Final Results
F&C Global Smaller Companies PLC
19 June 2006
Date: 19 June 2006
Contact: Peter Ewins
F&C Management Limited
020 7628 8000
F&C GLOBAL SMALLER COMPANIES PLC
Unaudited Preliminary Statement of Results
for the year ended 30 April 2006
HIGHLIGHTS
• Rise in share price of 62.0%
• NAV per share up 51.2%, well ahead of the 43.2% rise in the benchmark
• Discount reduced significantly during the year
• Rise in total dividends for the year of 25.7%, including a 1p special
dividend
• Tender Offer and ongoing share buybacks improved balance of share register
SUMMARY OF UNAUDITED RESULTS FOR THE YEAR ENDED 30 APRIL 2006
Attributable to ordinary shareholders 30 April 2006 30 April 2005 % Change
Share price 435.00p 268.50p +62.0
Net asset value per share (debenture at nominal value) 470.83p 311.33p* +51.2
Net asset value per share (debenture at market value) 463.47p 306.81p* +51.1
Benchmark (capital return) +43.2
Return per share - revenue 4.54p 4.63p -1.9
Dividends per share** 5.53p** 4.40p +25.7
Total expense ratio (based on average net assets) 0.69% 0.66%
* Restated to reflect changes in accounting policies (see note 1).
** Includes a special dividend of 1.00p per share.
Chairman's Statement
I am pleased to be able to report that your Company has had its best year in
terms of share price growth for more than 20 years. With smaller companies
remaining in vogue during the year under review, and world equity markets being
strong across the board, the Company's NAV rose by 51.2%. The share price
exceeded this gain, rising by 62%. The discount to the NAV at which the share
price traded narrowed sharply, from 12.5% to 6.1% taking the Company's debenture
at market value. The results incorporate the impact of new accounting
standards, as described in the notes on the accounts.
The year was also exceptional in revenue terms, partly as a consequence of the
Tender Offer announced in October 2005. As a result of this, the Board is
proposing two dividends at this stage, a recommended normal final dividend of
3.04p, a rise of 2.7% on the prior year, and an additional 1.00p declared as a
special dividend. More details on the reason for this are outlined below.
Performance
Shareholders will recall that on 1 May 2005, the Company changed its benchmark
from a pure UK index, the Extended Hoare Govett Smaller Companies Index (HGSC),
to a blended international index, comprising 40% the HGSC and 60% the MSCI World
Small Cap ex UK Index. We felt this provided a fairer way to judge the
performance of the overall portfolio given its remit and global nature.
The Manager achieved a strong outperfomance of this benchmark with the NAV gain
of 51.2% in capital terms surpassing the benchmark return of 43.2%. Share price
and asset performance have exceeded both the new and former benchmark over the
last five years.
At the interim stage, I stated that NAV growth had failed to match the benchmark
due to weak performance in the international portfolios, so it is pleasing to be
able to report that investment performance improved markedly in the second half.
Stock selection, regional allocation decisions, gearing and share buybacks,
including the Tender Offer, all contributed to the good NAV performance.
As a global investment trust, it is important that the right decisions are made
about how to split the portfolio geographically. During the current year, the
Company benefited from a conscious decision to reduce the UK exposure in favour
of Europe. The rationale for this change was that whereas economic growth in
the UK was declining on the back of a reduction in the pace of consumer
spending, European markets were showing early signs of a pick up. As a result,
Europe proved to be our best performing region. At the same time we have had
less exposure than the benchmark to the US, where returns, although very
acceptable, have been somewhat lower.
The Company remained geared throughout the year despite the distraction of the
Tender Offer. In the run-up to the Tender, futures contracts were employed to
maintain market exposure as part of the investment portfolio was realised to
provide cash for exiting shareholders. Gearing ended the year lower than it
started as we became less positive on further upside for valuations in the
near-term. As we have said on many occasions, gearing is a strategic issue for
the Board to consider, and it will only be employed where we believe it is in
shareholders' near-term interest.
Markets
Stockmarkets produced better returns in the last year than were anticipated. In
the main this reflected the fact that the world economy was much stronger than
expected. Economic growth in the world's largest economy, the US, remained
above trend, Japan picked up strongly and Europe showed solid signs of
improvement. Again however, the outstanding numbers came out of China, where in
2005, GDP growth of 9.9% was recorded.
