Annual Financial Report
ABERDEEN SMALLER COMPANIES INCOME TRUST PLC
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2018
STRATEGIC REPORT
1. FINANCIAL HIGHLIGHTS
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Net asset value total return{A} |
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FTSE Small Cap ex Inv Trust Index total return |
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2018: -14.6% |
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2018: -13.8% |
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2017: +32.9% |
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2017: +15.6% |
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Share price total return{A} |
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Earnings per Ordinary share (revenue) |
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2018: -20.2% |
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2018: 9.03p |
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2017: 46.0% |
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2017: 7.76p |
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Dividend per share |
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2018: 7.35p |
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2017: 7.05p |
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{A} Considered to be an Alternative Performance Measure. Further details can be found on pages 15, 62 and 71 of the published 2018 Annual Report. |
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2. OVERVIEW OF STRATEGY
Business Model
The business of the Company is that of an investment company which conducts its affairs in order to qualify as an investment trust for UK capital gains tax purposes.
The Company aims to attract long term private and institutional investors looking to benefit from the income and capital growth prospects of UK 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 aim 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 is invested in investment grade corporate bonds and preference shares.
Gearing
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.
Risk diversification
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. Although the Company is not permitted to invest more than 15% of its total assets in other listed investment companies (including investment trusts), the Board currently does not intend to invest in other listed investment companies.
Benchmark index
FTSE Small Cap excluding Investment Trusts (total return).
Management
The Board has appointed Aberdeen Standard Fund Managers Limited ("ASFML" or "the Manager") to act as the alternative investment fund manager ("AIFM"). 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 ASFML and AAML. AAML and ASFML are both wholly owned subsidiaries of Standard Life Aberdeen plc, formed by the merger of Aberdeen Asset Management PLC and Standard Life plc on 14 August 2017.
Delivering the Investment Policy
Equity Investment Process
The equity investment process is active and bottom-up, based on a disciplined evaluation of companies through company meetings with the Investment Manager. Stock selection is the major source of added value, concentrating on quality, growth and momentum characteristics.
Great emphasis is placed on understanding a company's business and understanding how it should be valued. New investments are not made without the Investment Manager having first met management of the investee company and undertaken further analysis to outline the underlying investment merits. Top-down investment factors are secondary in the equity portfolio construction, with diversification and 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; and
- Maximum acquisition cost of an investment grade bond is £1 million and of a 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:
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KPI |
Description |
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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 Small Cap excluding Investment Trusts. The returns over 1, 3 and 5 years are provided on page 15 and a graph showing performance against the benchmark index is shown on page 16 of the published 2018 Annual Report.
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.
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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 CPI. A graph showing the dividends and yields over 5 years is provided on page 16 of the published 2018 Annual Report.
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Share price performance |
The Board monitors the performance of the Company's share price on a total return basis. A graph showing the share price total return performance against the benchmark index is shown on page 16 of the published 2018 Annual Report. |
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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. A graph showing the share price discount/premium relative to the net asset value is shown on page 16 of the published 2018 Annual Report. |
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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 includes 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 in 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.
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Description |
Mitigating Action |
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Investment and Market risk The Company is exposed to fluctuations in share prices and a fall in the value of its investment portfolio will have an adverse effect on the value of shareholders' funds. The Company invests in smaller companies which may be subject to greater volatility than larger companies counterparts. |
The Board has appointed ASFML to manage the portfolio within the remit of the investment policy. The Board monitors the results and implementation of the Manager's investment process and reviews the investment portfolio, including diversification and performance, at each meeting. |
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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. |
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.
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Gearing risk Gearing has the effect of accentuating market falls and market gains. The inability 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 its assets and liabilities and reviews the Company's compliance with the principal loan covenants. In addition, ASFML, 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. However, the Board currently has no plans to initiate this level of gearing and intends to continue to employ a much more modest level of gearing.
The Company's gearing consists of a £10 million facility comprised of a £5 million five year fixed rate loan and a £5 million three year variable rate loan. The facility commenced in April 2018 and at the year end £7 million was drawn down (£5 million fixed rate and £2 million variable rate).
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Income and dividend risk The ability of the Company to pay dividends and any future dividend growth will depend over the longer term on the level of income generated from its investments and the timing of receipt of such income by the Company. In the shorter term the size of the Company's revenue reserves will determine the extent that shareholder dividend payments can be less volatile than the dividends actually paid by the companies in which the Trust invest. Accordingly there is no guarantee that the Company's dividend objective will continue to be met.
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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. |
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Operational risk The Company is dependent on third parties for the provision of services and systems, in particular those of the Manager and the Depositary. Failure by a third party provider to carry out its contractual obligations could result in loss or damage to the Company. |
Written agreements are in place defining the roles and responsibilities of third party providers and their performance is reviewed on an annual basis. The Board reviews regular reports from the Manager on its internal controls and risk management systems, including internal audit and compliance monitoring functions. The Manager reports to the Board on the control environment and quality of service provided by third parties, including business continuity plans and policies to address cyber crime. Further details of internal controls are set out in the Audit Committee's Report.
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In addition to these risks, the outcome of the UK Government's negotiations with the European Union on Brexit is still unclear at the date of this report. This remains an economic risk for the Company, principally in relation to the potential impact of Brexit on UK companies within the portfolio and on the Manager's operations. Whilst most of the portfolio holdings are UK-based companies, many have operations overseas with broad and geographically diverse earnings streams. Aberdeen Standard Investments has a significant Brexit program in place aimed at ensuring that they can continue to satisfy their clients' investment needs post Brexit.
In all other respects, the Company's principal risks and uncertainties have not changed materially since the year end.
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 Manager on behalf of a number of investment trusts under its management. The Company's financial contribution to the programme is matched by the Manager and regular reports are provided to the Board on promotional activities as well as analysis of the shareholder 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 Manager'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 therefore 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. Each Director brings different skills and experience to the Board. The Board also recognises the benefits, and is supportive, of the principle of diversity in its recruitment of new Board members. At 31 December 2018, 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 Standard 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.
Modern Slavery Act
Due to the nature of the Company's business, being a company that does not offer goods and services to customers, the Board considers that it is not within the scope of the Modern Slavery Act 2015 because it has no turnover. The Company is therefore not required to make a slavery and human trafficking statement. In any event, the Board considers the Company's supply chains, dealing
predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.
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 Manager'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 above 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. The Company has the ability to renew or repay its gearing: and
- The impact of stress testing on the portfolio, including the effects of any substantial future falls in investment values.
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 and the period over which the performance of the Trust is monitored.
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 changes in regulations and changes within 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 below.
Robert Lister
Chairman
7 March 2019
3. CHAIRMAN'S STATEMENT
Performance
In an uncertain year for capital markets, the Trust's performance at the year-end was slightly behind that of its benchmark, the FTSE Small Cap (excl. investment trusts) Index, with a total return of -14.6%, versus a benchmark total return of -13.8%. Share price performance on the same basis was -20.2%, following a widening of the discount.
Whilst the one year performance figures have lagged, the Trust's Net Asset Value performance over the 3 and 5 year periods remains very strong with returns of 22.8% and 36.4% respectively, representing outperformance relative to the Index of 10.6% and 13.1%.
Dividend
The Company has had an exceptional year in delivering income returns, enhanced by an increase in the number of special dividends received during the year, from Savills, Victrex and in particular Aveva.
Overall this resulted in an increase in the revenue return for the year ending 31 December 2018 to 9.03p (2017 - 7.76p) and allowed the Trust to increase the amount of its total dividend for the year ended 31 December 2018 to 7.35p compared to 7.05p for 2017, an increase of 4.3%, compared to an increase of 2.1% in the CPI in the year.
With the year-end share price at 224p, this gave a dividend yield of 3.3%. Over 3 and 5 years, the dividend has increased by 10.5% and 17.6% respectively compared to rises in CPI of 6.8% and 7.5%.
The undistributed balance of the revenue account will be added to the Company's revenue reserve. The revenue reserve account, which will represent 12.13p per share following payment of the fourth interim dividend, provides the Company with flexibility in future years, should markets be challenged by a lower dividend environment.
Ongoing Charges
Your Board actively monitors costs and is committed to keeping these under tight control. As highlighted in the interim report, it was agreed to revise the basis of the calculation of the management fee from net assets plus debt to net assets with effect from 19 April 2018. The management fee rate remains at 0.75%.
Discount
The Board is disappointed that the share price discount to NAV has widened over the course of the year to 20.9% at the year end, having started the year at a 15.1% discount. The Board continues to monitor the discount closely and works with the Manager to generate additional demand for the Company's shares.
Investee Company Stewardship
The Manager values its active engagement, and continued to meet with its investee companies over the course of the year, something that is strongly encouraged by the Board. Some examples of this are highlighted in the Manager's report.
Gearing/Debt
In April 2018, the Company renewed its debt facilities with The Royal Bank of Scotland, continuing with a £10 million facility, of which £5 million is fixed and fully drawn down and £5 million is floating. At the year end £7 million of the facility was deployed, which is roughly in line with the size of the Trust's fixed income and preference share portfolio.
The renewed facility also continues to have staggered maturity terms for its fixed and floating rate elements, with the floating rate facility being drawn to 2021 and the fixed rate facility to 2023.
This gives the Trust a net gearing position of 6.2%, compared to 8.5% at the end of 2017.
Board Composition
Having taken over as Chairman of the Company in 2017 following my appointment to the Board in 2012, and following the appointments of David Fletcher in 2016 and Dagmar Kent Kershaw in 2017, together with Barry Rose's continued service, we feel that the Board has undergone sufficient refreshment and is now well positioned for the future.
We do, however, continue to review the Board's composition and to consider succession and refreshment policy.
Manager
Following the merger of Aberdeen Asset Management PLC with Standard Life Investments, Abby Glennie took over the management of the portfolio from Jonathan Allison in September last year, having worked with Jonathan on the portfolio since March. Abby is part of the successful Standard Life Investments Smaller Companies team, headed up by Harry Nimmo.
Since taking over responsibility for the portfolio, it has undergone some repositioning towards the Quality Growth Momentum investment process that the Smaller Companies team have successfully followed for over 20 years in the UK Small Cap area.
The Trust's income objective is to grow the dividend above CPI. The change within the management team will add a growth focus to the investment process, which we believe should enhance dividend growth in future years.
