Annual Financial Report

RNS Number : 6782C

BMO Global Smaller Companies PLC

19 June 2019

 

Date:              19 June 2019

Contact:         Peter Ewins                                                   

                        BMO Investment Business Limited                 

                        020 7628 8000                                               

BMO Global Smaller Companies PLC

Audited Statement of Results

for the year ended 30 April 2019

Financial highlights

Diluted Net Asset Value ("NAV") total return of 3.8% beat the Benchmark return of 3.0%

The diluted NAV rose to 1,405.69p from 1,368.80p.

Share price total return of -1.0%

The share price ended the year at 1,346p.

Dividend of 16.50 pence

49th consecutive annual increase, up by 14.6%.

Shares ended the year at a discount to the diluted NAV of 4.3%

 

Chairman's Statement

This was a tricky year for investors at large and our Manager to navigate. Interest rates rose in the US and the pace of global economic growth moderated. There were bouts of volatility in financial markets as the risks of a full-blown trade war between the US and China ebbed and flowed. More locally, the ongoing political saga of Brexit served to undermine visibility around the future prospects for companies operating in the UK. It was perhaps not surprising therefore that returns from equity markets were modest in the twelve months nor that smaller company shares tended to lag their larger peers over the period.

The Company's Benchmark is a blended index of the returns from the MSCI All Country World ex UK Small Cap Index and the Numis UK Smaller Companies (excluding investment companies) Index in a 70/30% proportion. This delivered a total return of 3.0% in the year, while the Net Asset Value ("NAV") total return on a diluted basis was up 3.8%. Outperformance came largely as a result of positive stock selection on the investment portfolio and pleasingly this is the seventh consecutive year of growth in the NAV.

With Brexit in particular creating uncertainty for domestic-based investors, a slowdown in flows into retail investment funds, both open and closed ended, has been evident more recently. This led to some pressure on the rating of the Company's shares which stood at 1,346p at the end of the year, down 1.0% on a total return basis and at a 4.3% discount to the diluted NAV compared to a 0.5% premium a year earlier.

While there is no guarantee that returns in the future will match those of the past, longer term performance of the Company's NAV and share price has been good as highlighted by the chart on the previous page and the table below. Shareholders who have held the Company's shares for the last 25 years have received a compound annual total return in share price terms of 10.0%.

Performance: Total return over the long-term
	1 year %	3 years %	5 years %	10 years %	25 years %
NAV (diluted) total return	3.8	45.6	75.6	342.3	1,025.3
Benchmark total return	3.0	45.0	68.1	279.0	844.0
Share price total return	(1.0)	38.7	68.5	359.3	973.3

Source: BMO GAM

Share issues and buybacks

A total of 741,583 new shares were issued in the year primarily to satisfy conversion requests from Convertible Unsecured Loan Stock ("CULS") holders. However, late in the period, the Board used its share buyback powers as the share price moved below the NAV, buying in 150,044 shares. These shares will be held in Treasury in the short-term and may be reissued at a later stage. This activity illustrates the importance that the Board attaches towards maintaining a balance between demand and supply of the Company's shares in the market. The aim remains to keep any discount to NAV at less than 5% in normal market conditions. The Board will therefore be seeking renewal at the AGM of the buyback and issuance powers for further deployment in the coming period should this be necessary.

Costs

Ongoing charges for the year were down to 0.79% (2018: 0.83%). There were no performance fees payable to managers of the collective fund holdings during the year.

Dividends

Although some companies have been impacted by the more sluggish overall economic environment, investment income in the form of dividends received was again comfortably up, helped at the margin by foreign exchange movements, with sterling lower against the US dollar. Revenue returns per share rose by 10.2% and the Board has decided to recommend a final dividend payment of 11.50p per share, up 15.0% on last year's payment, making a total dividend for the year of 16.50p per share, up 14.6%. This will be the 49th consecutive year of dividend growth and the eighth year in a row of double-digit percentage increases. The final dividend will be paid on 31 July 2019 to shareholders on the register on 12 July 2019.

