield of over 3% is not considered to be high relative to other high income funds. In addition, our Trust seeks to derive its income primarily from equities and therefore generally holds less bonds than more commonly found in other high income funds.

It is therefore our intention to change the name of the Company to "Aberdeen Smaller Companies Income Trust plc." This will be done by a Directors' resolution, exercising the powers conferred under the Company's articles of association and will be effective from the conclusion of this year's AGM.

Succession Planning

The Board regularly undertakes a review of its performance and structure to ensure that it has the appropriate mix of relevant skills and experience for the effective operation of the Company's business.  As part of this we consider the issue of Board refreshment and Jimmy West, who has been a non-executive Director of the Company since 2002, intends to retire from the Board during the course of 2016, a search for a new Audit Committee Chairman has already commenced.  In order to ensure a suitable period of transition for the role of Audit Committee Chairman, Mr West will retire in September 2016, following the publication of the half yearly results. 

The Board would like to thank Jimmy for his significant contribution to the Company over the past 14 years.  His wide knowledge of the investment trust sector and investment management, and in particular, his contribution as Audit Committee Chairman has been invaluable to the Board. He carries the best wishes for the future of all of his Board colleagues. 

Investment Manager

Since the end of the Company's year, Phil Webster, the member of the Aberdeen investment team most associated with the Company in recent years has left the Investment Manager.  Shareholders will be aware that the Aberdeen investment process is both disciplined and team-based.  The Board are pleased to confirm that they remain happy with the management arrangements in place for the Company and we have already developed a good relationship with his replacement, Jonathan Allison.  The Board would like to take this opportunity to thank Phil for his work on behalf of the Company since 2008.

Outlook

The Board believes that we have taken the appropriate action to give us flexibility to deal with the current market backdrop. We have put in place both fixed and floating debt and can draw this down further if we feel that yields are looking attractive. We remain cautious on bond markets but this will correct and the Manager has been encouraged that equity markets are offering more value than for some time.

Annual General Meeting

The Annual General Meeting will be held at Aberdeen's London office on Thursday 21 April 2016 at 12.00 noon followed by a lunch for shareholders. This will give shareholders the opportunity to meet the Directors and Manager after the formal AGM business has concluded and we welcome all shareholders to attend.

Carolan Dobson

Chairman

2 March 2016

4.       INVESTMENT MANAGER'S REVIEW

Performance

After a flat 2014 the Trust returned to growth in 2015 with the net asset value (NAV) rising 13.4% (on a total return basis) and the share price by16.6%. For investors 2015 has been a turbulent year and a market which best suited stock pickers.  Smaller companies also bucked the lacklustre performance of wider equity indices which have been hit by commodity prices collapsing, China and emerging markets slowing and huge currency swings.

Whilst these topics have all been written about extensively they have all played their part, to a greater or lesser degree, and are topics that we have spent considerable time discussing with the management teams of our holdings. While we conduct considerable due diligence on all of our companies the price of oil (and other commodities), competition and regional growth dynamics are all out of our control. This is why we focus our analysis on what management can control: high barriers to entry (capital or know-how), intellectual property, critical products, pricing power and strategy.  These, along with a careful review of a company's cash flow and balance sheet, are all key constituents of our investment analysis. As a house, Aberdeen sits at the conservative end of the spectrum in terms of leverage and would go as far as saying that we prefer an inefficient balance sheet (sitting on too much cash). Given that we know that each one of our companies will run into troubled water at some point in time, balance sheet strength is important to ensure that they have the best ability to come out the other side in as strong a position as possible.

Overview

From a performance perspective, the Company's returns over the year were broadly based by sector and stocks. Although we are, bottom-up stock pickers it is interesting to note that our largest positive contribution to relative performance came from our underweight position to Oil & Gas and Mining that added nearly 200 bps of outperformance to the portfolio. This is not the result of a specific asset allocation call, more the result of our investment process; we have always found it tough getting comfortable with the volatility in exploration & production (E&P) companies combined with our lack of informational advantage on the market price.

While on the subject of sectoral returns, General Industrials, Pharmaceuticals and Food & Drug Retailers all added to our performance whereas the Real Estate sector was one of the main areas of underperformance, due more to our overall underweight than the performance of any individual holdings.  We own Helical Bar and Hansteen, with a secondary exposure through Savills. As a sector we have always been slightly wary of the cyclicality of this market but it is fair to say that balance sheets are in much better state today than they were in the previous cycle. That said, we have been reducing our exposure to the sector recently on concerns that yield tightening has broadly played out and valuations that look less appealing. This comment is more London-centric and while the regions still see more attractive yields overall, we remain cautious after a period of very strong returns.

We have spoken a number of times about the commodity sector and the challenges of owning companies at the smaller end of the market cap spectrum. Whilst it would be easy to dismiss this sector altogether because of the leverage and poor returns there are good quality businesses that we can own. Having sat on the side-lines there will be a time to get involved again, although it does feel like the sector has to take more pain before it will recover.

During the year, Aveva received an approach from Schneider Electric, which subsequently collapsed as they could not agree terms, we will look to add to this holding over time.  We also saw Elementis warn of lower profit expectations for the full-year in part due to weak U.S. shale markets. Exova also has exposure to the sector, although through the more defensive testing market, where regulation and cost of failure drives spending. These are all quality, diversified plays on the oil price but with a much higher level of recurring revenue.  

The takeover of Domino Printing and Anite, which we discussed in the interim report, were welcome opportunities for value crystallisation, but, of course, this then raises the issue of re-investing the proceeds. We initiated new positions in Exova, mentioned above, Xaar, Stock Spirits and Smart Metering and, post the year end we have added a new holding in Burford Capital.

All of these bring something new to the portfolio. In the case of Stock Spirits we declined to invest at the initial public offering as we felt that the valuation did not reflect the short-term challenges they faced from upcoming excise price hikes. Following further due diligence and their lowering profit expectations we have initiated a small position. They are the market leader, by value, in the Polish and Czech vodka markets. Although they have a strong position in the convenience channel they have seen one of their competitors pricing irrationally in the discounter channel. That said, they have a well invested business, are vertically integrated and have a strong balance sheet. Burford Capital is a specialist in litigation financing. This is a niche area of the market where law firms need access to capital to fund cases. They have a very strong track record of delivering high returns as their experienced senior legal team cherry-pick the best cases to tilt the outcome in their favour. Smart Metering Systems are a leading meter rental company serving the electricity and gas utilities. They benefit from a highly visible recurring, long term revenue stream, underpinned by the blue chip nature of their customer base. The current and contracted business provides sufficient cash flows to make the shares attractive. They also have a significant opportunity with the roll-out of domestic smart meters, very few contracts have been awarded to date but this is a sizeable potential market for the company.

The biggest underperformer, in stock terms, this year was BBA Aviation, which provides flight support and aftermarket services through their market leading position in the U.S. business jet market. This weakness is, in our opinion, an overreaction to its acquisition of Landmark, a deal which nearly doubled the size of the business post a sizeable rights issue. We continue to believe that the deal makes strategic sense and cements their dominance but accept that it will take time to extract the full synergies of the network they have acquired. It also dilutes down some of the weaker areas of the group.

