Annual Financial Report

RNS Number : 0793U

F&C Global Smaller Companies PLC

18 June 2009

 



Date:          17 June 2009

Contact:    Peter Ewins    

                    F&C Management Limited    

                    020 7628 8000    

F&C Global Smaller Companies PLC

Audited Statement of Results

for the year ended 30 April 2009

Summary of results

Attributable to equity shareholders	30 April 2009	30 April 2008	% Change
Share price	325.00p	385.00p	-15.6
Net asset value per share (debenture at nominal value)	360.23p	428.23p	-15.9
Net asset value per share (debenture at market value)	351.06p	421.05p	-16.6
	Year ended 30 April 2009	Year ended 30 April 2008	% Change
Revenue return per share	5.66p	5.54p	+2.2
Dividends per share	4.89p	4.83p	+1.2
Total expense ratio (based on average net assets)	0.93%	0.77%

  Chairman's Statement

Investors will be well aware that the year under review has witnessed a remarkable series of events in financial markets. The upshot has been that the majority of developed economies have rapidly moved into recession, leading to heavy falls in equity markets in the first three quarters of the period. Despite the highly difficult economic background, there was a strong bounce back in share prices at the end of the year as investors started to factor in an eventual recovery in economic activity.

Performance

The Company's benchmark is a blended index of the returns from the Hoare Govett UK Smaller Companies Index (40%) and the MSCI World ex UK Small Cap Index (60%) ('the Benchmark'), with the proportions approximating the historic long-term geographic split of the portfolio. Over the twelve months under review the Benchmark produced a    -17.9% total return, while the Company's net asset value ('NAV') per share total return was -14.8%. Although the portfolio was unable to buck the trend of falling markets, investment performance was somewhat better than the Benchmark, helped by a strong showing from the US part of the portfolio. The Company's share price ended the year at 325p per share, down 15.6%. This marked a sharp recovery from the low reached in November of 221p per share.

Last year I reported that the Company had been included in the AIC's global growth sector. It is pleasing to be able to report that the Company's NAV per share performance relative to this peer group was good, ranking 4th out of 32 over the year. This was a sound performance, particularly given that smaller companies have not been uniformly in favour in world equity markets at a time of widespread economic contraction. 

While the Company's fee structure incorporates a performance fee to reward the Manager when the NAV per share return surpasses that of the Benchmark, a carry forward of underperformance means that no performance fee was earned in the year to 30 April 2009. Despite this, the total expense ratio ('TER'), which measures the operating costs of the Company in relation to the average net assets, rose to 0.93% from 0.77% in the prior year, mainly as a consequence of the lower average value of assets under management. This TER remains low by the industry's standards.

Dividends

Shareholders will no doubt have seen that a large number of companies are cutting or passing entirely their dividend payments as a result of pressure on their profitability and balance sheets from the downturn. Despite this, dividend income received from the Company's investments held up well, a positive indicator as far as the quality of the portfolio is concerned, but also reflecting beneficial currency moves. Income in the year also benefited from the recovery of VAT, a subject to which I shall return later. After balancing this with the likelihood of further pressure on dividend receipts and a fall in interest income from deposits in the year ahead resulting from the collapse in interest rates, the Board is recommending the payment of a 3.29p per share final dividend, up 1.2% on last year's payment. Including the 1.60p per share interim dividend, this means that the payout for the year is up by 1.2%, making this the 39th consecutive year of underlying dividend growth for your Company. The dividend will be paid on 6 August 2009 to investors on the register on 3 July 2009.

The Board is aiming to continue with a progressive dividend policy and would consider drawing on revenue reserves on a short-term basis if it felt sufficiently confident in the longer term outlook for income. For 2008/9 a further £375,000 was added to revenue reserves despite increasing the dividend and this puts the Company in a good position for the future.

Market background

It is fair to say that what we have seen in the last year has been totally unprecedented in most investors' lifetimes. 