Market and regional portfolio performance

The US economy entered the period with good momentum, helped by the impact of the previously implemented personal and corporate tax cuts. The Federal Reserve Bank increased interest rates three times in response to signs of a pick-up in inflationary pressures, but as we entered 2019 and the impact of the trade spat with China and slower growth elsewhere began to take their toll, the Central Bank indicated that it would take a pause on further monetary policy tightening. Despite the rate rises, US small cap shares performed considerably better over the year than those in other markets with the boost to company earnings from lower taxes on profits helping to contribute towards this.

Returns from smaller company indices outside of the US were generally disappointing. Japan's performance was particularly weak as international investors pulled money out of the market on the basis that a slowdown in global trade would particularly impact the country. Other Asian markets also came under pressure in the year as exports into China started to be hampered by weaker demand, partly due to the imposition of tariffs by the US.

The stalling of the impetus in the European economic recovery from mid-2018 took investors by surprise. While there were some short-term factors at work such as new automotive industry regulations putting the brake on growth in the key German economy, it is nevertheless concerning to see how fragile some of the larger continental economies seem to still be. From a political perspective too, there have been challenges with the Italian government in dispute with the European Commission in relation to fiscal policy, the French street protests and the rise of populist parties in some other European countries. UK small cap shares were also out of favour as the Brexit deadlock persisted, but the domestic economy performed resiliently despite weaker investment spending by the corporate sector.

Geographical performance (total return sterling adjusted)
for the year ended 30 April 2019
	Portfolio	Local smaller companies index
UK	-1.8%	-3.4%
Europe	4.0%	-1.9%
USA	14.0%	10.5%
Japan	-9.7%	-5.9%
Rest of World*	0.8%	-4.2%  (Pacific ex Japan)   0.1%  (Latin America)

Source: BMO GAM

*Performance of the Rest of World portfolio is shown here against both Asian and Latin American smaller company indices

The table above shows how the five country/regional sub portfolios performed versus the relevant local smaller company indices. In four out of five of these portfolios we beat the local market returns, but returns were only meaningfully positive in North America. A good relative showing in both the European and Rest of World portfolios was welcome after underperformance in the prior year. The Managers Review on pages 18 to 26 of the Report and Accounts explains the contributors to performance in each area. While the overall NAV return was low compared to recent years, there were still plenty of individual smaller companies doing very well.

Asset allocation

With the US market performing so much better than other parts of the world, it is not surprising that the weighting to North America rose. However, given the outperformance of the market, we have recently moved to a modest underweighting in North America versus the Benchmark. A reduction in exposure to Asian markets via the Rest of World portfolio in the first half of the year was partially rebuilt later in the year as hopes grew for a trade rapprochement between the US and China.

Geographical distribution of the investment portfolio as at 30 April 2019
North America	41.1% (38.4%)
UK	26.1% (27.6%)
Europe	12.0% (11.8%)
Rest of World	11.2% (12.4%)
Japan	9.6%   (9.8%)

The percentages in brackets are as at 30 April 2018

Source: BMO GAM

As in the prior year, we adopted a cautious stance towards the UK. We stayed overweight in Europe and in Japan where valuations continued to look more attractive. Importantly balance sheets tend to be stronger in these markets than in North America. The overall impact of the geographic market positioning versus the Benchmark was broadly neutral in performance terms over the year, with the positive from being underweight in the UK offset by the weak performance of Japan.

Geographical weightings against Benchmark as at 30 April 2019
UK	-3.9%
Europe	+2.0%
North America	-0.6%
Japan	+1.8%
Rest of World	+0.7%

Source: BMO GAM & MSCI

Gearing and Convertible Unsecured Loan Stock

The effective level of gearing was maintained through the year at close to 5%, ending at 4.6%. Borrowings in respect of loans at the end of the year totalled £34.1m, drawn down in US dollars, yen and euros under the enlarged £50m revolving credit facility. At the end of the year, there was also £15.4 million nominal of 3.5 per cent CULS remaining in issue.