The equity portfolio has seen the name count increase over the last twelve months from 40 to 44 holdings.  This has been driven by the pipeline of new ideas but also an active decision to increase the number of holdings in the portfolio. We have always run a concentrated portfolio that has seen some of our preferred names get to 4% positions weights. While the Board has always encouraged us to back our convictions, with recent strong share price performance we feel it is prudent to reduce our exposure to these holdings and thereby also lower the stock specific risk.

Bonds

2015 was a year of enormous volatility in both government yields and credit spreads. The European bond market started the year in a very bullish mood brought about by the ECB's decision to finally engage in quantitative easing (QE). Initially the market's anticipation caused spreads to tighten significantly and brought 10 year German bunds to an all-time-low of 0.07%. However, in May, government bond yields suddenly decompressed, and credit spreads followed. In the second half of the year growing concerns over emerging markets, commodities and slowing global growth caused a further weakness in spreads. Towards the end of the year, the focus was again on the Fed, which in December raised rates for the first time in almost a decade. Markets reacted calmly, with European fixed income almost unaffected.

Given this backdrop we have struggled to find yield in quality issuers whilst also maintaining our short duration stance. We had the Stagecoach 2016 bond redeemed early at what was then a low yield. We used the proceeds to acquire Society of Lloyds 7.241% 21/05/2017 with a 4.3% yield. Earlier in the year we also initiated a position in Coventry Building Society 6.092% perpetual. We are beginning to see some movements in some sectors but still feel it is too early to be buying duration. The yield curve will move in time and we have capital available in the form of undrawn debt to allocate to the asset class but for now we remain patient.

Dividends

We are encouraged by the strength of balance sheets with the Company benefitting from a number of special dividends in 2015. Earnings and dividend growth remains hard won and, while it is difficult to generalise, mid-to-high single digit growth in earnings and dividends was a reasonable outcome for 2015. The revenue account was covered on an underlying basis for the year and we are in a reasonably strong position as we enter 2016.

We still see an opportunity for more special dividends in 2016 as companies continue to generate strong cash-flow. Recent volatility in markets has also left the market more polarised in terms of yield opportunities.

Outlook

We are encouraged by the outlook for smaller companies and feel they are better insulated given the domestic backdrop. We are also seeing a big disconnect between company fundamentals and the market. The recent sell-off has been driven by sentiment and negative headlines which are then self-fulfilling in driving sentiment and the market. Most of these issues have little correlation to the Company's holdings and therefore we see this as good opportunity to add to positions on weakness. We retain the view that smaller companies offer attractive growth over the medium-term without some of the issues facing the larger end of the market cap spectrum and should remain a core part of your portfolio for 2016.

Aberdeen Asset Managers Limited*

2 March 2016

*on behalf of Aberdeen Fund Managers Limited

Both companies are subsidiaries of Aberdeen Asset Management PLC

5.       RESULTS AND PERFORMANCE

Financial Highlights

	31 December 2015	31 December 2014	% change
Total investments	£59,157,000	£58,222,000	+1.6
Shareholders' funds	£55,263,000	£50,098,000	+10.3
Market capitalisation	£47,425,000	£40,682,000	+16.6
Net asset value per share	249.95p	226.59p	+10.3
Share price (mid market)	214.50p	184.00p	+16.6
Discount to adjusted NAV{A}	13.6%	18.2%
Net gearing{B}	7.2%	16.5%
Ongoing charges ratio{C}	1.50%	1.58%
Dividends and earnings
Revenue return per share{D}	7.54p	7.14p	+5.5
Dividends per share{E}	6.65p	6.45p	+3.1
Dividend cover	1.13	1.11
Revenue reserves{F}	£2,423,000	£2,216,000
{A}   Based on IFRS NAV above reduced by dividend adjustment of 1.70p (2014 - 1.65p).
{B}   Calculated in accordance with AIC guidance "Gearing Disclosures post Retail Distribution Review".
{C}   The ongoing charges ratio has been calculated in accordance with guidance issued by the AIC as the total of investment management fees (excluding performance fees) and administrative expenses divided by the average cum income net asset value throughout the year.
{D}   Measures the revenue earnings for the year divided by the weighted average number of Ordinary shares in issue (see Statement of Comprehensive Income).
{E}   The figures for dividends per share reflect the years in which they were earned (see note 7).
{F}   The revenue reserve figure does not take account of the fourth interim dividend amounting to £376,000 (2014 - £365,000).

Performance (Total Return)	1 year	3 year	5 year
	% return	% return	% return
Net asset value	+13.4	+61.0	+89.1
Share price (based on mid price)	+20.4	+55.8	+93.5
FTSE SmallCap Index (excluding Investment Companies)	+13.0	+58.2	+82.9
FTSE All-Share Index	+1.0	+23.4	+33.8
All figures are for total return and assume re-investment of net dividends excluding transaction costs.

Dividends

	Rate per share	xd date	Record date	Payment date
First interim dividend	1.65p	2 April 2015	7 April 2015	30 April 2015
Second interim dividend	1.65p	9 July 2015	10 July 2015	31 July 2015
Third interim dividend	1.65p	8 October 2015	9 October 2015	30 October 2015
Fourth interim dividend	1.70p	7 January 2016	8 January 2016	29 January 2016
	________
2015	6.65p
	________
First interim dividend	1.60p	2 April 2014	4 April 2014	30 April 2014
Second interim dividend	1.60p	9 July 2014	11 July 2014	31 July 2014
Third interim dividend	1.60p	16 October 2014	17 October 2014	31 October 2014
Fourth interim dividend	1.65p	8 January 2015	9 January 2015	30 January 2015
	________
2014	6.45p
	________

6.       PORTFOLIO INVESTMENTS

Investment Portfolio - Ordinary Shares

As at 31 December 2015

	Valuation	Total	Valuation
	2015	portfolio	2014
Company	£'000	%	£'000
Dechra Pharmaceuticals	2,000	3.4	1,999
RPC Group	1,974	3.3	2,056
XP Power	1,931	3.3	1,773
Berendsen	1,791	3.0	1,426
Wilmington	1,775	3.0	2,025
Chesnara	1,638	2.8	1,839
Hansteen	1,617	2.7	1,236
Acal	1,607	2.7	1,387
Devro	1,586	2.7	1,668
Elementis	1,565	2.6	1,405
Ten largest investments	17,484	29.5
Oxford Instruments	1,550	2.6	1,014
Euromoney Institutional Investor	1,532	2.6	1,612
Fisher (James) & Sons	1,484	2.5	923
Helical Bar	1,450	2.5	1,781
Manx Telecom	1,404	2.4	751
Aveva Group	1,400	2.4	880
Morgan Sindall	1,393	2.4	1,159
Victrex	1,371	2.3	1,374
Close Brothers	1,364	2.3	1,524
Interserve	1,317	2.2	1,410
Twenty largest investments	31,749	53.7
Rathbone Brothers	1,287	2.2	1,345
Mothercare	1,258	2.1	1,001
BBA Aviation	1,223	2.1	1,296
Fuller Smith & Turner 'A'	1,182	2.0	1,041
Abcam	1,164	2.0	932
Dignity	1,148	1.9	1,031
Hiscox	1,138	1.9	1,034
Robert Walters	1,107	1.9	1,073
TT Electronics	1,098	1.9	963
Intermediate Capital Group	1,064	1.8	911
Thirty largest investments	43,418	73.5
Fenner	1,017	1.7	1,070
Savills	992	1.7	1,047
Bellway	856	1.4	834
Genus	839	1.4	-
Barr (A.G.)	794	1.3	574
Exova Group	725	1.2	-
Numis Corporation	639	1.1	948
Restaurant Group	638	1.1	614
Xaar	592	1.0	-
Huntsworth	539	0.9	887
Forty largest investments	51,049	86.3
Stock Spirits Group	525	0.9	-
Bloomsbury Publishing	503	0.9	1,030
Keller Group	442	0.7	717
Enquest	195	0.3	-
Smart Metering Systems	27	0.1	-
Total Ordinary shares	52,741	89.2

