Final Results

RNS Number : 9957Z

F&C U.S. Smaller Companies PLC

30 September 2009

Date: 30 September 2009

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 2009

Summary of results

Attributable to equity shareholders	30 June 2009	30 June 2008	% Change

Net assets	£60.61m	£55.98m	8.3

Net assets per share	292.69p	269.32p	8.7

Russell 2000 Index (sterling adjusted)	308.64	346.54	-10.9

Share price	253.50p	245.50p	3.3

Increase in net asset value per share since inception on 8 March 1993			203.1

Increase since 8 March 1993 in the Russell 2000 Index (sterling adjusted)			95.7

Chairman's Statement

I am pleased to report good results for the twelve months to 30 June 2009, notwithstanding that it was another difficult year for the US equity market. The net asset value ('NAV') per share of the Company rose 8.7% to 292.69p. This compared to a fall of 10.9% in our benchmark, the sterling-adjusted Russell 2000 Index and 13.2% in the sterling-adjusted Standard & Poor's Composite Index.

Market review

During the year under review the Russell 2000 dropped 26.3% in dollar terms while the major US equity indices also declined: the Standard & Poor's Composite Index fell 28.2% and the technology-orientated NASDAQ Composite Index lost 20.0%.

Sterling investors benefited from a rebound in the US dollar over the year, although the dollar's rally versus sterling partially reversed in the second half of the year. The Company's investments are denominated in dollars but are valued in the portfolio in sterling. The 20.9% rise in the dollar against sterling this year meant that shareholders experienced gains instead of losses. The dollar's rise reflected, on the one hand, its safe haven status and a sharp fall in commodity prices, and, on the other hand, concerns about the impact of the financial crisis particularly on the UK economy. Later in spring, the stresses in the credit markets eased and commodity prices began to recover, with the result that the dollar lost ground.

After the failure of Lehman Brothers last September, the US stock market suffered a very painful sell-off, lasting about two months. In that time the Russell 2000 Index lost around half its value. Shares bounced but again plunged to new lows in March as the reality of the depth of the US recession further undermined confidence. The market then began to recover as the financial system responded to the support applied by central banks and hopes grew that the decline in economic activity might abate.

The dominant features of the market in the first half of the period were the bursting of the bubble in energy-related shares and the collapse in shares of companies perceived to have any significant financial risk. Subsequently, both groups staged a recovery. The best performing sectors in the Russell 2000 were defensive ones, such as utilities and consumer staples, and technology. The laggards were energy (which fell more than 50%, even after a partial recovery), financial services and producer durables.

The Company's disciplined investment approach paid off this year. The sell-off in the market presented new investment opportunities and the fund manager took advantage of these.

Discount and buybacks

The price of the shares rose by 3.3% to 253.5p over the year. The discount to NAV per share widened during the year from 8.8% to 13.4% and at 28 September 2009 was 13.4%. The average discount during the year was 12.9%. Although the average discount was somewhat wider than the Board's long-term target of around 10%, market conditions were extraordinary and it was more difficult to justify repurchase when the underlying NAV per share was extremely volatile from day to day.

Nevertheless, the Company bought back some of its own shares during the year. There were purchases of 79,500 shares at an average discount of 13.0%.

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 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 Wednesday 18 November 2009 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.

F&C savings plans proportional voting

In 2008, F&C modified the arrangements for voting by its savings plans at shareholder meetings. At last year's AGM, the nominee company, which holds the Company's shares on behalf of these investors, voted all the planholders' shares, whether or not they actually voted. In particular, where planholders had not voted, these shares were voted in the same proportion as those who did vote. The savings plans currently hold approximately 19% of the Company's share capital. This arrangement will apply again at the Company's AGM, but with two modifications, which are in line with the practice for other F&C investment trusts: firstly, at least 5% of the shares held in the savings plans must actually vote before the arrangement can be applied; secondly, when the voting proportion is calculated, the votes of any one individual cannot exceed 9,800 shares, being approximately 0.25% of shares in the savings plans (in other words 5% of the threshold just mentioned). Any shares voted by an investor in excess of that limit will remain valid, but will not form part of the proportional voting assessment. Finally, as last year, any investor wishing to exclude their shares from the proportional voting basis may do so.

Prospects

The US smaller company sector proved to be an exciting one in which to invest this year and I expect it will continue so in the future. The market has staged an impressive recovery from its lows in March but the US, in common with other developed economies, faces many obstacles before it returns to the path of sustainable growth; however, given the vitality of its people, its wealth of resources and well-developed manufacturing sector it is likely to recover first and stands to benefit from expansion in Asia. The enormous growth of government borrowing suggests that inflationary risks are probably higher than they have been for a generation. It is worth recalling that in the 1970s, the last time inflation became a serious problem, smaller companies experienced one of their strongest periods of performance.

Gordon Grender

Chairman

30 September 2009

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 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 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 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 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 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.

