REG - abrdn Smll Co's IT - Annual Financial Report
15/03/2022 07:00
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RNS Number : 7464E abrdn Smaller Companies Inc Tst PLC 15 March 2022
abrdn Smaller Companies Income Trust plc
ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2021
STRATEGIC REPORT
1. FINANCIAL HIGHLIGHTS
Net asset value total return{A} Numis Smaller Companies ex Inv Trust Index
2021: 2021:
+30.4% +21.9%
2020: -4.1% 2020: -4.3%
Share price total return{A} Earnings per Ordinary share (revenue)
2021: 2021:
+22.9% 9.69p
2020: -5.1% 2020: 5.60p
Dividend per share Discount to net asset value{A}
2021: 2021:
8.85p 15.3%
2020: 8.24p 2020: 10.3%
{A} Considered to be an Alternative Performance Measure. Further details can
be found on pages 85 to 87 of the 2021 Annual Report.
2. CHAIRMAN'S STATEMENT
Performance
In another year in which the Covid-19 pandemic has dominated the headlines,
your Company has delivered strong absolute and relative performance, with a
net asset value ("NAV") total return of +30.4% compared to the benchmark, the
Numis Smaller Companies (ex Investment Trusts) Index, which returned +21.9%.
Share price performance was also ahead of the benchmark, with a total return
(including dividends reinvested) of +22.9% over the period.
Three and five year NAV performance against the benchmark has been equally
strong, with returns of +68.2% and +91.0% respectively, versus composite
benchmark returns of +37.3% and +36.8%.
The Company's one year performance is measured against the Numis Smaller
Companies (ex Investment Trusts) Index, which was introduced by the Company on
1 January 2020. Prior to that date, the Company's benchmark was the FTSE Small
Cap (ex Investment Trusts) Index. Performance over three and five year periods
is therefore measured against a composite of both indices.
Dividend
It was pleasing to see the Company's revenue return for the year ended 31
December 2021 of 9.69p (2020: 5.60p) recover to similar levels to those seen
before the start of the pandemic. This was a reflection of a robust year for
UK equity markets, which saw a normalisation of earnings and a return of
confidence to companies in the distribution of cash. This resulted in a more
positive outlook for investors, boosted by the introduction of a vaccine
rollout programme and some lifting of Government restrictions. More
information on this can be found in the Manager's Review.
The Company was also able to return to paying a covered dividend this year and
to increase the dividend to its highest level in ten years, with the total
dividend for the year being 8.85p (2020: 8.24p).
With the year-end share price at 375p, this imputes a dividend yield of 2.4%.
Over three and five years, the dividend has increased by 20.4% and 29.2%
respectively, compared to rises in Consumer Prices Index ("CPI") of 7.5% and
13.0%.
The undistributed balance of the revenue account will be added to the
Company's revenue reserve. The revenue reserve account continues to remain at
a healthy level and will represent 12.1p per share following payment of the
Company's fourth interim dividend.
Ongoing Charges
The Company's ongoing charges, which are regularly monitored by the Board,
decreased during the year to 31 December 2021, to 1.20% from 1.35%.
Discount
At 31 December 2021, the Company's discount stood at -15.3% (2020: -10.3%).
While this was disappointing, the widening of the discount was representative
of a general trend in the smaller companies sector as a whole.
Gearing/Debt
The Company's use of its £10 million credit facility (£5 million of which is
at a fixed interest rate and £5 million at a floating interest rate) has
remained unchanged, with £7 million of the facility drawn down at the year
end. The £5 million floating element of the facility expires in April 2022
and the Company is already seeking terms for its renewal. The £5 million
fixed rate facility expires in April 2023.
The Company's net gearing position as at 31 December 2021 was 4.5%, compared
to 7.0% at the end of 2020. This is lower due to short term cash balances held
at the year end date.
Board Composition
Further to my update on the Board's composition in the Company's Half-Yearly
Report, in which I referred to the retirement of Barry Rose and the
appointment of Christopher Metcalfe, I am delighted to advise that on 5
January 2022, we welcomed Rosalyn Breedy to the Board as an independent
Non-Executive Director.
Rosalyn is a corporate, funds and financial services lawyer and brings with
her a wealth of experience of regulated funds, as well as a unique and diverse
background which will complement the Board's skills and experience as a whole.
Rosalyn's biography can be found on page 41 of the 2021 Annual Report and both
Rosalyn and Christopher, who was appointed to the Board on 7 June 2021, will
stand for election at the Company's Annual General Meeting ("AGM") in May
2022.