Annual General Meeting
The Annual General Meeting will be held at the offices of Aberdeen Standard Investments, 1 Bread Street, London, on Thursday 2 May 2019 at 12 noon. In addition to the formal business of the meeting, our portfolio manager, Abby Glennie, will provide a presentation on performance for the year and the outlook for smaller companies, and there will also be an opportunity for shareholders to meet informally with the Directors and representatives from the management team at the conclusion of the meeting. An invitation to the meeting is included with the Annual Report and shareholders are requested to complete and return this to the Company Secretary.
Outlook
2018 has been a tougher year, following several years of a bull market. The levels of uncertainty have elevated globally, and particularly so in the UK with the Brexit issues.
The economic picture globally and in the UK also looks more challenged. Economic growth is under pressure, industrial production and manufacturing numbers are abating, there is a prospect of further interest rate rises, commodity prices have fallen sharply, and political interference is at heightened levels particularly in the UK and US.
As a Board, however, we believe the Company is well placed to benefit from finding stock specific growth opportunities in what is a very wide and diverse investable universe. The focus on quality companies by our Manager should help provide some protection in tougher environments, and access to management teams remains extremely accommodative which gives excellent investment insights.
Robert Lister
Chairman
7 March 2019
4. INVESTMENT MANAGER'S REPORT
Overview
2018 was a tougher year for the Trust in difficult market environments, with a Net Asset Value (NAV) total return of -14.6%, marginally underperforming the benchmark return of -13.8%. Long term performance remains strong, with good outperformance over the 3 and 5 year time periods. The NAV total returns over 3 and 5 years were +22.8% and 36.4% respectively compared to benchmark returns of +12.2% and 23.3% respectively. The discount widened over 2018, reflecting the share price return of -20.2% as we saw negative sentiment towards UK markets and, in particular, Small Cap which is viewed as being more domestic.
It was an interesting year for UK markets as a whole, particularly in Small Caps. The FTSE All Share Index had the worst annual performance since the global financial crisis. Following a very strong year in 2017, where UK Small Cap was one of the strongest asset classes globally, 2018 proved more challenging. The Trust's benchmark, the FTSE Small Cap ex IT, was the weakest index in the UK, with a total return of -13.8% in 2018. The FTSE 100 held up best with a return of -8.7%, as investors looked for more globally diverse and defensive exposures in the second half of 2018, often gained through the mega caps. Small Caps showed resilience in the first half of 2018, but peaked at the end of May and had a challenging second half, falling sharply in Q4.
We would remind shareholders that UK Small Cap is a very wide and diverse investment universe. Exposure to UK Small Cap is not just exposure to the UK economy. We continue to source a wide range of high quality and high growth businesses in this space. This is particularly important in times of economic and macro stress, where the companies we invest in have stock specific drivers which remain strong despite the external headwinds they might be facing. Calling macroeconomic factors is not our key skill, particularly in these unprecedented times of political uncertainty, and we continue to focus on bottom up stock picking. Our close contact with companies, many of which we have known and invested in for many years, is key to our successful investment track record within Aberdeen Standard Investments Small Cap team.
The valuation of the market has continued to fall this year, with MSCI UK standing at 13.2x Price/Earnings ratio (P/E) at the year end, and dividend yields at almost a 5% level. The UK market very much looks to be in "cheap" territory. The challenge is that earnings revisions have been negative through the year, and the market needs to see some stability of this to gain confidence in the outlook.
Against this tough environment, the Trust marginally underperformed the benchmark. We believe that the fundamentals of our investment process, Quality, Growth and Momentum, remain key and will be increasingly important throughout 2019 as well. The sharp market rotation in Q4, out of growth names into value names, we believe has settled, and was somewhat characterised by profit taking in those high quality high growth businesses which had performed so strongly over the past year. Following many years of strong bull markets and economic growth, in hindsight we look to have entered a bear market around late May, and our focus on quality is key to relative outperformance through tougher environments.
The split of total assets at the year-end is similar to previous years, with just below 90% of the assets in equities, around 7% in bonds and preference shares, and the remainder in cash.
Equity Portfolio
The three biggest contributors to performance in 2018 were Burford Capital, Aveva and Telecom Plus. Burford was also one of the best contributors in 2017, highlighting its strength over the long term and why it remits a large position size despite being one of the lower yielders. The growth Burford has delivered is impressive, with attractive returns, and a bright outlook given increased funding. Burford is the leader in litigation finance, a market which is large and growing, and with a leading position it has created barriers to entry. It hasa track record of superior underwriting expertise, has developed a superb network of clients which gives it great origination abilities, and has access to a diversified investor base for capital requirements. Aveva has had a very solid year, driven by a combination of strong underlying growth, and the benefits of the merger with Schneider Software coming through. It has integrated the businesses quickly, with enhanced product portfolios, improved sales efficiencies, and cost cutting, with more benefits to flow through in 2019. This deal looks to have been a very smart one. Importantly we believe the business is less dependent or correlated to oil prices that it has been historically. The balance sheet is net cash, with attractive dividend growth. Lastly Telecom Plus has been a strong performer, particularly in Q4. After a long period of market disruption from low priced challengers, the environment is now going in its favour. Regulation has improved its position, with a price cap forthcoming, and with smaller challengers going bust, and price inflation at the lower end of the market, its competitive position has improved heavily and this increases our optimism of strong growth coming back into the business. Its balance sheet is well positioned, and provides a strong dividend yield.
The main detractors from performance to highlight include Victoria and Cairn Homes. Victoria shares fell sharply in October on their trading update. Results were slightly disappointing on margin levels, but the market de-rated shares on concern over the future strategy and its need to refinance and the associated costs of that. Over the week it tried to launch a €450m bond, the pricing of that debt rose significantly, and the issue was cancelled. Victoria's business model is based around acquisitions, and improving those businesses, so where its multiple is lower than previously, and debt costs are rising, this challenges its model. Cairn Homes shares were weak through the year, but particularly in Q4. Earnings downgrades were made to reflect a slower level of ramp-up, as well as slightly higher operating costs. The uncertainty around Brexit also remains a concern for Irish markets and the housing market. Given neither of these names pay dividends, and their outlooks have weakened, exposure to both holdings were reduced.
There has been a certain amount of repositioning in the portfolio this year, but the overall impact on turnover levels has been minimal. The transactions have partly been driven by the investment process focusing on quality, growth and momentum going forward. Through these transactions the Manager has maintained the dividend yield exposure, but improved the quality of the businesses (strong balance sheets and higher return on earnings) and the quantum of the growth prospects (revenue growth, earnings growth and importantly dividend growth). The multiple paid for these businesses is slightly higher on a P/E basis, but we feel this is warranted given the higher growth as they grow into their multiples, and the manager believes the benefit will come through in more attractive total returns.
New holdings in the fund include: Hollywood Bowl, Liontrust, Diploma, Midwich, AJ Bell, Cineworld, and FDM. These are all stocks providing attractive dividend yields, and are quality, growth, momentum businesses which score well on our Matrix screening tool. Hollywood Bowl is a leisure operator in the UK, focused on ten pin bowling centres. It has a strong refurbishment program driving attractive returns on investment, as well as operational efficiency improvements and solid like-for-like growth. Liontrust has diversified its exposure as an asset manager through the acquisition of new teams in different asset classes. It is seeing strong performance and importantly fund flows, and has an impressive management team. Diploma is a value add distributor, attracting impressive margins, and is not overly cyclical. Midwich is also a value add distributor, but focused on audio visual markets. It has good organic growth, but supplements that with acquisitions, both in the UK and internationally mostly in Europe. It has strong relationships with original equipment manufacturers (OEMs), is building out its product portfolio, and its strong knowledge and service offering makes it a trusted partner. We took part in the Initial Public Offering of AJ Bell, a high quality player in the platform space, with good assets under administration and solid pricing levels. The CEO founded the business, and our engagement with him has been very impressive. Cineworld acquired Regal cinemas in the US, and we believe there is a strong turnaround story in that undermanaged and underinvested business. FDM is a specialist technology recruitment business, who train graduates, ex-military and female returners to work, in specialist areas of IT. Those "mounties" are then placed out directly to customers, with whom FDM see strong repeat business.
We also topped up existing holdings in Telecom Plus, Dechra and Intermediate Capital.
The Manager exited holdings in Gima, Keller, BBA Aviation and Mothercare. Keller's profit warning was disappointing, and changed the investment case outlook. BBA is seeing challenging end markets which has driven earnings downgrades, and we had concerns over its cyclicality. We also had concerns over the lack of order visibility in Gima, with weak read across on capex from Philip Morris, and high expectation in market forecasts. Lastly, Mothercare has suffered from the weaker UK retail environment and a lack of differentiation. The international business could no longer make up for this, and its balance sheet caused concerns.
We have also reduced exposure to Smart Metering, Euromoney, Ultra Electronics, Stock Spirits, Manx Telecom, Elementis, Fuller Smith and Turner, and Genus.
Investee Company Stewardship
We met the Chairman of XP Power to discuss the changes he has made to the governance framework in recent years. A new Internal Audit function has been established and the risk processes strengthened. Their remuneration policy has been formalised and disclosure improved. We should expect these improvements to continue. Key upcoming changes include progressing board succession planning and the likelihood of an audit tender. The Chairman gave a good account of their plans to progress these.
At Close Brothers, we met the new Chair to discuss business strategy, culture, succession planning for executives and non-executives, board evaluation and tendering of the audit. With regard to audit, PwC were their remuneration consultants from 2008 but have stepped down since they became auditors at the start of 2018. We asked the company to include in the Annual Report more disclosure as to how that potential conflict was managed by the Audit Committee during the tender process. On culture, we were reassured that there is a strong focus on the customer and social purpose.
Fixed Income and Preference Share portfolio
A small number of themes dominated financial markets throughout almost all of 2018. An escalation of trade concerns - specifically, trade wars between the United States and China - unnerved market participants as to prospects for global growth. Worries about Eurozone viability in the shape of Italian political turmoil were a powerful influence. Elsewhere, negotiations over the UK's withdrawal from the European Union rumbled on, with no signs of a clear and satisfactory conclusion. US data shows a solid pace of economic activity and continues to lead and outperform other developed markets globally.