The last opportunity for the holders of CULS to convert their investment into Ordinary Shares will be on 31 July 2019, at a fixed price per Ordinary Share of 977.6970p. In the event that any remaining stock holders do not elect to convert their holdings into Ordinary Shares prior to 31 July 2019, the Trustee, appointed at the time of issue, has sole discretion to exercise the rights to convert the remaining CULS and sell the Ordinary Shares allotted on each conversion. In such an event, the proceeds, net of any administration costs, would be distributed to those holders. Should the Trustee decide not to exercise the conversion rights, the nominal value of any CULS not previously redeemed, purchased or converted will be repaid by the Company on 31 July 2019 at its nominal amount together with interest accrued up to but excluding the date of redemption.

Ahead of the maturity of the CULS, the Board has been giving active consideration to potential replacement borrowing options and further announcements in relation to this will be made in due course.

Proposed share split

The Board is proposing a sub-division, or share split, whereby shareholders will receive ten shares with a par value of 2.5 pence in place of every ordinary share of 25 pence par value at the time of the share split. While the share price, net asset value per share and dividend per share can be expected to become one tenth of their respective values immediately preceding the share split, the total value of the holding will not change as the lower values will be offset by the increased number of shares. Marketability of the Company's shares should improve as a result of the share split with the resultant lower price becoming more appealing to new investors and to regular investors through savings schemes. The proposal is subject to shareholder approval at the AGM and details can be found on page 35 of the Report and Accounts.

Name change

On 9 November 2018, we announced that we had decided to change the name of the Company to BMO Global Smaller Companies PLC. BMO, which is a very large North American bank and global asset manager, bought F&C in 2014 and since then has been integrating the business into its wider asset management operations. As part of its development plans, and no doubt with the aim of becoming better known as a brand in the UK market, BMO decided to rebrand F&C's savings plans with the BMO prefix. The Board carefully considered the appropriate course of action and decided that it would be confusing for shareholders if the savings plans had one brand while we as a Company had another. If we had stuck with the status quo, we would also lose the benefits of any promotional spend which BMO has committed to the savings plans and to its brand more generally. The Lead Manager, investment policy and process remain unchanged.

At the same time as our name change, BMO Financial Group changed the name of our management company from F&C Investment Business Limited to BMO Investment Business Limited.

The Board and succession planning

It was with great sadness that we announced on 29 January 2019 the death of our much liked and admired colleague Andrew Adcock, after a long and valiant fight against cancer. There is a tribute to him set out on page 33 of the Report and Accounts; we miss him greatly.

As reported last year our process of Board refreshment was already under way, but the loss of Andrew has obviously added impetus to it. Jane Tozer, our Senior Independent Director, and I have both served on the Board for over 9 years so we intend to retire immediately following the Company's 2020 annual general meeting; it is intended that Anja Balfour should then succeed me as Chairman. The Board considers that Anja's in-depth investment knowledge, expertise and experience in international investment management and her directorship and chairmanship skills make her very well suited to leading the Company forward in the years ahead.

We have retained search consultants to help us find two new non-executive directors to add to our number and hope to make appointments in the next few months; this will give our new colleagues time to play their hands in before Jane and I depart. We will announce further details in due course.

Change of auditor

For the reasons set out in the Report of the Audit and Management Engagement Committee, PricewaterhouseCoopers LLP ("PwC") will not seek reappointment as external auditor at the AGM. This is by mutual agreement between the Board and PwC, reflecting the modern auditor rotation provisions. PwC have provided excellent service to the Company since its foundation in 1889. Following the audit tender process, a resolution to approve the appointment of BDO LLP as the Company's auditors for the financial year ending 30 April 2020 is being put to shareholders at the forthcoming AGM.

AGM

The AGM of the Company will take place at the Chartered Accountants Hall, 1 Moorgate Place, London EC2R 6EA on Thursday 25 July 2019 at 12 noon. We hope as many shareholders as possible will attend. The Manager will, as usual, give a review of the year together with his outlook.