Having served on the Board of your Company for 10 years, with 7 years as
Chairman, I shall be retiring as a Director at the forthcoming AGM and am
happy to announce that Dagmar Kent Kershaw, who has served on the Board since
2017, has agreed to be my successor.
Environmental, Social and Corporate Governance ("ESG")
ESG has been embedded in your Manager's investment process for a number of
years and the Board is pleased to see that they continue to actively engage
with portfolio companies on ESG matters on a regular basis.
More information on this and the Manager's ESG investment process can be found
in the Manager's Review.
The Manager
In July 2021, Standard Life Aberdeen plc changed its name to abrdn plc as part
of a rebranding exercise. Following this change, and as advised in the
Company's Half-Yearly Report, it is anticipated that the Company's Manager,
Investment Manager and Company Secretary (Aberdeen Standard Fund Managers
Limited, Aberdeen Asset Managers Limited and Aberdeen Asset Management PLC
respectively) will also to change their names in the future.
Change of Name
Following the abrdn name change, the Board made the decision to align itself
with the Manager's new brand by changing the Company's name to abrdn Smaller
Companies Income Trust plc. This change came into effect on 7 January 2022.
Annual General Meeting
The Company's AGM will take place on Thursday 5 May 2022 at 12 noon and is
currently scheduled to be held at the offices of abrdn, Bow Bells House, 1
Bread Street, London EC4M 9HH.
As you will be aware, for the last two years, in order to adhere to Government
guidelines, we were unable to hold a physical meeting. This year, we are
pleased to advise that we do intend to hold a physical meeting, but would
encourage shareholders, in the event of any change to Government guidelines or
a change of venue, to continue to check for updates from the Company on its
website abrdnsmallercompaniesincome.co.uk or via Company announcements to the
London Stock Exchange.
As in previous physical meetings, shareholders will have the opportunity to
hear an update from the Manager and to ask questions of the Manager and the
Board and we very much look forward to seeing you. I would encourage
shareholders (whether or not they intend to attend the AGM in person) to lodge
their proxy votes in advance of the meeting. Shareholders are also encouraged
to send any questions in advance, by email, to
smallercompaniesincome@abrdn.com (mailto:smallercompaniesincome@abrdn.com) .
Outlook
Your Manager's investment process has delivered good results for the Company
and we are pleased to see the return of a more positive outlook for markets
and to see dividend payments resume.
The continuation of a focus on stock selection in line with your Manager's
disciplined Quality Growth and Momentum investment process with an income
bias, will continue to guide them towards a portfolio of quality growth
businesses, which can prove resilient in a variety of environments.
Robert Lister
Chairman
14 March 2022
3. OVERVIEW OF STRATEGY
Business Model
The business of the Company is that of an investment company which conducts
its affairs in order to qualify as an investment trust for UK capital gains
tax purposes.
The Company aims to attract long term private and institutional investors
looking to benefit from the income and capital growth prospects of UK smaller
companies. The Directors do not envisage any change in this activity in the
foreseeable future.
Investment Objective and Purpose
The objective and purpose of the Company is to provide a high and growing
dividend and capital growth from a portfolio invested principally in the
ordinary shares of UK smaller companies and UK fixed income securities.
Investment Policy
The Company invests in equities, corporate bonds and preference shares. The
primary aim of the Company is to invest in the equity shares of smaller
companies listed on a regulated UK stock market in order to gain growth in
dividends and capital. The Company employs gearing with the primary intention
of enhancing income and to a lesser extent, long-term total returns. The
majority of the additional funds raised by gearing are invested in investment
grade corporate bonds and preference shares.
Gearing
The level of gearing varies with opportunities in the market and the Board
adopts a prudent approach to the use of gearing. The total level of gearing
will not exceed 25% of the Company's net assets, at the time it is instigated,
and within that gearing limit, the equity portfolio gearing will not exceed
10%, at the time it is instigated.
Risk diversification
The investment risk within the portfolio is managed through a diversified
portfolio of equities, corporate bonds and preference shares. The Company does
not invest in securities that are unquoted at the time of investment. A
maximum of 5% of the Company's total assets can be invested in the securities
of one company at the time of purchase. Although the Company is not permitted
to invest more than 15% of its total assets in other listed investment
companies (including investment trusts), the Board currently does not intend
to invest in other listed investment companies.