UK data saw a modest rise in growth after a weather affected start to the year and a rate rise from the Bank of England, with Brexit concerns expected to weigh on the economy. With the rise in volatility and US central bank rates, UK government bond yields rose before returning to the same starting yield as equity markets sold off into year end.
Corporate bond spreads widened from the lows at the start of 2018, particular lower quality and long dated companies. This was led by banks and insurance companies which have previously been the stronger performers in 2017.
The performance of the Company's holding in the Scottish and Southern Electric hybrid bond has been disappointing following profit warnings and difficulties in its retail business. But with a call in late 2020 the yield remains attractive. The other remaining bond is Anglian Water 2026, a subordinated bond issued out of the core regulated entity. A harsher regulatory price review and concerns on Labour's nationalisation policy on utilities over hang the sector. The price review is focusing companies on better balance sheet management and with the benefit of a higher yield than Anglian Water senior debt, the bond remains attractive.
There was a part tender of Wales & West utility, trading at +120bp over gilts and tendered at +50bp. The remaining holding was called by the company in December 2018. The HBOS Capital 6.461% was also called by its issuing company in December 2018.
With respect to the Preference share holdings, following Aviva's announcement in March that it might cancel some of its preference share securities at par and its subsequent decision not to cancel following significant investor criticism, we saw the value of the preference share portfolio start to recover to the levels we had seen prior to that announcement, which was encouraging. However, in spite of this recovery, in the second half of the year, we saw the value of the preference share portfolio decline, following the fall in markets in the 4th quartile of 2018.
The weak tone was driven by concerns of the US Fed continuing to raise rates in 2019, lacklustre GDP growth particularly in UK & Europe, China trade wars muddling along and Brexit concerns in the UK. The valuation of the Company's holding in Ecclesiastical was more resilient than that of other preference shares, in the main due to their assurances that they had no plans to cancel at par.
Outlook
Levels of uncertainty in markets are high relative to history, partly driven by Brexit but also wider concerns globally about where we are in the economic cycle. This has been a long bull market, and it does feel like that has now come to an end. Importantly our investment process is on stock specifics, and therefore we are not over analysing the many macro factors which are seeing change. Our investment process of focusing on Quality, Growth and Momentum, remains constant despite what stage of the market cycle we might be in. We focus on bottom up stock picking, and our engagement with management teams and fundamental analysis is critical to our process.
Markets in 2019 are likely to remain challenging, coming from years of bull market territory. Brexit remains the main overhang in the UK, and we continue to lack clarity of a resolution for that. We expect that quality will become increasingly important in tougher markets, which our process plays into well. The sustainability of earnings growth will also be an important factor driving share prices, where we saw an extreme level of profit warnings in 2018 and shares sharply falling on those warnings.
The UK Small Cap space remains an attractive hunting ground for quality growth businesses, which provide attractive income levels; with a diverse range of exposures and stock specific drivers. We continue to engage with management teams to inform our investment views on where we can generate the most attractive investment returns for the portfolio.
Aberdeen Asset Managers Limited*
7 March 2019
*on behalf of Aberdeen Standard Fund Managers Limited
Both companies are subsidiaries of Standard Life Aberdeen plc.
5. RESULTS AND PERFORMANCE
Financial Highlights
|
|
31 December 2018 |
31 December 2017 |
% change |
|
Total investments |
£66,843,000 |
£81,673,000 |
-18.2 |
|
Shareholders' funds |
£63,052,000 |
£75,421,000 |
-16.4 |
|
Market capitalisation |
£49,526,000 |
£63,676,000 |
-22.2 |
|
Net asset value per share |
285.18p |
341.12p |
-16.4 |
|
Adjusted net asset value per share{A} |
283.23p |
339.32p |
-16.5 |
|
Share price (mid market) |
224.00p |
288.00p |
-22.2 |
|
Discount to adjusted NAV{A} |
20.9% |
15.1% |
|
|
Net gearing{B} |
6.2% |
8.5% |
|
|
Ongoing charges ratio{C} |
1.28% |
1.35% |
|
|
|
|
|
|
|
Dividends and earnings |
|
|
|
|
Earnings per Ordinary share (revenue){D} |
9.03p |
7.76p |
+16.4 |
|
Dividends per Ordinary share{E} |
7.35p |
7.05p |
+4.3 |
|
Dividend cover{F} |
1.23 |
1.10 |
|
|
Revenue reserves{G} |
£3,114,000 |
£2,709,000 |
|
|
|
|||
|
{A} Considered to be an Alternative Performance Measure, based on NAV above reduced by the fourth interim dividend adjustment of 1.95p (2017 - 1.80p). Further details can be found on page 62 of the published 2018 Annual Report. |
|||
|
{B} Considered to be an Alternative Performance Measure. Calculated in accordance with AIC guidance "Gearing Disclosures post Retail Distribution Review" (see definition on page 63 of the published 2018 Annual Report). |
|||
|
{C} Considered to be an Alternative Performance Measure. Ongoing charges are calculated in accordance with guidance issued by the AIC (further details can be found on page 63 of the published 2018 Annual Report). |
|||
|
{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 8).
|
|||
|
{F} Considered to be an Alternative Performance Measure. Further details can be found on page 63 of the published 2018 Annual Report. |
|||
|
{G} The revenue reserve figure does not take account of the fourth interim dividend amounting to £431,000 (2017 - £398,000). |
|||
|
Performance (Total Return) |
1 year |
3 year |
5 year |
|
|
% return |
% return |
% return |
|
Net asset value{A} |
-14.6 |
+22.8 |
+36.4 |
|
Share price (based on mid price){A} |
-20.2 |
+14.3 |
+17.1 |
|
FTSE Small Cap ex Inv Trust Index |
-13.8 |
+12.2 |
+23.3 |
|
FTSE All-Share Index |
-9.5 |
+19.5 |
+22.1 |
|
|
|||
|
{A} Considered to be an Alternative Performance Measure. Further details can be found on pages 62 and 71 of the published 2018 Annual Report. |
|||
Dividends
|
|
Rate per share |
xd date |
Record date |
Payment date |
|
First interim dividend |
1.80p |
5 April 2018 |
6 April 2018 |
27 April 2018 |
|
Second interim dividend |
1.80p |
12 July 2018 |
13 July 2018 |
27 July 2018 |
|
Third interim dividend |
1.80p |
4 October 2018 |
5 October 2018 |
26 October 2018 |
|
Fourth interim dividend |
1.95p |
3 January 2019 |
4 January 2019 |
25 January 2019 |
|
|
________ |
|
|
|
|
2018 |
7.35p |
|
|
|
|
|
________ |
|
|
|
|
First interim dividend |
1.75p |
6 April 2017 |
7 April 2017 |
28 April 2017 |
|
Second interim dividend |
1.75p |
6 July 2017 |
7 July 2017 |
28 July 2017 |
|
Third interim dividend |
1.75p |
5 October 2017 |
6 October 2017 |
27 October 2017 |
|
Fourth interim dividend |
1.80p |
4 January 2018 |
5 January 2018 |
26 January 2018 |
|
|
________ |
|
|
|
|
2017 |
7.05p |
|
|
|
|
|
________ |
|
|
|
PORTFOLIO
|
TEN LARGEST EQUITY HOLDINGS |
|||||
|
at 31 December 2018 |
|||||
|
|
|
Valuation |
Total |
Valuation |
|
|
|
|
2018 |
Portfolio |
2017 |
|
|
Company |
Sector |
£'000 |
% |
£'000 |
|
|
Aveva Group |
|
2,626 |
4.0 |
3,000 |
|
|
One of the world's leading engineering, design and information management software providers to the process, plant and marine industries. Aveva's world-leading technology was originally developed and spun out of Cambridge University and today the business operates in 46 countries around the world. |
Software & Computer Services |
|
|
|
|
|
Assura |
|
2,497 |
3.7 |
2,989 |
|
|
Assura is a long-term investor and developer of primary care property, working with general practitioners, health professionals and National Health Services to deliver patient care. |
Real Estate Investment Trusts |
|
|
|
|
|
Dechra Pharmaceuticals |
|
2,401 |
3.6 |
2,157 |
|
|
An international specialist veterinary pharmaceuticals business that manufactures and distributes veterinary products in more than 50 countries around the world. Recent acquisitions have enhanced the pipeline of drugs as well as granted access to new markets. |
