Annual Financial Report

RNS Number : 5572Q

Standard Life UK Small.Co's Tst PLC

02 September 2014

 

STANDARD LIFE UK SMALLER COMPANIES TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 JUNE 2014

1.      CHAIRMAN'S STATEMENT

It gives me great pleasure to address shareholders for the first time as Chairman following my appointment on 26 February 2014.

Performance

For the year ended 30 June 2014, the Company's diluted net asset value total return was 7.7%, compared with a total return of 20.3% for the Company's benchmark. The last quarter has been a particularly difficult performance period for the Company. The valuations of quality growth smaller company stocks have been hit hard since 7 March 2014 with the prospect of higher interest rates earlier than the market had previously anticipated.

Despite this recent underperformance, the Company's long term performance remains strong. Indeed, since Standard Life Investments took over as Investment Manager on 1 September 2003, the Company has delivered a net asset value total return of 410.4%, representing an annualised return of 16.2% per annum and outperforming the Company's benchmark, the Numis Smaller Companies Index (excluding investment companies), by 3.3% per annum.

The Company continues to perform well against its peer group over five years and since Standard Life Investments' appointment, as reflected in the table below.

	3 years	5 years	10+ years (since SLI appointment)
Net asset value total return	30.1%	189.4%	410.4%
Share price total return	24.2%	202.1%	586.4%
Benchmark total return	52.1%	161.2%	274.6%
Peer group ranking	10/12	6/12	1/12

Sources: Thomson Datastream and JP Morgan Cazenove

The Investment Manager's Report provides further information on stock performance and portfolio activity during the year, as well as the Investment Manager's outlook for smaller companies. The Board agrees with the Manager's view that steady growth stocks should outperform cyclical stocks over the long term.

Earnings and Dividend

The undiluted (or basic) revenue return per share for the year ended 30 June 2014 was 5.05p (2013 - 4.58p). Underlying earnings per share have increased by 10.3% this year as dividend growth from the portfolio remained strong. Income from investments increased by 14.9% in the period. The Company has, again, benefitted from high levels of special dividends, which totalled £874,000 for the year (1.26p per share).

The Board is recommending a final dividend of 3.23p per share, an increase on last year's final dividend of 11.4%. If approved, the final dividend, together with the interim dividend of 1.27p paid in April, will give a total dividend for the year of 4.50p and will represent an increase of 11.1% on last year.

Subject to shareholder approval at the Annual General Meeting on 9 October 2014, the final dividend will be paid on 16 October 2014 to shareholders on the register as at 19 September 2014 with an associated ex-dividend date of 17 September 2014.

Investment Manager

The Board believes that the appointment of Standard Life Investments continues to be in the long-term interests of shareholders. Harry Nimmo, Head of Smaller Companies at Standard Life Investments, has been the lead investment manager of the Company's investment portfolio since 2003 and his strong performance record gives the Board confidence in the ability of the Investment Manager to continue to deliver attractive long term returns for shareholders. The Company was one of the first investment companies to simplify its investment management fee arrangements ahead of the implementation of the Retail Distribution Review. The performance fee was removed from 1 July 2012 and the investment management fee now comprises only a basic fee of 0.85% of total assets.  

Awards

The Company won the Moneywise UK Smaller Companies Trust of the year for the seventh year in a row and at the Grant Thornton Quoted Companies Awards on 29 January 2014, Harry Nimmo won Fund Manager of the Decade, reflecting the excellent share price performance of the Company over that period.

Gearing

The Board has given the Investment Manager discretion to vary the level of gearing between a net cash position of 5% and net gearing of 25% of net assets, depending on the Investment Manager's view of the outlook for smaller companies.

The Company currently has £20.58million 3.5% Convertible Unsecured Loan Stock 2018 (CULS) in issue and the Investment Manager is able to vary net gearing by adjusting the level of cash held by the Company. At 30 June 2013, the net cash level was 4.6%.

As a reminder to holders of the CULS, these can be converted into Ordinary shares on 30 September and 31 March of each year up to March 2018, at a fixed price per Ordinary share of 237.2542p.

Discount

The discount at which the Company's shares trade relative to the underlying diluted net asset value was 5.9% at 30 June 2014. The Company's shares have traded at an average premium of 0.4% over the year ended 30 June 2014 (source: Winterflood Securities) and the Board will continue to monitor the discount level closely going forward. This discount compares very favourably with the peer group average, which was 13.4% at 30 June 2014.

Issue of Shares

During the period the Company issued over 2.9m new ordinary shares at a premium to net asset value and a further 1.8m new ordinary shares as a result of CULS conversions, increasing the capital base by 7.0%. The current market capitalisation is now £205m with total assets of over £244m. The Board continues to seek ways of improving the size and liquidity of the Company's ordinary shares.

Regular Tender Offers

The Board exercised its discretion and did not conduct a tender offer at either of the 31 December 2013 or 30 June 2014 tender dates as the Company's shares have traded at a small average premium over the year as discussed in the discount section above.

AIFMD

The European Alternative Investment Fund Managers Directive (AIFMD) is effective, with the final implementation date of 22 July 2014 now passed. The Board has appointed its Investment Manager to undertake the necessary regulatory returns and ongoing compliance. This appointment became effective on 7 July 2014, the date of the Investment Manager's authorisation as an AIFM. BNP Paribas has been appointed as depositary to the Company.

Succession Planning

I am delighted to welcome Allister Langlands as a new non-executive director following his appointment on 1 July 2014. Allister has a wealth of business experience having served as chairman, chief executive and finance director of Wood Group over a twenty-three year period. He will succeed Lynn Ruddick as the Audit Committee Chairman during the course of the next year.

Having taken over as Chairman of the Company it is appropriate that I pay tribute to the work of my predecessor in this role, Donald MacDonald. Donald has been Chairman since the Company's launch in 1993 and has guided us through some turbulent events and difficult times. His wise counsel and excellent chairmanship have been of enormous value to us, and it is pleasing to see that as he leaves the chair, the Trust has established such a strong position.

AGM

Following the success of last year's AGM in London the Board has decided to keep the same location for this year. The AGM will be held at the Investment Manager's offices at 30 St. Mary Axe, London (the Gherkin) on Tuesday 9 October 2014. The meeting will start at 12:30pm and will include a presentation from the Investment Manager.

Outlook

The Investment Manager's investment process has delivered excellent returns for shareholders and the Board remains confident in the outlook for the Company over the long term. We expect the portfolio to continue to deliver strong earnings and dividend growth. The emphasis on risk aversion, quality and resilience, growth and momentum remains intact.

David Woods

Chairman

1 September 2014

2.      INVESTMENT MANAGER'S REPORT

The UK smaller companies sector, as represented by the Numis Smaller Companies Index (excluding Investment Companies), returned 20.3% in total return terms over the year. This compares with a diluted net asset value total return for the Company of 7.7% and a share price total return of 1.6%. Over the same period the total return of the FTSE 100 Index of the largest UK listed companies was 12.3%. The reasons for this performance are explained in the Equity Markets and Performance sections below.

Equity markets

The performance of UK smaller company equities can be divided into two periods, with 7 March 2014 being the turning point. This coincided with the new US Federal Reserve (the Fed) Chair Janet Yellen raising the possibility of an earlier than anticipated increase in US interest rates. The market seized on her rather laconic comments that the time difference between the end of quantitative easing (QE) and the first rate increase could be six months, thus bringing forward the market's expectation of such an event by around nine months. While not earth shattering in itself it did cause investors particularly in the US, the UK and Japan to re-examine the risk profiles in their portfolios in what turned out to be a dramatic fashion. At the same time the crisis in Crimea and Ukraine unfolded, causing further market turbulence. By June, Iraq and the activities of the Islamic State of Iraq and the Levant had also gripped the attention of markets.