Benchmark index
Numis Smaller Companies (excluding Investment Trusts) Index (total return) -
effective from 1 January 2020; FTSE Small Cap Index (excluding Investment
Trusts) Index (total return) - up to 31 December 2019.
Management
The Board has appointed ASFML (the "Manager") to act as the alternative
investment fund manager ("AIFM"). The Company's portfolio is managed on a
day-to-day basis by Aberdeen Asset Managers Limited ("AAML" or the "Investment
Manager") by way of a delegation agreement between ASFML and AAML. AAML and
ASFML are both wholly owned subsidiaries of abrdn plc.
Delivering the Investment Policy
Equity Investment Process
The equity investment process is active and bottom-up, based on a disciplined
evaluation of companies through company meetings with the Investment Manager.
Stock selection is the major source of added value, concentrating on quality,
growth and momentum characteristics.
Great emphasis is placed on understanding a company's business and
understanding how it should be valued. New investments are not made without
the Investment Manager having first met management of the investee company and
undertaken further analysis to outline the underlying investment merits.
Top-down investment factors are secondary in the equity portfolio
construction, with diversification and formal controls guiding stock and
sector weights.
Fixed Income Investment Process
The fixed income investment process is an active investment style which
identifies value between individual securities. This is achieved by combining
bottom-up security selection with a top-down investment approach. Investments
in corporate bonds and preference shares are also managed by investment
guidelines drawn up by the Board in conjunction with the Investment Manager
which include:
- No holding in a single fixed interest security to exceed 5% of the
total bond issue of the investee company; and
- Maximum acquisition cost of an investment grade bond is £1 million
and of a non-investment grade bond is £500,000.
Key Performance Indicators ("KPIs")
The Board uses a number of financial performance measures to assess the
Company's success in achieving its objective and determining the progress of
the Company in pursuing its investment policy. The main KPIs identified by the
Board in relation to the Company which are considered at each Board meeting
are as follows:
KPI Description
Performance of net asset value against the benchmark index The Board considers the Company's net asset value total return figures to be
the best indicator of performance over time and is therefore the main
indicator of performance used by the Board. The Board measures performance
against the benchmark index. The returns over one, three and five years are
provided on page 25 and a graph showing performance against the benchmark
index is shown on page 27 of the 2021 Annual Report.
Revenue return and The Board monitors the Company's net revenue return and dividend growth
dividend growth through the receipt of detailed income forecasts and considers the level of
income at each meeting. The Company aims to grow the dividend at a level above
CPI when taken over a number of years. A graph showing the dividends and
yields over five years is provided on page 26 of the 2021 Annual Report.
Share price performance The Board monitors the performance of the Company's share price on a total
return basis. A graph showing the share price total return performance against
the benchmark index is shown on page 27 of the 2021 Annual Report.
Share Price Discount/ The discount/premium relative to the net asset value per share represented by
the share price is monitored by the Board. A graph showing the share price
Premium to NAV discount/premium relative to the net asset value is shown on page 27 of the
2021 Annual Report.
Ongoing Charges Ratio (OCR) The Company's OCR is provided on page 5 of the 2021 Annual Report. The Board
reviews the OCR, taking account of its total assets.
Principal Risks and Uncertainties
There are a number of risks which, if realised, could have a material adverse
effect on the Company and its business model, financial position, future
performance, solvency or liquidity and prospects. The Board has in place a
robust process to identify, assess and monitor the principal risks and
uncertainties facing the Company. A summary of the principal risks together
with their mitigating action is set out below.
The Board also regularly identifies and evaluates newly emerging risks, for
example the impact of climate change and monitors these closely, as
appropriate for the Company. The impact of climate change is not considered to
be material to the financial statements as the entire investment portfolio
consists of listed equities and corporate bonds and the quoted market (being
bid) price is expected to reflect market participants' view of climate change
risk.
The Board has adopted a risk matrix which identifies the key risks for the
Company and covers strategy, investment management, operations, shareholders,
regulatory and financial obligations and third party service providers. This
risk matrix is reviewed formally every six months but risks, including
emerging risks, are, if appropriate, discussed by the Board at, or between,
formal Board quarterly meetings.
The principal risks associated with an investment in the Company's shares are
published monthly in the Company's factsheet or they can be found in the
pre-investment disclosure document ("PIDD") published by the Manager, both of
which are on the Company's website.
Description Mitigating Action
Investment and Market risk The Board has appointed ASFML to manage the portfolio within the remit of the
investment policy. The Board monitors the results and implementation of the
The Company is exposed to fluctuations in share prices and a fall in the value Manager's investment process and reviews the investment portfolio, including
of its investment portfolio will have an adverse effect on the value of diversification and performance, at each meeting.
shareholders' funds. The Company invests in smaller companies which may be
subject to greater volatility than similar larger companies.