Investment Portfolio - Other Investments

As at 31 December 2015

	Valuation	Total	Valuation
	2015	portfolio	2014
Company	£'000	%	£'000
Convertibles
Balfour Beatty Cum Conv 10.75%	1,003	1.7	1,016
	___________	___________
Total Convertibles	1,003	1.7
	___________	___________
Corporate Bonds
Wales & West Utilities Finance 6.75% 2036	553	0.9	579
Anglian Water 4.5% 2026	532	0.9	542
Coventry Building Society 6.092%	504	0.9	-
Electricite de France 6% {A}	478	0.8	531
	___________	___________
Total Corporate Bonds	2,067	3.5
	___________	___________
Preference shares
General Accident 8.875%	1,284	2.2	1,215
Aviva 8.75%	1,270	2.1	1,238
Ecclesiastical Insurance 8.625%	792	1.3	771
	___________	___________
Total Preference shares	3,346	5.6
	___________	___________
Total Other Investments	6,416	10.8
	___________	___________
Total investments	59,157	100.0
	___________	___________
{A}        All investments are listed on the London Stock Exchange (sterling based), except those marked, which are listed on overseas exchanges based in sterling.

	Distribution of Assets and Liabilities As at 31 December 2015
		Valuation at		Movement during the year				Valuation at
		31 December					Gains/	31 December
		2014		Purchases	Sales	Other{A}	(losses)	2015
		£'000	%	£'000	£'000	£'000	£'000	£'000	%
Listed investments
Ordinary shares		50,748	101.3	8,967	(12,393)	-	5,419	52,741	95.4
Convertibles		1,016	2.0	-	-	-	(13)	1,003	1.8
Corporate bonds		3,234	6.5	1,032	(2,088)	(47)	(64)	2,067	3.7
Other fixed interest		3,224	6.4	-	-	-	122	3,346	6.1
		______	______	______	______	______	______	______	______
		58,222	116.2	9,999	(14,481)	(47)	5,464	59,157	107.0
		______	______	______	______	______	______	______	______
Current assets		2,115	4.2					3,271	5.9
Other current liabilities		(239)	(0.5)					(165)	(0.3)
Short-term loan		(10,000)	(19.9)					(2,000)	(3.6)
Long-term loan		-	-					(5,000)	(9.0)
		______	______					______	______
Net assets		50,098	100.0					55,263	100.0
		______	______					______	______
Net asset value per Ordinary share		226.6p						249.9p
		______						______
{A} Amortisation adjustment of £47,000 (see note 2).

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.  Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with UK Accounting Standards. The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. 

In preparing these financial statements, the Directors are required to: 

-       select suitable accounting policies and then apply them consistently; 

-       make judgments and estimates that are reasonable and prudent;

-       state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and 

-       prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.  

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. 

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

We confirm that to the best of our knowledge:

-       the financial statements, prepared in accordance with the applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

-       that in the opinion of the Directors, the Annual Report taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Company's position and performance, business model and strategy; and

-       the Strategic Report and Directors' Report include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces.

For and on behalf of Aberdeen Smaller Companies High Income Trust PLC

Carolan Dobson

Chairman

2 March 2016

GOING CONCERN

The Company's assets comprise mainly readily realisable securities which can be sold to meet funding commitments if necessary.  The Board has set gearing limits and regularly reviews actual exposures, cash flow projections and compliance with banking covenants. The Company has a £10 million credit facility of which £5 million expires in 2018 and £5 million expire in 2020.  The Directors believe that the Company has adequate financial resources to continue its operational existence for the foreseeable future and at least 12 months from the date of this annual report and accordingly, continue to adopt the going concern basis in preparing the financial statements.

 

FINANCIAL STATEMENTS

STATEMENT OF COMPREHENSIVE INCOME (AUDITED)

		Year ended			Year ended
		31 December 2015			31 December 2014
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Gains/(losses) on investments at fair value	9	-	5,464	5,464	-	(2,207)	(2,207)
Revenue	2
Dividend income		1,963	-	1,963	1,840	-	1,840
Interest income/(expense) from investments		236	(47)	189	265	(34)	231
Other income		14	-	14	12	-	12
		_______	______	______	_______	______	______
		2,213	5,417	7,630	2,117	(2,241)	(124)
		_______	______	______	_______	______	______
Expenses
Investment management fee	3	(141)	(330)	(471)	(137)	(319)	(456)
Other administrative expenses	4	(351)	-	(351)	(347)	-	(347)
Finance costs of borrowings	5	(55)	(129)	(184)	(54)	(124)	(178)
		_______	______	______	_______	______	______
Profit/(loss) before tax		1,666	4,958	6,624	1,579	(2,684)	(1,105)
Tax expense	6	-	-	-	-	-	-
		_______	______	______	_______	______	______
Profit/(loss) attributable to equity holders	8	1,666	4,958	6,624	1,579	(2,684)	(1,105)
		_______	______	______	_______	______	______
Earnings/(loss) per Ordinary share (pence)	8	7.54	22.42	29.96	7.14	(12.14)	(5.00)
		_______	______	______	_______	______	______
The total column of this statement represents the Company's Statement of Comprehensive Income, prepared in accordance with IFRS. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies. All items in the above statement derive from continuing operations.
The Company does not have any income or expense that is not included in profit for the year, and therefore the "Profit/(loss) attributable to equity holders " is also the "Total comprehensive income attributable to equity holders" as defined in IAS 1 (revised).
All of the profit and comprehensive income are attributable to the equity holders of the Company.
All items in the above statement derive from continuing operations.
The accompanying notes are an integral part of these financial statements.

 

BALANCE SHEET (AUDITED)

		As at	As at
		31 December	31 December
		2015	2014
	Notes	£'000	£'000
Non-current assets
Ordinary shares		52,741	50,748
Convertibles		1,003	1,016
Corporate bonds		2,067	3,234
Other fixed interest		3,346	3,224
		_________	_________
Securities at fair value	9	59,157	58,222
Current assets
Cash and cash equivalents		3,014	1,747
Other receivables	10	257	368
		_________	_________
		3,271	2,115
		_________	_________
Current liabilities
Short-term loan	11	(2,000)	(10,000)
Trade and other payables		(165)	(239)
		_________	_________
		(2,165)	(10,239)
		_________	_________
Net current assets/(liabilities)		1,106	(8,124)
		_________	_________
Total assets less current liabilities		60,263	50,098
		_________	_________
Non-current liabilities
Long-term loan	11	(5,000)	-
		_________	_________
Net assets		55,263	50,098
		_________	_________
Issued capital and reserves attributable to equity holders
Called-up share capital	12	11,055	11,055
Share premium account		11,892	11,892
Capital redemption reserve		2,032	2,032
Retained earnings:
Capital reserve	13	27,861	22,903
Revenue reserve	13	2,423	2,216
		_________	_________
		55,263	50,098
		_________	_________
Net asset value per Ordinary share (pence)	8	249.95	226.59
		_________	_________

