Annual Financial Report

RNS Number : 5037U

F&C U.S. Smaller Companies PLC

15 October 2010

 



Date:                15 October 2010

Contact:           Robert Siddles                                               

                        F&C Management Limited                              

                        020 7628 8000                                               

F&C US Smaller Companies PLC

Audited Statement of Results

for the year ended 30 June 2010

Summary of results

Attributable to equity shareholders	30 June 2010	30 June 2009	% Change
Net assets	£77.30m	£60.61m	27.5
Net assets per share	373.29p	292.69p	27.5
Russell 2000 Index (sterling adjusted)	407.39	308.64	32.0
Share price	354.50p	253.50p	39.8
Gearing/(net liquidity)*	(1.2)%	(5.1)%
Increase in net asset value per share since inception   on 8 March 1993			286.8
Increase since 8 March 1993 in the Russell 2000 Index   (sterling adjusted)			157.7

*Calculated as loans less cash and investment debtors plus overdrafts and investment creditors at balance sheet value as a percentage of net assets.

Chairman's Statement

During the year under review, the US stock market continued the rebound started in March 2009. At the beginning of the period investors doubted that the economy would recover in the near future and the period ended with investors suffering a fresh round of doubts about economic recovery. Despite this the medium-term economic outlook for the US seems better than it was 12 months ago.

Performance

I am pleased to report a significant advance in net asset value ("NAV") during the twelve months to 30 June 2010.  The NAV per share rose 27.5% to 373.29p. This compared to a rise of 32.0% in our benchmark, the sterling-adjusted Russell 2000 Index and 23.4% in the sterling-adjusted Standard & Poor's Composite Index.

Although it is disappointing that performance was less than the benchmark this year, it followed a very strong 2009 and over the last three years NAV per share increased 11.1% compared to a fall in the benchmark of 2.0%. Since inception in March 1993, the NAV per share has risen by 286.8%, whereas the sterling-adjusted Russell 2000 Index gained 157.7%.

Market review

In dollar terms during the year under review the Russell 2000 gained 19.9% while the other major US equity indices also advanced although not as much: the Standard & Poor's Composite Index rose 12.1% and the more technology-orientated NASDAQ Composite Index gained 14.9%.

Sterling investors benefited from a rebound in the US dollar over the year. The Company's investments are denominated in dollars but are valued in the portfolio in sterling. The 10.1% rise in the dollar against sterling this year meant that shareholders benefited from this. The dollar's rise reflected its safe haven status as concerns grew about the poor outlook for several European economies and evidence of economic recovery in the US. Following the result of the UK election sterling has regained ground against the dollar.

The US stock market rallied during much of the period reaching a peak in April but then suffered a bout of profit-taking as investors became more nervous. The market's advance from its earlier lows in March 2009 when investors were very sceptical was driven by an easing of the credit crisis, low interest rates and the first signs of US economic recovery, especially in manufacturing. The Russell 2000 more than doubled from its recent lows by April 2010 and a correction often follows this magnitude of gain. The market's psychology changed quickly as new worries appeared: the US economy's strong recovery seemed to be losing momentum, the anniversary of the fiscal stimulus was in view with little evidence of job creation; China's infrastructure stimulus seemed to be slowing, sending shockwaves through the commodity markets as they adjusted to lower demand; a second financial crisis might be developing in the Eurozone; and BP seemed to be in meltdown.

The market rise was initially led by the consumer discretionary sector, which had suffered particularly badly in the bear market, and by materials and processing and technology. The laggards were the defensive sectors, utilities and health care as well as financial services, mainly consisting of insurance, a generally defensive sector, and banks, which continued to suffer from credit problems.

The Company's conservative investment approach means that it does not always keep up with very strong market rallies such as the thirteen month run that began in March 2009. Although these conditions did not suit the Company's approach this year, it has paid off over the longer term.

 

Discount and buybacks

The price of the shares rose by 39.8% to 354.5p over the year.  The discount to NAV per share narrowed during the year from 13.4% to 5.0% and at 12 October 2010 was 5.1%. The average discount during the year was 12.7%. Although the average discount was somewhat wider than the Board's long term target of around 10%, market conditions continued to be volatile for much of the year.

The Company did not buy back any shares during the year compared to a total of 79,500 shares bought back during the previous fiscal year.

The Board will continue to apply its policy of buying back shares at appropriate times with a view to limiting the discount in the longer term to around 10%.