Investment portfolio management The Board is responsible for ensuring that the investment policy is met. The
day-to-day management of the Company's assets has been delegated to the
Investing outside of the investment restrictions and guidelines set by the Manager under investment guidelines determined by the Board. The Board
Board could result in poor performance and inability to meet the Company's regularly reviews these guidelines to ensure they remain appropriate and
objectives. monitors compliance with the guidelines through regular reports from the
Manager, including performance reporting.
Major market event or geo-political risk External risks over which the Company has no control are always a risk. The
Company does what it can to address these risks where possible, not least
The Company is exposed to stockmarket volatility or illiquidity as a result of operationally and to try and meet the Company's investment objectives.
a major market shock due to a national or global crisis. The impact of such
risks, associated with the portfolio or the Company itself, could result in
disruption on the operations of the Company and losses.
The Board is cognisant of the risks arising from the outbreak and spread of
the Coronavirus around the world, including stockmarket instability and longer
term economic effects, and the impact on the operations of the third-party
suppliers, including the Manager. The Manager has undertaken an assessment of
the Company's portfolio and is in close communication with the underlying
investee companies in order to navigate and guide the Company through the
current challenges. The Manager assesses and reviews the investment risks
arising from the Covid-19 pandemic on companies in the portfolio, including
but not limited to: employee absence, reduced demand, supply chain breakdown,
balance sheet strength, ability to pay dividends, and takes the necessary
investment decisions.
The Manager has extensive business continuity procedures and contingency
arrangements to ensure they are able to service their clients, including
investment trusts. The services from third parties, including the Manager,
have continued to be supplied effectively and the Board will continue to
monitor arrangements through regular updates from the Manager.
Gearing risk The Board monitors the Company's actual gearing levels (including equity
gearing) in relation to its assets and liabilities and reviews the Company's
Gearing has the effect of accentuating market falls and market gains. The compliance with the principal
inability of the Company to meet its financial obligations, or an increase in
loan covenants.
the level of gearing, could result in the Company becoming over-geared or
unable to take advantage of potential opportunities and result in a loss of
value to the Company's shares.
The Company's gearing consists of a £10 million facility comprised of a £5
million five year fixed rate loan and a £5 million three year variable rate
loan. As at 31 December 2021, £7 million was drawn down (£5 million fixed
rate and £2 million variable rate).
Income and dividend risk The Board monitors this risk through the receipt of detailed income forecasts
and considers the level of income at each Board meeting and the Manager has
The ability of the Company to pay dividends and any future dividend growth developed detailed and sophisticated models for forecasting and monitoring
will depend over the longer term on the level of income generated from its dividend payments.
investments and the timing of receipt of such income by the Company. In the
shorter term the size of the Company's revenue reserves will determine the
extent that shareholder dividend payments can be less volatile than the
dividends actually paid by the companies in which the Company invests.
Accordingly there is no guarantee that the Company's dividend objective will
continue to be met.
Operational risk Written agreements are in place defining the roles and responsibilities of
third party providers and their performance is reviewed on an annual basis.
The Company is dependent on third parties for the provision of services and The Board reviews regular reports from the Manager on its internal controls
systems, in particular those of the Manager and the Depositary. Failure by a and risk management systems, including internal audit and compliance
third party provider to carry out its contractual obligations could result in monitoring functions. The Manager reports to the Board on the control
loss or damage to the Company. Disruption, including that caused by environment and quality of service provided by third parties, including
information technology breakdown or other cyber-related issue, could prevent business continuity plans and policies to address cyber crime. Further details
the functioning of the Company. of internal controls are set out in the Audit Committee's Report on page 48 of
the 2021 Annual Report.
Promoting the Success of the Company
The Board is required to report on how it has discharged its duties and
responsibilities under section 172 of the Companies Act 2006 (the "s172
Statement"). Under section 172, the Directors have a duty to promote the
success of the Company for the benefit of its members as a whole, taking into
account the likely long term consequences of decisions, the need to foster
relationships with the Company's stakeholders and the impact of the Company's
operations on the environment.
The Company currently consists of five Directors and has no employees or
customers in the traditional sense. Without a variety of external
stakeholders, the Company can neither exist nor flourish. Our shareholders own
us and the Company's Manager, ASFML, provides investment management services.