A year ago, in the early stages of the credit crunch, markets were concerned about what impact the financial crisis would have on the prospect for corporate earnings, but the wholesale implosion of a number of major financial institutions, including Lehman Brothers and AIG in the US, and the distressed state reached by the likes of RBS and HBOS closer to home, was certainly not anticipated. Over-exuberant lending practices were the fundamental cause of most of the problems in the banking sector, but as time passed it became apparent that a large number of banks would need additional capital in the face of increasing bad debts arising from the economic slowdown. This put pressure on the availability of credit lines globally, particularly to financially stretched organisations, and many companies responded by reducing their capital spending and shedding costs, leading to rising unemployment in most countries. Such actions inevitably have serious consequences for overall economic growth, leading to a move towards zero interest rates in the US, UK and a number of other countries. More recently we have seen the initiation of less conventional policies from central banks to buy in government bonds in an attempt to cut corporate borrowing rates.

The scale and speed of the global downturn in late 2008 and early 2009 led to significant volatility in stock markets as analysts' forecasts of future profits and cash flows were cut back. Investors found it harder to have confidence in any projections given the speed with which events were moving. A series of fiscal stimulus packages and specific measures to address particular weakness, in areas such as the automotive market, around the world have also been influences on markets more recently. As already mentioned, the year ended with a strong rally in equity markets, particularly with respect to cyclical and financially geared stocks.

Portfolio performance

While losses were hard to avoid given the market context, the US portfolio had an outstanding year, recording a gain in sterling terms. We were also well ahead of the local benchmark in Asia, where the portfolio of collective investments performed strongly. Elsewhere, the Company's Japanese portfolio marginally underperformed against the FTSE Japan Smaller Companies Index. This was the first year following the decision to move to a third party fund structure for this market and the costs of the reorganisation had some impact on performance in the first half of the year. Despite this, performance in Japan was better than most actively managed Japanese smaller company funds, and ahead of other local small cap indices, so the Board is pleased with the early results of the change. One consequence of this move, however, is that collective investments now dominate the top of the portfolio in terms of value because we have chosen to make large investments in funds that we believe are well managed and should deliver outperformance. For the bulk of the portfolio outside of Asia and Japan, we continue to invest directly in individual smaller companies chosen by F&C's regional small cap teams. During the last year, the UK and European portfolios failed to match the relevant local small cap indices; in both cases a slightly defensive stock bias did not help late in the period as markets rallied hard and recovery stocks outperformed. 

Geographical performance (total return sterling adjusted)
for the year ended 30 April 2009
	Portfolio	Local smaller companies index
UK	-32.2%	-23.7%
North America	8.2%	-7.4%
Continental Europe	-33.3%	-28.3%
Japan	-0.3%	0.7%
Pacific (ex Japan)	-19.7%	-30.8%
Source: F&C Management Limited

As part of a regular review, the Board will, over the course of this year, be considering the appropriateness of the existing Benchmark and the regional comparator indices, and it is possible that changes could be made to reflect the changing structure and spread of the Company's portfolio and the evolution of the indices.

Currencies and asset allocation

As in previous years, currency gyrations had a big impact on returns in the different markets. While returns in local currency terms were all negative, sterling weakness had a large impact on the numbers, with overseas investments value being enhanced when measured in sterling. The biggest impact was on the Japanese portfolio with the yen appreciating 42% against sterling. The weakness of the pound was partly as a consequence of diminished confidence in the fundamental position of the UK economy. Perceptions of this were damaged by the deteriorating position showing through in the government finances, combined with the impact on the domestic economy from weakness of the financial markets given their importance to the UK.

The asset allocation strategy of the Company aims to take account of projected currency movements and the attractions of the different geographic markets for small companies. In the year, asset allocation made a positive contribution to overall outperformance against the Benchmark. The prime reason for this was correctly anticipating the move down in sterling with the portfolio remaining underweight in the UK throughout the year. 

The European and Japanese weightings fell in the second half of the year as we took a more cautious stance towards these markets given the more substantial near-term deterioration in their economies. We remained more positive on the Asian region throughout the year. Here at least some regional economies such as China are still moving forward, while the region's banking system has been less contaminated and fiscal positions generally look more promising, providing greater scope for governments to provide cyclical assistance.