STATEMENT OF CHANGES IN EQUITY (AUDITED)

Year ended 31 December 2015
			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
As at 31 December 2014		11,055	11,892	2,032	22,903	2,216	50,098
Revenue profit for the year		-	-	-	-	1,666	1,666
Capital gains for the year		-	-	-	4,958	-	4,958
Equity dividends	7	-	-	-	-	(1,459)	(1,459)
		_______	_______	_______	_______	_______	_______
As at 31 December 2015		11,055	11,892	2,032	27,861	2,423	55,263
		_______	_______	_______	_______	_______	_______
Year ended 31 December 2014
			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
As at 31 December 2013		11,055	11,892	2,032	25,587	2,052	52,618
Revenue profit for the year		-	-	-	-	1,579	1,579
Capital losses for the year		-	-	-	(2,684)	-	(2,684)
Equity dividends	7	-	-	-	-	(1,415)	(1,415)
		_______	_______	_______	_______	_______	_______
As at 31 December 2014		11,055	11,892	2,032	22,903	2,216	50,098
		_______	_______	_______	_______	_______	_______
The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.
The accompanying notes are an integral part of the financial statements.

 

CASH FLOW STATEMENT (AUDITED)

	Year ended		Year ended
	31 December 2015		31 December 2014
	£'000	£'000	£'000	£'000
Cash flows from operating activities
Investment income received		2,275		2,121
Investment management fee paid		(543)		(460)
Other cash expenses		(360)		(320)
		_______		_______
Cash generated from operations		1,372		1,341
Interest paid		(173)		(178)
		_______		_______
Net cash inflows from operating activities		1,199		1,163
		_______		_______
Cash flows from investing activities
Purchases of investments	(9,999)		(7,068)
Sales of investments	14,526		7,384
	_______		_______
Net cash inflow from investing activities		4,527		316
		_______		_______
Cash flows from financing activities
Loan repaid		(10,000)		-
Loan drawdown		7,000		-
Equity dividends paid		(1,459)		(1,415)
		_______		_______
Net cash outflow from financing activities		(4,459)		(1,415)
		_______		_______
Net increase in cash and cash equivalents		1,267		64
		_______		_______

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31 December 2015

1.	Accounting policies
	(a)	Basis of accounting
		The financial statements of the Company have been prepared in accordance with International Financial Reporting Standards (IFRSs) which comprise standards and interpretations approved by the International Accounting Standards Board ("IASB"), and International Accounting Standards and International Financial Reporting Interpretations Committee interpretations approved by the International Accounting Standards Committee ("IASC") that remain in effect, and to the extent that they have been adopted by the European Union.
		The Statement of Recommended Practice for Investment Trust Companies and Venture Capital Trusts issued by the Association of Investment Trust Companies in November 2014 ('the SORP') is applicable for accounting periods commencing on or after 1 January 2015.  There are no significant changes to the Company's accounting policies or disclosures as a result of the adoption of the SORP. Where presentational guidance set out in the SORP is consistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP except as referred to in paragraph (c) and (g) below. The effects on capital and revenue of the items involving departures from the SORP are set out in note 15.
		The financial statements have been prepared under the historical cost convention as modified to include the revaluation of securities held at fair value and on the assumption that approval as an investment trust will continue to be granted. The principal accounting policies adopted are set out below. These policies have been applied consistently throughout the year. The financial statements have been prepared on a going concern basis.
		In order to better reflect the activities of an investment trust company and in accordance with guidance issued by the AIC, supplementary information which analyses the Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Statement of Comprehensive Income. Additionally, the net revenue of the Company is the measure the Directors believe appropriate in assessing its compliance with certain requirements set out in Sections 1158 - 1159 of the Corporation Tax Act 2010.
		At the date of authorisation of these financial statements, the following Standards and Interpretations were effective for annual periods beginning on or after 1 January 2016:
		-	IFRS 14 - Regulatory Deferral Accounts
		At the date of authorisation of these financial statements, the following Standards and Interpretations were effective for annual periods beginning on or after 1 January 2018:
		-	IFRS 9 - Financial Instruments (revised, early adoption permitted)
		-	IFRS 15 - Revenue from Contracts with Customers (early adoption permitted)
		At the date of authorisation of these financial statements, the following Standards and Interpretations were effective for annual periods beginning on or after 1 January 2019:
		-	IFRS 16 - Leases (early adoption permitted)
		The following amendments to Standards are all effective for annual periods beginning on or after 1 January 2016:
		-	IFRS 10 and IAS 28 - Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
		-	IFRS 10, IFRS 12 and IAS 28 - Investment Entities:  Applying the Consolidation Exception
		-	IFRS 11 - Accounting for Acquisitions of Interests in Joint Operations
		-	IAS 1 - Disclosure Initiative
		-	IAS 16 and IAS 38 - Clarification of Acceptable Methods of Depreciation and Amortisation
		-	IAS 27 - Equity Method in Separate Financial Statements
		In addition, under the Annual Improvements to IFRSs 2012 - 2014 Cycle, a number of Standards are included for annual periods beginning on or after 1 January 2016.
		The Directors anticipate that the adoption of these Standards and Interpretations in future periods will have no material financial impact on the financial statements of the Company. The Company concludes however that certain additional disclosures may be necessary on their application.
	(b)	Investments
		Investments have been designated upon initial recognition at fair value through profit or loss. Investments are recognised and de-recognised at trade date where a purchase or sale is under a contract whose terms require delivery within the time frame established by the market concerned, and are initially measured at fair value. Subsequent to initial recognition, investments are valued at fair value. For listed investments, this is deemed to be bid market prices or closing prices for SETS stocks sourced from The London Stock Exchange. SETS is the London Stock Exchange's electronic trading service for UK securities including all the FTSE All-Share Index constituents.
		Gains and losses arising from the changes in fair value are included in net profit or loss for the period as a capital item. Transaction costs are treated as a capital cost.
	(c)	Income
		Dividend income from equity investments including preference shares which have a discretionary dividend is recognised when the shareholders' rights to receive payment have been established, normally the ex-dividend date.
		Interest from debt securities which include preference shares which do not have a discretionary dividend are accounted for on an effective yield basis. Any write off of the premium or discount on acquisition as a result of using this basis is allocated against capital reserve. The SORP recommends that such a write off should be allocated against revenue. The Directors believe this treatment is not appropriate for a high yielding investment trust which frequently trades in debt securities and believe any premium or discount paid for such an investment is a capital item.
		Interest receivable on AAA rated money market funds and short term deposits are accounted for on an accruals basis.
		Underwriting commission is taken to revenue, unless any shares underwritten are required to be taken up, in which case the proportionate commission received is deducted from the cost of the investment.
	(d)	Expenses
		All expenses are accounted for on an accruals basis. In respect of the analysis between revenue and capital items presented within the Statement of Comprehensive Income, all expenses have been presented as revenue items except those where a connection with the maintenance or enhancement of the value of the investments held can be demonstrated. Accordingly the management fee and finance costs have been allocated 30% (2014: 30%) to revenue and 70% (2014: 70%) to capital, in order to reflect the Directors' expected long-term view of the nature of the investment returns of the Company.
	(e)	Bank borrowings
		Interest-bearing bank loans and overdrafts are recorded at the proceeds received. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are accounted for on an accruals basis in the Statement of Comprehensive Income using the effective interest rate method.
	(f)	Finance costs and long-term borrowings
		Long-term borrowings are stated at the amount of the proceeds of issue net of expenses. The finance costs, being the difference between the net proceeds of borrowing and the total amount of payments that require to be made in respect of that borrowing, accrue evenly over the life of the borrowing and are allocated between capital and revenue.
		Finance costs have been allocated 30% (2014: 30%) to revenue and 70% (2014: 70%) to capital in the Statement of Comprehensive Income, in order to reflect the Directors expected long-term view of the nature of the investment returns of the Company.
	(g)	Taxation
		The tax payable is based on the taxable profit for the year. Taxable profit differs from net profit as reported in the  Statement of Comprehensive Income because it excludes items of income or expenditure that are taxable or deductible in other years and it further excludes items that are never taxable or deductible (see note 6 for a more detailed explanation). The Company has no liability for current tax.
		Deferred tax is provided in full on timing differences which result in an obligation at the Balance Sheet date to pay more tax, or a right to pay less tax, at a future date at rates expected to apply when they crystallise, based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in financial statements. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered.
		The SORP requires that a transfer should be made from income to capital equivalent to the tax value of any management expenses that arise in capital but are utilised against revenue. The Directors consider that this requirement is not appropriate for an investment trust with an objective to provide a high and growing dividend that does not generate a corporation tax liability. Given there is only one class of shareholder and hence overall the net effect of such a transfer to the net asset value of the shares is nil no such transfer has been made.
	(h)	Foreign currencies
		Transactions involving foreign currencies are converted at the rate ruling at the time of the transaction. Assets and liabilities in foreign currencies are translated at the closing rates of exchange at the Balance Sheet date. Any gain or loss arising from a change in exchange rate subsequent to the date of the transaction is included as an exchange gain or loss in capital reserve or the revenue account as appropriate.
	(i)	Nature and purpose of reserves
		Share premium account
		The balance classified as share premium includes the premium above nominal value from the proceeds on issue of any equity share capital comprising ordinary shares of 50p.
		Capital redemption reserve
		The capital redemption reserve is used to record the amount equivalent to the nominal value of any of the Company's own shares purchased and cancelled in order to maintain the Company's capital.
		Capital reserve
		This reserve reflects any gains or losses on investments realised in the period along with any increases and decreases in the fair value of investments held that have been recognised in the Statement of Comprehensive Income.
		Revenue reserve
		This reserve reflects all income and costs which are recognised in the revenue column of the Statement of Comprehensive Income. The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.