A number of other stakeholders support us by providing regulatory and other
services, including secretarial, administration, depositary, custodial,
banking and audit services. For example, BNP Paribas is our Depository and
Ernst & Young LLP is our auditor.
Our relationship with each is different. We meet the Manager on a quarterly
basis but might meet our investors, both institutional and retail, only once a
year. We often need to balance the interests of different stakeholders, for
example, in agreeing their fees.
The Board's principal concern has been, and continues to be, the interests of
the Company's shareholders and potential investors. The Manager undertakes an
annual programme of meetings with the largest shareholders and reports back to
the Board on issues raised at these meetings. In normal circumstances, the
Board encourage all shareholders to attend and participate in the Company's
AGM and note that they can contact the Directors via the Company Secretary.
Shareholders and investors can obtain up-to-date information on the Company
through its website and the Manager's information services and have direct
access to the Company through the Manager's customer services team or the
Company Secretary. As the normal format of the 2021 AGM was not able to take
place due to the government's social distancing restrictions in place, a
number of presentations and podcasts by the Manager were made available on the
Company's website for shareholders to access.
The Board believes that one of the key strategies of the Company, for its
long-term stability and sustainability, is to develop share ownership among
the growing retail and self-directed investors. Approximately 49% of the
shares are currently held by such investors. In order to raise and maintain
awareness of the Company, the Board participates in the promotional programme
run by the Manager on behalf of a number of investment trusts under its
management. The purpose of the programme is both to communicate effectively
with existing shareholders and to reach more new shareholders, thus improving
liquidity and enhancing the value and rating of the Company's shares. Regular
reports are provided to the Board on promotional activities as well as
analysis of the shareholder register.
As the Company has no employees, the culture of the Company is embodied in the
Board of Directors. In seeking to deliver the Company's investment objective
for shareholders, our values are trust and fairness while challenging
constructively, and in a respectful way, our advisers and other stakeholders.
The Board undertakes a robust evaluation of the Manager, including investment
performance and responsible stewardship, to ensure that the Company's
objective of providing sustainable income and capital growth for its investors
is met. The portfolio activities undertaken by the Manager on behalf of the
Company can be found in the Manager's Review and details of the Board's
relationship with the Manager and other third party providers, including
oversight, is provided in the Statement of Corporate Governance.
Key decisions and actions during the year to 31 December 2021, which required
the Directors to have greater focus on stakeholders included:
Directorate and Succession Planning
The Board has continued to progress its succession plans during the year and,
as explained in the Chairman's statement, in light of the retirement of Barry
Rose in June 2021 and the retirement of the Chairman in May 2022, has
successfully recruited two new Directors in the year, Christopher Metcalfe and
Rosalyn Breedy. Dagmar Kent Kershaw has agreed to take the role of Chairman of
the Board from May 2022. Shareholders' interests are best served by ensuring a
smooth and orderly refreshment of the Board which serves to provide continuity
and maintain the Board's open and collegiate style.
Change of Company Name
In light of the Manager's rebrand to 'abrdn' in September 2021, the Board
considered the opportunity to leverage the significant promotional activity
and agreed that it was in the best interests of the Company to align the
Company name with that of its Manager. Accordingly, the name change was
effected in January 2022 at the earliest opportunity after the year end.
Renewal of Debt Facility
During the year, the Board approved the renewal of the Company's loan
agreement with RBSI to provide it with a £10 million credit facility, £5
million of which is at a fixed interest rate and £5 million at a floating
interest rate. The £5 million floating element of the facility expires in
April 2022 and the Company is already seeking terms for its renewal. The £5
million fixed rate facility expires in April 2023. The Board believes that the
modest use of gearing by the Company is of long term benefit to shareholders.
Board Diversity
The Board recognises the importance of having a range of skilled, experienced
individuals with the appropriate knowledge represented on the Board in order
to allow the Board to fulfill its obligations. Each Director brings different
skills and experience to the Board. The Board takes the benefits of diversity
into account in its recruitment of new Board members and this is evidenced in
recent Board changes. At 31 December 2021, the Board consisted of three males
and one female.
Employee, Environmental, Social and Human Rights Issues
The Company has no employees as the Board has delegated the day-to-day
management and administrative functions to the Manager. There are therefore no
disclosures to be made in respect of employees. The Company's socially
responsible investment policy is outlined in the Statement of Corporate
Governance.