Geographical distribution of the investment portfolio
	30 April 2009		30 April 2008
UK	34.1%		36.9%
North America	43.9%		34.6%
Continental Europe	7.1%		14.4%
Japan	6.3%		7.2%
Rest of World	8.6%		6.9%
Source: F&C Management Limited

Gearing policy

Gearing is a tactical consideration for the Manager and the Board and the aim is to enhance shareholder returns by gearing up at times when markets are rising, while in weaker periods, gearing should be low or ideally non-existent. Timing gearing decisions is always difficult and particularly so in the last year given all the volatility. The Company ended the year with gearing at 4.1%, although this had been at lower levels for most of the year. The recent modest up-tick reflects the Manager's view that equities may well continue to rally following the heavy sell-off in the last two years. This is predicated on the assumption that the current recession does not turn into a more serious depression.

Discount and buybacks

The Board takes the discount at which the share price trades to the NAV per share seriously and has continued to try to limit this by way of an active policy of share buybacks. The aim remains to keep the discount to NAV per share (including the debenture at market value but excluding current period income) close to 5% in normal market conditions. Over the course of the year 4.6% of the opening share capital was bought in and cancelled and this enhanced the NAV per share by around 0.6%.

The volatility of markets led to some periods when the discount rose but, at the end of the year the discount measured on the above basis was down to 6.3% from 7.7% a year ago.

At the annual general meeting ('AGM'), we will again seek shareholder approval for buying back up to 14.99% of the issued share capital, with the option of holding shares bought back in treasury. As previously, it is likely that in practice shares bought in will be immediately cancelled. Any shares held in treasury would only be re-issued at a premium to NAV per share.

Marketing

Shareholder numbers continued to rise in the year, despite the weakness of markets, and once again there has been a shift towards a higher proportion of retail shareholders. The Company continues to be well-served by the success of F&C's general marketing which has driven a strong net inflow in the various savings plans offered, and it is likely that this will be the focus in the new year rather than any additional Company-specific activity.

VAT

In its accounts for the year ended 30 April 2008, the Company recognised £1m of VAT recoverable in relation to VAT paid on management fees in prior years. At that time, I explained that uncertainties remained in respect of further recoveries. Happily, those uncertainties were resolved and the Company has recovered a total of £1.2m of VAT (including the £1m previously accrued) in full settlement of VAT paid in the periods 1990 to 1996 and 2001 to 2007. In addition, interest of £422,000 was received, calculated on a simple basis. Details of these receipts and their allocation between capital and revenue are set out in the notes on the accounts.

VAT paid on management fees in the intervening period (1997 to 2001) could not be reclaimed under the Claverhouse ruling. No VAT recovery has been accrued or otherwise recognised in the accounts in respect of this period as recoverability remains uncertain under EU Law and is likely to remain so for several years. For similar reasons, the prospect of receiving interest on a compound, rather than simple, basis for all periods remains uncertain and no further interest receipts have been accrued or recognised in the accounts.

Electronic communications

Last year we introduced arrangements for the Company's main register shareholders to access the annual report and accounts and lodge their proxy votes online. Similar arrangements have been put in place this year for investors holding their shares in the F&C savings plans.*

* Not applicable for the Pensions Savings Plan.

F&C savings plans proportional voting

In 2008, F&C modified its arrangements under which investors in its savings plans vote at shareholder meetings. Under these arrangements, the nominee company, which holds around 48% of the Company's share capital on behalf of these investors, votes the shares held on behalf of planholders who have not returned their voting directions in the same proportion to those who have. This arrangement will apply again at the Company's AGM, subject to a minimum threshold of 5% of the shares held in the savings plans being voted. There will be a maximum limit of 50,000 on the number of shares that any one individual investor can vote, being approximately 5% of the minimum threshold, for the purposes of assessing the voting proportions. Any shares voted by an investor in excess of that limit will remain valid, but will not form part of the proportional voting assessment.  Any investor wishing to exclude their shares from the proportional voting basis may do so.