From the start of the Company's financial year until 6 March 2014, the market was happy to take on risk and in particular support high growth companies, with valuation a secondary consideration. In general, markets took the view that the smaller the stock, the better the performance. This is typical of a bull market: stocks exhibiting earnings and price momentum were favoured. All this was supported by a buoyant economic backdrop, especially in the UK, but also in the US. Indeed an unusually strong confluence of economic growth and recovery was evident all round the world including Japan, China and even continental Europe. This was a vintage period for smaller companies, with this part of the market up by 27% in the period to 6 March 2014.

Following that date and Fed Chair Yellen's comments, investors, including the increasingly influential multi-asset, global macro segment, moved to reduce risk by exiting small and mid sized companies. This was often achieved by indirect methods such as derivatives or selling exchange traded funds (ETFs). This, in turn, caused selling in the underlying holdings and prompted downwards share price pressure in particular on the smaller constituents of the FTSE 250 which also coincide with some of our larger holdings. At the same time the new issues market was unusually active, particularly with retail new issues. Fund managers who wish to participate in these new issues tend to sell previous winners, especially existing retail holdings. High growth stocks which did particularly well in the preceding period were sold due to being seen as high risk. The microcap segment, in which this Company is only a small participant, was exempt from this major rotation as there are no derivatives in this part of the market. Microcaps were not weighed down by new issues. Indeed, there were strong money flows into this sub-sector during the year.

After a barren period, bid activity started to pick up towards the end of the financial year, culminating in a bid for Kentz towards the end of June. The oil price remained stable throughout the year.

Performance

The period to 6 March 2014 saw the Company perform roughly in line with the very strong showing for smaller companies as a whole - a good result given the strength of the microcap segment. However, following that date, a period of severe underperformance set in. After 6 March, the Company suffered under the onslaught of derivative-related selling activity at the lower end of the FTSE 250. Our approach is to identify companies which exhibit strong quality, earnings visibility and price or earnings momentum and in this environment these companies underperformed. Also some of our erstwhile growth winners, such as Asos and Ocado, came off dramatically. The extremely benign nature of the economic backdrop in the UK and worldwide meant that quality, strong balance sheets, cashflow and earnings visibility were no longer regarded by some investors as positives. Indeed given the maturity of the recovery, which after all began in 2009, our favoured holding type looked pedestrian when compared with the seeming performance of the more cyclical recovery segment. Underperformance was prodigious, to the extent that the return for the year in question was most disappointing.

Our five leading performers in the year were as follows:-

Kentz Corp, an oil services company specialising in engineering and technical services agreed a bid from SNC Lavalin, a Canadian engineering services conglomerate. The shares were up 152% in the year. The share price is up just over four times since our first purchase in April 2010.

Hargreaves Lansdown, the on-line financial services provider continued to perform well even though their business environment was rendered uncertain by regulatory change. We continue to scale out of this holding as it has moved right on through to the FTSE 100 Index.

Safestyle, the provider of replacement windows was an unlikely but spectacularly successful new issue. Listed at 100p, the shares traded at 189p by the year end.

Andor Technologies, the specialist microscopic camera designer received a 525p bid from Oxford Instruments. Our ownership dates back to the listing of the company in December 2004 when a stake was bought at 90p.

GB Group is an ID verification company both for internet transactions but also for the recruitment into sensitive employment areas. GB is developing a strong franchise in this market.

The poorest performers included PaddyPower the on-line bookmaker. Its UK markets have become more competitive in the last year due to tougher regulation. Waterlogic, the innovative water purification company suffered setbacks in product development.  Abcam, the on-line antibody distributor faced slowing growth in its end markets. Blinkx suffered an onslaught of selling as a consequence of a vexatiously written short sell sponsored research note and Xaar warned of slower profits growth due to increased competition.

Our growth orientated retailers and high growth companies performed extremely well prior to 7 March 2014 and then extremely badly for the rest of the year in question when being overweight in this sector was very negative. New issue activities in 2014 were generally positive with Gulf Marine Services, Safestyle, FDM and Poundland being standouts. Our preference for high quality stocks with dependable earnings and strong characteristics was badly out of favour in an environment of rampant economic and market optimism.

Dealing and Activity

The most significant new additions to the portfolio were as follows:-

The Company bought back a stake in Big Yellow Group, the self-storage operator in the south east of England. Significant capital investment has been made and it is simply a case of seeing the company benefit from increased utilisation rates. Keller, the international ground services company, was bought as high quality exposure to international construction recovery. Cranswick, the meat products company, was purchased. Its consistency fits well with our investment process. Blinkx, the on-line video advertising company was added. The shares were subsequently sold at a substantial loss and represents one of the worst investments the Company has made in the last ten years, as a short sell sponsored research note destabilised the customer base. Ocado, the on-line food retailer was purchased following the deal with Morrisons. The shares were subsequently sold for a handsome profit.

Our key sales were:-

Asos was sold in its entirety during the year taking in over £13m for an investment of just over £0.4m. Latterly the company has encountered issues controlling its pace of growth. Furthermore, Asos can no longer be described as a smaller company. Domino's Pizza (UK & Ireland) was sold following a successful nine years in the portfolio. Its UK business was becoming mature and the expansion into Germany had been problematic. Profits were also taken in Xaar, the laser printhead technology company, following strong share price appreciation as it took the ceramic tile printing market by storm worldwide. The Company reduced the size of its holding in Hargreaves Lansdown following strong performance. Again, this is a company that has done its job and no longer can be defined as a smaller company. Likewise, PaddyPower has moved into largecap territory and profits have been taken.

Indeed, the Company has been going through somewhat of a process of renewal, as successful larger holdings are being sold on account of their size and the proceeds recycled into the new larger companies of tomorrow. The stock selection process remains constant throughout.

In terms of sector exposure the proportion of the Company exposed to on-line businesses and retailers, although still significant, has come down. Likewise the electrical & electronics sector has been reduced, signifying the end of the explosive capital investment boom in China. Areas of increased sector exposure include support services reflecting a wide array of different types of business in the largest sector in the smaller companies universe. This sector is often fertile ground for new smaller companies. A particular subsector of interest here is represented by Smart Metering Systems and Utilitywise, companies that are beneficiaries of rising energy prices. Financial services now feature prominently after an absence of many years, notably in the shape of holdings in two "challenger banks", Secure Trust Bank, purchased just after the year end, and Paragon. These companies are beneficiaries of the government's wish to boost diversity and competition in banking following the disasters of the banking crisis. Software remains a heavyweight component given the growth and predictability characteristics. Healthcare has increased following a number of recent additions, including interesting growth companies in discrete niches such as Cambian in mental health rehabilitation and CVS in veterinary medicine.

Outlook

The interest rate environment has been incredibly benign during the year, with base rates in the UK remaining at half of one percent for more than five years now. A similar pattern is evident in the US, Europe and Japan. Under the influence of continued injections of QE across the developed world, strong economic growth in the UK and US and recovery in Europe and Japan have been established. In the UK, consumer confidence and industrial production are very buoyant. The housing market in London and the south east is showing signs of overheating. The ripple of higher house prices is spreading across the UK as the Government's help-to-buy scheme is starting to take effect. Corporate profit growth, particularly in the more cyclical sectors, is accelerating. The Chinese economy is slowing but still showing 6% plus growth. Oil prices have remained quite stable at around $110 per barrel, even though political instability in the Ukraine, Syria and Iraq has made the world a more dangerous place. Partly in response to this sterling has strengthened against most international currencies over the past year.

The constantly improving economic backdrop driven by ultra low interest rates and QE has helped smaller companies markets to rise by around 300% from the lows of early December 2008 with some commentators suggesting that an asset bubble is in the process of being formed. First sight of a future of rising interest rates caused significant weakness in smaller companies from March 2014 onwards. Monetary authorities are now seen as being more cunning in their ability to pull the levers that drive the world economy. There is growth in the belief that, to paraphrase Gordon Brown, 'the economics of boom and bust have been banished'.  We do not share this view.

At this time many of the more cyclical industries are moving towards profit margin levels that are quite close to those last seen in 2007. Cyclical stocks, after five years of recovery, have now delivered strong long term earnings records that make the earnings growth track record of our consistent quality growth holdings look quite pedestrian.