Outlook

Since the end of the financial year, the US and China trade war has stepped up a gear, with additional tariffs being imposed in both directions. This is not helpful for investor sentiment or for the global economy even though the impact of these measures may be limited for most of our holdings. The UK political scene remains in a state of flux after the resignation of the Prime Minister. More positively from a market perspective, it is possible that fiscal and monetary policies may be eased in some parts of the world to take account of the slowdown and still low inflation.

While a more cautious overall approach to the management of the portfolio seems merited for now, the Board remains of the view that the long term outlook for the global smaller companies' market remains attractive.

Anthony Townsend
Chairman
18 June 2019

 

Principal Risks and Future Prospects

The principal risks, both perceived and observed, together with their mitigations are described below. Note 26 on the Report and Accounts details the Financial Risk Management of the Company. The risks that affect the Company's ongoing operations as well as the threats to security over the Company's assets may vary in significance from time to time. The risks are unchanged from those reported in the prior year. The principal risks identified as most relevant to the assessment of the Company's future prospects and viability were those relating to inappropriate business strategy, potential investment portfolio under-performance and its effect on share price discount/premium and dividends, as well as threats to security over the Company's assets.

Principal Risk: Errors, fraud or control failures at service providers or loss of data through business continuity failure or cyber attacks could damage reputation or investors' interests or result in loss. Cyber risks remain heightened.

Unchanged throughout the year under review.

Mitigation: The Board receives regular control reports from BMO GAM covering risk and compliance, including oversight of third party service providers. The Board has access to BMO GAM's Head of Business Risk and their Group Information Security Officer, International and requires any significant issues directly relevant to the Company to be reported immediately. The Depositary is specifically liable for loss of any of the Company's securities and cash held in custody unless resulting from an external event beyond its reasonable control.

The Board also monitors efficiency of service providers' processes through efficiency KPIs.

Actions taken in the year: The Audit and Management Engagement Committee regularly reviews the Company's risk management framework with the assistance of the Manager. Supervision of third party service providers has been maintained by BMO GAM and includes assurances regarding IT security and increasing cyber threats. The Depositary maintained oversight of custody of investments and cash and its regular reports to the Board indicated no matters of concern. The Board engaged with the Manager and other data processors to implement, comply and embed the necessary safeguards under the General Data Protection Regulations introduced in May 2018. As such, this risk is unchanged.

Principal Risk: An inappropriate business strategy or policy, or ineffective implementation, could result in poor returns for shareholders.

Unchanged throughout the year under review.

Mitigation: The Board holds a separate strategy meeting each year and considers investment policy review reports from the Manager at each Board meeting. The Board assesses investor needs through targeted research and marketing, the effectiveness of which is kept under continuous review.

Performance KPIs are monitored by the Board.

Actions taken in the year: The Board continually measures the Manager's investment performance against the Key Performance Indicators set out on page 15 of the Report and Accounts and is satisfied that the Manager's long-term performance remains in line with expectations. Marketing campaigns continued throughout the year, including promotion across financial and other relevant websites and publications. As such, this risk is unchanged.

Principal Risk: A significant share price discount or premium to the Company's diluted NAV per share, or related volatility, could lead to high levels of uncertainty or speculation and the potential to reduce investor confidence.

Increased during the year under review.

Mitigation: The Board has established share buyback and share issue policies, together with a dividend policy, in order to moderate the level of share price discount or premium to the diluted NAV per share and related volatility and seeks shareholder approval each year for the necessary powers to implement these policies.

The Company's premium/discount is a KPI measured by the Board on an ongoing basis.

Actions taken in the year: The Company issued 50,000 shares to satisfy demand from investors and help contain the premium. A further 691,583 shares were also issued as a result of the CULS conversions. The Company's share price moved below the diluted NAV later in the year and a total of 150,044 shares were bought back in accordance with the Company's buy back policy. As such, this risk is categorised as increased.