Pharmaceuticals & Biotechnology |
|
|
|
|
|
DiscoverIE Group |
|
2,350 |
3.5 |
2,545 |
|
|
Discoverie Group is a supplier of niche electronic products, manufacturing customs designed and built electronics to industrial and medical companies across Europe and South Africa. |
Support Services |
|
|
|
|
|
Telecom Plus |
|
2,305 |
3.4 |
1,532 |
|
|
Telecom Plus, through its Utility Warehouse brand, is a supplier of energy and telephony services to UK households. It is a reseller which makes money from managing the end customer relationship. |
Fixed Line Telecommunications |
|
|
|
|
|
Victrex |
|
2,299 |
3.4 |
2,321 |
|
|
The leading global manufacturer of PEEK polymer which is a high performance thermoplastic. With its high strength and performance qualities it is used as an alternative product to metal in a number of different industries. |
Chemicals |
|
|
|
|
|
Burford Capital |
|
2,221 |
3.3 |
1,697 |
|
|
A market leading litigation finance company, providing finance for corporate litigation, arbitration and other disputes. |
Financial Services |
|
|
|
|
|
Chesnara |
|
2,039 |
3.1 |
2,298 |
|
|
Chesnara is a holding company engaged in the management of life and pension books in the UK, Sweden and the Netherlands. The overriding strategy is to deliver a reliable dividend stream to shareholders funded from the emergence of surplus cash from their various life assurance subsidiaries. |
Life Insurance |
|
|
|
|
|
XP Power |
|
1,978 |
3.0 |
3,379 |
|
|
A power solutions business that designs and manufactures power convertors used by customers to ensure their electronic equipment can function both safely and efficiently. With over 5,000 different products, XP Power can provide a full value add capability to its customers. |
Electronic & Electrical Equipment |
|
|
|
|
|
Hollywood Bowl |
|
1,914 |
2.9 |
- |
|
|
Leisure operator focused on ten pin bowling in the UK. Growth driven by refurbishments, new site openings, and acquisitions; generating attractive returns and cash generation. |
Travel & Leisure |
|
|
|
|
|
|
|
22,630 |
33.9 |
|
|
Investment Portfolio - Equity Investments
As at 31 December 2018
|
|
|
Valuation |
Total |
Valuation |
|
|
|
2018 |
portfolio |
2017 |
|
Company |
Sector classification |
£'000 |
% |
£'000 |
|
Close Brothers |
Financial Services |
1,843 |
2.7 |
1,853 |
|
Morgan Sindall |
Construction and Materials |
1,792 |
2.7 |
2,231 |
|
Unite Group |
Real Estate Investment Trusts |
1,787 |
2.6 |
1,634 |
|
Barr (A.G.) |
Beverages |
1,645 |
2.5 |
1,390 |
|
Big Yellow |
Real Estate Investment Trusts |
1,592 |
2.4 |
1,585 |
|
Robert Walters |
Support Services |
1,592 |
2.4 |
1,580 |
|
Fisher (James) & Sons |
Industrial Transportation |
1,528 |
2.3 |
1,379 |
|
Intermediate Capital Group |
Financial Services |
1,511 |
2.3 |
1,564 |
|
RPC Group |
General Industrials |
1,506 |
2.2 |
2,036 |
|
Oxford Instruments |
Electronic & Electrical Equipment |
1,492 |
2.2 |
1,534 |
|
Twenty largest investments |
|
38,918 |
58.2 |
|
|
Rathbone Brothers |
Financial Services |
1,441 |
2.2 |
1,715 |
|
Workspace Group |
Real Estate Investment Trusts |
1,440 |
2.2 |
1,470 |
|
Hilton Food Group |
Food Producers |
1,429 |
2.1 |
- |
|
Hiscox |
Non-life Insurance |
1,426 |
2.1 |
1,288 |
|
Abcam |
Pharmaceuticals & Biotechnology |
1,417 |
2.1 |
1,372 |
|
Euromoney Institutional Investor |
Media |
1,207 |
1.8 |
2,545 |
|
Ultra Electronics |
Aerospace & Defence |
1,207 |
1.8 |
- |
|
Genus |
Pharmaceuticals & Biotechnology |
1,192 |
1.8 |
1,746 |
|
Manx Telecom |
Fixed Line Telecommunications |
1,128 |
1.7 |
1,826 |
|
Liontrust Asset Management |
Financial Services |
1,012 |
1.5 |
- |
|
Thirty largest investments |
|
51,817 |
77.5 |
|
|
Scandinavian Tobacco {A} |
Tobacco |
1,000 |
1.5 |
1,514 |
|
Savills |
Real Estate Investment & Services |
997 |
1.5 |
1,400 |
|
Midwich |
Support Services |
981 |
1.5 |
- |
|
Diploma |
Support Services |
867 |
1.3 |
- |
|
FDM |
Software & Computer Services |
833 |
1.2 |
- |
|
Hansteen |
Real Estate Investment Trusts |
651 |
1.0 |
1,004 |
|
Cineworld Group |
Travel & Leisure |
598 |
0.9 |
- |
|
Elementis |
Chemicals |
586 |
0.9 |
1,855 |
|
Hostelworld Group |
Travel & Leisure |
574 |
0.8 |
- |
|
Victoria |
Household Goods & Home Construction |
509 |
0.8 |
1,354 |
|
Forty largest investments |
|
59,413 |
88.9 |
|
|
Stock Spirits Group |
Beverages |
497 |
0.7 |
1,904 |
|
Fuller Smith & Turner 'A' |
Travel & Leisure |
481 |
0.7 |
905 |
|
Cairn Homes |
Household Goods & Home Construction |
443 |
0.7 |
1,569 |
|
Smart Metering Systems |
Support Services |
429 |
0.6 |
2,499 |
|
AJ Bell |
Financial Services |
400 |
0.6 |
- |
|
Total Equity investments |
|
61,663 |
92.2 |
|
|
|
||||
|
{A} All investments are listed on the London Stock Exchange (sterling based), except those marked, which are listed on overseas exchanges based in sterling. |
||||
Investment Portfolio - Other Investments
As at 31 December 2018
|
|
Valuation |
Total |
Valuation |
|
|
2018 |
portfolio |
2017 |
|
Company |
£'000 |
% |
£'000 |
|
Convertible Preference Shares |
|
|
|
|
Balfour Beatty Cum Conv 10.75% 01/07/2020 |
954 |
1.4 |
1,004 |
|
|
________ |
________ |
|
|
Total Convertibles |
954 |
1.4 |
|
|
|
________ |
________ |
|
|
Corporate Bonds |
|
|
|
|
Anglian Water 4.5% 2026 |
535 |
0.8 |
570 |
|
SSE 3.875% Var perp |
491 |
0.8 |
519 |
|
|
________ |
________ |
|
|
Total Corporate Bonds |
1,026 |
1.6 |
|
|
|
________ |
________ |
|
|
Preference Shares{A} |
|
|
|
|
Aviva 8.75% |
1,192 |
1.8 |
1,599 |
|
General Accident 8.875% |
1,192 |
1.8 |
1,568 |
|
Ecclesiastical Insurance 8.625% |
816 |
1.2 |
930 |
|
|
________ |
________ |
|
|
Total Preference shares |
3,200 |
4.8 |
|
|
|
________ |
________ |
|
|
Total Other Investments |
5,180 |
7.8 |
|
|
|
________ |
________ |
|
|
Total Investments |
66,843 |
100.0 |
|
|
|
________ |
________ |
|
|
|
|
|
|
|
{A} None of the preference shares listed have a fixed redemption date. |
|||
|
All investments are listed on the London Stock Exchange (sterling based). |
|
||
|
Distribution of Assets and Liabilities As at 31 December 2018 |
|||||||
|
|
Valuation at |
Movement during the year |
Valuation at |
||||
|
|
31 December |
|
|
Gains/ |
31 December |
||
|
|
2017 |
Purchases |
Sales |
(losses) |
2018 |
||
|
|
£'000 |
% |
£'000 |
£'000 |
£'000 |
£'000 |
% |
|
Listed investments |
|
|
|
|
|
|
|
|
Equity investments |
74,544 |
98.9 |
14,726 |
(16,390) |
(11,217) |
61,663 |
97.9 |
|
Convertible preference shares |
1,004 |
1.3 |
- |
- |
(50) |
954 |
1.5 |
|
Corporate bonds |
2,028 |
2.7 |
- |
(910) |
(92) |
1,026 |
1.6 |
|
Preference shares |
4,097 |
5.4 |
- |
- |
(897) |
3,200 |
5.1 |
|
|
______ |
______ |
______ |
______ |
______ |
______ |
______ |
|
|
81,673 |
108.3 |
14,726 |
(17,300) |
(12,256) |
66,843 |
106.1 |
|
|
______ |
______ |
______ |
______ |
______ |
______ |
______ |
|
Current assets |
912 |
1.2 |
|
|
|
3,414 |
5.4 |
|
Other current liabilities |
(164) |
(0.2) |
|
|
|
(222) |
(0.4) |
|
Loans |
(7,000) |
(9.3) |
|
|
|
(6,983) |
(11.1) |
|
|
______ |
______ |
|
|
|
______ |
______ |
|
Net assets |
75,421 |
100.0 |
|
|
|
63,052 |
100.0 |
|
|
______ |
______ |
|
|
|
______ |
______ |
|
Net asset value per Ordinary share |
341.12p |
|
|
|
|
285.18p |
|
|
|
______ |
|
|
|
|
______ |
|
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 2021 and £5 million expires in 2023. The Directors believe that the Company has adequate financial resources to continue in 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.
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 they have elected to prepare the financial statements in accordance with IFRSs as adopted by the EU and applicable law.
Under company law the Directors must not approve the financial statements unless they are satisfied that they 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 judgements and estimates that are reasonable and prudent;
- state whether they have been prepared in accordance with IFRSs as adopted by the EU; 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 adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the 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 complies 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.
Responsibility statement of the Directors in respect of the annual financial report
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company taken as a whole; and
- the Strategic Report includes 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 they face.
We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.