		2015	2014
2.	Income	£'000	£'000
	Income from investments
	Dividend income from UK equity securities	1,675	1,547
	Dividend income from overseas equity securities	248	185
	Stock dividends	-	93
	Property income distribution	40	15
	Interest income from investments	236	265
		_______	_______
		2,199	2,105
		_______	_______
	Other income
	Bank interest	3	1
	Underwriting commission	11	11
		_______	_______
	Total revenue income	2,213	2,117
		_______	_______
	As per note 1(c), the Company amortises the premium or discount on acquisition on debt securities against unrealised capital reserve. For 2015 this represented £47,000 (2014 - £34,000) which has been reflected in the capital column of the Statement of Comprehensive Income.

		2015			2014
		Revenue	Capital	Total	Revenue	Capital	Total
3.	Management fee	£'000	£'000	£'000	£'000	£'000	£'000
	Management fee	141	330	471	137	319	456
		_______	_______	_______	_______	_______	_______
	For the year ended 31 December 2015 management services were provided by  Aberdeen Fund Managers Limited ("AFML").  The fee is at an annual rate of 0.75% on the Company's net assets adding back bank debt, calculated and paid monthly. The balance due to AFML at the year end was £39,000 (2014 - £111,000 calculated monthly and paid quarterly). The fee is allocated 70% (2014 - 70%) to capital and 30% (2014 - 30%) to revenue.

		2015	2014
4.	Other administrative expenses	£'000	£'000
	Directors' remuneration - fees as Directors	107	107
	Fees payable to auditor (net of VAT):
	Fees payable to the Company's auditor for the audit of the Annual Report	19	19
	Promotional activities	54	52
	Legal and professional fees	12	8
	Registrars fees	16	18
	Printing and postage	17	19
	Broker fees	36	36
	Directors' & Officers' liability insurance	7	6
	Trade subscriptions	23	22
	Other expenses	60	60
		_______	_______
		351	347
		_______	_______
	Expenses of £54,000 (2014 - £52,000) were paid to Aberdeen Fund Managers Limited (AFML) in respect of the promotion of the Company. The balance outstanding at the year end was £14,000 (2014 - £14,000).
	All of the expenses above, with the exception of the auditor's remuneration, include irrecoverable VAT where applicable. The VAT charged on the auditor's remuneration is disclosed within other expenses.

		2015			2014
		Revenue	Capital	Total	Revenue	Capital	Total
5.	Finance costs and borrowings	£'000	£'000	£'000	£'000	£'000	£'000
	Bank loans	55	129	184	54	124	178
		_______	_______	_______	_______	_______	_______

6.	Taxation
	The UK corporation tax rate was 21% until 31 March 2015 and 20% from 1 April 2015 giving an effective rate of 20.25% (2014 - effective rate of 21.50%). The tax assessed for the year is lower than the rate of corporation tax. The differences are explained below:
		2015			2014
		Revenue	Capital	Total	Revenue	Capital	Total
		£'000	£'000	£'000	£'000	£'000	£'000
	Profit/(loss) before tax	1,666	4,958	6,624	1,579	(2,684)	(1,105)
		_______	_______	_______	_______	_______	_______
	Taxation of return on ordinary activities at the standard rate of corporation tax	337	1,004	1,341	339	(577)	(238)
	Effects of:
	UK dividend income not liable to further tax	(357)	-	(357)	(351)	-	(351)
	Capital gains disallowed for the purposes of corporation tax	-	(1,097)	(1,097)	-	482	482
	Overseas income not subject to tax	(50)	-	(50)	(60)	-	(60)
	Excess management expenses not utilised	70	93	163	72	95	167
		_______	_______	_______	_______	_______	_______
	Taxation charge for the year	-	-	-	-	-	-
		_______	_______	_______	_______	_______	_______
	Management expenses arising on revenue items this year were sufficient to offset against taxable revenue. In accordance with accounting policy 1(g) no amount (2014 - £nil) has been credited to capital and charged to revenue as a notional corporation tax item.
	At 31 December 2015, the Company had net surplus management expenses and loan relationship deficits of £11,975,000 (2014 - £11,095,000) in respect of which a deferred tax asset has not been recognised. This is because the Company is not expected to generate taxable income in a future period in excess of the deductible expenses and deficits of that future period and, accordingly, it is unlikely that the Company will be able to reduce future tax liabilities through the use of existing surplus expenses and loan relationship deficits.