Five Year Horizon

Through a series of connected stress tests ranging from moderate to extreme scenarios and based on historical information, but forward looking over the five years commencing 1 May 2019, the Board assessed the risks of:

• potential illiquidity of the Company's portfolio;

• the effects of any substantial future falls in investment values and income receipts on the ability to repay the CULS and potential breach of CULS covenants; and

• significant falls in income on the ability to continue paying steadily-rising dividends and maintaining adequate reserves and the retention of investors.

Based on its assessment and evaluation of the Company's future prospects, the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the coming five years. This period is consistent with advice, provided by many investment advisers, that investors should invest in equities for a minimum of five years. The Company's business model, strategy and embedded characteristics have helped define and maintain the stability of the Company over many decades. The Board expects this to continue and will assess viability over subsequent five year rolling periods.

 

Statement of Directors' Responsibilities in Respect of the Financial Statements

In accordance with Chapter 4.1.12 of the Disclosure Guidance and Transparency Rules the Directors confirm, in respect of the annual report for the year ended 30 April 2019 of which this statement of results is an extract, to the best of their knowledge that:

·      the company financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland", and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the Company; and

·      the Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

On behalf of the Board

Anthony Townsend

Chairman

18 June 2019

 

Income Statement

for the year ended 30 April	2019			2018
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains on investments	-	25,676	25,676	-	66,345	66,345
Foreign exchange gains/(losses)	11	(478)	(467)	(13)	(277)	(290)
Income	13,824	-	13,824	12,344	-	12,344
Management fee	(1,034)	(3,103)	(4,137)	(971)	(2,914)	(3,885)
Other expenses	(803)	(22)	(825)	(848)	(19)	(867)
Net return before finance costs and taxation	11,998	22,073	34,071	10,512	63,135	73,647
Finance costs	(423)	(1,269)	(1,692)	(382)	(1,145)	(1,527)
Net return on ordinary activities before taxation	11,575	20,804	32,379	10,130	61,990	72,120
Taxation on ordinary activities	(952)	-	(952)	(682)	-	(682)
Net return attributable to equity shareholders	10,623	20,804	31,427	9,448	61,990	71,438
Return per share (basic) - pence	17.67	34.61	52.28	16.17	106.13	122.30
Return per share (diluted) - pence	17.55	34.61	52.28	15.92	102.40	118.32

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.

The net return attributable to equity shareholders is also the total comprehensive income.

 

Statement of Changes in Equity

for the year ended 30 April 2019
		Share	Capital	Equity			Total
	Share	premium	redemption	component	Capital	Revenue	shareholders'
	capital	account	reserve	of CULS	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 April 2018	14,933	189,476	16,158	728	589,513	16,023	826,831
Movements during the year ended 30 April 2019
Dividends paid	-	-	-	-	-	(8,982)	(8,982)
Shares repurchased by the    Company and held in treasury ended 30 April 2019	-	-	-	-	(2,001)	-	(2,001)
Shares issued	13	632	-	-	-	-	645
Conversion of Convertible Unsecured Loan Stock ("CULS")	173	6,748	-	(222)	-	-	6,699
Net return attributable to equity shareholders	-	-	-	-	20,804	10,623	31,427
Balance at 30 April 2019	15,119	196,856	16,158	506	608,316	17,664	854,619

for the year ended 30 April 2018
		Share	Capital	Equity			Total
	Share	premium	redemption	component	Capital	Revenue	shareholders'
	capital	account	reserve	of CULS	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 April 2017	14,284	160,243	16,158	1,169	527,523	13,905	733,282
Movements during the year ended 30 April 2018
Dividends paid	-	-	-	-	-	(7,330)	(7,330)
Shares issued	305	15,937	-	-	-	-	16,242
Conversion of Convertible
Unsecured Loan Stock
("CULS")	344	13,296	-	(441)	-	-	13,199
Net return attributable to equity shareholders	-	-	-	-	61,990	9,448	71,438
Balance at 30 April 2018	14,933	189,476	16,158	728	589,513	16,023	826,831