The importance of the Chinese economy cannot now be over-stated, with many
companies, large and small, facing competition from rapidly evolving Chinese
manufacturing rivals, while the development of the Chinese economy has also
created great opportunities. The Manager's task in part, is to identify
companies that are being proactive in meeting these challenges. Many of our
holdings benefit from investments in China, from selling into China, or from
effective sourcing of products from Chinese suppliers. The same could be said
of India and a number of other rapidly emerging economies. The Manager seeks to
avoid investing in companies based in the developed world that supply low value
added products which are susceptible to emerging market competition.
Returns in all markets in terms of the local small cap benchmarks were positive,
with Europe leading the way, followed by Asia, Japan, the UK and the US. We
outperformed the local indices in Europe, the UK and Japan, but were behind in
the US and markedly so in Asia. I will return to the issue of Asia later.
Dividend
As stated earlier, the Board has decided to declare a special dividend of 1.00p
alongside the proposed final dividend.
Investment income received from the portfolio fell as a result of the Tender
Offer, with holdings downsized or sold to finance the cash payment to
shareholders tendering their positions. Offsetting this, there is a fall in the
number of shares ranking for dividends. As an investment trust, the Company is
required to distribute at least 85% of investment income in each financial year.
In considering the dividend for this year, we have therefore declared a special
dividend that, in our view, takes account of the exceptional circumstances
surrounding the Tender Offer, and recommended a normal final dividend that
reflects the underlying position of the Company's revenue. By definition, the
special dividend is unlikely to recur in the current financial year. We know
the importance that many shareholders attach to dividends and we think that
4.53p (excluding the special dividend) gives us a good base from which to move
forward. The Company has a healthy revenue reserve and we are keen to preserve
our 36 year record of underlying dividend growth.
Tender Offer, Buybacks, Treasury Shares and the Discount
The rationale for the Tender Offer and the share buybacks that followed were
explained to shareholders at the time. Although, of course, we would rather not
have seen the asset base of the Company shrink, it has had the beneficial effect
of bringing supply and demand for the Company's shares into a much better
balance. Over the year, the number of shares in issue fell by 43.1% and
shareholders who did not see themselves as long-term holders have exited the
share register. In essence, the percentage of shares held by retail investors,
whether directly or via private client fund managers, has increased at the
expense of certain institutional holders, who did not feel that our mandate met
their particular requirements.
F&C Asset Management offers a range of savings schemes which have helped build
up the number of our retail shareholders over many years. This year has been
particularly successful and we have more than 5,000 new shareholders. Many of
the new shareholders have come in via the Child Trust Fund (CTF) Scheme. F&C is
the only investment trust provider currently offering a range of trusts through
the CTF scheme and your Company has benefited from this initiative. We hope
that the young shareholders we have gained through this scheme will be with us
for many years and see their savings grow satisfactorily. In the coming year,
your Board is placing a particular emphasis on marketing and the Manager will
actively promote the Company to institutions and private client fund managers
with the objective of helping to improve demand for the Company's shares.
In terms of the discount, at the time of the Tender Offer, we committed to keep
the discount close to 5%, with the debenture valued at market price. As
previously stated, at the end of the year under review the discount on this
basis was close to this level at 6.1%. The Board is mindful that it needs to
remain constantly vigilant on this front, and is determined to act so that
shareholders do not suffer loss from a meaningful widening in the discount in
normal market conditions. Where market conditions become very turbulent, as we
have seen recently, the discount may move markedly higher, but we will act to
ensure as far as possible that such periods are short-lived. Further share
buybacks will take place as necessary, and the Board is again seeking to renew
the authority at the AGM to buy up to 14.99% of the issued share capital.
Last year the Board applied for and received from shareholders the power to put
shares bought back into Treasury (that is, kept for further re-issue if this was
felt appropriate). The Board stated last year that any shares that were put
into Treasury would only be re-issued at a premium to NAV, thereby ensuring that
re-issue would not lead to NAV dilution, and any shares that remained in
Treasury at the end of the financial year would be cancelled. We intend to
maintain the same policy this year. All the shares that were bought in over the
last year were immediately cancelled.
