Final Results

RNS Number : 3488E

F&C U.S. Smaller Companies PLC

25 September 2008

Date: 25 September 2008

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 2008

Summary of results

Attributable to equity shareholders	30 June 2008	30 June 2007	% Change

Net assets	£55.98m	£73.18m	-23.5

Net asset value per share	269.32p	336.06p	-19.9

Russell 2000 Index (sterling adjusted)	346.54	415.53	-16.6

Share price	245.50p	300.50p	-18.3

Increase in net asset value per share since inception on 8 March 1993			178.9

Increase since 8 March 1993 in the Russell 2000 Index (sterling adjusted)			119.2

Chairman's Statement

The year to 30 June 2008 was a difficult period for the US equity market. The net asset value ('NAV') per share of the Company fell 19.9% to 269.32p. This compared to a decline of 16.6% in our benchmark, the sterling-adjusted Russell 2000 Index and 14.2% in the sterling-adjusted Standard & Poor's Composite Index.

The poor absolute returns this year were disappointing but occurred against a backdrop of a severe financial crisis, which began in the US and spread across the globe. As a result of this, riskier assets, such as smaller companies, performed badly as investors fled to what they perceived as safer assets. Performance was also less than our benchmark: as I mentioned in my half-yearly statement, this was an especially poor period for the value style of investing, which is the style employed by your Company. In the year to 30 June 2008, the Russell 2000 Value Index* performed poorly compared to the Russell 2000, falling 22.6% in sterling terms, notably worse than the portfolio.

On a brighter note I can report that performance compared to our benchmark improved in the second half of the financial year, although not all the losses versus the benchmark were clawed back. The long-term performance of the Company is strong: over the last five years the NAV per share rose by 34.6% compared to a gain in our benchmark of 27.5%. Since inception in March 1993, the NAV per share has risen by 178.9%, whereas the sterling-adjusted Russell 2000 Index gained 119.2%.

*The Russell 2000 Value Index is an index of stocks within the Russell 2000 that have below average valuation

Market review

During the year under review the Russell 2000 Index dropped 17.3% in dollar terms; the major US equity indices also fell but by less: the Standard & Poors Composite Index dropped 14.9% and the technology-orientated NASDAQ Composite Index, retreated 11.9%.

The movement in the US dollar-sterling exchange rate had little effect this year. The Company's investments are denominated in dollars but are valued in the portfolio in sterling. The 0.8% rise in the dollar against sterling this year meant that shareholders' losses were less by a corresponding amount than if there had been no exchange rate movement. The dollar appeared to stabilise against sterling after several years of falls. This reflected the perception that the UK economy would weaken whereas in the US, interest rate cuts made a recovery there more likely.

The US stock market was hit by bouts of selling during the year. The Russell 2000 bottomed in March, subsequently staging a rally that petered out in June. Investors' main concerns were as follows: firstly, the financial crisis that resulted from the collapse in the housing market, poor mortgage underwriting and reckless buying of risky loans by institutions; secondly, a deceleration in economic activity, especially in those sectors most sensitive to consumer spending (e.g. automobiles) and in those regions where the housing situation was most severe (e.g. Florida and California); and thirdly, a sharp rise in the price of oil, which finally threatened to push the economy into recession. After a short delay, the Federal Reserve acted decisively to reduce interest rates in order to ease the pressure on lenders and Washington authorised a large tax rebate to stimulate consumer spending. Despite the effect of housing on the economy, the export and energy sectors remained strong and overall the US economy continued to grow.

A major feature of the stock market this year was the appearance of a bubble in the price of oil and energy-related shares: investor exuberance for these knew no bounds and towards the end of the period, wild swings in the oil price became increasingly frequent - the typical sign of a market extreme.

As might be expected the best performing sectors in the Russell 2000 were energy related: in particular, the index was led by integrated oils and other energy, followed by the 'other' sector (which includes diversified companies). The worst performing sectors were autos and transportation, financial services, and the consumer discretionary sector.

Overall it was not a good year for the Company as investors deserted small cap value stocks in the first half of the period. Performance, however, improved in the second half as the Company's disciplined investment approach started to bear fruit once more.

Discount and buybacks

The price of the shares fell by 18.3% to 245.5p over the year. The discount to NAV per share narrowed during the year from 10.6% to 8.8% and at 24 September 2008 was 8.0%. The average discount during the year was 10.6%.

The Company bought back some of its own shares during the year. There were purchases of 988,634 shares at an average discount of 11.5%.

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. The Board has the authority to gear the Company. 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 additional risk by 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 Thursday 20 November 2008 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.

Proportional voting for savings plans

The Manager has modified its arrangements under which investors in its savings plans vote at shareholder meetings. Under the new arrangements, it is intended that the nominee company, which holds 17% of the share capital on behalf of these investors, will vote the shares held on behalf of plan holders who have not returned their voting directions in proportion to the directions of those who have. Plan holders may exclude their shares from the proportional voting arrangements if they wish.