The new issues market since March 2014 until recently has been remorseless. While providing new investment opportunities, it has seriously sapped the strength of markets as investors have had to sell existing holdings to buy the new companies. Summer provides a lull to these activities which will return in the autumn.

Acquisition activity is likely to increase from very low levels over the next 12 months. The Company has benefitted from three in the year (Andor Technology, Declam and Kentz). There is no shortage of well financed large companies looking to bolster growth further down the marketcap spectrum.

Whilst investment returns should be good over the next five years, it is unlikely that smaller companies will deliver the spectacular returns of the previous five years. A period of rising interest rates may begin later this year which should temper the extraordinarily supportive current business environment. 'Boom and Bust' is not over. The interconnectedness of global markets and banking systems, the very high levels of sovereign and personal debt and increased levels of geopolitical instability, particularly in regions where vital oil & gas resources are to be found, all suggest that caution should be the watchword.

To this end nothing has changed with our process. It has generally worked well over the past ten years and we see no reason for this to change. The vast majority of our companies have net cash positions and can grow from internally generated cashflows in a predictable way. Dividend growth is strong and special dividends are quite plentiful without compromising growth prospects. This all gives us great confidence in the long term outlook for the Company. Our aim is to be exposed to predictable growth, but in a lower risk way as there is always risk out there particularly in this interdependent global financial system. Given that uncertainty remains around every corner, our emphasis on risk aversion, resilience, growth and momentum still feels right for the future.

Harry Nimmo

Standard Life Investments, Manager

1 September 2014

3.     STRATEGIC REPORT                 

This Strategic Report has been prepared by the Directors in accordance with Section 414 of the Companies Act 2006, as amended. The Company's Auditor is required to confirm that this Report is consistent with the Financial Statements.

The Board

The Board is responsible for setting and monitoring the Company's strategy. As at 30 June 2014, the Board consisted of four non-executive Directors, two men and two women. Mr Allister Langlands was appointed to the Board on 1 July 2014. Following his appointment the Board consists of five non-executive Directors, three men and two women. The Directors have a range of investment, commercial and professional experience.

Investment Objective

The Company aims to achieve long term capital growth by investment in UK quoted smaller companies.

Business Model and Investment Policy

The Company is an investment trust which invests in accordance with the objective stated above. It has no employees and outsources its management function to its Investment Manager, Standard Life Investments (Corporate Funds) Limited ("the Manager").

To achieve its investment objective the Company invests in a diversified portfolio consisting mainly of UK quoted smaller companies. The portfolio will normally comprise around 50 individual holdings representing the Manager's highest conviction investment ideas. In order to reduce risk in the Company without compromising flexibility, no holding within the portfolio should exceed 5 per cent. of total assets at the time of acquisition.

The Company may use derivatives for portfolio hedging purposes (i.e. only for the purpose of reducing, transferring or eliminating the investment risks in its investments in order to protect the Company's portfolio).

The Company is adhering to its stated investment policy and managing the risks arising from it. This is illustrated in various tables and charts throughout the Annual Report, and from the information provided in the Chairman's Statement and the Investment Manager's Report.

Gearing Policy

Within the Company's Articles of Association, the maximum level of gearing is 100% of net assets. The Directors' policy is that gearing will be between 5% net cash and 25% net gearing (at the time of drawdown) in normal market conditions. The Directors have delegated responsibility to the Investment Manager for the operation of the gearing level within the above parameters.

The Board regularly reviews gearing which was a net cash position of 4.6% as at 30 June 2014.This compared to a net gearing figure of 8.8% as at 30 June 2013.  Gearing is calculated as the liability component of the Convertible Unsecured Loan Stock 2018 ("CULS") less cash balances, as a proportion of net assets.

Manager's investment process

The Manager's investment process combines asset allocation, stock selection, portfolio construction, risk management, and dealing. The investment process is research-intensive and is driven by the Manager's distinctive "focus on change" which recognises that different factors drive individual stocks and markets at different times in the business cycle. This flexible, but disciplined process ensures that the Manager has the opportunity to out-perform in different market conditions.

Results and Dividend

The Company's results and performance for the year are detailed in the Financial Highlights.

The total revenue return attributable to Ordinary shareholders for the year ended 30 June 2014 amounted to £3,500,000 (2013:£3,026,000).

An interim dividend of 1.27 pence per share (2013 - 1.15 pence) was paid on 7 April 2014 to shareholders on the register as at 14 March 2014. The ex-dividend date was 12 March 2014.

The Directors are recommending to shareholders that a final Ordinary dividend of 3.23 pence per share (2013- 2.90 pence) be paid on 16 October 2014 to shareholders on the share register as at the close of business on 19 September 2014. The ex-dividend date is 17 September 2014.

If approved, the final dividend together with the interim dividend paid in April will give a total dividend for the year of 4.50 pence per share (2013-4.05 pence).

Details of the final Ordinary and Interim dividends paid during the year ended 30 June 2014 are disclosed in Note 7 to the Financial Statements.

Review of Performance

For the year ended 30 June 2014, the Company's net asset value total return was 7.7%, compared to a total return of 20.3% for the Company's benchmark, the Numis Smaller Companies Index (excluding Investment Companies).

The Board considers performance with the Manager at every meeting. The Board receives a detailed portfolio report for each meeting, sets the overall strategy for the Company and establishes the extent to which the Company is successful in achieving its objectives, as measured by key performance indicators.

Key Performance Indicators (KPIs)

 The three KPIs by which performance is measured are as follows:

•              net asset value relative to the Company's benchmark with particular attention to long-term performance, which is considered by the Board to be over a period of five years;

•              Ordinary share price (total return); and

•              discount or premium of the Ordinary share price to underlying net asset value.

A record of these KPIs, for the year under review, is included in the financial highlights and the Chairman's Statement.

A review of the Company's performance, market background, investment activity and portfolio strategy during the year under review, as well as the Manager's investment outlook, is provided in the Investment Manager's Report.

Principal Risks and Uncertainties

The Board regularly reviews the principal risks and uncertainties facing the Company which the Board and the Manager have identified and the Board sets out delegated controls designed to manage those risks and uncertainties. Key risks within investment strategy, including inappropriate stock selection and gearing, are managed by the Board through a defined investment policy, with guidelines and restrictions, and by the process of oversight at each Board meeting. Operational disruption, accounting and legal risks are also covered at least annually and regulatory compliance is reviewed at each Board meeting.

The Directors have adopted a robust framework of internal controls which is designed to monitor the principal risks and uncertainties facing the Company and to provide a monitoring system to enable the Directors to mitigate these risks as far as possible.

The major risks associated with the Company are:

• Investment and market risk: The Company is exposed to the effect of variations in share prices due to the nature of its business. A fall in the value of its investment portfolio will have an adverse effect on the value of shareholders' funds.

• Capital structure and gearing risk: The Company's capital structure, as at 30 June 2014, consisted of equity share capital comprising 71,383,586 Ordinary shares and £20,584,450 nominal amount of CULS.

The effect of gearing should be beneficial in rising markets but could adversely affect returns to shareholders in falling markets. The Manager is able to increase or decrease the Company's level of net gearing by holding a lower or higher cash balance subject to the Company's investment policy which requires that gearing should remain between 5% net cash and 25% net gearing at the time of drawdown.

• Revenue and dividend risk: In view of the Company's investment objective, which is to generate long-term capital growth by investment in UK quoted smaller companies, the Manager is required to strike a balance more in favour of capital growth than revenue return. In normal circumstances, the Board intends to pay a dividend commensurate with the year's income. The Board receives regular updates as to the progress made by the Manager in generating a revenue return and the consequent level of the Company's anticipated dividend.