Foreign currency hedging policy and gearing policy

It is worth reiterating the Board's policy in relation to hedging and gearing. Although the Board has the authority to hedge out the £/$ risk for a sterling based investor, it does not routinely do so and the portfolio is not currently hedged.

The Company is not currently geared although the Board does have the authority to apply gearing. The Board takes the view that the asset class in which it invests is sufficiently risky that it does not wish to compound this by adding the additional risk of borrowing. The Board believes that most of the Company's shareholders are conservative long-term investors and that this policy suits their needs.

Annual general meeting

The annual general meeting ("AGM") will be held at 12.30 p.m. on Wednesday 24 November 2010 and I hope that you will attend.  The meeting will be held in the offices of F&C Management Limited at Exchange House, Primrose Street, London EC2A 2NY. 

Prospects

The market seems to be recovering from its sell-off in May, however it has not regained the highs reached in 2007. There probably needs to be an adjustment to what seems to be a deceleration in the pace of the US recovery and the curtailment of stimulus spending in China. In addition the US housing market is still far from healthy but the prospects of continued low interest rates in the US should provide some support to equities. If inflationary pressures build it is worth recalling that in the late 1970s smaller companies proved to be a good inflation hedge.

Gordon Grender

Chairman

15 October 2010 

Principal risks

The Company's assets consist mainly of listed equities and its principal risks are therefore market related. The specific key risks faced by the Company include the following:

Market - the Company's investments consist of quoted equity securities and it is therefore exposed to movements in the price of individual securities and the market generally. The large number of investments held and the sector diversity of the portfolio enable the Company to spread its risks with regard to individual companies and sectors, but a significant fall in US equity markets could have an adverse impact on the value of the Company's investment portfolio. The Board recognises that by its nature the US smaller companies sector can be a risky asset class to invest in and has adopted a disciplined and relatively conservative investment style that it considers appropriate to long-term investment in this sector.

Investment strategy - inappropriate investment strategy or ineffective implementation of this strategy could result in poor returns for shareholders and a widening of the discount of the share price to the NAV per share. The Board periodically reviews the investment strategy and regularly monitors the Company's investment portfolio and the investment selection, performance and operations of the Manager.

Currency - the Company's investments are denominated in US dollars but are valued in sterling in accordance with the Company's accounting policies. Any weakening of the US dollar against sterling will adversely affect the performance of those assets when measured in sterling. Although the Board has the authority to hedge currency risk it does not routinely do so.

Gearing - borrowing money for investment ("gearing") increases the negative impact on the Company's asset value if the value of those investments subsequently falls. Although the Company is authorised to borrow money in accordance with its investment policy it does not generally do so.

Investment management resources - the quality of the management team is a crucial factor in delivering good performance and loss by the Manager of key staff could adversely affect investment returns. The Manager has training and development programmes in place for its employees and develops its recruitment and remuneration packages in order to retain key staff.

Regulation - failure to comply with applicable legal and regulatory requirements could result in the Company losing its listing and/or being subject to corporation tax on its capital gains. The Board reviews regular reports from the Manager on the controls in place to ensure compliance by the Company with rules and regulations. The Board also receives regular investment valuations and income forecasts as part of its monitoring of compliance with the provisions of section 1158 of the Corporation Tax Act 2010 ("CTA").

Financial control - inadequate financial controls could result in misappropriation of assets, loss of income and debtor receipts and inaccurate reporting of NAVs. The Board regularly reviews the Manager's reports on its internal controls and procedures and subjects the books and records of the Company to an annual audit. The financial risks are set out in more detail in note 2 below.

Safe custody - failure of the custodian to provide a secure service or continue operating could result in the Company's assets being at risk.  The Board receives regular information on the service of the custodian from the Manager, which reviews service levels and receives an annual SAS70 report on the custodian by an independent auditor.

Counterparties - the Company is exposed to potential failures by counterparties to deliver securities for which it has paid or to pay for securities which it has delivered.

Statement of Directors' Responsibilities in Respect of the Financial Statements

In accordance with Chapter 4 of the Disclosure and Transparency Rules, the Directors confirm that to the best of their knowledge, in respect of the annual report for the year ended 30 June 2010, of which this statement of results is an extract:

·      the financial statements have been prepared in accordance with applicable UK generally accepted accounting standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      the annual report includes a fair review of the development and performance of the Company and the important events that have occurred during the financial year and their impact on the financial statements, describes the principal risks and uncertainties for the forthcoming year and includes details on related party transactions.