Outlook

Predictions for near-term stock market returns are difficult at any time and particularly now given that identifying how deep and protracted recessions will be is never easy. It is important to remember, however, that stock markets tend to move ahead some time before the economic cycle turns, and this in part helps to explain the recent move up. 

Smaller company shares generally do well in relation to larger stocks at times when economies move through the worst point of the economic cycle and investors start to regain their confidence. We have seen evidence of this in the last couple of months. It is possible that this sentiment could reverse, particularly if there are no more concrete signs of improvement in the coming months. Developments in the US, which led the world into the downturn, will be particularly important to monitor.

The Board's view is that the recent actions by governments and central banks should slow the rate of economic contraction, though the rate of recovery could ultimately prove to be disappointing given the need for the financial system to continue to de-leverage. Having not long ago been worried by the potential for deflation, it is also possible that markets may start to get concerned about higher inflation given the consequences of the combination of stimulus measures used to date.

At a time of considerable uncertainty, the Manager is looking to concentrate investment on well managed companies which are attractively valued when assessed on a longer term basis, while also aiming to add value in the asset allocation process.

Anthony Townsend

Chairman

17 June 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:

• Investment strategy - an inappropriate investment strategy could result in poor returns for shareholders and a widening of the discount of the share price to the net asset value ('NAV') per share. The Board regularly reviews strategy and considers the allocation of assets between geographic regions and industrial sectors, gearing, currency exposure and the balance between quoted and unquoted stocks.

• Investment management resources - the quality of the management team employed by F&C is a crucial factor in delivering good performance and loss of the Manager's key staff could affect investment returns. The Manager develops its recruitment and remuneration packages in order to retain key staff, has training and development programmes in place and undertakes succession planning.

• Regulatory - 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 the Company's compliance with these requirements, together with regular investment listings and income forecasts as part of its monitoring of compliance with section 842.

• Operational - failure of the Manager's core accounting systems, or a disastrous disruption to its business, could lead to an inability to provide accurate reporting and monitoring. The Manager is contractually obliged to ensure that its conduct of business conforms to applicable laws and regulations. The Manager has confirmed that reliable back-up systems are in place.

• Financial - inadequate financial controls could result in misappropriation of assets, loss of income and debtor receipts and inaccurate reporting of NAV per share. The Board regularly reviews the Manager's statements 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 4.

• 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, in respect of the annual report for the year ended 30 April 2009 of which this statement of results is an extract, that to the best of their knowledge:

• 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

Anthony Townsend

Chairman

17 June 2009

  Income Statement

for the year ended 30 April	2009			2008
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Losses on investments	-	(32,248)	(32,248)	-	(38,996)	(38,996)
Foreign exchange gains/(losses)	2	2,017	2,019	(4)	(188)	(192)
Income	3,948	-	3,948	3,848	-	3,848
Management fee	(173)	(404)	(577)	(252)	(590)	(842)
Performance fee	-	-	-	-	-	-
Recoverable VAT	171	58	229	500	500	1,000
Other expenses	(817)	(21)	(838)	(807)	(35)	(842)
Net return before finance costs and taxation	3,131	(30,598)	(27,467)	3,285	(39,309)	(36,024)
Finance costs	(344)	(804)	(1,148)	(347)	(808)	(1,155)
Net return on ordinary activities before taxation	2,787	(31,402)	(28,615)	2,938	(40,117)	(37,179)
Taxation on ordinary activities	(357)	171	(186)	(428)	226	(202)
Net return attributable to equity shareholders	2,430	(31,231)	(28,801)	2,510	(39,891)	(37,381)
Return per share - pence	5.66	(72.77)	(67.11)	5.54	(88.09)	(82.55)