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 2009, 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

30 September 2009

Income Statement

for the year ended 30 June	2009			2008
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s

Gains/(losses) on investments	-	4,631	4,631	-	(14,730)	(14,730)
Foreign exchange gains/(losses)	-	605	605	-	(19)	(19)
Income	837	-	837	836	-	836
Management fee	(474)	-	(474)	(485)	-	(485)
Performance fee	-	(416)	(416)	-	-	-
Other expenses	(232)	(4)	(236)	(209)	(6)	(215)
Net return before finance costs and taxation	131	4,816	4,947	142	(14,755)	(14,613)
Finance costs	-	-	-	-	-	-
Net return on ordinary activities before taxation	131	4,816	4,947	142	(14,755)	(14,613)
Taxation on ordinary activities	(124)	-	(124)	(102)	-	(102)
Net return attributable to equity shareholders	7	4,816	4,823	40	(14,755)	(14,715)

Return per share - pence	0.03	23.22	23.25	0.19	(69.15)	(68.96)

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 2009
		Share	Non-	Capital			Total equity
	Share	premium	distributable	redemption	Capital	Revenue	shareholders'
	capital	account	reserve	reserve	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s

Balance at 30 June 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

for the year ended

30 June 2008

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)

Net return attributable

to equity shareholders

(14,755)

(14,715)

Balance at 30 June

2008

5,197

2,468

841

8,155

40,400

(1,079)

55,982

Balance Sheet

at 30 June	2009	2008
	£'000s	£'000s
Fixed assets
Listed investments	58,101	54,413
Current assets
Debtors	250	50
Cash at bank and short-term deposits	3,182	1,720
	3,432	1,770
Creditors: amounts falling due within one year	(926)	(201)
Net current assets	2,506	1,569
Net assets	60,607	55,982
Capital and reserves
Share capital	5,177	5,197
Share premium account	2,468	2,468
Non-distributable reserve	841	841
Capital redemption reserve	8,175	8,155
Capital reserves	45,018	40,400
Revenue reserve	(1,072)	(1,079)
Total shareholders' funds	60,607	55,982

Net asset value per share - pence	292.69	269.32

Cash Flow Statement

for the year ended 30 June	2009	2008
	£'000s	£'000s
Operating activities
Investment income received	658	661
Interest received	16	59
Other income received	12	-
Fee paid to management company	(466)	(519)
Fees paid to Directors	(69)	(70)
Other payments	(162)	(132)
Net cash outflow from operating activities	(11)	(1)
Financial investment
Purchases of investments	(42,781)	(29,798)
Sales of investments	43,852	31,933
Other capital charges and credits	(4)	(7)
Net cash inflow from financial investment	1,067	2,128
Net cash inflow before use of liquid resources and financing	1,056	2,127
Management of liquid resources
Increase in short-term deposits	(1,531)	(1,714)
Financing
Shares purchased and cancelled	(198)	(2,555)
Cash outflow from financing	(198)	(2,555)
Decrease in cash	(673)	(2,142)

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 £7,000 profit (2008: £40,000 profit).

Capital return

The capital return per share is based on the net capital return attributable to equity shareholders of £4,816,000 profit (2008: £14,755,000 loss).

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 20,737,606 (2008: 21,338,447).

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 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, 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 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

2009

Average for

the year

At 30 June

2008

Average for

the year

US dollar

1.6468

1.6311

1.9902

2.0092

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:

	2009	2008
Weakening of sterling by 10% against the US dollar
Net revenue return attributable to equity shareholders - £'000s	33	132
Net capital return attributable to equity shareholders - £'000s	6,802	6,241
Net total return attributable to equity shareholders - £'000s	6,835	6,373
NAV per share - pence	33.0	30.7

	2009	2008
Strengthening of sterling by 10% against the US dollar
Net revenue return attributable to equity shareholders - £'000s	(90)	(114)
Net capital return attributable to equity shareholders - £'000s	(5,571)	(5,106)
Net total return attributable to equity shareholders - £'000s	(5,661)	(5,220)
NAV per share - pence	(27.3)	(25.1)

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:

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

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

Interest rate exposure

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

	2009		2008
	Within one year £'000s	Net total £'000s	Within one year £'000s	Net total £'000s
Exposure to floating rates - cash and bank overdraft	3,144	3,144	1,681	1,681
Net exposure	3,144	3,144	1,681	1,681
Minimum net exposure during the year	437	437	195	195
Maximum net exposure during the year	3,416	3,416	3,064	3,064

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 (2008: 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 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 £58,101,000 at 30 June 2009 (2008: £54,413,000) 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	2009 Decrease in value £'000s	Increase in value £'000s	2008 Decrease in value £'000s
Capital return	11,620	(11,620)	10,883	(10,883)
NAV per share - pence	56.1	(56.1)	52.4	(52.4)

(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 (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
2009
Current liabilities - other creditors	926	926
2008
Current liabilities - other creditors	201	201

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 (2008: 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 Wednesday 18 November 2009 at 12.30 p.m.

4 Report and accounts

The report and accounts for the year ended 30 June 2009 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.