 

Balance Sheet

at 30 April		2019		2018
	£'000s	£'000s	£'000s	£'000s
Fixed assets
Investments		893,548		868,469
Current assets
Debtors	1,631		4,343
Cash and cash equivalents	12,135		7,532
Total current assets	13,766		11,875
Creditors: amounts falling due within one year
Bank loans	(34,052)		(24,000)
Creditors	(3,094)		(7,640)
Creditors	(15,549)		-
Total current liabilities	(52,695)		(31,640)
Net current liabilities		(38,929)		(19,765)
Total assets less current liabilities		854,619		848,704
Creditors: amounts falling due after more than one year
Convertible Unsecured Loan Stock		-		(21,873)
Net assets		854,619		826,831
Capital and reserves
Share capital		15,119		14,933
Share premium account	196,856		189,476
Capital redemption reserve	16,158		16,158
Equity component of CULS	506		728
Capital reserves	608,316		589,513
Revenue reserve	17,664		16,023
		839,500		811,898
Total shareholders' funds		854,619		826,831
Net asset value per share (basic) - pence		1,416.71		1,384.22
Net asset value per share (diluted) - pence		1,405.69		1,368.80

 

Statement of Cash Flows

for the year ended 30 April			2019	2018
			£'000s	£'000s
Cash flows from operating activities before dividends received and interest paid			(5,145)	(4,919)
Dividends received			13,172	11,903
Interest paid			(1,754)	(1,647)
Cash inflows from operating activities			6,273	5,337
Investing activities
Purchases of  investments			(254,389)	(263,773)
Sales of investments			253,156	223,308
Other capital charges			(24)	(23)
Cash outflows from investing activities			(1,257)	(40,488)
Cash inflows/(outflows) before financing activities			5,016	(35,151)
Financing activities
Ordinary dividends paid			(8,982)	(7,330)
Proceeds from issue of shares			645	16,242
Cash flows from share buybacks for treasury shares			(1,660)	-
Movement in loans			10,155	24,000
Cash inflows from financing activities			158	32,912
Net movement in cash and cash equivalents			5,174	(2,239)
Cash and cash equivalents at the beginning of the year			7,532	10,061
Effect of movement in foreign exchange			(571)	(290)
Cash and cash equivalents at the end of the year			12,135	7,532
Represented by:
Cash at bank			12,135	7,532

 

Notes

1    Dividend

The Directors have proposed a final dividend in respect of the year ended 30 April 2019 of 11.50 pence per share, payable on 31 July 2019 to all shareholders on the register at close of business on 12 July 2019. The recommended final dividend is subject to approval by shareholders at the Annual General Meeting.

2    Financial Risk Management

The Company is an investment company, listed on the London Stock Exchange, and conducts its affairs so as to qualify in the United Kingdom (UK) as an investment trust under the provisions of Section 1158 of the Corporation Tax Act 2010. 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 full details of financial risks are contained in note 24 of the Report and Accounts.

3    Annual general meeting

The Annual General Meeting will be held at the Chartered Accountants Hall, 1 Moorgate Place, London EC2R 6EA on Thursday 25 July 2019 at 12 noon.

4    Report and Accounts

This statement was approved by the Board on 18 June 2019. It is not the Company's statutory accounts. The statutory accounts for the financial year ended 30 April 2019 have been approved and audited, and received an independent auditors' report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report. The statutory accounts for the financial year ended 30 April 2018 also received an independent auditors' report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report.

The Report and Accounts for the year ended 30 April 2019 will be posted to shareholders and made available on the website bmoglobalsmallers.com. Copies may also be obtained from the Company's registered office, Exchange House, Primrose Street, London EC2A 2NY.

Legal Entity Identifier: 2138008RRULYQP8VP386

Information disclosed in accordance with Disclosure Guidance and Transparency Rule 4.1

By order of the Board

BMO Investment Business Limited, Secretary

Exchange House, Primrose Street, London EC2A 2NY

18 June 2019

 

END

 

 

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