• Regulatory risk: The Company operates in a complex regulatory environment and faces a number of regulatory risks. A breach of Section 1158 would result in the Company being subject to capital gains tax on portfolio investments. Breaches of other regulations, including the Companies Act 2006, the UKLA Listing Rules or the UKLA Disclosure and Transparency Rules, could lead to a number of detrimental outcomes and reputational damage. Breaches of controls by service providers to the Company could also lead to reputational damage or loss.

• Supplier risk: in common with most investment trusts, the Company has no employees. The Company therefore relies upon services provided by third parties, including the Manager in particular, to whom responsibility for the management of the Company has been delegated under an Investment Management Agreement.

Your Company and the Manager are registered in Scotland and it is acknowledged that there is some uncertainty arising from the referendum on Scottish independence due to take place on 18 September 2014. Should the vote be for independence, the Board considers that there will be a transition period during which there will be an opportunity to assess the impact and take any appropriate action.

Employee, Environmental and Human Rights Policy

As an investment trust, the Company has no direct employee or environmental responsibilities, nor is it responsible for the emission of greenhouse gases. Its principal responsibility to Shareholders is to ensure that the investment portfolio is properly managed and invested. The Company has no employees and, accordingly, has no requirement to report separately on employment matters. The management of the portfolio is undertaken by the Manager. The Manager engages with the Company's underlying investee companies in relation to their corporate governance practices and in developing their policies on social, community and environmental matters and further information may be found in the Statement of Corporate Governance. The Manager's specific policies are outlined in their Corporate Governance UK Guidelines, which may be found on the Manager's website at http://www.standardlifeinvestments.com/CG_Corporate_Governance_Booklet/getLatest.pdf. In light of the nature of the Company's business, there are no relevant human rights issues and, therefore, the Company does not have a human rights policy.

Future Trends

The Company's smaller company portfolio features high quality growth stocks with visible, recurring revenue, which exhibit both earnings and price momentum. Given the availability of high quality companies at sustainable valuations, the Company continues to be positive about the long-term outlook for smaller companies.

Future Strategy

The Board and Manager intend to maintain the strategic policies set out above for the year ending 30 June 2015 as it is believed that these are in the best interests of shareholders.

David Woods

Chairman

1 September 2014

4.      FINANCIAL HIGHLIGHTS

	Year to 30 June 2014
Diluted net asset value total return			7.7%
Share price total return			1.6%
Benchmark total return			20.3%

	30 June
	2014	2013	% change
Capital
Net asset value per Ordinary share
- Basic	307.38p	290.23p	5.9
- Diluted	298.92p	281.58p	6.2
Share price	281.25p	280.50p	0.3
Benchmark capital return	6,476.55	5,525.53	17.2
Discount of Ordinary share price to net asset value
- Basic	8.5%	3.4%
- Diluted	5.9%	0.4%
Total assets (£m)1	239.14	217.05	10.2
Shareholders' funds (£m)	219.42	193.48	13.4
Ordinary shares in issue	71,383,586	66,665,988	7.1
Gearing
(Net cash)/net gearing2	(4.6%)	8.8%
CULS
CULS in issue	£20,584,450	£24,896,887	(17.3)
CULS yield	2.9%	3.0%
CULS price	122.00p	116.13p	5.1
Earnings and Dividends (year ended)
Revenue return per Ordinary share
-Basic	5.05p	4.58p	10.3
-Diluted	4.66p	4.19p	11.2
Interim dividend paid for the year	1.27p	1.15p	10.4
Proposed final dividend for the year	3.23p	2.90p	11.4
Total dividends for the year	4.50p	4.05p	11.1
Dividend yield	1.6%	1.4%
Expenses
Ongoing charges3	1.19%	1.28%
1        Total assets less current liabilities, after excluding short-term debt of nil (2013-nil).
2     Net gearing ratio calculated as the total liability component of £19.7m of the Convertible Unsecured Loan Stock less the cash invested in AAA money market funds and cash and short term deposits, divided by net assets.
3     Ongoing charges ratio calculated in accordance with guidance issued by the AIC as the total of the investment management fee and administrative expenses divided by the average cum income net asset value throughout the year.

5.            GOING CONCERN

The Company's assets consist of equity shares in companies listed on recognised stock exchanges and are considered by the Board to be realisable within a short timescale under normal market conditions. The Board has set overall limits for borrowing and regularly reviews the Company's level of gearing, cash flow projections and compliance with banking covenants, when applicable.

The Company has no bank borrowings at 30 June 2014 (2013: nil).

The Directors are mindful of the Principal Risks and Uncertainties disclosed in the Strategic Report and, having reviewed forecasts detailing revenue and liabilities, the Directors believe that the Company has adequate financial resources to continue its operational existence for the foreseeable future. Accordingly, the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the Financial Statements.

6.            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 UK Accounting Standards. 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 judgments and estimates that are reasonable and prudent; and

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

The Directors are responsible for keeping proper 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 its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

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

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

The work carried out by the auditor does not involve consideration of these matters and, accordingly, the auditor accepts no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.

The Directors are also responsible for ensuring that the Annual Report and Financial Statements, taken as a whole are fair, balanced and understandable and provide the information necessary to assess the Company's performance, business model and strategy.

Directors' Responsibilities statement

Each Director confirms, to the best of their knowledge,

that:

•       the financial statements have been prepared in accordance with UK Accounting Standards and applicable law, give a true and fair view of the assets, liabilities, financial position and profit of the Company as at 30 June 2014 and for the year to date;

•       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 the Company faces; and

•       the Annual Report and Financial Statements taken as a whole are fair, balanced and understandable and provide the information necessary to assess the Company's performance, business model and strategy.

For and on behalf of the Board of Standard Life UK Smaller Companies Trust plc

David Woods

Chairman

1 September 2014

INCOME STATEMENT

for the year ended 30 June 2014

		2014			2013
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Net gains on investments held at fair value	9	-	14,399	14,399	-	50,634	50,634
Currency losses		-	(13)	(13)	-	(5)	(5)
Income	2	4,860	-	4,860	4,197	-	4,197
Investment management fee	3	(526)	(1,580)	(2,106)	(413)	(1,240)	(1,653)
Other administrative expenses	4	(566)	-	(566)	(459)	-	(459)
		________	________	________	________	________	________
NET RETURN BEFORE FINANCE COSTS AND TAXATION		3,768	12,806	16,574	3,325	49,389	52,714
Finance costs	5	(262)	(786)	(1,048)	(288)	(865)	(1,153)
		________	________	________	________	________	________
RETURN ON ORDINARY ACTIVITIES BEFORE TAXATION		3,506	12,020	15,526	3,037	48,524	51,561
Taxation	6	(6)	-	(6)	(11)	-	(11)
		________	________	________	________	________	________
RETURN ON ORDINARY ACTIVITIES AFTER TAXATION		3,500	12,020	15,520	3,026	48,524	51,550
		________	________	________	________	________	________
RETURN PER ORDINARY SHARE:
BASIC	8	5.05p	17.33p	22.38p	4.58p	73.48p	78.06p
DILUTED	8	4.66p	15.90p	20.56p	4.19p	64.12p	68.31p
The total column of this statement represents the profit and loss account of the Company.
A Statement of Total Recognised Gains and Losses has not been prepared as all gains or losses are recognised in the Income Statement.
All revenue and capital items in the above statement derive from continuing operations.
The accompanying notes are an integral part of the financial statements.

