Annual Financial Report

RNS Number : 3170Q

F&C U.S. Smaller Companies PLC

17 October 2011

 



Date:                17 October 2011

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 2011

Summary of results

Attributable to equity shareholders	30 June 2011	30 June 2010	% Change
Net assets	£96.20m	£77.30m	24.5
Net assets per share	464.58p	373.29p	24.5
Russell 2000 Index (sterling adjusted)	515.39	407.39	26.5
Share price	433.88p	354.50p	22.4
Gearing/(net liquidity)*	(3.9)%	(1.2)%
Increase in net asset value per share since inception   on 8 March 1993			381.4
Increase since 8 March 1993 in the Russell 2000 Index   (sterling adjusted)			226.8

*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 rally that began in March 2009. In almost a replay of last year, the period both opened and closed with investors worried about US economic growth, however, in between economic performance was good, as was the growth of corporate profits.

Performance

I am pleased to report another significant advance in net asset value ("NAV") during the twelve months to 30 June 2011.  The NAV per share of the Company rose 24.5% to 464.6p. This compared to a rise of 26.5% in our benchmark, the sterling-adjusted Russell 2000 Index and 19.4% in the sterling-adjusted Standard & Poor's Composite Index.

Although it is disappointing that performance was slightly less than the benchmark this year, relative performance in the second half of the year improved compared to the first half and over the last three years NAV per share increased 72.5% compared to a rise in the benchmark of 48.7%. Since inception in March 1993, the NAV per share has risen by 381.4%, whereas the sterling-adjusted Russell 2000 Index gained 226.8%.

Market review

In dollar terms, during the year under review the Russell 2000 gained 35.8%. The other major US equity indices also advanced although not by as much: the Standard & Poor's Composite Index rose 28.1% and the more technology-orientated NASDAQ Composite Index advanced by 31.5%.

Sterling investors suffered from a fall in the US dollar over the year. The Company's investments are denominated in dollars but are valued in the portfolio in sterling. The 6.8% drop in the dollar against sterling this year meant that shareholders suffered from this. As market confidence returned in the aftermath of the financial crisis, the dollar lost its attractions as a safe haven and so it weakened.

The US stock market made little progress in the opening months of the period under review as investors waited for evidence of better US growth. In September the usually reliable ISM survey of manufacturing activity revealed a reacceleration and the market's advance began again. This improvement in activity and the rally continued until this spring, when fresh concerns arose about the potential impact of the slowdown outside the US. Indeed, US growth did seem to slow towards the end of the period; this was caused by shortages in the automobile industry as a result of the Japanese tsunami and the impact of high gasoline prices on consumer spending.

The market was led by the energy, technology, and materials and processing sectors. The laggards were financial services and the defensive sectors, consumer staples and utilities.

The Company's conservative investment approach means that it does not always keep up with very strong rallies, however, the Company's approach has been successful over the longer term.

 

Discount and buybacks

The price of the shares rose by 22.4% to 433.9p over the year.  The discount to NAV per share was 6.6% at the end of the period compared to 5.0% a year earlier, however, the average discount during the year was 3.0%. At 12 October 2011, it was 6.2%.

For the second year in a row, the Company did not buy back any shares, reflecting a relatively narrow discount for much of the year.

The Board will continue to apply its policy of buying back shares at appropriate times with a view to limiting the discount over 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 sterling/dollar risk for a sterling based investor, it does not routinely do so and the portfolio is not currently hedged.

The Company is not geared. The Board takes the view that the asset class in which the Company invests is sufficiently risky and 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.

Corporate governance

The Company is committed to high standards of corporate governance and the Board believes that the Company has complied with the relevant guidance in this area.

Annual general meeting

The annual general meeting ("AGM") will be held at 12.30 p.m. on Tuesday 29 November 2011 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 EC2. 

Developments after the year end

After the year end in June, market sentiment deteriorated following protracted wrangling by politicians over the US Federal budget as well as uncertainty concerning EU finances.  The agreement reached in Washington can be interpreted as the beginning of a new phase of austerity in the US following a period of all-out stimulus: monetary, fiscal and quantitative.  Further US stimulus cannot be ruled out and President Obama has already begun to push for this; moreover the US economy will receive a boost from the recovery of its enormous automobile industry, as post-tsunami shortages ease, and lower fuel prices will help the consumer.  Both the markets and the dollar/sterling exchange rate have been unusually volatile in the current year to date.  The sterling-adjusted Russell 2000 Index fell 19.8% in the three months since June whereas the Company's NAV fell 15.8%, beating the benchmark.

Continuation vote and prospects

The Company holds a continuation vote every three years to give shareholders the opportunity to vote on whether they wish the Company to continue as an investment trust. The next vote will be held at this year's AGM.

My fellow Directors and I have no hesitation in recommending that you vote in favour of the Company's continuation and we intend to vote our own beneficial holdings the same way. The Company has returned strong performance over the long term. The Board believes that the key to success is its disciplined investment approach, which focuses on companies with a strong franchise, free cash flow and management ownership, whose shares are cheap and that this will benefit shareholders in the future.

In addition the US smaller company sector is an exciting one in which shareholders can benefit from investing alongside some of America's most entrepreneurial managers.