Modern Slavery Act
Due to the nature of the Company's business, being a company that does not
offer goods and services to customers, the Board considers that it is not
within the scope of the Modern Slavery Act 2015 because it has no turnover or
employees. The Company is therefore not required to make a slavery and human
trafficking statement. In any event, the Board considers the Company's supply
chains, dealing predominantly with professional advisers and service providers
in the financial services industry, to be low risk in relation to this matter.
Global Greenhouse Gas Emissions
The Company has no greenhouse gas emissions to report from the operations of
its business, nor does it have responsibility for any other emissions
producing sources under the Companies Act 2006 (Strategic Report and
Directors' Report) Regulations 2013.
The Company qualifies as a "low energy user" under the Streamlined Energy and
Carbon Reporting Requirements (SECR), and its energy and carbon information is
not disclosed for that reason.
Viability Statement
The Company does not have a formal fixed period strategic plan but the Board
formally considers risks and strategy at least annually. The Board considers
the Company, with no fixed life, to be a long term investment vehicle, but for
the purposes of this viability statement has decided that a period of three
years is an appropriate period over which to report. The Board considers that
this period reflects a balance between looking out over a long term horizon
and the inherent uncertainties of looking out further than three years.
In assessing the viability of the Company over the review period the Directors
have focused upon the following factors:
- The principal risks detailed in the Strategic Report on pages 19 to
21 of the 2021 Annual Report and the steps taken to mitigate these risks. In
particular, the Board has considered the operational ability of the Company to
continue in the current environment, which continues to be impacted by the
global Pandemic, and the ability of the key third-party suppliers to continue
to provide essential services to the Company. Third party services have
continued to be provided effectively;
- The investment objective in the current environment remains
attractive. A resolution for the continuation of the Company was passed at the
AGM in June 2020 demonstrating ongoing support for the Company's mandate. The
Company has continued to deliver sustained dividend growth as well as good
capital growth over the longer term;
- The outlook for the Company and its portfolio detailed in the
Chairman's Statement and the Investment Manager's Review;
- The Company is invested in readily realisable listed securities;
- The level of revenue surplus generated by the Company over a number
of years and its ability to achieve its dividend objective;
- The level of gearing is closely monitored. Covenants are actively
monitored and there is adequate headroom in place. The Company has the ability
to renew its gearing or repay its borrowings through proceeds from sales of
investments. Initial discussions with banks have commenced with a view to
renewing the facility; and
- The impact of stress testing on the portfolio, including the effects
of any substantial future falls in investment values.
When considering the risk of under-performance, the Board reviewed the impact
of stress testing on the portfolio, including the effects of any substantial
future falls in investment values. The Board also considered that matters such
as significant economic or stock market volatility, a substantial reduction in
the liquidity of the portfolio, the emerging risk of climate change or changes
in investor sentiment could have an impact on its assessment of the Company's
prospects and viability in the future and the period over which the
performance of the Company is monitored. The results of the stress tests have
given the Board comfort over the viability of the Company.
Accordingly, taking into account all of these factors, the Company's current
position and the potential impact of its principal risks and uncertainties,
the Board has a reasonable expectation that the Company will be able to
continue in operation and meet its liabilities as they fall due for a period
of three years from the date of this Report.
Robert Lister,
Chairman
14 March 2022
4. INVESTMENT MANAGER'S REVIEW
Overview
The Company delivered a NAV total return of 30.4% for the year ended 31
December 2021, outperforming the Numis Smaller Companies (ex- Investment
Trusts) Index return of 21.9% by 8.5%. This continues the solid long term
track record of the Company which, over three and five years, has delivered a
NAV total return of 68.2% and 91.0% respectively, outperforming its composite
benchmark by 30.9% and 54.2% respectively.
Our investment process of Quality Growth Momentum ("QGM") with an income
support performed well over the course of 2021. Following an extraordinary
2020, this year has again proved our ability to identify high quality
resilient businesses with levers for growth whilst maintaining the ability to
pay dividends.
2021 was a strong year for global equities, including UK stocks. The Covid-19
pandemic (the "Pandemic") continued to put strain on the economy, particularly
with the discovery of new variants, while investors grappled with the economic
fallout. However, markets had largely adapted to this constrained environment,
and were also underpinned by ongoing government and central bank support.
Investor sentiment also improved on the back of a highly successful domestic
vaccine rollout, positive economic data and robust corporate earnings.