Management Arrangements
Shareholders will recall that at the time of the Tender Offer the Board stated
that it would be reviewing its arrangements with the Manager, F&C. We have now
completed this review.
As part of this process, the Board considered whether F&C should retain
management responsibility for all parts of the portfolio. As well as looking at
performance, the review had to take into account that the smaller size of the
Company means that the absolute sums allocated to the various global regions
have decreased. In order to maintain a proper balance between risk and return,
a spread of investments is clearly important. We have concluded that our
returns in Asia ex Japan are likely to be enhanced through the use of third
party collective vehicles, rather than direct investment in individual
companies, and we will be moving towards this configuration. The Manager will
recommend how best to achieve this and the Board will oversee the process.
Until the new financial year, the Manager has received 0.42% fees on gross
assets based on a three year rolling average level. The reduced size of the
Company has meant that these arrangements would lead to an increase in the Total
Expense Ratio over the forthcoming period. We have taken this opportunity to
review our arrangements and agreed a revised fee to take effect from the start
of the current financial year. F&C will receive a lower base fee for managing
the assets of 0.4% based on net assets measured on a monthly basis. Investments
made from this point into third party collectives on strategic grounds will be
charged at a reduced rate of 0.25%. F&C will also be entitled to receive a
performance fee of up to a maximum additional 0.6% in any one financial year,
triggered only if the Company outperforms the Benchmark Index.
These new arrangements establish a reduced base management fee which will be one
of the lowest in the investment trust market. They also provide F&C with a
strong incentive to deliver excellent investment returns going forward.
Outlook
At the end of April, although many markets were at multi-year highs, we were
beginning to take a more cautious view of the future. Early weeks of the new
financial year have seen markets give back some of last year's gains, and there
has been sharply increased volatility. This appears to be the result of renewed
fears about increasing inflation on the back of energy and commodity price rises
and the likelihood of higher interest rates particularly in the US
While we expect another sound year of economic growth for the world given the
underlying momentum, a period of consolidation is only to be expected in the
near-term for market indices. The Manager's task is to take a balanced view of
the future and to seek out dynamic companies that can outperform in the
prevailing market conditions. We expect smaller companies with sensible
management, a sound underlying business market position and a solid financial
base to continue to prosper.
The growth attractions of smaller company equities have been more recognised in
recent years. The Board continues to believe that investors will be well served
by the mandate of investing in a well spread portfolio of small growing
companies around the world. Until markets regain their poise, some caution is
necessary but we expect present market levels to give us a satisfactory base
from which to move forward again in due course.
Gerry Grimstone
Chairman
June 2006
INCOME STATEMENT
for the year ended 30 April 2006 2005
Revenue Capital Total+ Revenue Capital Total+
(Restated)* (Restated)*
£'000s £'000s £'000s £'000s £'000s £'000s
Gains on investments - 99,506 99,506 - 28,545 28,545
Exchange (losses)/gains (3) (535) (538) 2 1,010 1,012
Income 4,912 - 4,912 5,598 - 5,598
Management fee (366) (855) (1,221) (329) (766) (1,095)
Other expenses (578) (605) (1,183) (583) (43) (626)
Net return before finance costs and taxation 3,965 97,511 101,476 4,688 28,746 33,434
Interest payable and similar charges (444) (1,035) (1,479) (445) (1,038) (1,483)
Return on ordinary activities before taxation 3,521 96,476 99,997 4,243 27,708 31,951
Taxation on ordinary activities (311) 66 (245) (313) - (313)
Return attributable to equity shareholders 3,210 96,542 99,752 3,930 27,708 31,638
Return per share - pence 4.54 136.62 141.16 4.63 32.61 37.24
+The total column of this statement is the profit and loss account of the
Company.
* Restated to reflect changes in accounting policies (see note 1).