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 April 2009		Share	Capital			Total equity
	Share	premium	redemption	Capital	Revenue	shareholders’
	capital	account	reserve	reserves	reserve	funds
	£’000s	£’000s	£’000s	£’000s	£’000s	£’000s
Balance at 30 April 2008	10,981	23,132	15,202	131,463	7,322	188,100
Movements during the year ended 30 April 2009
Dividends paid	-	-	-	-	(2,095)	(2,095)
Shares purchased and cancelled	(502)	-	502	(6,210)	-	(6,210)
Net return attributable to equity shareholders	-	-	-	(31,231)	2,430	(28,801)
Balance at 30 April 2009	10,479	23,132	15,704	94,022	7,657	150,994

 

 

for the year ended 30 April 2008		Share	Capital			Total equity
	Share	premium	redemption	Capital	Revenue	shareholders’
	capital	account	reserve	reserves	reserve	funds
	£’000s	£’000s	£’000s	£’000s	£’000s	£’000s
Balance at 30 April 2007	11,693	23,132	14,490	183,286	6,973	239,574
Movements during the year ended 30 April 2008
Dividends paid	-	-	-	-	(2,161)	(2,161)
Shares purchased and cancelled	(712)	-	712	(11,932)	-	(11,932)
Net return attributable to equity shareholders	-	-	-	(39,891)	2,510	(37,381)
Balance at 30 April 2008	10,981	23,132	15,202	131,463	7,322	188,100

 

Balance Sheet

at 30 April		2009		2008
	£'000s	£'000s	£'000s	£'000s
Fixed assets
Investments		157,668		194,453
Current assets
Debtors	1,227		2,849
Taxation recoverable	30		21
Cash at bank and short-term deposits	5,925		5,822
	7,182		8,692
Creditors: amounts falling due within one year
Other	(3,856)		(5,045)
	(3,856)		(5,045)
Net current assets		3,326		3,647
Total assets less current liabilities		160,994		198,100
Creditors: amounts falling due after more than one year
Debenture		(10,000)		(10,000)
Net assets		150,994		188,100
Capital and reserves
Share capital		10,479		10,981
Share premium account	23,132		23,132
Capital redemption reserve	15,704		15,202
Capital reserves	94,022		131,463
Revenue reserve	7,657		7,322
		140,515		177,119
Total shareholders' funds		150,994		188,100
Net asset value per share - pence		360.23		428.23

  Cash Flow Statement

for the year ended 30 April		2009		2008
	£'000s	£'000s	£'000s	£'000s
Operating activities
Investment income received	3,208		3,171
Interest received	151		258
Stock lending fees received	61		37
Underwriting commission received	11		3
Management fee paid to the management company	(516)		(860)
Performance fee paid to the management company	-		(524)
Directors' fees paid	(134)		(134)
VAT recovered (including interest thereon)	1,651
Other payments	(643)		(705)
Net cash inflow from operating activities		3,789		1,246
Servicing of finance
Interest paid	(1,152)		(1,154)
Cash outflow from servicing of finance		(1,152)		(1,154)
Financial investment
Purchases of equities and other investments	(100,867)		(98,138)
Sales of equities and other investments	105,564		111,749
Other capital charges and credits	(27)		(35)
Net cash inflow from financial investment		4,670		13,576
Equity dividends paid		(2,095)		(2,161)
Net cash inflow before use of liquid resources and financing		5,212		11,507
Management of liquid resources
Decrease in short-term deposits		-		2,000
Financing
Shares purchased and cancelled	(7,131)		(11,045)
Cash outflow from financing		(7,131)		(11,045)
(Decrease)/increase in cash		(1,919)		2,462

  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 £2,430,000 profit (2008: £2,510,000 profit).

Capital return

The capital return per share is based on the net capital return attributable to equity shareholders of £31,231,000 loss (2008: £39,891,000 loss).

Weighted average ordinary shares in issue

Both the revenue and capital returns per share are based on a weighted average of 42,916,280 ordinary shares in issue during the year (2008: 45,282,575).

2    Dividend

The Directors recommend a final dividend in respect of the year ended 30 April 2009 of 3.29p per share, payable on 6 August 2009 to all shareholders on the register at close of business on 3 July 2009. The recommended final dividend is subject to approval by shareholders at the annual general meeting.