At the end of December 2020, more than three-quarters of the UK's population
were under the most severe restrictions yet markets were optimistic over the
vaccine success as roll outs began around the world. The positive momentum
took a brief pause in January 2021, and UK equities dipped slightly, before
picking up in February and again thereafter. Supportive government policy,
with Chancellor Rishi Sunak pledging an additional £65 billion in emergency
support measures for workers and businesses, drove markets upwards. Easing
lockdown restrictions, positive earnings results and an impressive vaccine
rollout also benefited UK equities.
Equities were supported in the second half of the year by the continued easing
of the Pandemic restrictions. Although the Government delayed 'freedom day' by
four weeks, due to an uptick in infections caused by the Delta variant, all
lockdown restrictions were eventually lifted at the end of July. This brought
a welcome recovery in economic activity in August, however, this also put
strain on supply chains. Supply chain pressure continued to build in September
and proved one of the market's biggest challenges in the second half of the
year while the disruption caused by a fuel shortage also dented sentiment. In
October, equities were weighed down by soaring energy prices, with several
small UK energy firms going bust as a result. Stocks fell back dramatically at
the end of November after the discovery of a new variant of Covid-19 in South
Africa, sparking fears around vaccine efficacy and the return of restrictions.
Unlike some European countries, the UK has not seen a dramatic rise in
hospitalisations. Concerns about rising inflation and less-supportive monetary
policy were also reflected in investor sentiment at the end of the year.
In UK economic news, third-quarter growth figures showed that the UK has
lagged behind other rich economies. The Bank of England held its benchmark
interest rate at the all-time low of 0.1%, while maintaining the current rate
of its asset-purchasing programme. Meanwhile, UK CPI continued to rise through
the year, reaching 5.4% year on year in December - its highest level f many
years.
The new issues market remained buoyant. As smaller companies investors it has
been pleasing to see the UK market hosting vibrant new growth businesses.
abrdn has enjoyed meeting prospective listed businesses, but has remained
selective and true to our QGM investment process with an income bias.
Performance
Your Manager has run its QGM investment process for over 20 years and adheres
to this process in all environments. The Company's portfolio is positioned to
deliver outperformance over the cycle. Value rallies are the most challenging
time for this process and it is believed that the extreme market volatility
experienced last year, and the value rally of late 2020 into early 2021, is
now behind us. The portfolio has delivered a NAV total return of 30.4%,
outperforming the Numis Smaller Companies (ex- Investment Trusts) return of
21.9% for the year ended 31 December 2021. Effective company engagement
remains key to identification of the QGM businesses that the Company invests
in. In particular, your Manager looks for businesses that have many angles to
their growth opportunities, giving them a greater ability to continue to grow,
whether it be through areas like complimentary products and services, new
geographies, or investments funded by the strength of their quality balance
sheets.
Having paid a dividend of 8.85p per share for the year, the Company is pleased
to report a Dividend Yield of 2.4%, higher than its benchmark which yielded
2.1%.
Equity Portfolio
Stock selection was a significant contributor to the outperformance of the
Company over 2021. Earnings seasons have brought positive updates from the
names held in the Company's portfolio and share prices have responded
accordingly. Encouragingly, balance sheets are healthy and there is dividend
growth coming through. Accordingly, your Manager believes that the dividend
situation across the portfolio is now normalising.
Financials Liontrust and Tatton Asset Management were top contributors over
the year having enjoyed sustained net inflows throughout 2021. Both companies
are focused on the UK intermediary community as their core audience (IFAs,
wealth managers) but the real point of differentiation is the simplicity and
consistency of their investment management processes. Specifically, Liontrust
delivered sustained net inflows in the period, with 21% growth in headline
Assets under Management ("AuM"). The fund management process is clear and
well-articulated, giving advisers confidence in the fundamental strength of
stock selection and portfolio management discipline. It finished the year with
the acquisition of institutional asset manager Majedie which boosted AuM
further, and provides institutional growth opportunities. Liontrust's AuM is
now in excess of £40 billion having delivered consistent organic growth on a
diverse range of funds (equities, fixed income, multi-asset) and is
increasingly diversified, having completed selective and accretive bolt-on
acquisitions.
Tatton Asset Management has maintained impressive net inflows, benefiting from
reduced social distancing restrictions which has allowed them to resume more
meaningful face-to-face marketing, including the return of its annual
conference. It has a clear portfolio asset allocation, with a number of
variants (both risk rated and specialist - like ethical) which allows the
solution to be tailored, aided by an attractive pricing position. The
company's AuM has now broken the £11 billion mark driven by sustained monthly
inflows. This has been complemented by the acquisition of the Verbatim funds,
adding further AuM and also bringing a strategic partnership with Fintel.