		2015	2014
7.	Dividends	£'000	£'000
	Amounts recognised as distributions to equity holders in the period:
	Fourth interim dividend for the year ended 31 December 2014 of 1.65p (2013 - 1.60p) per share	365	354
	Three interim dividends for the year ended 31 December 2015 totalling 4.95p (2014 - 4.80p) per share	1,094	1,061
		_______	_______
		1,459	1,415
		_______	_______
	The fourth interim dividend of 1.70p per share, declared on 4 December 2015 and paid on 29 January 2016, has not been included as a liability in these financial statements.
	We also set out below the total dividends payable in respect of the financial year, which is the basis on which the requirements of Sections 1158-1159 of the Corporation Tax Act 2010 are considered:
		2015	2014
		£'000	£'000
	Three interim dividends for the year ended 31 December 2015 totalling 4.95p (2014 - 4.80p) per share	1,094	1,061
	Fourth interim dividend for the year ended 31 December 2015 of 1.70p (2014 - 1.65p) per share	376	365
		_______	_______
		1,470	1,426
		_______	_______

		2015	2014
8.	Return and net asset value per share	£'000	£'000
	The returns per share are based on the following figures:
	Revenue return	1,666	1,579
	Capital return	4,958	(2,684)
		_______	_______
	Net return	6,624	(1,105)
		_______	_______
	Weighted average number of shares in issue	22,109,765	22,109,765
		___________	___________
	The net asset value per share is based on net assets attributable to shareholders of £55,263,000 (2014 - £50,098,000) and on the 22,109,765 (2014 - 22,109,765) shares in issue at 31 December 2015.

		2015	2014
9.	Non-current assets - securities at fair value	£'000	£'000
	Listed on recognised stock exchanges:
	United Kingdom	58,679	57,691
	Overseas	478	531
		_______	_______
		59,157	58,222
		_______	_______
		2015	2014
		£'000	£'000
	Cost at 31 December 2014	42,695	39,809
	Investment holdings gains at 31 December 2014	15,527	21,011
		_______	_______
	Fair value at 31 December 2014	58,222	60,820
	Purchases	9,999	7,068
	Amortised cost adjustments to fixed interest securities	(47)	(34)
	Sales - proceeds	(14,481)	(7,425)
	Sales - net gains	4,829	3,277
	Movement in investment holdings gains during the year	635	(5,484)
		_______	_______
	Fair value at 31 December 2015	59,157	58,222
		_______	_______
	Cost at 31 December 2015	42,995	42,695
	Investment holdings gains at 31 December 2015	16,162	15,527
		_______	_______
	Fair value at 31 December 2015	59,157	58,222
		_______	_______

 

For an analysis of investments between equity and fixed interest securities and for detailed interest rates, see above. ​​

		2015	2014
	Gains/(losses) on investments	£'000	£'000
	Net realised gains on sales	4,829	3,277
	Movement in fair value	635	(5,484)
		_______	_______
	Gains/(losses) on investments	5,464	(2,207)
		_______	_______
	The total transaction costs on the purchases and sales in the year were £42,000 (2014 - £27,000) and £10,000 (2014 - £7,000) respectively.
	All investments are categorised as held at fair value through profit and loss.

		2015	2014
10.	Other receivables	£'000	£'000
	Due from brokers	-	45
	Accrued income & prepayments	257	318
	Other debtors	-	5
		_______	_______
		257	368
		_______	_______
	None of the above amounts are overdue.

			2015	2014
11.	Current liabilities		£'000	£'000
	(a)	Bank loan included at amortised cost	2,000	10,000
			_______	_______
		Bank loan
		The two year facility of £10 million with State Street Bank was re-negotiated in April 2015. The Company has in place a £10 million facility with State Street Bank comprised of two £5 million tranches; Tranche A is at a fixed rate for three years and Tranche B is at a variable rate for five years.  Tranche A was drawn down in full on 29 April 2015 and is repayable on 27 April 2018. The interest on Tranche A is fixed at 2.47% per annum, payable quarterly in arrears. Tranche A has been included within the balance sheet as a non-current liability as noted below. On Tranche B, £3 million was initially drawn down and rolled over monthly until September 2015 when £1 million was repaid. On 27 November 2015 Tranche B was rolled over for two months at a rate of 1.83613% per annum. Subsequently, the amount drawn down under Tranche B has been rolled over on a monthly basis with a rate of 1.80981% applying at the date this report was approved.
		The Directors are of the opinion that the fair value of the short term bank loan at 31 December 2015 is not materially different from the book value.
			2015	2014
	(b)	Trade and other payables	£'000	£'000
		Investment management fee	39	111
		Interest payable	31	21
		Sundry creditors	95	107
			_______	_______
			165	239
			_______	_______
			2015	2014
	Non-current liabilities		£'000	£'000
	Bank loan included at amortised cost		5,000	-
			_______	_______
	The fair value of the long term loan at 31 December 2015 is estimated to be £5,025,000.

		Ordinary shares
		of 50 pence each
12.	Called-up share capital	Number	£'000
	Allotted and fully paid
	At 31 December 2015 and 31 December 2014	22,109,765	11,055
		_______	_______
	The objective of the Company is to provide a high and growing dividend and capital growth from a portfolio invested principally in the ordinary shares of smaller UK companies and UK fixed income securities.
	The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance.
	The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes:
	·     the planned level of gearing, which takes account of the Investment Manager's views on the market;
	·     the level of equity shares in issue; and
	·     the extent to which revenue in excess of that which is required to be distributed should be retained.
	The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period.
	The Company does not have any externally imposed capital requirements.

		2015	2,014
13.	Retained earnings	£'000	£'000
	Capital reserve
	At 1 January 2015	22,903	25,587
	Net gains on sales of investments during the year	4,829	3,277
	Movement in investment holdings gains during the year	635	(5,484)
	Amortised cost adjustment relating to capital	(47)	(34)
	Finance costs of borrowings (note 5)	(129)	(124)
	Management fee	(330)	(319)
		_______	_______
	At 31 December 2015	27,861	22,903
		_______	_______
	The capital reserve includes investment holding gains amounting to £16,162,000 (2014 - £15,527,000), as disclosed in note 9.
		2015	2014
	Revenue reserve	£'000	£'000
	At 1 January 2015	2,216	2,052
	Revenue return	1,666	1,579
	Dividends paid	(1,459)	(1,415)
		_______	_______
	At 31 December 2015	2,423	2,216
		_______	_______

14.

Financial instruments and risk management

The Company's investment activities expose it to various types of financial risk associated with the financial instruments and markets in which it invests. The Company's financial instruments comprise UK listed equities, preference shares, convertibles and corporate fixed interest bonds, cash balances, debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income. The Company may enter into derivative transactions for the purpose of managing market risks arising from the Company's activities though there was no exposure to derivative instruments, including contracts for difference, during the year.

The Board has delegated the risk management function to Aberdeen Fund Managers Limited ("the AIFM" or "AFML") under the terms of its management agreement with AFML (further details of which are included under note 3). The Board regularly reviews and agrees policies for managing each of the key financial risks identified with the Manager. The types of risk and the Manager's approach to the management of each type of risk, are summarised below. Such approach has been applied throughout the year and has not changed since the previous accounting period. The numerical disclosures exclude short-term debtors and creditors.

Risk management framework

The directors of Aberdeen Fund Managers Limited collectively assume responsibility for AFML's obligations under the AIFMD including reviewing investment performance and monitoring the Company's risk profile during the year.

AFML is a fully integrated member of the Aberdeen Asset Management PLC ("Aberdeen") group of companies (referred to as "the Group"), which provides a variety of services and support to AFML in the conduct of its business activities, including in the oversight of the risk management framework for the Company. The AIFM has delegated the day to day administration of the investment policy to Aberdeen Asset Managers Limited, which is responsible for ensuring that the Company is managed within the terms of its investment guidelines and the limits set out in FUND 3.2.2R (details of which can be found on the Company's website). The AIFM has retained responsibility for monitoring and oversight of investment performance, product risk and regulatory and operational risk for the Company.