For and on behalf of Aberdeen Smaller Companies Income Trust PLC
Robert Lister
Chairman
7 March 2019
FINANCIAL STATEMENTS
STATEMENT OF COMPREHENSIVE INCOME (AUDITED)
|
|
|
Year ended |
Year ended |
||||
|
|
|
31 December 2018 |
31 December 2017 |
||||
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
Notes |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
(Losses)/gains on investments at fair value |
10 |
- |
(12,256) |
(12,256) |
- |
17,278 |
17,278 |
|
Currency gains |
|
- |
1 |
1 |
- |
1 |
1 |
|
|
|
|
|
|
|
|
|
|
Revenue |
3 |
|
|
|
|
|
|
|
Dividend income |
|
2,513 |
- |
2,513 |
2,212 |
- |
2,212 |
|
Interest income from investments |
|
87 |
- |
87 |
104 |
347 |
451 |
|
Other income |
|
4 |
- |
4 |
2 |
- |
2 |
|
|
|
_______ |
______ |
______ |
_______ |
______ |
______ |
|
|
|
2,604 |
(12,255) |
(9,651) |
2,318 |
17,626 |
19,944 |
|
|
|
_______ |
______ |
______ |
_______ |
______ |
______ |
|
Expenses |
|
|
|
|
|
|
|
|
Investment management fee |
4 |
(166) |
(389) |
(555) |
(167) |
(390) |
(557) |
|
Other administrative expenses |
5 |
(374) |
- |
(374) |
(371) |
- |
(371) |
|
Finance costs |
6 |
(56) |
(130) |
(186) |
(50) |
(116) |
(166) |
|
|
|
_______ |
______ |
______ |
_______ |
______ |
______ |
|
Profit/(loss) before tax |
|
2,008 |
(12,774) |
(10,766) |
1,730 |
17,120 |
18,850 |
|
Taxation |
7 |
(11) |
- |
(11) |
(14) |
- |
(14) |
|
|
|
_______ |
______ |
______ |
_______ |
______ |
______ |
|
Profit/(loss) attributable to equity holders |
9 |
1,997 |
(12,774) |
(10,777) |
1,716 |
17,120 |
18,836 |
|
|
|
_______ |
______ |
______ |
_______ |
______ |
______ |
|
|
|
|
|
|
|
|
|
|
Return per Ordinary share (pence) |
9 |
9.03 |
(57.77) |
(48.74) |
7.76 |
77.43 |
85.19 |
|
|
|
_______ |
______ |
______ |
_______ |
______ |
______ |
|
|
|
|
|
|
|
|
|
|
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 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 |
|
|
|
2018 |
2017 |
|
|
Notes |
£'000 |
£'000 |
|
Non-current assets |
|
|
|
|
Equities |
|
61,663 |
74,544 |
|
Convertible preference shares |
|
954 |
1,004 |
|
Corporate bonds |
|
1,026 |
2,028 |
|
Preference shares |
|
3,200 |
4,097 |
|
|
|
_________ |
_________ |
|
Securities at fair value |
10 |
66,843 |
81,673 |
|
|
|
|
|
|
Current assets |
|
|
|
|
Cash and cash equivalents |
|
3,071 |
582 |
|
Other receivables |
11 |
343 |
330 |
|
|
|
_________ |
_________ |
|
|
|
3,414 |
912 |
|
|
|
_________ |
_________ |
|
Current liabilities |
|
|
|
|
Bank loan |
12 |
(2,000) |
(7,000) |
|
Trade and other payables |
12 |
(222) |
(164) |
|
|
|
_________ |
_________ |
|
|
|
(2,222) |
(7,164) |
|
|
|
_________ |
_________ |
|
Net current assets/(liabilities) |
|
1,192 |
(6,252) |
|
|
|
_________ |
_________ |
|
Total assets less current liabilities |
|
68,035 |
75,421 |
|
|
|
_________ |
_________ |
|
Non-current liabilities |
|
|
|
|
Bank loan |
13 |
(4,983) |
- |
|
|
|
_________ |
_________ |
|
Net assets |
|
63,052 |
75,421 |
|
|
|
_________ |
_________ |
|
Share capital and reserves |
|
|
|
|
Called-up share capital |
15 |
11,055 |
11,055 |
|
Share premium account |
|
11,892 |
11,892 |
|
Capital redemption reserve |
|
2,032 |
2,032 |
|
Capital reserve |
|
34,959 |
47,733 |
|
Revenue reserve |
|
3,114 |
2,709 |
|
|
|
_________ |
_________ |
|
Equity shareholders' funds |
|
63,052 |
75,421 |
|
|
|
_________ |
_________ |
|
|
|
|
|
|
Net asset value per Ordinary share (pence) |
16 |
285.18 |
341.12 |
|
|
|
_________ |
_________ |
STATEMENT OF CHANGES IN EQUITY (AUDITED)
Year ended 31 December 2018
|
|
|
|
Share |
Capital |
|
|
|
|
|
|
Share |
premium |
redemption |
Capital |
Revenue |
|
|
|
|
capital |
account |
reserve |
reserve |
reserve |
Total |
|
|
Notes |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
As at 31 December 2017 |
|
11,055 |
11,892 |
2,032 |
47,733 |
2,709 |
75,421 |
|
(Loss)/profit for the year |
|
- |
- |
- |
(12,774) |
1,997 |
(10,777) |
|
Dividends paid in the year |
8 |
- |
- |
- |
- |
(1,592) |
(1,592) |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
As at 31 December 2018 |
|
11,055 |
11,892 |
2,032 |
34,959 |
3,114 |
63,052 |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
|
|
Year ended 31 December 2017 |
|
|
|
|
|
|
|
|
|
|
|
Share |
Capital |
|
|
|
|
|
|
Share |
premium |
redemption |
Capital |
Revenue |
|
|
|
|
capital |
account |
reserve |
reserve |
reserve |
Total |
|
|
Notes |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
As at 31 December 2016 |
|
11,055 |
11,892 |
2,032 |
30,613 |
2,541 |
58,133 |
|
Profit for the year |
|
- |
- |
- |
17,120 |
1,716 |
18,836 |
|
Dividends paid in the year |
8 |
- |
- |
- |
- |
(1,548) |
(1,548) |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
As at 31 December 2017 |
|
11,055 |
11,892 |
2,032 |
47,733 |
2,709 |
75,421 |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
|
|
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 2018 |
31 December 2017 |
|
|
£'000 |
£'000 |
|
Cash flows from operating activities |
|
|
|
Dividend income received |
2,498 |
2,152 |
|
Interest income received |
90 |
117 |
|
Other income received |
4 |
2 |
|
Investment management fee paid |
(526) |
(585) |
|
Other cash expenses |
(370) |
(365) |
|
|
_______ |
_______ |
|
Cash generated from operations |
1,696 |
1,321 |
|
|
|
|
|
Interest paid |
(162) |
(182) |
|
Overseas taxation suffered |
(27) |
(26) |
|
|
_______ |
_______ |
|
Net cash inflows from operating activities |
1,507 |
1,113 |
|
|
_______ |
_______ |
|
Cash flows from investing activities |
|
|
|
Purchases of investments |
(14,690) |
(15,198) |
|
Sales of investments |
17,295 |
15,667 |
|
|
_______ |
_______ |
|
Net cash inflow from investing activities |
2,605 |
469 |
|
|
_______ |
_______ |
|
Cash flows from financing activities |
|
|
|
Loan repaid |
(7,000) |
- |
|
Loan drawndown |
7,000 |
- |
|
Costs relating to drawdown of loan |
(32) |
- |
|
Equity dividends paid |
(1,592) |
(1,548) |
|
|
_______ |
_______ |
|
Net cash outflow from financing activities |
(1,624) |
(1,548) |
|
|
_______ |
_______ |
|
Net increase in cash and cash equivalents |
2,488 |
34 |
|
|
_______ |
_______ |
|
Analysis of changes in cash and cash equivalents during the year |
|
|
|
Opening balance |
582 |
547 |
|
Currency gains |
1 |
1 |
|
Increase in cash and cash equivalents as above |
2,488 |
34 |
|
|
_______ |
_______ |
|
Closing balances |
3,071 |
582 |
|
|
_______ |
_______ |
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2018
|
1. |
Principal activity |
|
|
The Company is a closed-end investment company, registered in Scotland No SC137448, with its Ordinary shares being listed on the London Stock Exchange. |
|
2. |
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 Directors believe that the Company has adequate resources to continue in operational existence for the foreseeable future and, for the above reasons, they continue to adopt the going concern basis in preparing the financial statements. |
|
|
|
|
|
|
|
The Company's financial statements are presented in sterling, which is also the functional currency as it is the currency in which shares are issued and expenses are generally paid. All values are rounded to the nearest thousand pounds (£'000) except when otherwise indicated. |
|
|
|
|
|
|
|
Where presentational guidance set out in the Statement of Recommended Practice ("SORP"): 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' issued by the Association of Investment Companies ("AIC"), 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 issued in November 2014 and updated in February 2018 with consequential amendments. |
|
|
|
|
|
|
|
Significant accounting judgements, estimates and assumptions |
|
|
|
The preparation of financial statements requires the use of certain significant accounting judgements, estimates and assumptions which requires management to exercise its judgement in the process of applying the accounting policies and are continually evaluated. The area requiring most significant judgement and assumption in the financial statements is the determination of the fair value hierarchy classification of quoted bonds which have been assessed as being Level 2 due to them not being considered to trade in active markets. The Directors do not consider there to be any significant estimates within the financial statements. |
|
|
|
|
|
|
|
New and amended accounting standards and interpretations |
|
|
|
At the date of authorisation of these financial statements, the following amendments to Standards and Interpretations were assessed to be relevant and are all effective for annual periods beginning on or after 1 January 2019: |
|
|
|
- IFRIC 23 - Uncertainty over Income Tax Treatments |
|
|
|
|
|
|
|
In addition, under the Annual Improvements to IFRSs 2015 - 2017 Cycle, a number of Standards are included for annual periods beginning on or after 1 January 2019. |
|
|
|
|
|
|
|
The Company intends to adopt the Standards and Interpretations in the reporting period when they become effective and the Board does not anticipate that the adoption of these Standards and Interpretations in future periods will materially impact the Company's financial results in the period of initial application although there may be revised presentations to the Financial Statements and additional disclosures. |
|
|
|
|
|
|
(b) |
Investments |
|
|
|
The Company has adopted the classification and measurement provisions of IFRS 9 'Financial Instruments' which replaces IAS 39 'Financial Instruments: Recognition and Measurement'. It makes changes to classification and measurement of financial assets and introduces an 'expected credit loss' model for the impairment of financial assets. |
|
|
|
|
|
|
|
The adoption of IFRS 9 did not result in any change to the classification or measurement of financial instruments in either the current or prior year. The Company's investments remain classified as fair value through profit or loss. Under IAS 39 the Company carried its investments at fair value through profit or loss under a designation option; on adoption of IFRS 9, the investments are classified as fair value through profit or loss. |
|
|
|
|
|
|
|