On behalf of the Board

Gordon Grender

Chairman

15 October 2010

Income Statement

for the year ended 30 June	2010			2009
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains on investments	-	16,726	16,726	-	4,631	4,631
Foreign exchange gains	-	274	274	-	605	605
Income	644	-	644	837	-	837
Management fee	(620)	-	(620)	(474)	-	(474)
Performance fee	-	-	-	-	(416)	(416)
Other expenses	(245)	(2)	(247)	(232)	(4)	(236)
Net return on ordinary activities before taxation	(221)	16,998	16,777	131	4,816	4,947
Taxation on ordinary activities	(86)	-	(86)	(124)	-	(124)
Net return attributable to equity shareholders	(307)	16,998	16,691	7	4,816	4,823
Return per share - pence	(1.48)	82.09	80.61	0.03	23.22	23.25

The total column of this statement is the profit and loss account of the Company.

All revenue and capital items in the above statement derive from continuing operations.

A statement of total recognised gains and losses is not required as all gains and losses of the Company have been reflected in the above statement.

Reconciliation of Movements in Shareholders' Funds

for the year ended    30 June 2010
	Called-up	Share	Non-	Capital			Total
	share	premium	distributable	redemption	Capital	Revenue	shareholders'
	capital	account	reserve	reserve	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 1 July 2009	5,177	2,468	841	8,175	45,018	(1,072)	60,607
Movements during the year ended 30 June 2010
Shares purchased and cancelled by the Company	-	-	-	-	-	-	-
Net return attributable to equity shareholders	-	-	-	-	16,998	(307)	16,691
Balance at 30 June 2010	5,177	2,468	841	8,175	62,016	(1,379)	77,298

for the year ended 30 June 2009
Balance at 1 July 2008	5,197	2,468	841	8,155	40,400	(1,079)	55,982
Movements during the year ended 30 June 2009
Shares purchased and cancelled by the Company	(20)	-	-	20	(198)	-	(198)
Net return attributable to equity shareholders	-	-	-	-	4,816	7	4,823
Balance at 30 June    2009	5,177	2,468	841	8,175	45,018	(1,072)	60,607

Balance Sheet

at 30 June	2010	2009
	£'000s	£'000s
Fixed assets
Listed investments	76,525	58,101
Current assets
Debtors	68	250
Cash at bank and short-term deposits	1,036	3,182
	1,104	3,432
Creditors: amounts falling due within one year	(331)	(926)
Net current assets	773	2,506
Net assets	77,298	60,607
Capital and reserves
Called-up share capital	5,177	5,177
Share premium account	2,468	2,468
Non-distributable reserve	841	841
Capital redemption reserve	8,175	8,175
Capital reserves	62,016	45,018
Revenue reserve	(1,379)	(1,072)
Total shareholders' funds	77,298	60,607
Net asset value per share - pence	373.29	292.69

Cash Flow Statement

for the year ended 30 June	2010	2009
	£'000s	£'000s
Operating activities
Investment income received	463	658
Interest received	5	16
Other income received	-	12
Fee paid to management company	(1,002)	(466)
Fees paid to Directors	(69)	(69)
Other payments	(177)	(162)
Net cash outflow from operating activities	(780)	(11)
Return on investment and servicing of finance
Purchases of investments	(44,438)	(42,781)
Sales of investments	42,838	43,852
Other capital charges and credits	(2)	(4)
Net cash (outflow)/inflow from investment and servicing of finance	(1,602)	1,067
Net cash (outflow)/inflow before use of liquid resources and financing	(2,382)	1,056
Management of liquid resources
Decrease/(increase) in short-term deposits	2,259	(1,531)
Financing
Shares purchased and cancelled	-	(198)
Cash outflow from financing	-	(198)
Decrease in cash	(123)	(673)

Notes

1   Return per ordinary share

Revenue return

The revenue return per share is based on the net revenue return attributable to equity shareholders of £307,000 loss (2009: £7,000 profit).

Capital return

The capital return per share is based on the net capital return attributable to equity shareholders of £16,998,000 profit (2009: £4,816,000 profit).

Weighted average ordinary shares in issue

Both the revenue and capital returns are based on a weighted average of ordinary shares in issue during the year of 20,707,135 (2009: 20,737,606).

2    Financial risk management

The Company is an investment company, listed on the London Stock Exchange, and conducts its affairs so as to qualify in the United Kingdom (UK) as an investment trust under the provisions of section 1158 of the CTA. In so qualifying, the Company is exempted in the UK from corporation tax on capital gains on its portfolio of fixed asset investments.