Developments after the year end

After the year end in June, market sentiment has improved significantly as oil prices fell sharply: not only did the Russell 2000 rise by 7.2% in dollar terms in the two months since June but the dollar also rallied by 9.1% against sterling, that is, a two month gain of 17.0% in sterling terms. The Federal government bail out of the two mortgage Government Sponsored Enterprises, Fannie Mae and Freddie Mac, was also regarded as important by some observers. The performance of the Company in the two month period was strong with NAV per share rising 20.9%, beating the benchmark. At the same time, the Company performed well compared to the AIC US small company peer group and at 31 August 2008, its NAV performance had beaten the other trusts in the peer group over six months, one year, three years and five years.

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 this 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 small company sector is an exciting one in which shareholders can benefit from investing alongside some of America's most entrepreneurial managers. The US economy has shown itself to be resilient despite blows from oil price and credit shocks. It should continue to grow in the future helped by a cheap dollar and the country's dynamic business culture.

Gordon Grender

Chairman

25 September 2008

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, together with our mitigation approach, include the following:

Market - the Company's assets 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, together with the sector diversity of the portfolio, enables the Company to spread its risks with regard to individual companies and sectors, but a significant fall in US equity markets would 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 assets 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 performance of those assets when measured in sterling. Although the Board has the authority to hedge this 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 employed by F&C 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 programs 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 subjected to corporation tax on its capital gains. The Board receives and 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 842.

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.

Statement of Directors' Responsibilities in Respect of the Financial Statements

In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge, in respect of the annual report for the year ended 30 June 2008, of which this statement of results is an extract:

the financial statements have been prepared in accordance with applicable UK 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 important events that have occurred during the financial year and of the principal risks and uncertainties and their impact on the financial statements; and
the annual report includes details on related party transactions.

On behalf of the Board

Gordon Grender

Chairman

25 September 2008

Income Statement

for the year ended 30 June	2008			2007
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s

(Losses)/gains on investments	-	(14,730)	(14,730)	-	3,214	3,214
Foreign exchange losses	-	(19)	(19)	-	(179)	(179)
Income	836	-	836	1,032	-	1,032
Management fee	(485)	-	(485)	(585)	-	(585)
Other expenses	(209)	(6)	(215)	(209)	(6)	(215)
Net return before finance costs and taxation	142	(14,755)	(14,613)	238	3,029	3,267
Finance costs	-	-	-	-	-	-
Net return on ordinary activities before taxation	142	(14,755)	(14,613)	238	3,029	3,267
Taxation on ordinary activities	(102)	-	(102)	(144)	-	(144)
Net return attributable to equity shareholders	40	(14,755)	(14,715)	94	3,029	3,123

Return per share - pence	0.19	(69.15)	(68.96)	0.41	13.37	13.78

The total column of this statement is the profit and loss account of the Company. The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

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 2008
		Share	Non-	Capital				Total equity
	Share	premium	distributable	redemption	Special	Capital	Revenue	shareholders'
	capital	account	reserve	reserve	reserve	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s

Balance at 30 June 2007	5,444	2,468	841	7,908	-	57,635	(1,119)	73,177
Movements during the year ended 30 June 2008:
Shares purchased and cancelled by the Company	(247)	-	-	247	-	(2,480)	-	(2,480)
Net return attributable to equity shareholders	-	-	-	-	-	(14,755)	40	(14,715)
Balance at 30 June 2008	5,197	2,468	841	8,155	-	40,400	(1,079)	55,982

for the year ended 30 June 2007
		Share	Non-	Capital				Total equity
	Share	premium	distributable	redemption	Special	Capital	Revenue	shareholders'
	capital	account	reserve	reserve	reserve	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s

Balance at 30 June 2006	5,923	2,468	841	7,429	4,235	55,781	(1,213)	75,464
Movements during the year ended 30 June 2007:
Shares purchased and cancelled by the Company	(479)	-	-	479	(4,235)	(1,175)	-	(5,410)
Net return attributable to equity shareholders	-	-	-	-	-	3,029	94	3,123
Balance at 30 June 2007	5,444	2,468	841	7,908	-	57,635	(1,119)	73,177

Balance Sheet

at 30 June	2008	2007
	£'000s	£'000s
Fixed assets
Listed investments	54,413	71,472
Current assets
Debtors	50	52
Cash at bank and short-term deposits	1,720	2,128
	1,770	2,180
Creditors: amounts falling due within one year	(201)	(475)
Net current assets	1,569	1,705
Net assets	55,982	73,177
Capital and reserves
Share capital	5,197	5,444
Share premium account	2,468	2,468
Non-distributable reserve	841	841
Capital redemption reserve	8,155	7,908
Special reserve	-	-
Capital reserves	40,400	57,635
Revenue reserve	(1,079)	(1,119)
Total shareholders' funds - equity	55,982	73,177