The Company classifies its investments based on their contractual cash flow characteristics and the Company's business model for managing the assets. The business model, which is the determining feature, is such that the portfolio of investments is managed, performance and risk is evaluated, on a fair value basis. The Manager is also compensated based on the fair value of the Company's assets. Consequently, all investments are measured 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 timeframe established by the market concerned, and are measured at fair value. For listed investments, this is deemed to be bid market prices or closing prices for SETS (London Stock Exchange's electronic trading service) stocks sourced from the London Stock Exchange. |
|
|
|
|
|
|
|
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, and income from preference shares which do not have a discretionary dividend are accounted for on an accruals 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 an 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 recognised when the underwriting services are provided and 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% to revenue and 70% to capital (2017 - same), in order to reflect the Directors' expected long-term view of the nature of the investment returns of the Company. This allocation is reviewed on a regular basis. |
|
|
|
|
|
|
(e) |
Borrowings |
|
|
|
After initial measurement, bank borrowings are subsequently measured at amortised cost. Amortised cost is calculated by taking into account any discount or premium on issue funds, and costs that are an integral part of the effective interest rate. The finance costs of such borrowings are accounted for on an accruals basis using the effective interest rate method and are charged 30% to revenue and 70% to capital in the Statement of Comprehensive Income to reflect the Company's investment policy and prospective income and capital growth. |
|
|
|
|
|
|
(f) |
Taxation |
|
|
|
The tax expense represents the sum of tax currently payable and deferred tax. Any 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 expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Company's liability for current tax is calculated using tax rates that were applicable at the Balance Sheet date. |
|
|
|
|
|
|
|
Deferred tax is recognised in respect of all temporary differences at the Balance Sheet date, where transactions or events that result in an obligation to pay more tax in the future or right to pay less tax in the future have occurred at the Balance Sheet date. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the temporary differences can be deducted. Deferred tax assets and liabilities are measured at the rates applicable to the legal jurisdictions in which they arise, using tax rates that are expected to apply at the date the deferred tax position is unwound. |
|
|
|
|
|
|
|
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. |
|
|
|
|
|
|
(g) |
Foreign currencies |
|
|
|
Monetary assets and liabilities and non-monetary assets held at fair value denominated in foreign currencies are converted into sterling at the rate of exchange ruling at the reporting date. Transactions during the year involving foreign currencies are converted at the rate of exchange ruling at the transaction date. Gains or losses arising from a change in exchange rates subsequent to the date of a transaction are included as a currency gain or loss in revenue or capital in the Statement of Comprehensive Income, depending on whether the gain or loss is of a revenue or capital nature. |
|
|
|
|
|
|
(h) |
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 per share. |
|
|
|
|
|
|
|
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. These include gains and losses from foreign currency exchange differences. |
|
|
|
|
|
|
|
Additionally, expenses, including finance costs, are charged to this reserve in accordance with (e) above. |
|
|
|
|
|
|
|
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. |
|
|
|
|
|
|
(i) |
Dividends payable |
|
|
|
Interim dividends are recognised in the financial statements in the period in which they are paid. |
|
|
|
|
|
|
(j) |
Segmental reporting |
|
|
|
The Directors are of the opinion that the Company is engaged in a single segment of business activity, being investment business. Consequently, no business segmental analysis is provided. |
|
|
|
2018 |
2017 |
|
3. |
Income |
£'000 |
£'000 |
|
|
Income from investments |
|
|
|
|
Dividend income from UK equity securities |
1,912 |
1,746 |
|
|
Dividend income from overseas equity securities |
349 |
324 |
|
|
Stock dividends from UK equity securities |
31 |
- |
|
|
Property income distributions |
221 |
142 |
|
|
|
_______ |
_______ |
|
|
|
2,513 |
2,212 |
|
|
Interest income from investments |
87 |
104 |
|
|
|
_______ |
_______ |
|
|
|
2,600 |
2,316 |
|
|
Other income |
_______ |
_______ |
|
|
Bank interest |
4 |
- |
|
|
Underwriting commission |
- |
2 |
|
|
|
_______ |
_______ |
|
|
Total revenue income |
2,604 |
2,318 |
|
|
|
_______ |
_______ |
|
|
|
|
|
|
|
As per note 2(c), the Company amortises the premium or discount on acquisition on debt securities against its capital reserve. For 2018 this represented £nil (2017 - £1,000) which has been reflected in the capital column of the Statement of Comprehensive Income. |
||
|
|
|
2018 |
2017 |
||||
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
4. |
Management fee |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
Management fee |
166 |
389 |
555 |
167 |
390 |
557 |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
|
|
|
For the year ended 31 December 2018 management services were provided by Aberdeen Standard Fund Managers Limited ("ASFML"). The management fee was calculated at an annual rate of 0.75% of the net assets of the Company adding back bank debt, calculated and paid monthly until 18 April 2018. With effect from 19 April 2018, the Company and the Manager agreed that the management fee be calculated at an annual rate of 0.75% of the net assets of the Company, calculated and paid monthly. The balance due to ASFML at the year end was £80,000 (2017 - £52,000). The fee is allocated 30% (2017 - 30%) to revenue and 70% (2017 - 70%) to capital. |
||||||
|
|
|
||||||
|
|
The agreement is terminable on twelve months' written notice from the Company or the Manager, however, the Company may terminate the agreement on immediate notice on the payment to the Manager of six months' fees in lieu of notice. |
||||||
|
|
|
2018 |
2017 |
|
5. |
Other administrative expenses |
£'000 |
£'000 |
|
|
Directors' fees |
107 |
107 |
|
|
Auditor's remuneration: |
|
|
|
|
- fees payable for the audit of the annual accounts |
19 |
19 |
|
|
- fees payable for iXBRL tagging services |
2 |
2 |
|
|
Promotional activities |
64 |
59 |
|
|
Legal and professional fees |
21 |
31 |
|
|
Registrars' fees |
18 |
18 |
|
|
Printing and postage |
20 |
20 |
|
|
Broker fees |
36 |
36 |
|
|
Directors' & Officers' liability insurance |
6 |
7 |
|
|
Trade subscriptions |
26 |
26 |
|
|
Other expenses |
55 |
46 |
|
|
|
_______ |
_______ |
|
|
|
374 |
371 |
|
|
|
_______ |
_______ |
|
|
|
||
|
|
Expenses of £64,000 (2017 - £59,000) were paid to ASFML in respect of the promotion of the Company. The balance outstanding at the year end was £16,000 (2017 - £15,000). |
||
|
|
|
||
|
|
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. In addition the VAT charged on applicable directors fees is included within other expenses. |
||
|
|
|
2018 |
2017 |
||||
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
6. |
Finance costs |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
Bank loans |
56 |
130 |
186 |
50 |
116 |
166 |
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
_______ |
|
7. |
Taxation |
|||||||
|
|
(a) |
Analysis of charge for the year |
||||||
|
|
|
|
2018 |
2017 |
||||
|
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
Overseas withholding tax |
11 |
- |
11 |
14 |
- |
14 |
|
|
|
|
_______ |
_______ |
_______ |
_______ |
______ |
_______ |
|
|
|
Total tax charge for the year |
11 |
- |
11 |
14 |
- |
14 |
|
|
|
|
_______ |
_______ |
_______ |
_______ |
______ |
_______ |
|
|
|
|
|
|
|
|
|
|
|
|
(b) |
Factors affecting tax charge for the year |
||||||
|
|
|
The UK corporation tax rate was 19% throughout the year (2017 - effective rate of 19.25%). The tax assessed for the year is lower than the corporation tax rate. The differences are explained below: |
||||||
|
|
|
|
||||||
|
|
|
|
2018 |
2017 |
||||
|
|
|
|
Revenue |
Capital |
Total |
Revenue |
Capital |
Total |
|
|
|
|
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
Profit/(loss) before tax |
2,008 |
(12,774) |
(10,766) |
1,730 |
17,120 |
18,850 |
|
|
|
|
_______ |
_______ |
_______ |
_______ |
______ |
_______ |
|
|
|
Taxation of profit/(loss) at the effective standard rate of corporation tax |
382 |
(2,427) |
(2,045) |
333 |
3,296 |
3,629 |
|
|
|
Effects of: |
|
|
|
|
|
|
|
|
|
Non taxable UK dividend income |
(369) |
- |
(369) |
(348) |
- |
(348) |
|
|
|
Capital losses/(gains) disallowed for the purposes of corporation tax |
- |
2,329 |
2,329 |
- |
(3,393) |
(3,393) |
|
|
|
Non taxable overseas income not subject to tax |
(66) |
- |
(66) |
(62) |
- |
(62) |
|
|
|
Excess management expenses not utilised |
53 |
98 |
151 |
77 |
97 |
174 |
|
|
|
Irrecoverable overseas withholding tax |
11 |
- |
11 |
14 |
- |
14 |
|
|
|
|
_______ |
_______ |
_______ |
_______ |
______ |
_______ |
|
|
|
Total tax charge for the year |
11 |
- |
11 |
14 |
- |
14 |
|
|
|
|
_______ |
_______ |
_______ |
_______ |
______ |
_______ |
|
|
|
|
|
|
|
|
|
|
|
|
(c) |
Factors that might affect future tax charges |
||||||
|
|
|
No provision for deferred tax has been made in the current or prior accounting year. The Company has not provided for deferred tax on capital gains or losses arising on the revaluation or disposal of investments as it is exempt from tax on these items because of its status as an investment trust company. |
||||||
|
|
|
|
||||||
|
|
|
At the period end, after offset against income taxable on receipt, there is a potential deferred tax asset of £2,393,771 (2017 - £2,258,731) in relation to surplus management expenses. It is unlikely that the fund will generate sufficient taxable profits in the future to utilise these amounts and therefore no deferred tax asset has been recognised. |