The AIFM conducts its risk oversight function through the operation of the Group's risk management processes and systems which are embedded within the Group's operations. The Group's Risk Division supports management in the identification and mitigation of risks and provides independent monitoring of the business. The Division includes Compliance, Business Risk, Market Risk, Risk Management and Legal. The team is headed up by the Group's Head of Risk, who reports to the Chief Executive Officer of the Group. The Risk Division achieves its objective through embedding the Risk Management Framework throughout the organisation using the Group's operational risk management system ("SWORD").

The Group's Internal Audit Department is independent of the Risk Division and reports directly to the Group CEO and to the Audit Committee of the Group's Board of Directors. The Internal Audit Department is responsible for providing an independent assessment of the Group's control environment.

The Group's corporate governance structure is supported by several committees to assist the board of directors of Aberdeen, its subsidiaries and the Company to fulfil their roles and responsibilities. The Group's Risk Division is represented on all committees, with the exception of those committees that deal with investment recommendations. The specific goals and guidelines on the functioning of those committees are described on the committees' terms of reference.

Risk management

The main risks the Company faces from its financial instruments are (i) market risk (comprising interest rate risk and price risk), (ii) liquidity risk and (iii) credit risk.

(i)

Market risk

The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises two elements - interest rate risk and price risk.

Interest rate risk

Interest rate risk is the risk that interest rate movements will affect:

-

the fair value of the investments in fixed interest rate securities;

-

the level of income receivable on cash deposits;

-

interest payable on the Company's variable rate borrowings.

Management of the risk

The Board will monitor the effects of interest movements closely to take account of when making investment and borrowing decisions.

The Board reviews on a regular basis the values of the fixed interest rate securities.

Interest rate profile

The interest rate risk profile of the portfolio of financial assets and liabilities (excluding ordinary shares and convertibles) at the Balance Sheet date was as follows:

Weighted average

Weighted

period for which

average interest

Fixed

Floating

Non- interest

rate is fixed

rate

rate

rate

bearing

As at 31 December 2015

Years

%

£'000

£'000

£'000

Assets

Corporate bonds

19.67

5.65

2,067

-

-

Preference shares

-

6.39

3,346

-

-

Cash

-

-

-

3,014

-

_______

_______

_______

_______

______

Total assets

-

-

5,413

3,014

-

_______

_______

_______

_______

______

Liabilities

Short-term bank loan

0.08

1.84

(2,000)

-

-

Long-term bank loan

2.33

2.47

(5,000)

_______

_______

_______

_______

______

Total liabilities

-

-

(7,000)

-

-

_______

_______

_______

_______

______

Total

-

-

(1,587)

3,014

-

_______

_______

_______

_______

______

Weighted average

Weighted

period for which

average interest

Fixed

Floating

Non- interest

rate is fixed

rate

rate

rate

bearing

As at 31 December 2014

Years

%

£'000

£'000

Assets

Corporate bonds

8.03

5.49

3,234

-

-

Preference shares

-

6.64

3,224

-

-

Cash

-

-

-

1,747

-

_______

_______

_______

_______

______

Total assets

-

-

6,458

1,747

-

_______

_______

_______

_______

______

Liabilities

Short-term bank loan

0.33

1.70

(10,000)

-

-

_______

_______

_______

_______

______

Total liabilities

-

-

(10,000)

-

-

_______

_______

_______

_______

______

Total

-

-

(3,542)

1,747

-

_______

_______

_______

_______

______

The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average interest rate on bank loan is based on the interest rate payable, weighted by the total value of the loan. The maturity date of the Company's loan is shown in note 11 to the financial statements.

The cash assets consist of cash deposits on call earning interest at prevailing market rates.

Short-term debtors and creditors, with the exception of bank loans, have been excluded from the above tables.

All financial liabilities are measured at amortised cost.

Maturity profile

The maturity profile of the Company's financial assets and liabilities at the Balance Sheet date was as follows:

Within

Within

Within

Within

Within

More

1 year

1-2 years

2-3 years

3-4 years

4-5 years

than 5 years

At 31 December 2015

£'000

£'000

£'000

£'000

£'000

£'000

Fixed rate

Corporate bonds

-

-

-

-

-

2,067

Bank loan

(2,000)

-

(5,000)

-

-

-

______

______

______

______

______

_______

(2,000)

-

(5,000)

-

-

2,067

______

______

______

______

______

_______

Floating rate

Cash

3,014

-

-

-

-

-

______

______

______

______

______

_______

Total

1,014

-

(5,000)

-

-

2,067

______

______

______

______

______

_______

Within

Within

Within

Within

Within

More

1 year

1-2 years

2-3 years

3-4 years

4-5 years

than 5 years

At 31 December 2014

£'000

£'000

£'000

£'000

£'000

£'000

Fixed rate

Corporate bonds

936

646

-

-

-

1,652

Bank loan

(10,000)

-

-

-

-

-

______

______

______

______

______

_______

(9,064)

646

-

-

-

1,652

______

______

______

______

______

_______

Floating rate

Cash

1,747

-

-

-

-

-

______

______

______

______

______

_______

Total

(7,317)

646

-

-

-

1,652

______

______

______

______

______

_______

The maturity table above excludes the value of holdings in UK irredeemable preference shares held at the year end, which equated to £3,346,000 (2014 - £3,224,000).

Interest rate sensitivity

The sensitivity analysis below have been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the Balance Sheet date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.

If interest rates had been 100 basis points higher and all other variables were held constant, the Company's:

-

profit before tax for the year ended 31 December 2015 would decrease  by approximately £40,000 (2014 - £73,000 decrease) in relation to the Company's exposure to interest rates on its floating rate cash balances and bank loans. These figures have been calculated based on cash positions and bank loans at each year end; and

-

profit before tax for the year ended 31 December 2015 would decrease  by £58,000 (2014 - £116,000) in relation to the Company's exposure to interest rates on its fixed interest securities. This is based on a Value at Risk ('VaR') calculated at a 99% confidence level.

If interest rates had been 100 basis points lower and all other variables were held constant, the Company's:

-

profit before tax for the year ended 31 December 2015 would increase by approximately £40,000 (2014 - £73,000 increase ) in relation to the Company's exposure to interest rates on its floating rate cash balances and bank loans. These figures have been calculated based on cash positions and bank loans at each year end; and

-

profit before tax for the year ended 31 December 2015 would increase by £58,000 (2014 - £116,000) in relation to the Company's exposure to interest rates on its fixed interest securities. This is based on a Value at Risk ('VaR') calculated at a 99% confidence level.

In the opinion of the Directors, the above sensitivity analyses would not necessarily reflect the year as a whole, since the level of exposure changes frequently as part of the interest rate risk management process used to meet the Company's objectives. The risk parameters used will also fluctuate depending on the current market perception.

Price risk

Price risks (ie changes in market prices other than those arising from interest rate) will affect the value of the quoted investments. The Company's stated objective is to provide a high and growing dividend with capital growth from a portfolio invested principally in the ordinary shares of smaller UK companies and UK fixed income securities.

Management of the risk

It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular sector. The allocation of assets to specific sectors and the stock selection process both act to reduce market risk. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy. All of the investments held by the Company are listed on the London Stock Exchange, with the exception of its holding in Electricite de France, which is traded on Euronext Paris.