BALANCE SHEET

as at 30 June 2014

		2014	2013
	Notes	£'000	£'000
NON-CURRENT ASSETS
Investments at fair value through profit or loss	9	212,603	210,492
		___________	___________
CURRENT ASSETS
Debtors	10	1,348	928
Investments in AAA Money Market funds	15	29,798	6,468
Cash and short term deposits	15	5	19
		___________	___________
		31,151	7,415
		___________	___________
CURRENT LIABILITIES
Creditors: amounts falling due within one year	11	(4,617)	(856)
		___________	___________
NET CURRENT ASSETS		26,534	6,559
		___________	___________
TOTAL ASSETS LESS CURRENT LIABILITIES		239,137	217,051
NON-CURRENT LIABILITIES
3.5% Convertible Unsecured Loan Stock 2018	12	(19,719)	(23,567)
		___________	___________
NET ASSETS		219,418	193,484
		___________	___________
CAPITAL AND RESERVES
Called-up share capital	13	17,846	16,666
Share premium account		19,309	7,225
Equity component of Convertible Unsecured Loan Stock 2018	12	1,470	1,470
Special reserve		46,871	46,871
Capital reserve		129,582	117,562
Revenue reserve		4,340	3,690
		___________	___________
EQUITY SHAREHOLDERS' FUNDS		219,418	193,484
		___________	___________
NET ASSET VALUE PER ORDINARY SHARE
BASIC	16	307.38p	290.23p
DILUTED	16	298.92p	281.58p

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 30 June 2014
		Share	Equity
	Share	premium	component	Special	Capital	Revenue
	capital	account	CULS 2018	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 June 2013	16,666	7,225	1,470	46,871	117,562	3,690	193,484
Return on ordinary activities after taxation	-	-	-	-	12,020	3,500	15,520
Issue of  shares	725	8,434	-	-	-	-	9,159
Issue of new Ordinary Shares from conversion of  3.5% Convertible Unsecured Loan Stock 2018	455	3,650	-	-	-	-	4,105
Dividends paid (see note 7)	-	-	-	-	-	(2,850)	(2,850)
	________	________	________	________	________	________	________
BALANCE AT 30 JUNE 2014	17,846	19,309	1,470	46,871	129,582	4,340	219,418
	________	________	________	________	________	________	________
For the year ended 30 June 2013
		Share	Equity
	Share	premium	component	Special	Capital	Revenue
	capital	account	CULS 2018	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 June 2012	16,250	3,722	1,470	46,871	69,038	2,796	140,147
Return on ordinary activities after taxation	-	-	-	-	48,524	3,026	51,550
Issue of  shares	412	3,469	-	-	-	-	3,881
Issue of new ordinary shares from conversion of 3.5% Convertible Unsecured Loan Stock 2018	4	34	-	-	-	-	38
Dividends paid (see note 7)	-	-	-	-	-	(2,132)	(2,132)
	________	________	________	________	________	________	________
BALANCE AT 30 JUNE 2013	16,666	7,225	1,470	46,871	117,562	3,690	193,484
	________	________	________	________	________	________	________
The revenue reserve represents the amount of the Company's retained reserves distributable by way of dividend.
The accompanying notes are an integral part of the financial statements.

CASHFLOW STATEMENT

Year ended 30 June 2014

		2014		2013
	Notes	£'000	£'000	£'000	£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES	14		2,654		1,763
SERVICING OF FINANCE
Interest paid			(828)		(873)
TAXATION			(6)		(23)
FINANCIAL INVESTMENT
Purchase of investments		(63,068)		(43,024)
Sale of investments		78,268		31,674
		_________		_________
NET CASH INFLOW/(OUTFLOW) FROM FINANCIAL INVESTMENT			15,200		(11,350)
EQUITY DIVIDENDS PAID			(2,850)		(2,132)
			_________		_________
NET CASH INFLOW/(OUTFLOW) BEFORE MANAGEMENT OF LIQUID RESOURCES AND FINANCING			14,170		(12,615)
FINANCING
Shares issued		9,159		3,881
		_________		_________
NET CASH INFLOW FROM FINANCING			9,159		3,881
			_________		_________
NET CASH (OUTFLOW)/INFLOW FROM MANAGEMENT OF LIQUID RESOURCES			23,329		(8,734)
MANAGEMENT OF LIQUID RESOURCES
Purchase of AAA Money Market funds		(68,530)		(28,860)
Sale of AAA Money Market funds		45,200		37,600
		_________		_________
NET CASH  (OUTFLOW)/INFLOW FROM MANAGEMENT OF LIQUID RESOURCES			(23,330)		8,740
			_________		_________
(DECREASE)/INCREASE IN CASH	15		(1)		6
			_________		_________

RECONCILIATION OF NET CASHFLOW TO MOVEMENT IN NET CASH
(Decrease)/increase in cash		(1)		6
Net change in liquid resources		23,330		(8,740)
Other non-cash movements		3,835		(251)
		_________		_________
MOVEMENT IN NET CASH/(DEBT) IN YEAR			27,164		(8,985)
OPENING NET DEBT			(17,080)		(8,095)
			_________		_________
CLOSING NET CASH/(DEBT)			10,084		(17,080)
			_________		_________

The accompanying notes are an integral part of the financial statements.

NOTES TO FINANCIAL STATEMENTS:

For the year ended 30 June 2014

1	Accounting policies
	(a)	Basis of accounting
		The financial statements have been prepared on a going concern basis and in accordance with applicable UK Generally Accepted Accounting Practice ('UK GAAP') and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts'. They have also been prepared on the assumption that approval as an investment trust will continue to be granted.
	(b)	Valuation of investments
		Investments have been designated upon initial recognition as fair value through profit or loss. This is done because all investments are considered to form part of a group of financial assets which is evaluated on a fair value basis, in accordance with the Company's documented investment strategy, and information about the grouping is provided internally on that basis. 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 initially at fair value. Subsequent to initial recognition, investments are valued at fair value. For listed investments, this is deemed to be bid market prices or closing prices for SETS stocks sourced from the London Stock Exchange. SETS is the London Stock Exchange electronic trading service covering most of the market including all FTSE 100 constituents and most liquid FTSE 250 along with some other securities. Gains and losses arising from changes in fair value are included in net profit or loss for the period as a capital item in the Income Statement and are ultimately recognised in the capital reserve.
	(c)	AAA money market funds
		The AAA money market funds are used by the Company to provide additional short term liquidity. As they are not listed on a recognised exchange and due to their short term nature, they are recognised in the financial statements at cost and as a current asset.
	(d)	Income
		Income from equity investments (other than special dividends), including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend. Special dividends are credited to revenue or capital in the Income Statement depending on the commercial circumstances behind the payment. Foreign income is converted at the exchange rate applicable at the time of receipt. Interest receivable on short term deposits is accounted for on an accruals basis.
	(e)	Expenses and interest payable
		Expenses are accounted for on an accruals basis. Expenses are charged to the capital column of the Income Statement when they are incurred in connection with the maintenance or enhancement of the value of investments. In this respect, the investment management fee and relevant finance costs are allocated 25% to revenue and 75% to the capital columns of the Income Statement in line with the Board's expectation of returns from the Company's investments over the long term in the form of revenue and capital respectively (see note 3).
		Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the Income Statement.
	(f)	Dividends payable
		Dividends are recognised in the period in which they are paid.
	(g)	Capital reserve
		Gains and losses on realisation of investments and changes in fair values which are readily convertible to cash, without accepting adverse terms, are transferred to the capital reserve.
	(h)	Taxation
		Tax expenses represents the sum of tax currently payable and deferred tax. Any tax payable is based on taxable profit for the period. Taxable profit differs from profit before tax as reported in the income statement because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the Balance Sheet date where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the Balance Sheet date measured on an undiscounted basis and based on enacted tax rates. 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 underlying temporary differences can be deducted. Temporary differences are differences arising between the Company's taxable profits and its results as stated in the Financial Statements which are capable of reversal in one or more subsequent periods.
		Owing to the Company's status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
	(i)	Other reserves
		The special reserve arose following court approval for the cancellation of the share premium account balance at 24 June 1999 and on 13 October 2009, Court of Session approval was granted for the cancellation of the Company's entire share premium account and capital redemption reserve and subsequent creation of a special distributable capital reserve.
	(j)	Foreign currency
		Overseas monetary assets and liabilities are converted into Sterling at the rate of exchange ruling at the Balance Sheet date.  Transactions during the year involving foreign currencies are converted at the rate of exchange ruling at the transaction date.  Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in the Income Statement.
	(k)	3.5% Convertible Unsecured Loan Stock 2018
		Convertible Unsecured Loan Stock ("CULS") issued by the Company is regarded as a compound instrument, comprising of a liability component and an equity component.  At the date of issue, the fair value of the liability component was estimated by assuming that an equivalent non-convertible obligation of the Company would have a coupon rate of 4.83%.  The fair value of the equity component, representing the option to convert liability into equity, is derived from the difference between the issue proceeds of the CULS and the fair value of assigned to the liability.  The liability component is subsequently measured at amortised cost using the effective interest rate method and the equity component remains unchanged.
		Direct expenses associated with the CULS issue are allocated to the liability and equity components in proportion to the split of the proceeds of the issue.  Expenses allocated to the liability component are amortised over the life of the instrument using the effective interest rate.
		The interest expense on the CULS is calculated according to the effective interest rate method by applying the assumed rate of 4.83% at initial recognition to the liability component of the instrument.
		On conversion of CULS, equity is issued and the liability component is derecognised.  The original equity component recognised at inception remains in equity.  No gain or loss is recognised on conversion.
		When CULS is repurchased for cancellation, the fair value of the liability at the redemption date is compared to its carrying amount, giving rise to a gain or loss on redemption that is recognised through profit or loss. The amount of consideration allocated to equity is recognised in equity with no gain or loss being recognised.