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
Called up Capital Share Total equity
share redemption premium Capital Revenue shareholders'
capital reserve account reserves reserve funds
£'000s £'000s £'000s £'000s £'000s £'000s
Balance at 30 April 2004
(as previously reported) 21,262 4,921 23,132 181,357 4,718 235,390
Add: accrued dividend at 30 April
2004* - - - - 2,407 2,407
Less: investment valuation
restatement* - - - (1,129) - (1,129)
Balance at 30 April 2004 (restated) 21,262 4,921 23,132 180,228 7,125 236,668
Movements during the year ended 30
April 2005
Dividends paid - - - - (3,630) (3,630)
Shares purchased by the Company (31) 31 - (278) - (278)
Return attributable to equity
shareholders (as previously
reported) - - - 26,924 3,930 30,854
Add: investment valuation - - - 784 - 784
restatement*
Balance at 30 April 2005 (restated) 21,231 4,952 23,132 207,658 7,425 264,398
Movements during the year ended 30
April 2006
Dividends paid - - - - (3,258) (3,258)
Shares purchased by the Company (9,143) 9,143 - (133,240) - (133,240)
Return attributable to equity
shareholders - - - 96,542 3,210 99,752
Balance at 30 April 2006 12,088 14,095 23,132 170,960 7,377 227,652
* Restated for changes in accounting policies (see note 1).
BALANCE SHEET
at 30 April 2006 2005
(Restated)* (Restated)*
£'000s £'000s £'000s £'000s
Fixed assets
Investments 238,228 283,901
Current assets
Debtors 1,619 1,263
Cash at bank and short-term deposits 2,652 6,812
4,271 8,075
Creditors: amounts falling due within
one year:
Loans (3,000) (14,006)
Other (1,847) (3,572)
(4,847) (17,578)
Net current liabilities (576) (9,503)
Total assets less current liabilities 237,652 274,398
Creditors: amounts falling due after more
than one year:
Debenture (10,000) (10,000)
Net assets 227,652 264,398
Capital and reserves
Called up share capital 12,088 21,231
Share premium account 23,132 23,132
Capital redemption reserve 14,095 4,952
Capital reserves 170,960 207,658
Revenue reserve 7,377 7,425
215,564 243,167
Total equity shareholders' funds 227,652 264,398
Net asset value per ordinary share
- pence 470.83 311.33
* Restated for changes in accounting policies (see note 1).
CASH FLOW STATEMENT
For the year ended 30 April 2006 2005
£'000s £'000s
Net cash inflow from operating activities 2,959 3,970
Cash outflow from servicing of finance (1,503) (1,458)
Total tax paid (242) (269)
Net cash inflow/(outflow) from financial investment 143,044 (8,625)
Equity dividends paid (3,258) (3,610)
Net cash inflow before use of liquid resources and financing 141,000 (9,992)
Decrease in short-term deposits 3,993 8,000
Net cash outflow from financing (146,176) (278)
Decrease in cash (1,183) (2,270)
Reconciliation of net cash flow movement to movement in
net debt
Decrease in cash (1,183) (2,270)
Decrease in short-term deposits (3,993) (8,000)
Decrease in short-term loans 12,936 -
Exchange movement (537) 1,010
Movement in net debt 7,223 (9,260)
Net debt brought forward (17,779) (8,519)
Net debt carried forward (10,556) (17,779)
Notes
1 ACCOUNTING POLICIES
Changes in Accounting Policies
With effect from 1 May 2005, the Company has adopted Financial Reporting
Standards (FRS) 21 to 26. The effect of adoption, where it has resulted in a
change in a significant accounting policy, is described below.
FRS 21 (Events after the Balance Sheet date) - Dividends paid by the Company are
accounted for in the period in which the Company is liable to pay them.
Previously the Company accrued dividends in the period in which the net revenue,
to which those dividends related, was accounted for.
FRS 25 (Financial Instuments: Disclosure and Presentation) and FRS 26 (Financial
Instruments: Measurement) - The Company has designated its assets as being
measured at 'fair value through profit and loss'. The fair value of fixed asset
quoted investments is deemed to be the bid value of those investments at the
close of business on the relevant date. Previously, all quoted investments were
valued at middle market value.
There have been no other changes to significant accounting policies during the
year.
The comparatives for the year ended 30 April 2005 have been restated to give
effect to the above changes. Notes 3 and 4 further explain these restatements.
2 DIVIDENDS
The Directors recommend a final dividend of 3.04p per share (2005 - 2.96p)
payable on 3 August 2006 to shareholders on the register at close of business on
7 July 2006.
The Directors have declared a special dividend of 1.00p per share (2005 - nil)
payable on 3 August 2006 to shareholders on the register at close of business on
7 July 2006.
3 RETURN PER ORDINARY SHARE
Revenue return
The revenue return per share is based on the revenue return attributable to
equity shareholders of £3,210,000 (2005: £3,930,000).