||||||
|
|
|
2018 |
2017 |
|
8. |
Dividends |
£'000 |
£'000 |
|
|
Amounts recognised as distributions to equity holders in the period: |
|
|
|
|
Fourth interim dividend for the year ended 31 December 2017 of 1.80p (2016 - 1.75p) per share |
398 |
387 |
|
|
Three interim dividends for the year ended 31 December 2018 totalling 5.40p (2017 - 5.25p) per share |
1,194 |
1,161 |
|
|
|
_______ |
_______ |
|
|
|
1,592 |
1,548 |
|
|
|
_______ |
_______ |
|
|
|
|
|
|
|
The fourth interim dividend of 2018 of 1.95p per share has not been included as a liability in these financial statements. |
||
|
|
|
||
|
|
The following table sets out 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. The revenue available for distribution by way of dividend for the year is £1,997,000 (2017 - £1,716,000). |
||
|
|
|
|
|
|
|
|
2018 |
2017 |
|
|
|
£'000 |
£'000 |
|
|
Three interim dividends for the year ended 31 December 2018 totalling 5.40p (2017 - 5.25p) per share |
1,194 |
1,161 |
|
|
Fourth interim dividend for the year ended 31 December 2018 of 1.95p (2017 - 1.80p) per share |
431 |
398 |
|
|
|
_______ |
_______ |
|
|
|
1,625 |
1,559 |
|
|
|
_______ |
_______ |
|
|
|
2018 |
2017 |
|
9. |
Earnings per Ordinary share |
p |
p |
|
|
Revenue return |
9.03 |
7.76 |
|
|
Capital return |
(57.77) |
77.43 |
|
|
|
_______ |
_______ |
|
|
Net return |
(48.74) |
85.19 |
|
|
|
_______ |
_______ |
|
|
The returns per share are based on the following figures: |
|
|
|
|
|
|
|
|
|
|
2018 |
2017 |
|
|
|
£'000 |
£'000 |
|
|
Revenue return |
1,997 |
1,716 |
|
|
Capital return |
(12,774) |
17,120 |
|
|
|
_______ |
_______ |
|
|
Net return |
(10,777) |
18,836 |
|
|
|
_______ |
_______ |
|
|
Weighted average number of shares in issue |
22,109,765 |
22,109,765 |
|
|
|
_______ |
_______ |
|
|
|
2018 |
2017 |
|
10. |
Non-current assets - securities at fair value |
£'000 |
£'000 |
|
|
Listed on recognised stock exchanges: |
|
|
|
|
United Kingdom |
65,843 |
79,768 |
|
|
Overseas |
1,000 |
1,905 |
|
|
|
_______ |
_______ |
|
|
|
66,843 |
81,673 |
|
|
|
_______ |
_______ |
|
|
|
|
|
|
|
|
2018 |
2017 |
|
|
|
£'000 |
£'000 |
|
|
Opening fair value |
81,673 |
64,517 |
|
|
Investment holdings gains |
(29,015) |
(16,838) |
|
|
|
_______ |
_______ |
|
|
Opening book cost |
52,658 |
47,679 |
|
|
Purchases |
14,726 |
15,198 |
|
|
Amortised cost adjustments to fixed interest securities |
- |
347 |
|
|
Sales - proceeds |
(17,300) |
(15,667) |
|
|
Sales - net gains |
861 |
5,101 |
|
|
|
_______ |
_______ |
|
|
Closing book cost |
50,945 |
52,658 |
|
|
Closing investment holdings gains |
15,898 |
29,015 |
|
|
|
_______ |
_______ |
|
|
Closing fair value |
66,843 |
81,673 |
|
|
|
_______ |
_______ |
|
|
|
|
|
|
|
|
2018 |
2017 |
|
|
(Losses)/gains on investments |
£'000 |
£'000 |
|
|
Net realised gains on sales |
861 |
5,101 |
|
|
Movement in fair value |
(13,117) |
12,177 |
|
|
|
_______ |
_______ |
|
|
(Losses)/gains on investments |
(12,256) |
17,278 |
|
|
|
_______ |
_______ |
|
|
Transaction costs |
|
|
|
|
During the year expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within (losses)/gains on investments in the Statement of Comprehensive Income. The total costs were as follows: |
||
|
|
|
|
|
|
|
|
2018 |
2017 |
|
|
|
£'000 |
£'000 |
|
|
Purchases |
74 |
64 |
|
|
Sales |
11 |
9 |
|
|
|
_______ |
_______ |
|
|
|
85 |
73 |
|
|
|
_______ |
_______ |
|
|
|
||
|
|
The above transaction costs are calculated in line with the AIC SORP. The transaction costs in the Company's Key Information Document are calculated on a different basis and in line with the PRIIPs regulations. |
||
|
|
|
2018 |
2017 |
|
11. |
Other receivables |
£'000 |
£'000 |
|
|
Amounts due from brokers |
5 |
- |
|
|
Accrued income & prepayments |
338 |
330 |
|
|
|
_______ |
_______ |
|
|
|
343 |
330 |
|
|
|
_______ |
_______ |
|
|
None of the above amounts are overdue. |
|
|
|
|
|
2018 |
2017 |
|
|
12. |
Current liabilities |
£'000 |
£'000 |
|
|
|
(a) |
Short-term loan |
2,000 |
2,000 |
|
|
|
Fixed rate loan |
- |
5,000 |
|
|
|
|
_______ |
_______ |
|
|
|
|
2,000 |
7,000 |
|
|
|
|
_______ |
_______ |
|
|
|
|
|
|
|
|
|
On 27 April 2018 the Company entered into a £10 million loan facility with Royal Bank of Scotland International Holdings (RBSi) which comprised of two £5 million traches. Tranche A is a 3 year £5 million multi-currency revolving credit facility and £2 million was drawn down at 31 December 2018 at a rate of 1.72225%. Tranche B is a 5 year £5 million fixed rate loan facility and was fully drawn down on 28 April 2018. The interest on Tranche B is fixed at 2.825% per annum payable quarterly in arrears. At the date of this Report the Company had drawn down £2 million on Tranche A at a rate of 1.67888%. |
||
|
|
|
Previously the Company had a £10 million loan facility with State Street Bank which comprised of two £5 million tranches; Tranche A was fixed rate for three years and Tranche B was at a variable rate for five years. Tranche A was drawn down in full and £2 million was drawn down on Tranche B. Both tranches were repaid in full on 27 April 2018. |
||
|
|
|
|
||
|
|
|
The Directors are of the opinion that the fair value of the short term bank loan at 31 December 2018 is not materially different from the book value. |
||
|
|
|
|
|
|
|
|
|
|
2018 |
2017 |
|
|
(b) |
Trade and other payables |
£'000 |
£'000 |
|
|
|
Investment management fee |
80 |
52 |
|
|
|
Interest payable |
32 |
14 |
|
|
|
Amounts due to brokers |
5 |
- |
|
|
|
Sundry creditors |
105 |
98 |
|
|
|
|
_______ |
_______ |
|
|
|
|
222 |
164 |
|
|
|
|
_______ |
_______ |
|
|
|
2018 |
2017 |
|
13. |
Non-current liabilities |
£'000 |
£'000 |
|
|
Fixed rate loan |
4,983 |
- |
|
|
|
_______ |
_______ |
|
|
|
|
|
|
|
All financial liabilities are measured at amortised cost. The fair value of the long term fixed rate loan at 31 December 2018 is estimated to be £5,161,000 (2017- N/A). |
||
|
14. |
Analysis of changes in financing liabilities during the year |
||
|
|
The following table shows the movements during the year of financing liabilities in the Balance Sheet: |
||
|
|
|
|
|
|
|
|
2018 |
2017 |
|
|
|
£'000 |
£'000 |
|
|
Opening balance at 1 January |
7,000 |
2,000 |
|
|
Net cash flows |
(32) |
5,000 |
|
|
Amortisation of arrangement costs |
15 |
- |
|
|
|
_______ |
_______ |
|
|
Closing balance at 31 December |
6,983 |
7,000 |
|
|
|
_______ |
_______ |
|
|
|
Ordinary shares |
|
|
|
|
of 50 pence each |
|
|
15. |
Called-up share capital |
Number |
£'000 |
|
|
Allotted and fully paid |
|
|
|
|
At 31 December 2018 and 31 December 2017 |
22,109,765 |
11,055 |
|
16. |
Net asset value per share |
||
|
|
The net asset value per Ordinary share and the net asset value attributable to the Ordinary shares at the year end were as follows: |
||
|
|
|
|
|
|
|
|
2018 |
2017 |
|
|
Net asset value attributable (£'000) |
63,052 |
75,421 |
|
|
Number of Ordinary shares in issue |
22,109,765 |
22,109,765 |
|
|
Net asset value per share (p) |
285.18 |
341.12 |
|
17. |
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 during the year. |
||||||||||||||
|
|
|
||||||||||||||
|
|
The Board has delegated the risk management function to Aberdeen Standard Fund Managers Limited ("the AIFM" or "ASFML") under the terms of its management agreement with ASFML (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. |
||||||||||||||
|
|
|
||||||||||||||
|
|
Risk management framework |
||||||||||||||
|
|
The directors of ASFML collectively assume responsibility for ASFML's obligations under the AIFMD including reviewing investment performance and monitoring the Company's risk profile during the year. |
||||||||||||||
|
|
|
||||||||||||||
|
|
ASFML is a fully integrated member of the Standard Life Aberdeen plc group of companies (referred to as "the Group"), which provides a variety of services and support to ASFML 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 co-Chief Executive Officers 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 ("SHIELD"). |
||||||||||||||
|
|
|
||||||||||||||
|
|
The Group's Internal Audit Department is independent of the Group's Risk Division and reports directly to the co-Chief Executive Officers 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 equity shares and convertible preference shares) at the Balance Sheet date was as follows: |
|||||||||||||
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
Weighted |
Weighted |
|
|
|
||||||||
|
|
|
|
average |
average |
|
|
Non- |
||||||||
|
|
|
|
period |
interest |
Fixed |
Floating |
interest |
||||||||
|
|
|
|
rate is fixed |
rate |
rate |
rate |
bearing |
||||||||
|
|
|
As at 31 December 2018 |
Years |
% |
£'000 |
£'000 |
£'000 |
||||||||
|
|
|
Assets |
|
|
|
|
|
||||||||
|
|
|
Convertible preference shares |
1.50 |
10.75 |
954 |
- |
- |
||||||||
|
|
|
Corporate bonds |
18.21 |
4.08 |
1,026 |
- |
- |
||||||||
|
|
|
Preference shares |
- |
6.69 |
3,200 |
- |
- |
||||||||
|
|
|
Cash |
- |
- |
- |
3,071 |
- |
||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
||||||||
|
|
|
Total assets |
- |
- |
5,180 |
3,071 |
- |
||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
||||||||
|
|
|
Liabilities |
|
|
|
|
|
||||||||
|
|
|
Short-term bank loan |
0.08 |
1.68 |
(2,000) |
- |
- |
||||||||
|
|
|
Fixed rate bank loan |
4.33 |
2.83 |
(5,000) |
- |
- |
||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
||||||||
|
|
|
Total liabilities |
- |
- |
(7,000) |
- |
- |
||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
||||||||
|
|
|
Total |
- |
- |
(1,820) |
3,071 |
- |
||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
||||||||
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
Weighted |
Weighted |
|
|
|
||||||||
|
|
|
|
average |
average |
|
|
Non- |
||||||||
|
|
|
|
period |
interest |
Fixed |
Floating |
interest |
||||||||
|
|
|
|
rate is fixed |
rate |
rate |
rate |
bearing |
||||||||
|
|
|
As at 31 December 2017 |
Years |
% |
£'000 |
£'000 |
|
||||||||
|
|
|
Assets |
|
|
|
|
|
||||||||
|
|
|
Convertible preference shares |
2.50 |
10.75 |
1,004 |
- |
- |
||||||||
|
|
|
Corporate bonds |
21.60 |
5.00 |
2,028 |
- |
- |
||||||||
|
|
|
Preference shares |
- |
5.22 |
4,097 |
- |
- |
||||||||
|
|
|
Cash |
- |
- |
- |
582 |
- |
||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
||||||||
|
|
|
Total assets |