		2014	2013
		£000	£000
2	Income
	UK dividend income	4,153	3,687
	REIT income	151	71
	Overseas dividend income	464	392
		__________	__________
	Total Income from Dividends	4,768	4,150
		__________	__________
	Other income
	Interest from AAA Money Market funds	92	47
		__________	__________
		92	47
		__________	__________
	Total income	4,860	4,197
		__________	__________

		2014	2013
3	Investment management fee	£000	£000
	Investment management fee	2,106	1,653
	Charged to capital reserve	(1,580)	(1,240)
		__________	__________
		526	413
		__________	__________
	The Company has an agreement with Standard Life Investments (Corporate Funds) Limited ('SLI') for the provision of investment management services. The contract is terminable by either party on twelve months notice.
	The management fee paid to SLI is 0.85% per annum of the gross assets of the Company after deducting current liabilities. The fee is chargeable 25% to revenue and 75% to capital.
	There is no Performance Fee payable to the Investment Manager.
	The balance due to SLI at the year end was £508,000 (2013 - £461,000).

		2014	2013
		£,000	£,000
4	Administrative expenses (inclusive of VAT)
	Secretarial fees Directors' fees	169	156
		88	83
	Auditor's remuneration
	- fees payable to the Company's auditor for the audit of the Company's annual accounts	22	22
	- fees payable to the Company's auditor and its associates for iXBRL tagging services	2	2
	Registrar's fees	30	32
	Professional fees	86	63
	Other expenses	169	101
		__________	_________
		566	459
		__________	_________
	The secretarial fee is paid to SLI and reflects revised arrangements put in place at the time of the appointment of Maven Capital Partners UK LLP.

		2014		2013
		£,000		£,000
5	Finance costs
	Interest on 3.5% Convertible Unsecured Loan Stock 2018	791		869
	Notional Interest on 3.5% Convertible Unsecured Loan Stock 2018		184	209
	Amortisation of 3.5% Convertible Unsecured Loan Stock 2018 issue expenses	73		75
		__________		_________
		1,048		1,153
	Charged to capital reserve	(786)		(865)
		__________		_________
	Charged to revenue reserve	262		288
		__________		_________

			2014				2013
			Revenue		Capital	Total	Revenue		Capital	Total
6	Taxation		£000		£000	£000	£000		£000	£000
	(a)  Analysis of charge for year
	Overseas taxation		6		-	6	11		-	11
			_______		_____	_______	_______		_____	_______
	(b)  Provision for deferred taxation
	At 30 June 2014, the Company had unutilised management expenses and loan relationship losses of £41,840,000 (2013 - £38,391,000).  No deferred asset has been recognised on the unutilised management expenses and loan relationship losses as it is unlikely there will be suitable taxable profits from which the future reversal of the deferred asset could be deducted.
	(c)  Factors affecting current tax charge for year
	UK corporation tax at an effective rate of 22.50% (2013: 23.75%). The differences are explained below.
		2014					2013
		Revenue		Capital		Total	Revenue		Capital	Total
		£'000		£'000		£'000	£'000		£'000	£'000
	Net profit on ordinary activities before taxation	3,506		12,020		15,526	3,037		48,524	51,561
		_______		_______		_______	_______		______	_______
	Corporation tax at an effective rate of 22.50% (2013: 23.75%)	789		2,705		3,494	721		11,524	12,245
	Effects of:
	Non-taxable UK dividend income	(934)		-		(934)	(876)		-	(876)
	Non-taxable overseas dividends	(104)		-		(104)	(93)		-	(93)
	Overseas taxes	6		-		6	11		-	11
	Excess management expenses and loan relationship losses	249		535		784	248		501	749
	Other capital returns (e.g. gains on investments)	-		(3,240)		(3,240)	-		(12,025)	(12,025)
		_______		_______		_______	_______		_______	_______
	Current tax charge	6		-		6	11		-	11
		_______		_______		_______	_______		_______	_______
								2014		2013
7	Dividends							£000		£000
	Amounts recognised as distributions to equity holders in the period:
	2013 final dividend of 2.90p per share (2012 - 2.10p) paid on 15 October 2013							1,954		1,365
	2014 interim dividend of 1.27p per share (2013 - 1.15p) paid on 7 April 2014							896		767
								__________		__________
								2,850		2,132
								__________		__________
	The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.
	We set out below the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Section 1158 - 1159 of the Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £3,500,000 (2013 - £3,026,000).

		2014	2013
		£000	£000
	2014 interim dividend of 1.27p per share (2013 - 1.15p) paid on 7 April 2014	896	767
	2014 final dividend of 3.23p per share (2013 - 2.90p) payable on 16 October 2014	2,306	1,943
		__________	__________
		3,202	2,710
		__________	__________
	The amount payable for the proposed final dividend is based on the Ordinary shares in issue as at 1 September 2014 (71,383,586) which satisfies the requirement of Section 1159 of the Corporation Tax Act 2010.

		2014		2013
		p	£000	p	£000
8	Return per ordinary share
	Basic	5.05	3,500	4.58	3,026
	Revenue return	17.33	12,020	73.48	48,524
	Capital return
		________	________	________	________
	Total return	22.38	15,520	78.06	51,550
		________	________	________	________
	Weighted average number of Ordinary shares in issue		69,340,457		66,040,454
			__________		__________
	Diluted
	Revenue return                                                                                     4.66		3,676	4.19	3,210
	Capital return                                                                 15.90		12,548	64.12	49,075
	________		________	________	________
	Total return                                                                          20.56		16,224	68.31	52,285
	________		________	_______	_______
	Weighted average number of Ordinary
	shares in issue		78,911,644		76,534,215

	The calculation of the diluted total, revenue and capital returns per ordinary share are carried out in accordance with Financial Reporting Standard 22, "Earnings per Share". For the purpose of calculating total, revenue and capital returns per Ordinary share, the number of Ordinary shares used is the weighted average number used in the basic calculation plus the number of Ordinary shares deemed to be issued for no consideration on exercise of all Convertible Unsecured Loan Stock 2018 (CULS). The calculations indicate that the exercise of CULS would result in an increase in the weighted average number of Ordinary shares of 9,571,187 (2013-10,503,821) to 78,911,644 (2013 - 76,544,275) Ordinary shares.
	Where dilution occurs, the net returns are adjusted for items relating to the Convertible Unsecured Loan Stock ("CULS"). Total earnings for the period are tested for dilution. Once dilution has been determined individual revenue and capital earnings are adjusted.  CULS finance costs for the period and unamortised issues expenses are reversed. The prior year disclosure of the diluted returns per ordinary share has been amended to accord with current year disclosures.