Net asset value per share - pence	269.32	336.06

Cash Flow Statement

for the year ended 30 June	2008	2007
	£'000s	£'000s
Operating activities
Investment income received	661	824
Interest received	59	50
Fees paid to management company	(519)	(589)
Fees paid to Directors	(70)	(71)
Other payments	(132)	(144)
Net cash (outflow)/inflow from operating activities	(1)	70
Financial investment
Purchases of investments	(29,798)	(17,973)
Sales of investments	31,933	22,886
Other capital charges and credits	(7)	(5)
Net cash inflow from financial investment	2,128	4,908
Net cash inflow before use of liquid resources and financing	2,127	4,978
Management of liquid resources
Increase in short-term deposits	(1,714)	-
Financing
Shares purchased and cancelled	(2,555)	(5,335)
Cash outflow from financing	(2,555)	(5,335)
Decrease in cash	(2,142)	(357)

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 £40,000 profit (2007: £94,000 profit).

Capital return

The capital return per share is based on the net capital return attributable to equity shareholders of £14,755,000 loss (2007: £3,029,000 profit).

Weighted average ordinary shares in issue

Both the revenue and capital returns per share are based on a weighted average of 21,338,447 ordinary shares in issue during the year (2007: 22,666,157).

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 842. In so qualifying, the Company is exempted in the UK from corporation tax on capital gains on its portfolio of investments.

The Company invests in quoted US smaller and medium sized companies in order to secure long-term capital growth. In pursuing the 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, as set out in detail in the Directors' Report and Business Review. 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 financial assets and liabilities 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 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

2008

Average for

the year

At 30 June

2008

Average for

the year

US dollar

1.9902

2.0092

2.0064

1.9368

Based on the financial assets and liabilities held at the balance sheet date, no portfolio movements and other factors remaining constant, 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:

	2008	2007
Weakening of Sterling by 10% against the US dollar
Net revenue return attributable to equity shareholders - £'000s	132	128
Net capital return attributable to equity shareholders - £'000s	6,241	8,177
Net total return attributable to equity shareholders - £'000s	6,373	8,305
Net asset value per share - pence	30.7	38.1

	2008	2007
Strengthening of Sterling by 10% against the US dollar
Net revenue return attributable to equity shareholders - £'000s	(114)	(163)
Net capital return attributable to equity shareholders - £'000s	(5,106)	(6,690)
Net total return attributable to equity shareholders - £'000s	(5,220)	(6,853)
Net asset value per share - pence	(25.1)	(31.5)

These analyses 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:

2008	Investments £'000s	Short-term debtors £'000s	Cash at bank and short-term deposits £'000s	Short-term creditors £'000s	Net exposure £'000s
Sterling	-	17	1	(162)	(144)
US dollar	54,413	33	1,719	(39)	56,126
Total	54,413	50	1,720	(201)	55,982

2007	Investments £'000s	Short-term debtors £'000s	Cash at bank and short-term deposits £'000s	Short-term creditors £'000s	Net exposure £'000s
Sterling	-	17	16	(261)	(228)
US dollar	71,472	35	2,112	(214)	73,405
Total	71,472	52	2,128	(475)	73,177

Interest rate exposure

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

	2008		2007
	Within one year £'000s	Net total £'000s	Within one year £'000s	Net total £'000s
Exposure to floating rates - cash and bank overdraft	1,681	1,681	2,128	2,128
Net exposure	1,681	1,681	2,128	2,128
Minimum net exposure during the year	195	195	1,457	1,457
Maximum net exposure during the year	3,064	3,064	3,506	3,506

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, or paid on bank overdrafts, 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 (2007: same).

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.

Other market 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 £54,413,000 at 30 June 2008 (2007: £71,472,000) 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	2008 Decrease in value £'000s	Increase in value £'000s	2007 Decrease in value £'000s
Capital return	10,883	(10,883)	14,294	(14,294)
NAV per share - pence	52.4	(52.4)	65.6	(65.6)

(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 large number of quoted investments held in the Company's portfolio (67 at 30 June 2008); the liquid nature of the portfolio of investments; the industrial diversity of the portfolio; and the existence of an ongoing overdraft facility. 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
2008
Current liabilities - other creditors	201	201
2007
Current liabilities - other creditors	475	475

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. The Board approves all counterparties used in such transactions, which must be settled on the basis of delivery against payment (except where local market conditions do not permit).

A list of pre-approved counterparties is maintained and regularly reviewed by the Manager and the Board. Broker 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, group accounts and other public information indicative of its financial position and performance.

The Company had no credit-rated bonds or similar securities or derivatives in its portfolio at the year end (2007: none) and does not normally invest in them. None of the Company's financial liabilities are past their 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 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 the registered office of the Company, Exchange House, Primrose Street, London EC2A 2NY on Thursday 20 November 2008 at 12.30 p.m.

4 Report and accounts

The report and accounts for the year ended 30 June 2008 will be posted to shareholders and made available on the website www.fandcussmallers.com in mid October 2008. Copies may also be obtained from the Company's registered office, Exchange House, Primrose Street, London EC2A 2NY.