- |
- |
7,129 |
582 |
- |
||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
||||||||
|
|
|
Liabilities |
|
|
|
|
|
||||||||
|
|
|
Short-term bank loan |
0.08 |
1.81 |
(2,000) |
- |
- |
||||||||
|
|
|
Fixed rate bank loan |
0.33 |
2.47 |
(5,000) |
- |
- |
||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
||||||||
|
|
|
Total liabilities |
- |
- |
(7,000) |
- |
- |
||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
||||||||
|
|
|
Total |
- |
- |
129 |
582 |
- |
||||||||
|
|
|
|
_______ |
_______ |
_______ |
_______ |
_______ |
||||||||
|
|
|
|
|||||||||||||
|
|
|
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 12 to the financial statements. |
|||||||||||||
|
|
|
The cash assets consist of cash deposits on call earning interest at prevailing market rates. |
|||||||||||||
|
|
|
The preference shares above have no fixed redemption date. |
|||||||||||||
|
|
|
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. |
|||||||||||||
|
|
|
|
|||||||||||||
|
|
|
Interest rate sensitivity |
|||||||||||||
|
|
|
The sensitivity analysis below have been determined based on the exposure to interest rates for 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 2018 would decrease by approximately £39,000 (2017 - £64,000 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 2018 would decrease by £117,000 (2017 - £235,000 decrease) in relation to the Company's exposure to interest rates on its fixed interest securities. |
||||||||||||
|
|
|
|
|||||||||||||
|
|
|
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 2018 would increase by approximately £39,000 (2017 - £64,000 increase) based on 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 2018 would increase by £117,000 (2017 - £235,000) in relation to the Company's exposure to interest rates on its fixed interest securities. |
||||||||||||
|
|
|
|
|||||||||||||
|
|
|
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, as detailed on page 66 of the published 2018 Annual Report, 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 Scandanavian Tobacco, which is traded on the Copenhagen exchange. |
|||||||||||||
|
|
|
|
|||||||||||||
|
|
|
Price sensitivity |
|||||||||||||
|
|
|
If market prices at the Balance Sheet date had been 10% higher while all other variables remained constant, net capital gains attributable to ordinary shareholders for the year ended 31 December 2018 would have increased by £6,262,000 (2017 - £7,555,000). If market prices at the Balance Sheet date had been 10% lower while all other variables remained constant, net capital gains attributable to ordinary shareholders for the year ended 31 December 2018 would have decreased by £6,262,000 (2017 - £7,555,000).This is based on the Company's equity portfolio and convertible preference shares 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 12). |
|||||||||||||
|
|
|
|
|||||||||||||
|
|
|
Maturity profile |
|||||||||||||
|
|
|
The maturity profile of the Company's financial liabilities at the Balance Sheet date was as follows: |
|||||||||||||
|
|
|
|
|||||||||||||
|
|
|
|
Within |
Within |
Within |
Within |
Within |
Within |
|||||||
|
|
|
|
1 year |
1-2 years |
2-3 years |
3-4 years |
4-5 years |
5 |
|||||||
|
|
|
At 31 December 2018 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|||||||
|
|
|
Trade and other payables |
(222) |
- |
- |
- |
- |
- |
|||||||
|
|
|
Bank loans |
(2,000) |
- |
- |
- |
(5,000) |
- |
|||||||
|
|
|
Interest on bank loans |
(144) |
(141) |
(141) |
(109) |
(70) |
- |
|||||||
|
|
|
|
_______ |
______ |
______ |
______ |
______ |
______ |
|||||||
|
|
|
|
(2,334) |
(141) |
(141) |
(109) |
(5,070) |
(7,795) |
|||||||
|
|
|
|
_______ |
______ |
______ |
______ |
______ |
______ |
|||||||
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
|
|
Within |
Within |
Within |
Within |
Within |
Within |
|||||||
|
|
|
|
1 year |
1-2 years |
2-3 years |
3-4 years |
4-5 years |
5 years |
|||||||
|
|
|
At 31 December 2017 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
£'000 |
|||||||
|
|
|
Trade and other payables |
(164) |
- |
- |
- |
- |
- |
|||||||
|
|
|
Bank loan |
(7,000) |
- |
- |
- |
- |
- |
|||||||
|
|
|
Interest on bank loans |
(70) |
- |
- |
- |
- |
- |
|||||||
|
|
|
|
_______ |
______ |
______ |
______ |
______ |
______ |
|||||||
|
|
|
|
(7,234) |
- |
- |
- |
- |
- |
|||||||
|
|
|
|
_______ |
______ |
______ |
______ |
______ |
______ |
|||||||
|
|
|
|
|
|
|
|
|
|
|||||||
|
|
(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; |
||||||||||||
|
|
|
- |
where transactions involving derivatives are entered into, these are 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 on a delivery versus payment basis 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. |
||||||||||||
|
|
|
- |
where 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: |
|||||||||||||
|
|
|
|
|||||||||||||
|
|
|
|
2018 |
2017 |
|||||||||||
|
|
|
|
Balance |
Maximum |
Balance |
Maximum |
|||||||||
|
|
|
|
Sheet |
exposure |
Sheet |
exposure |
|||||||||
|
|
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|||||||||
|
|
|
Non-current assets |
|
|
|
||||||||||
|
|
|
Quoted convertibles, bonds and preference shares at fair value through profit or loss |
5,180 |
5,180 |
7,129 |
7,129 |
|||||||||
|
|
|
|
|
|
|
|
|||||||||
|
|
|
Current assets |
|
|
|
|
|||||||||
|
|
|
Accrued income |
338 |
338 |
330 |
330 |
|||||||||
|
|
|
Cash and cash equivalents |
3,071 |
3,071 |
582 |
582 |
|||||||||
|
|
|
|
_______ |
______ |
______ |
______ |
|||||||||
|
|
|
|
8,589 |
8,589 |
8,041 |
8,041 |
|||||||||
|
|
|
|
_______ |
______ |
______ |
______ |
|||||||||
|
|
|
|
|
|
|
|
|||||||||
|
|
|
None of the Company's financial assets are past due or impaired. |
|||||||||||||
|
|
|
|
|||||||||||||
|
|
|
Fair value of financial assets and liabilities |
|||||||||||||
|
|
|
The book value of cash at bank and short-term bank loans and overdrafts included in these financial statements approximate to fair value because of their short-term maturity. The carrying values of fixed asset investments are stated at their fair values, which have been determined with reference to quoted market prices and have been categorised as Level 1 and Level 2 within the Fair Value Hierarchy table. For details of bond maturities and interest rates, see above. For all other short-term debtors and creditors, their book values approximate to fair values because of their short-term maturity. The fair value of the long term fixed rate bank loan is disclosed in note 12. |
|||||||||||||
|
|
|
|
|||||||||||||
|
|
|
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. |
|||||||||||||
|
18. |
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 2(c). The effect of this treatment on revenue and capital is set out below. |
||||
|
|
|
||||
|
|
As explained in note 2(f) 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 revenue 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. |
||||
|
|
|
||||
|
|
|
2018 |
2017 |
||
|
|
|
Revenue |
Capital |
Revenue |
Capital |
|
|
|
£'000 |
£'000 |
£'000 |
£'000 |
|
|
Finance costs arising on bank loan finance |
(28) |
(65) |
(25) |
(58) |
|
|
Return on corresponding investments |
64 |
(64) |
3 |
(3) |
|
|
Amortised cost adjustment charged to capital on debt securities |
- |
- |
1 |
(1) |
|
|
|
_______ |
______ |
______ |
______ |
|
|
|
36 |
(129) |
(21) |
(62) |
|
|
|
_______ |
______ |
______ |
______ |
|
19. |
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 2018 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) |
61,663 |
- |
- |
61,663 |
|
|
|
Quoted convertibles, bonds and preference shares |
b) |
- |
5,180 |
- |
5,180 |
|
|
|
|
|
_______ |
______ |
______ |
______ |
|
|
|
Total |
|
61,663 |
5,180 |
- |
66,843 |
|
|
|
|
|
_______ |
______ |
______ |
______ |
|
|
|
|
|
|
|
|
|
|
|
|
As at 31 December 2017 |
|
|
|
|
|
|
|
|
|
|
Level 1 |
Level 2 |
Level 3 |
Total |
|
|
|
|
Note |
£'000 |
£'000 |
£'000 |
£'000 |
|
|
|
Financial assets at fair value through profit or loss |
|
|
|
|
|
|
|
|
Quoted equities |
a) |
74,544 |
- |
- |
74,544 |
|
|
|
Quoted convertibles, bonds and preference shares |
b) |
- |
7,129 |
- |
7,129 |
|
|
|
|
|
_______ |
______ |
______ |
______ |
|
|
|
Total |
|
74,544 |
7,129 |
- |
81,673 |
|
|
|
|
|
_______ |
______ |
______ |
______ |
|
|
|
|
|
|
|
|
|
|
|
|
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 convertibles, bonds and preference shares |
|||||
|
|
|
The fair value of the Company's investments in quoted convertibles, bonds and preference shares has been determined by reference to their quoted bid prices at the reporting date. Investments categorised as Level 2 are not considered to trade in active markets. |
|||||
|
|
|
|
|||||
|
|
There have been no transfers of assets or liabilities between levels of the fair value hierarchy during any of the above periods. |
||||||
|
20. |
Related party transactions |
|
|
Directors fees and interests |
|
|
Fees payable during the year to the Directors and their interests in the shares of the Company are disclosed within the Directors' Remuneration Report on page 29 of the published 2018 Annual Report. |
|
|
|
|
|
Transactions with the Manager |
|
|
Management, promotional activities, secretarial and administration services are provided by ASFML with details of transactions during the year and balances outstanding at the year end disclosed in notes 4 and 5. |
|
21. |
Capital management policies and procedures |
|
|
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. |
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 2018. The statutory accounts for the year ended 31 December 2018 received an audit report which was unqualified.
The statutory accounts for the financial year ended 31 December 2018 were approved by the Directors on 7 March 2019 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 2 May 2019 at Bow Bells House, One Bread Street, London EC4M 9HH.
The Annual Report will be posted to shareholders in March 2019 and additional copies will be available from the Manager (Investor Helpline - Tel. 0808 500 4000) 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 Income Trust PLC
Aberdeen Asset Management PLC, Secretaries
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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