Price sensitivity

If market prices at the Balance Sheet date had been 10% higher while all other variables remained constant, the profit before tax attributable to ordinary shareholders for the year ended 31 December 2015 would have increased by £5,374,000 (2014 - £5,176,000). If market prices at the Balance Sheet date had been 10% lower while all other variables remained constant, the profit before tax attributable to ordinary shareholders for the year ended 31 December 2015 would have decreased by £5,374,000 (2014 - £5,176,000).This is based on the Company's equity portfolio and convertibles held at each year end.

(ii)

Liquidity risk

This is the risk that the Company will encounter difficulty raising funds to meet its cash commitments as they fall due. Liquidity risk may result from either the inability to sell financial instruments quickly at their fair value or from the inability to generate cash inflows as required.

Management of the risk

Liquidity risk is not considered to be significant as the Company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the use of loan facilities (note 11).

(iii)

Credit risk

This is failure of the counter party to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss.

Management of the risk

The Company considers credit risk not to be significant as it is actively managed as follows:

-

where the Manager makes an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Company of default;

-

investments in quoted bonds are made across a variety of industry sectors so as to avoid concentrations of credit risk;

-

transactions involving derivatives are entered into only with investment banks, the credit rating of which is taken into account so as to minimise the risk to the Company of default;

-

investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the Manager, and limits are set on the amount that may be due from any one broker;

-

the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the review of failed trade reports on a daily basis. In addition, both stock and cash reconciliations to the custodian's records are performed on a daily basis to ensure discrepancies are investigated on a timely basis. The Manager's compliance department carries out periodic reviews of the custodian's operations and reports its finding to the Manager's risk management committee.

-

transactions involving derivatives, structured notes and other arrangements wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest are subject to rigorous assessment by the Manager of the credit worthiness of that counterparty. The Company's aggregate exposure to each such counterparty is monitored regularly by the Board. The Company does not currently use derivatives. The Manager requires the Board's approval to implement the use of derivatives;

-

cash is held only with reputable banks with high quality external credit enhancements.

None of the Company's financial assets are secured by collateral or other credit enhancements.

Credit risk exposure

In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit risk at 31 December was as follows:

2015

2014

Balance

Maximum

Balance

Maximum

Sheet

exposure

Sheet

exposure

£'000

£'000

£'000

£'000

Non-current assets

Securities at fair value through profit or loss

59,157

59,157

58,222

58,222

Current assets

Trade and other receivables

-

-

50

50

Accrued income

257

257

318

318

Cash and cash equivalents

3,014

3,014

1,747

1,747

_______

_______

_______

_______

62,428

62,428

60,337

60,337

_______

_______

_______

_______

None of the Company's financial assets is past due or impaired.

Fair value of financial assets and liabilities

The book value of cash at bank and bank loans and overdrafts included in these financial statements approximate to fair value because of their short-term maturity. Investments held as dealing investments are valued at fair value. The carrying values of fixed asset investments are stated at their fair values, which have been determined with reference to quoted market prices. For details of bond maturities and interest rates. For all other short-term debtors and creditors, their book values approximate to fair values because of their short-term maturity.

Gearing

The Company has in place a £7 million unsecured loan. Although this gearing increases the opportunity for gain, it also increases the risk of loss in falling markets. The risk of increased gearing is managed by retaining the flexibility to reduce short term borrowings as appropriate.

15.	Income enhancement
	The SORP recommends that debt securities are accounted for on an effective yield basis with the associated adjustment being allocated to revenue. The Company has decided to allocate this adjustment to capital as explained in note 1(c). The effect of this treatment on revenue and capital is set out below.
	As explained in note 1(g) revenue may utilise surplus management expenses that have arisen in capital but does not compensate capital for this tax effect as recommended by the SORP.
	The effect of these income enhancement strategies on capital and income is summarised in the table below. There is a risk with these strategies that capital will be eroded unless the charges to capital are covered by gains elsewhere in the portfolio, and this is managed by investing in a portfolio of shares which in the long run is expected to provide adequate capital growth to absorb the effective yield adjustment while paying growing dividends which contribute to the pursuit of the Company's objectives.
	In following this strategy, the Directors recognise that there is only one class of shareholder.
		2015		2014
		Income	Capital	Income	Capital
		£'000	£'000	£'000	£'000
	Finance costs arising on bank loan finance	(27)	(64)	(27)	(62)
	Return on corresponding investments	45	(45)	53	104
	Amortised cost adjustment charged to capital on debt securities	47	(47)	34	(34)
		_______	_______	_______	_______
		65	(156)	60	8
		_______	_______	_______	_______

16.	Fair value hierarchy
	Under IFRS 13 'Fair Value Measurement' an entity is required to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels:
	-	Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
	-	Level 2: inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly (ie as prices) or indirectly (ie derived from prices); and
	-	Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
	The financial assets and liabilities measured at fair value in the statement of financial position are grouped into the fair value hierarchy at 31 December 2015 as follows:
					Level 1	Level 2	Level 3	Total
				Note	£'000	£'000	£'000	£'000
	Financial assets at fair value through profit or loss
	Quoted equities			a)	56,087	-	-	56,087
	Quoted bonds			b)	3,070	-	-	3,070
					_______	_______	_______	_______
	Total				59,157	-	-	59,157
					_______	_______	_______	_______
	As at 31 December 2014
					Level 1	Level 2	Level 3	Total
				Note	£'000	£'000	£'000	£'000
	Financial assets at fair value through profit or loss
	Quoted equities			a)	53,972	-	-	53,972
	Quoted bonds			b)	4,250	-	-	4,250
					_______	_______	_______	_______
	Total				58,222	-	-	58,222
					_______	_______	_______	_______
	a)		Quoted equities
			The fair value of the Company's investments in quoted equities has been determined by reference to their quoted bid prices at the reporting date. Quoted equities included in Fair Value Level 1 are actively traded on recognised stock exchanges.
	b)		Quoted bonds
			The fair value of the Company's investments in Corporate quoted bonds has been determined by reference to their quoted bid prices at the reporting date.
	There have been no transfers of assets or liabilities between levels of the fair value hierarchy during any of the above periods.

17.	Related party transactions
	Fees payable during the year to the Directors and their interests in the shares of the Company are disclosed within the Directors' Remuneration Report.

18.	Transactions with the Manager
	Management, promotional activities, secretarial and administration services are provided by AFML with details of transactions during the year and balances outstanding at the year end disclosed in notes 3 and 4.

ADDITIONAL NOTES TO THE ANNUAL FINANCIAL REPORT

This Annual Financial Report announcement is not the Company's statutory accounts for the year ended 31 December 2015. The statutory accounts for the year ended 31 December 2015 received an audit report which was unqualified.

The statutory accounts for the financial year ended 31 December 2015 were approved by the Directors on 2 March 2016 but will not be filed with the Registrar of Companies until after the Company's Annual General Meeting which is to be held at 12 noon on 21 April 2016 at Bow Bells House, One Bread Street, London EC4M 9HH.

The Annual Report will be posted to shareholders in March 2016 and additional copies will be available from the Manager (Investor Helpline - Tel. [phone]) or by download from the Company's webpage (www.aberdeensmallercompanies.co.uk)

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.

For Aberdeen Smaller Companies High Income Trust PLC

Aberdeen Asset Management PLC, Secretaries

 

END

 

 

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