		2014	2013
		£000	£000
9	Investments
	Fair value through profit or loss
	Opening fair value	210,492	147,937
	Opening fair value gains on investments held	(100,735)	(61,104)
		__________	_________
	Opening book cost	109,757	86,833
	Additions at cost	66,762	42,985
	Disposals - proceeds	(79,050)	(31,064)
	- realised gains on sales	36,949	11,003
		__________	_________
	Closing book cost	134,418	109,757
	Current year fair value gains on investments held	78,185	100,735
		__________	_________
	Closing fair value	212,603	210,492
		__________	_________
	Gains on investments
	Realised gains on sales	36,949	11,003
	(Decrease)/increase in fair value gains on investments held	(22,550)	39,631
		__________	_________
		14,399	50,634
		__________	_________
	All investments are equity shares listed on the London Stock Exchange.
	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 gains on investments in the Income Statement. The total costs were as follows:
		2014	2013
		£000	£000
	Purchases	278	259
	Sales	67	40
		__________	_________
		345	299
		__________	_________

		2014	2013
		£000	£000
10	Debtors
	Amounts due from brokers	782	-
	Net dividends and interest receivable	495	859
	Tax recoverable	54	54
	Other debtors	17	15
		__________	__________
		1,348	928
		__________	__________

		2014	2013
		£000	£000
11	Creditors: amounts falling due within one year
	Interest payable	180	217
	Investment management fee payable	508	461
	Sundry creditors	187	130
	Amounts due to brokers	3,742	48
		__________	__________
		4,617	856
		__________	__________

12	Non-current liabilities
		Nominal	Liability	Equity
	3.5% Convertible Unsecured Loan Stock 2018	Amount £000	Component £000	Component £000
	As at 30 June 2014
	Opening balance	24,897	23,567	1,470
	Conversion of 3.5% Convertible Unsecured Loan Stock 2018 into Ordinary Shares	(4,313)	(4,105)	-
	Notional Interest on 3.5% Convertible Unsecured Loan Stock 2018	-	184	-
	Amortisation	-	73	-
		__________	__________	__________
	Closing balance	20,584	19,719	1,470
		__________	__________	__________
	3.5% Convertible Unsecured Loan Stock 2018
	As at 30 June 2013
	Opening balance	24,935	23,321	1,470
	Conversion of 3.5% Convertible Unsecured Loan Stock 2018 into Ordinary Shares	(38)	(38)	-
	Notional Interest on 3.5% Convertible Unsecured Loan Stock 2018	-	209	-
	Amortisation	-	75	-
		__________	__________	__________
	Closing balance	24,897	23,567	1,470
		__________	__________	__________
	On 11 October 2013 the Company converted £2,463,662 nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 into 1,038,382 Ordinary Shares. Also on 8 April 2014 the Company converted £1,848,775 nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 into 779,216 Ordinary Shares. As at 30 June 2014, there was £20,584,450 nominal amount of 3.5% Convertible Unsecured Loan Stock 2018 in issue. The loan stock can be converted at the election of holders into Ordinary Shares during the months of March and September each year throughout their life up until 31 March 2018 at a fixed price per Ordinary share of 237.2542p.  Interest is paid on the 3.5% Convertible Unsecured Loan Stock 2018 on 30 September and 31 March each year. In the event of a winding-up of the Company the rights and claims of the Trustee and CULS holders would be subordinate to the claims of all creditors in respect of the Company's secured and unsecured borrowing, under the terms of the Trust Deed.

		2014	2013
13	Called up share capital	£000	£000
	Authorised:
		37,500	37,500
		__________	_________
	Issued and fully paid:
	71,383,586 (2013 - 66,665,988) Ordinary shares of 25p each - equity	17,846	16,666
	Held in treasury:
	Nil (2013 - nil) Ordinary shares of 25p each - equity	-	-
		__________	_________
		17,846	16,666
		__________	_________
		2014	2013
		Ordinary shares	Ordinary shares
		Number	Number
	As at 30 June 2013	66,665,988	64,999,905
	Conversion of CULS	1,817,598	16,083
	Issue of own shares	2,900,000	1,650,000
		__________	_________
	As at 30 June 2014	71,383,586	66,665,988
		__________	_________
	During the year the Company issued 2,900,000 Ordinary shares to satisfy shareholder demand for a total consideration received of £9,159,000.  Also, the Company issued 1,817,598 Ordinary shares following the receipt of elections to convert by holders of the Company's 3.5% Convertible Unsecured Loan Stock 2018.
	Capital Management
	The investment objective of the Company is to achieve long term capital growth by investment in UK quoted smaller companies.
	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;
	- 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.

		2014	2013
14	Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities	£000	£000
	Net return before finance costs and taxation	16,574	52,714
	Adjusted for:
	Gains on investments	(14,399)	(50,634)
	Currency losses	13	5
	Decrease/(increase) in accrued income	364	(556)
	Increase in other debtors	(2)	(4)
	Increase in sundry creditors including investment management fee	104	238
		__________	_________
	Net cash inflow from operating activities	2,654	1,763
		__________	_________

		At 30 June 2013	Cashflow	Currency and other movements	At 30 June 2014
		£000	£000	£000	£000
15	Analysis of changes in net debt
	Cash and short term deposits	19	(1)	(13)	5
	AAA Money Market funds	6,468	23,330	-	29,798
	Debt due in more than one year	(23,567)	-	3,848	(19,719)
		__________	_________	__________	_________
	Net (debt)/cash	(17,080)	23,329	3,835	10,084
		__________	_________	__________	_________

16	Net asset value per share
	Total shareholders' funds have been calculated in accordance with the provisions of applicable accounting standards. The analysis of total shareholders' funds on the face of the Balance Sheet reflects the rights, under the Articles of Association, of the ordinary shareholders on a return of assets.
		2014	2013
	Basic net asset value per share
	Net assets attributable (£000)	219,418	193,484
	Number of Ordinary shares in issue at year end	71,383,586	66,665,988
	(excluding shares held in treasury)
	Net asset value per share	307.38p	290.23p
		_________	________
	Diluted net asset value per share
	Net assets attributable (£000)	239,317	217,268
	Potential number of Ordinary shares in issue at year end	80,059,702	77,159,748
	(excluding shares held in treasury)
	Net asset value per share	298.92p	281.58p
		_________	_________

		The diluted net asset value per Ordinary share as at 30 June 2014 has been calculated on the assumption that £20,584,450 3.5% Convertible Unsecured Loan Stock 2018 are converted at 237.25p per share, giving a total of 80,059,702 Ordinary shares. Where dilution occurs, the net assets are adjusted for items relating to the convertible loan stock. Net asset value per share - debt converted In accordance with the Company's understanding of the current methodology adopted by the AIC, convertible financial instruments are deemed to be 'in the money' if the cum income (debt at fair value) net asset value ("NAV") exceeds the conversion price of 237.25p per share. In such circumstances a net asset value is produced and disclosed assuming the convertible debt is fully converted. At 30 June 2014 the cum income (debt at fair value) NAV was 307.38p and thus the CULS 2018 were 'in the money'.
17		Financial instruments
		The Company's financial instruments comprise securities and other investments, cash balances, loans and 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 also has the ability to enter into derivative transactions for the purpose of managing currency and market risks arising from the Company's activities. No such transactions took place during the year.
		The main risks the Company faces from its financial instruments are (i) market price risk (comprising interest rate risk, currency risk and other price risk), (ii) liquidity risk and (iii) credit risk.
		The Board regularly reviews and agrees policies for managing each of these risks. The Investment Manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term debtors and creditors, other than for currency disclosures.
		(i) Market price 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 three elements - interest rate risk, currency risk and other price risk.
		Interest rate risk
		Interest rate movements may affect:
		- the fair value of the investments in fixed interest rate securities;
		- the level of income receivable on cash deposits and money market funds;
		- interest payable on the Company's variable rate borrowings.
		The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.
		It is the Company's policy to increase its exposure to equity market price risk through the judicious use of borrowings.  When borrowed funds are invested in equities, the effect is to magnify the impact on Shareholders' funds of changes - both positive and negative - in the value of the portfolio.
		During the year ended 30 June 2014, the Company had no revolving credit facility in place.
		The Board regulates the overall level of gearing by raising or lowering the level of the credit facility and is also able, if the circumstances warrant, to use derivatives or to purchase fixed interest securities in order to offset the effect of gearing. The 3.5% Convertible Unsecured Loan Stock 2018 was issued by the Company at a fixed cost until its conversion.  It is carried in the Company's balance sheet at amortised cost rather than at fair value.
		Interest risk profile
		The interest rate risk profile of the portfolio of financial assets and liabilities at the Balance Sheet date was as follows:
			Weighted average period for which rate is fixed	Weighted average interest rate	Fixed rate	Floating rate
		As at 30 June 2014	Years	%	£000	£000
		Assets
		AAA Money Market funds	-	0.51	-	29,798
		Cash deposits	-	-	-	5
			_________	________	________	________
		Total assets	-	-	-	29,803
			_________	________	________	________
		Liabilities
		3.5% Convertible Unsecured Loan Stock 2018	3.75	3.50	19,719	-
			_________	________	________	________
		Total liabilities	-	-	19,719	-
			_________	________	________	________
			Weighted average period for which rate is fixed	Weighted average interest rate	Fixed rate	Floating rate
		As at 30 June 2013	Years	%	£000	£000
		Assets
		AAA Money Market funds	-	0.50	-	6,468
		Cash deposits	-	-	-	19
			_________	________	________	________
		Total assets	-	-	-	6,487
			_________	________	________	________