The Company invests primarily in quoted US smaller and medium sized companies in order to secure long-term capital growth. In pursuing this objective, the Company is exposed to financial risks which could result in a reduction of the value of the net assets. These financial risks are principally related to the market (currency movements, interest rate changes and security price movements), liquidity and credit. The Board, together with the Manager, is responsible for the Company's risk management. The Directors' policies and processes for managing the financial risks are set out in (a), (b) and (c) below.

The accounting policies which govern the reported balance sheet carrying values of the underlying financial assets and liabilities, as well as the related income and expenditure, are in compliance with UK Accounting Standards and best practice and include the valuation of fixed asset investments at fair value. The Company does not make use of hedge accounting rules.

(a) Market risks

The fair value of equity securities held in the Company's portfolio fluctuates with changes in market prices. Prices are themselves affected by movements in currencies and interest rates and by other financial issues, including the market perception of future risks. The Board sets policies for managing these risks within the Company's objective and meets regularly to review full, timely and relevant information on investment performance and financial results. The Manager assesses exposure to market risks when making each investment decision and monitors ongoing market risk within the portfolio.

The Company's other assets and liabilities may be denominated in US dollars and sterling and may also be exposed to interest rate risks. The Manager and the Board regularly monitor these risks. The Company does not normally hold significant cash balances. Although the Company is authorised to borrow money, it is not the Board's general policy to do so. Consequently, no borrowings were entered into during the year.

Income earned in foreign currencies is converted to sterling on receipt.

Currency exposure

The principal currency to which the Company was exposed during the year was the US dollar as all investments are quoted in that currency.

The exchange rates applying against sterling at 30 June and the average rates during the year ended 30 June were as follows:

	At 30 June	2010 Average for the year	At 30 June	2009 Average for the year
US dollar	1.4961	1.5851	1.6468	1.6311

Based on the financial assets and liabilities held and the exchange rates applying at the balance sheet date, a weakening or strengthening of sterling against the principal currency, US dollar, by 10% would have the following approximate effect on returns attributable to equity shareholders and on the NAV per share:

Weakening of sterling by 10% against the US dollar	2010	2009
Net revenue return attributable to equity shareholders - £'000s	82	33
Net capital return attributable to equity shareholders - £'000s	8,637	6,802
Net total return attributable to equity shareholders - £'000s	8,719	6,835
NAV per share - pence	42.1	33.0

Strengthening of sterling by 10% against the US dollar	2010	2009
Net revenue return attributable to equity shareholders - £'000s	(35)	(90)
Net capital return attributable to equity shareholders - £'000s	(7,068)	(5,571)
Net total return attributable to equity shareholders - £'000s	(7,103)	(5,661)
NAV per share - pence	(34.3)	(27.3)

These analyses are presented in sterling and are representative of the Company's activities although the level of the Company's exposure to the US dollar fluctuates in accordance with the investment and risk management processes.

The fair values of the Company's assets and liabilities at 30 June by currency are shown below:

2010	Investments £'000s	Short-term debtors £'000s	Cash at bank and short-term deposits £'000s	Short-term creditors £'000s	Net exposure £'000s
Sterling	-	18	1	(202)	(183)
US dollar	76,525	50	1,035	(129)	77,481
Total	76,525	68	1,036	(331)	77,298

2009	Investments £'000s	Short-term debtors £'000s	Cash at bank and short-term deposits £'000s	Short-term creditors £'000s	Net exposure £'000s
Sterling	-	14	-	(589)	(575)
US dollar	58,101	236	3,182	(337)	61,182
Total	58,101	250	3,182	(926)	60,607

Interest rate exposure

The exposure of the financial assets and liabilities to interest rate movements at 30 June was:

	2010		2009
	Within one year £'000s	Net total £'000s	Within one year £'000s	Net total £'000s
Exposure to floating rates - cash, short-term deposits and     bank overdraft	1,036	1,036	3,144	3,144
Net exposure	1,036	1,036	3,144	3,144
Minimum net exposure during the year	1,036	1,036	437	437
Maximum net exposure during the year	5,525	5,525	3,416	3,416

Exposures vary throughout the year as a consequence of changes in the make-up of the net assets of the Company arising out of the investment and risk management processes.

Interest received on cash balances is at ruling market rates. No borrowings were entered into during the current or prior year. There were no holdings in fixed interest investment securities during the year or at the year end (2009: none).

Based on the financial assets and liabilities held and the interest rates ruling at each balance sheet date, a decrease or increase in interest rates of 2% would have no material effect on the Income Statement revenue and capital returns after tax or on the NAV per share.