3    Recoverable VAT

			2009			2008
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Recoverable in respect of management fees	171	58	229	500	458	958
Recoverable in respect of performance fees	-	-	-	-	42	42
	171	58	229	500	500	1,000

Management fees are no longer subject to VAT. The Company has recovered £1,229,000 from HMRC, via its Manager, in relation to VAT paid on such fees in the periods 1990 to 1996 and 2001 to 2007. Of this amount, £1,000,000 was recognised in the Income Statement for the year ended 30 April 2008 and £229,000 has been recognised for the year ended 30 April 2009. In addition, interest of £422,000 relating to the VAT recovered has been received and recognised in the Income Statement.

Amounts relating to the period 1997 to 2000 have not been accrued or recognised as a contingent asset as their recovery remains uncertain under law.

4    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 of the Income and Corporation Taxes Act 1988. 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 in smaller companies worldwide in order to secure a high total return. In pursuing the objective, the Company is exposed to financial risks which could result in a reduction of either or both of the value of the net assets and the profits available for distribution by way of dividend. 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 financial assets and liabilities at fair value, except as noted in (d) below in respect of the debenture stock. The Company does not make use of hedge accounting rules.

(a) Market risks

The fair value of equity and other financial 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 currencies other than 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. Borrowings are limited to amounts and currencies commensurate with the portfolio's exposure to those currencies, thereby limiting the Company's exposure to future changes in exchange rates. Gearing may be short or long-term, in sterling and foreign currencies, and enables the Company to take a long-term view of the countries and markets in which it is invested without having to be concerned about short-term volatility. 

Income earned in foreign currencies is converted to sterling on receipt. The Board regularly monitors the effects on net revenue of interest earned on deposits and paid on gearing.

(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 increased borrowing. 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 (204 at 30 April 2009); the liquid nature of the portfolio of investments; and the industrial and geographical 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 11.5% debenture stock is governed by a trust deed and is redeemable in 2014 or at an earlier date or dates at the Company's behest. The Board does not therefore consider the repayment of the debenture stock as a likely short-term liquidity issue.

(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 maintained and 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. Payments in respect of private equity investments are made only to counterparties with whom a contracted commitment exists. During the year, securities could only be loaned to third parties in exchange for collateral which exceeded the value of the securities throughout the duration of the loan. The Company ceased stock lending in September 2008. 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 periodically. Details of securities held in custody on behalf of the Company are received and reconciled monthly. 

To the extent that F&C Management Limited ('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 (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, except for the debenture which is carried at par value in accordance with FRS4. The fair value of the debenture, based on a comparable UK gilt, was £13,846,000 (2008: £13,153,000). Borrowings under loan facilities are short-term in nature and hence do not have a value materially different from their capital repayment amount. Borrowings in foreign currencies are converted into sterling at exchanges rates ruling at each valuation date. 

Unquoted investments, including partnership investments, are valued based on professional assumptions and advice that is not wholly supported by prices from current market transactions or by observable market data. The Directors make use of recognised valuation techniques and may take account of recent arm's length transactions in the same or similar investments. With respect specifically to investments in partnerships, the Directors rely on valuations of the underlying unlisted investments as supplied by the managers of those partnerships. The Directors regularly review the principles applied by the managers to those valuations to ensure they comply with the Company's accounting policies and with fair value principles.

(e) Capital risk management

The objective of the Company is stated as being to invest in smaller companies worldwide in order to secure a high total return. 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 pay dividends to shareholders out of current year revenue earnings as well as out of brought forward revenue reserves.

5    Annual general meeting

The annual general meeting will be held at the Chartered Accountants’ Hall, One Moorgate Place, London EC2 on 30 July 2009 at 12 noon.

6    Report and accounts

The report and accounts for the year ended 30 April 2009 will be posted to shareholders and made available on the website www.fandcglobalsmallers.com at the beginning of July 2009. 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 June 2009

 

END

 

 

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