			Weighted average period for which rate is fixed	Weighted average interest rate	Fixed rate	Floating rate
			Years	%	£000	£000
	Liabilities
	3.5% Convertible Unsecured Loan Stock 2018		4.75	3.50	23,567	-
			_________	________	________	________
	Total liabilities		-	-	23,567	-
			_________	________	________	________
	The weighted average interest rate is based on the current yield of each asset, weighted by its market value.
	The floating rate assets consist of AAA Money Market funds and cash deposits on call earning interest at prevailing market rates.
	All financial liabilities are measured at amortised cost.
	Interest rate sensitivity
	The sensitivity analyses below have been determined based on the exposure to interest rates at the balance sheet date and with 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 or lower and all other variables were held constant, the Company's :
	- profit for the year ended 30 June 2014 and net assets would increase / decrease by £298,000 (2013: increase / decrease by £65,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances and money market funds.
	Foreign currency risk
	A small proportion of the Company's investment portfolio is invested in overseas securities and the Balance Sheet can be affected by movements in foreign exchange rates. It is not the Company's policy to hedge this risk on a continuing basis.  The Company only has borrowings denominated in sterling.
	The revenue account is subject to currency fluctuation arising on overseas income. The Company does not hedge this currency risk.

		Foreign currency risk exposure by currency of denomination:
		30 June 2014					30 June 2013
		Overseas investments	Net monetary assets	Total currency exposure	Overseas investments	Net monetary assets			Total
									currency
									exposure
		£'000	£'000	£'000	£'000	£'000			£'000
	Euro	3,084	-	3,084	9,219	-			9,219
		_________	_________	________	_________	________			________
	The asset allocation between specific markets can vary from time to time based on the Investment Manager's opinion of the attractiveness of the individual markets.
	Foreign currency sensitivity
	There is no sensitivity analysis included as the Company has no outstanding foreign currency denominated monetary items.  Where the Company's equity investments (which are non-monetary items) are priced in a foreign currency, they have been included within the other price risk sensitivity analysis so as to show the overall level of exposure.
	Other price risk
	Other price risks (i.e. changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments.
	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 and the stock selection process, both act to reduce market risk.  The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy.  The investments held by the Company are mainly listed on the London Stock Exchange.
	Other price risk sensitivity
	If market prices at the Balance Sheet date had been 10% higher or lower while all other variables remained constant, the return attributable to Ordinary shareholders for the year ended 30 June 2014 and net assets would have increased / decreased by £21,260,000 (2013 - increase / decrease of £21,049,000).  This is based on the Company's equity portfolio held at each year end.
	The exposures to each of interest, currency and price risk detailed above are considered as representative of exposure for the year as a whole.
	(ii) Liquidity risk
	This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.
	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. The maturity of the Company's existing borrowings is set out in the credit risk profile section of this note.

		Expected cashflows	Due within 3 months	Due between 3 months and 1 year	Due after 1 year
	As at 30 June 2014	£000	£000	£000	£000
	3.5% Convertible Unsecured Loan Stock 2018	2,876	360	358	2,158
		________	_________	_________	________
		2,876	360	358	2,158
		________	_________	_________	________
	(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.
	The risk is not significant, and is managed as follows:
	-     where the Investment 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;
	-     investment transactions are carried out with a large number of brokers, whose credit-standing is reviewed periodically by the investment 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 monthly basis. In addition, both stock and cash reconciliations to the Custodians' records are performed on a daily basis to ensure discrepancies are investigated on a timely basis.
	-     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 30 June was as follows:

		2014		2013
		Balance Sheet	Maximum exposure	Balance Sheet		Maximum exposure
	Current assets	£'000	£'000	£'000		£'000
	Loans and receivables	1,348	1,348	928		928
	AAA Money Markets funds	29,798	29,798	6,468		6,468
	Cash and short term deposits	5	5	19		19
		_________	_________	_________		_________
		31,151	31,151	7,415		7,415
		_________	_________	_________		_________
	None of the Company's financial assets is past due or impaired.

	Maturity of financial liabilities
	The maturity profile of the Company's financial liabilities at 30 June was as follows:
				In less than 1 year	Between 1 year and 3 years	In more than 3 years
				£000	£000	£000
	As at 30 June 2014
	3.5% Convertible Unsecured Loan Stock 2018			19,719	20,411	20,584
	All the other financial assets and liabilities will be settled within three months.
	The full contractual liability for the CULS assuming no further conversions is £23,286,000 (2013 - £29,036,000)
18		Fair Value hierarchy
		FRS 29 'Financial Instruments: Disclosures' requires an entity 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 shall have 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 asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
		-	Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
		All of the Company's investments are in quoted equities (2013- same) that are actively traded on recognised stock exchanges, with their fair value being determined by a reference to their quoted bid prices at the reporting date.  The total value of the investments (2014 - £212,603,000; 2013 - £210,492,000) have therefore been deemed as Level 1. The Company's CULS are actively traded on a recognised stock exchange.  The fair value of the CULS (2014 - £25,113,000; 2013 - £28,912,000) has therefore been deemed Level 1.
19.		Related party transactions
		Standard Life Investments (Corporate Funds) Limited received fees for its services as investment manager and company secretary.  Further details are provided in notes 3 and 4.  The Directors of the Company received fees for their services.

Additional notes

This Annual Financial Report is not the Company's statutory accounts.  The statutory accounts for the year ended 30 June 2013 have been delivered to the Registrar of Companies.   The statutory accounts for the years ended 30 June 2013 and 30 June 2014 received an audit report which was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not include a statement under either section 498(2) or 498(3) of the Companies Act 2006. 

The statutory accounts for the financial year ended 30 June 2014 have been approved and audited but will not be filed with the Registrar of Companies until after the Company's Annual General Meeting which will be held at 12.30pm on 9 October 2014 at the offices of Standard Life Investments, 30 St Mary Axe, London EC31 8EP.

The Annual Report will be posted to shareholders in September 2014 and copies will be available from the Manager or by download from the Company's webpage hosted by the Manager (www.standardlifeinvestments.com/its).

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 and may be affected by exchange rate movements.  Investors may not get back the amount they originally invested.

For Standard Life UK Smaller Companies Trust PLC

Maven Capital Partners UK LLP, Secretaries

For Further Information please contact:

Standard Life Investments - Gordon Humphries, Head of Investment Companies - Tel. [phone]

END

 

END

 

 

FR SSFFMFFLSESU