Other market price risk exposures

The Company does not usually enter into derivative transactions in managing its exposure to US market risks. The portfolio of investments, valued at £76,525,000 at 30 June 2010 (2009: £58,101,000) is therefore exposed to market price changes. The Manager assesses these exposures at the time of making each investment decision. The Board reviews overall exposures at each meeting against indices and other relevant information.

Based on the portfolio of investments held at each balance sheet date, and assuming other factors remain constant, a decrease or increase in the fair value of the portfolio, in sterling terms, by 20% would have had the following approximate effects on the net capital return attributable to equity shareholders and on the NAV per share:

	Increase in value £'000s	2010 Decrease in value £'000s	Increase in value £'000s	2009 Decrease in value £'000s
Capital return	15,305	(15,305)	11,620	(11,620)
NAV per share - pence	73.9	(73.9)	56.1	(56.1)

(b) Liquidity risk exposure

The Company is required to raise funds to meet commitments associated with financial instruments and share buybacks. These funds may be raised either through the realisation of assets or through a temporary bank overdraft.  The Company is authorised to borrow money but it is not the Board's general policy to do so. The risk of the Company not having sufficient liquidity at any time is not considered by the Board to be significant, given: the number of quoted investments held in the Company's portfolio (58 at 30 June 2010 and 65 at 30 June 2009); the liquid nature of the portfolio of investments; and the industrial diversity of the portfolio. Cash balances are held with reputable banks, usually on overnight deposit. The Company does not normally invest in derivative products. The Manager reviews liquidity at the time of making each investment decision. The Board reviews liquidity exposure at each meeting.

The contractual maturities of the financial liabilities at each balance sheet date, based on the earliest date on which payment can be required, were as follows:

	Three months or less £'000s	Total £'000s
2010
Creditors: amounts falling due within one year	331	331
2009
Creditors: amounts falling due within one year	926	926

(c) Credit risk and counterparty exposure

The Company is exposed to potential failure by counterparties to deliver securities for which the Company has paid, or to pay for securities which the Company has delivered. Such transactions must be settled on the basis of delivery against payment (except where local market conditions do not permit).

Responsibility for the approval, limit setting and monitoring of counterparties is delegated to the Manager and a list of approved counterparties is periodically reviewed by the Board. Counterparties are selected based on a combination of criteria, including credit rating, balance sheet strength and membership of a relevant regulatory body. The rate of default in the past has been negligible. Cash and deposits are held with reputable banks.

The Company has an ongoing contract with its custodian for the provision of custody services. The contract is reviewed regularly. Details of securities held in custody on behalf of the Company are received and reconciled monthly.

To the extent that F&C carries out management and administrative duties (or causes similar duties to be carried out by third parties) on the Company's behalf, the Company is exposed to counterparty risk. The Board assesses this risk continuously through regular meetings with the management of F&C (including the fund manager) and with F&C's internal audit function. In reaching its conclusions, the Board also reviews F&C's parent group's annual audit and assurance faculty report.

The Company had no credit-rated bonds or similar securities or derivatives in its portfolio at the year end (2009: none) and does not normally invest in them. None of the Company's financial liabilities is past its due date or impaired.

(d) Fair values of financial assets and liabilities

The assets and liabilities of the Company are, in the opinion of the Directors, reflected in the Balance Sheet at fair value, or at a reasonable approximation thereof.

The Company does not hold any unquoted investments.

(e) Capital risk management

The objective of the Company is stated as being to invest primarily in quoted US smaller and medium sized companies in order to secure long-term capital growth. In pursuing this long-term objective, the Board has a responsibility for ensuring the Company's ability to continue as a going concern. It must therefore maintain an optimal capital structure through varying market conditions. This involves the ability to: issue and buy back share capital within limits set by the shareholders in general meeting; borrow monies in the short and long term; and, to the extent that it is able to do so under company law, pay dividends to shareholders out of current year revenue earnings as well as out of brought forward revenue reserves.

3    Annual general meeting

The annual general meeting will be held at Exchange House, Primrose Street, London EC2A 2NY on Wednesday 24 November 2010 at 12.30 p.m.

4    Report and accounts

The report and accounts for the year ended 30 June 2010 will be posted to shareholders and made available on the website www.fandcussmallers.com shortly. Copies may also be obtained from the Company's registered office, Exchange House, Primrose Street, London EC2A 2NY.

By order of the Board

F&C Management Limited, Secretary

Exchange House, Primrose Street, London EC2A 2NY

15 October 2010

 

END

 

 

FR EASESFESEFFF