Gordon Grender

Chairman

17 October 2011

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 Manager is contractually obliged to ensure that its conduct of business, and that of any third party to which it has delegated the performance of any actions, conforms to applicable laws and regulations.  Service level agreements are in place between the Manager and its delegates and the reporting on internal controls to the Board includes details of the review by the Manager of the outsourced service providers.  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 2011, 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

17 October 2011

Income Statement

for the year ended 30 June	2011			2010
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains on investments	-	19,562	19,562	-	16,726	16,726
Foreign exchange (losses)/gains	-	(167)	(167)	-	274	274
Income	623	-	623	644	-	644
Management fee	(726)	-	(726)	(620)	-	(620)
Other expenses	(298)	(4)	(302)	(245)	(2)	(247)
Net return on ordinary activities before taxation	(401)	19,391	18,990	(221)	16,998	16,777
Taxation on ordinary activities	(87)	-	(87)	(86)	-	(86)
Net return attributable to equity shareholders	(488)	19,391	18,903	(307)	16,998	16,691
Return per share - pence	(2.36)	93.64	91.28	(1.48)	82.09	80.61

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 2011
	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 2010	5,177	2,468	841	8,175	62,016	(1,379)	77,298
Movements during the year ended 30 June 2011
Net return attributable to equity shareholders	-	-	-	-	19,391	(488)	18,903
Balance at 30 June 2011	5,177	2,468	841	8,175	81,407	(1,867)	96,201

for the year ended 30 June 2010
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
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

Balance Sheet

at 30 June	2011	2010
	£'000s	£'000s
Fixed assets
Listed investments	92,630	76,525
Current assets
Debtors	522	68
Cash at bank and short-term deposits	3,441	1,036
	3,963	1,104
Creditors: amounts falling due within one year	(392)	(331)
Net current assets	3,571	773
Net assets	96,201	77,298
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	81,407	62,016
Revenue reserve	(1,867)	(1,379)
Total shareholders' funds	96,201	77,298
Net asset value per share - pence	464.58	373.29

Cash Flow Statement

for the year ended 30 June	2011	2010
	£'000s	£'000s
Operating activities
Investment income received	498	463
Interest received	3	5
Fee paid to management company	(688)	(1,002)
Fees paid to Directors	(69)	(69)
Other payments	(209)	(177)
Net cash outflow from operating activities	(465)	(780)
Return on investment and servicing of finance
Purchases of investments	(29,437)	(44,438)
Sales of investments	32,478	42,838
Other capital charges and credits	(4)	(2)
Net cash inflow/(outflow) from investment and servicing of finance	3,037	(1,602)
Net cash inflow/(outflow) before use of liquid resources and financing	2,572	(2,382)
Management of liquid resources
(Increase)/decrease in short-term deposits	(2,388)	2,259
Increase/(decrease) in cash	184	(123)

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 £488,000 loss (2010: £307,000 loss).

Capital return

The capital return per share is based on the net capital return attributable to equity shareholders of £19,391,000 profit (2010: £16,998,000 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 (2010: 20,707,135).

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	2011 Average for the year	At 30 June	2010 Average for the year
US dollar	1.6055	1.5883	1.4961	1.5851

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	2011	2010
Net revenue return attributable to equity shareholders - £'000s	58	82
Net capital return attributable to equity shareholders - £'000s	10,736	8,637
Net total return attributable to equity shareholders - £'000s	10,794	8,719
Net asset value per share - pence	52.1	42.1

Strengthening of sterling by 10% against the US dollar	2011	2010
Net revenue return attributable to equity shareholders - £'000s	(50)	(35)
Net capital return attributable to equity shareholders - £'000s	(8,799)	(7,068)
Net total return attributable to equity shareholders - £'000s	(8,849)	(7,103)
Net asset value per share - pence	(42.7)	(34.3)

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:

2011	Investments £'000s	Short-term debtors £'000s	Cash at bank and short-term deposits £'000s	Short-term creditors £'000s	Net exposure £'000s
Sterling	-	500	-	(264)	236
US dollar	92,630	22	3,441	(128)	95,965
Total	92,630	522	3,441	(392)	96,201

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

Interest rate exposure

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

	2011		2010
	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	3,441	3,441	1,036	1,036
Net exposure	3,441	3,441	1,036	1,036
Minimum net exposure during the year	1,130	1,130	1,036	1,036
Maximum net exposure during the year	3,441	3,441	5,525	5,525

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 (2010: 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 £92,630,000 at 30 June 2011 (2010: £76,525,000) 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	2011 Decrease in value £'000s	Increase in value £'000s	2010 Decrease in value £'000s
Capital return	18,526	(18,526)	15,305	(15,305)
NAV per share - pence	89.5	(89.5)	73.9	(73.9)

(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 (54 at 30 June 2011 and 58 at 30 June 2010); 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
2011
Creditors: amounts falling due within one year	392
2010
Creditors: amounts falling due within one year	331

(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 (2010: 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.

A resolution, proposing that the Company continue as an investment trust, will be put to the shareholders at the forthcoming Annual General Meeting.  The Directors are recommending that shareholders vote "for" this resolution.  The Directors therefore believe it is appropriate for the Company to be treated as a going concern.

3    Annual general meeting

The annual general meeting will be held at Exchange House, Primrose Street, London EC2A 2NY on Tuesday 29 November 2011 at 12.30 p.m.

4    Report and accounts

The report and accounts for the year ended 30 June 2011 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

17 October 2011

 

END

 

 

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