Capital return (restated)
The capital return per share is based on the capital return attributable to
equity shareholders of £96,542,000 (2005: £27,708,000).
The capital return for the year ended 30 April 2005 has been increased by
£784,000 (0.92 per share). This reflects the effect of the reduction in
valuation of investments at 30 April 2004 by £1,129,000 and 30 April 2005 by
£345,000.
Both the revenue and capital returns per share are based on a weighted average
of 70,665,432 ordinary shares in issue during the year (2005: 84,947,342).
4 RESTATEMENT OF OPENING BALANCES
Balance Sheet Previously reported Restated
30 April 2005 Adjustment 30 April 2005
£'000s £'000s £'000s
Fixed assets
Investments* 284,246 (345) 283,901
Current assets
Debtors 1,263 - 1,263
Cash at bank and short-term deposits 6,812 - 6,812
8,075 - 8,075
Creditors: amounts falling due within
one year:
Loans (14,006) - (14,006)
Other** (6,086) 2,514 (3,572)
(20,092) 2,514 (17,578)
Net current liabilities (12,017) 2,514 (9,503)
Total assets less current liabilities 272,229 2,169 274,398
Creditors: amounts falling due after
more than one year:
Debenture (10,000) - (10,000)
Net assets 262,229 2,169 264,398
Capital and reserves
Called up share capital 21,231 - 21,231
Share premium account 23,132 - 23,132
Capital redemption reserve 4,952 - 4,952
Capital reserves* 208,003 (345) 207,658
Revenue reserve** 4,911 2,514 7,425
Total equity shareholders' funds 262,229 2,169 264,398
Net asset value per ordinary share
- pence 308.78 2.55 311.33
Note to the restatement of opening balances
* Effect of the revaluation of fixed asset investments from mid-market to bid
value.
** Effect of not recognising the proposed dividend declared until after the
balance sheet date.
4 RESTATEMENT OF OPENING BALANCES (continued)
Balance Sheet Previously reported Restated
30 April 2004 Adjustment 30 April 2004
£'000s £'000s £'000s
Fixed assets
Investments* 246,632 (1,129) 245,503
Current assets
Debtors 3,684 - 3,684
Cash at bank and short-term deposits 16,566 - 16,566
30,250 - 30,250
Creditors: amounts falling due within
one year:
Loans (15,085) - (15,085)
Other** (6,407) 2,407 (4,000)
(21,492) 2,407 (19,085)
Net current (liabilities)/assets (1,242) 2,407 1,165
Total assets less current liabilities 245,390 1,278 246,668
Creditors: amounts falling due after
more than one year:
Debenture (10,000) - (10,000)
Net assets 235,390 1,278 236,668
Capital and reserves
Called up share capital 21,262 - 21,262
Share premium account 23,132 - 23,132
Capital redemption reserve 4,921 - 4,921
Capital reserves* 181,357 (1,129) 180,228
Revenue reserve** 4,718 2,407 7,125
Total equity shareholders' funds 235,390 1,278 236,668
Net asset value per ordinary share
- pence 276.77 1.50 278.27
Note to the restatement of opening balances
* Effect of the revaluation of fixed asset investments from mid-market to bid
value.
** Effect of not recognising the proposed dividend declared until after the
balance sheet date.
5 RESULTS
The above financial information comprises non-statutory accounts within the
meaning of section 240 of the Companies Act 1985. The financial information for
the year ended 30 April 2005 has been extracted from published accounts (except
as restated) for the year ended 30 April 2005 that have been delivered to the
Registrar of Companies and on which the report of the auditors was unqualified.
6 ANNUAL GENERAL MEETING
The Annual General Meeting will be held at the Chartered Accountants' Hall, One
Moorgate Place, London EC2 on Monday 24 July 2006 at 12 noon.
7 REPORT AND ACCOUNTS
The Report and Accounts will be posted to shareholders at the end of June 2006.
Copies may be obtained during normal business hours from the Company's
Registered Office, Exchange House, Primrose Street, London EC2A 2NY.
By order of the Board
F&C Management Limited, Secretary
19 June 2006
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