Tatton Asset Management has a broad reach providing discretionary fund
management services to over 700 firms acting for in excess of 80,000
underlying investment accounts, a number which is continually growing.
Morgan Sindall added value following a number of upgrades to earnings guidance
for the year in spite of widespread inflation in the supply chain and
shortages of materials and labour. The UK construction business is benefiting
from structural growth in infrastructure from increased investment, and
heightened demand to help companies adapt offices to future ways of working.
Forward visibility continues to strengthen and recent margin improvement
reflected the continued focus on long-term relationships, operational
delivery, and strong risk management. Your Manager remains confident in the
growth potential on offer alongside the company's attractive yield.
It is unusual to be writing about Games Workshop as a detractor from
performance for the year. In fact the company had an exceptional year in terms
of sales demand, demonstrating excellent performance given that the
comparative period last year included the successful launch of Warhammer
40,000 and pent-up demand after the Pandemic. Although all these numbers are
promising, there were a number of headwinds in relation to pressures on
freight costs and currency exchange rates. Supply chain constraints meant the
company had to delay releases of new products. The company's stores and those
of the trade accounts were impacted by government restrictions on opening and
operating. This materially impacted sales in the channel as well as the
ability to offer introductory games. Sales to Europe were impacted by the UK
leaving the EU ("Brexit") and the company had to give refunds when delivery
was impacted. Nevertheless the company made a confident outlook statement,
with the focus on growing sales, given the planned increases in manufacturing
and distribution capacity. This provided some insight into the company's
thoughts on the sustainability of potential demand. Despite the share price
weakness, your Manager believes that there has been no change in the long term
investment case, namely that the niche category Games Workshop operates in
will continue to thrive, their competitive position within this category
remains strong and multiple longer term opportunities are available to the
group. Without global supply issues your Manager is confident that the quality
of the business and the top line growth opportunity will continue to provide
strong earnings growth in coming years, which in turn will drive dividend
growth.
There was a disappointing update from Seraphine shortly after its flotation,
namely a warning on supply chain challenges. During their second quarter,
supply constraints impacted availability which, in turn, weighed on new
customer acquisition. This diluted marketing spend and led to fewer new
customers which subsequently challenged revenues. The shares responded
negatively to the downgrades to earnings. The update was reflective of some of
the post-Pandemic supply chain difficulties facing the sector during the
middle of the year; these were more challenging for smaller brands and
retailers to mitigate. The company's update in December was encouraging,
indicating that revenue growth had re-accelerated due to stock levels
recovering and marketing spend being redirected (with customer acquisition
costs returning to historic levels). There was also progress in the US with
the Zalando partnership progressing well and a new agreement in place with
Next. This encouraging update, suggested that the second quarter was abnormal
and the business is getting back on track to delivering on its growth agenda.
Synthomer is a chemicals business that had a super normal year thanks to the
Pandemic-related increase in demand for nitrile which is used in the
production of latex gloves. Towards the end of the year there were some
management changes and the unknown around the normalisation of demand for
nitrile following the peak-of-cycle profitability, which weighed on the
shares. Looking forward, the business is in a strong position. Management are
confident that the benefits of the recent acquisitions of Eastman Chemical, an
adhesive technology business, together with investment in new capacity,
further efficiency measures and a proven strategy will underpin future growth.
The balance sheet remains strong and flexible to support the group's dividend.
Fixed Income Portfolio
Fixed income markets endured a more challenging period in 2021 as government
bond yields rose in response to stronger inflation data in many jurisdictions.
Having expected to be more transitory in nature the prolonged impact of the
Pandemic and the support being provided to economies have ultimately had a
dramatic impact on prices and the data is now forcing policymakers into a more
hawkish response. Policy rates did rise modestly in the UK at the end of 2021
and are expected to be raised again in the coming months, both in the UK and
further afield. The impact of policy action, despite the recognition that
inflation is largely caused by supply side issues, has pushed yields higher.
Credit spreads remain relatively tight when compared to historical levels
although further moves from government bonds could easily lead to a re-pricing
of these markets and some volatility was noted in markets during the final
quarter of the year.
Throughout most of the year, demand for investment grade credit was robust
with investors being attracted by the positive yields on offer. As a result,
the asset class outperformed government markets despite some volatility. Lower
quality areas of the market performed better than higher quality credit,
largely as a result of the higher yields on offer although weakness was
notable in sectors such as energy, basic materials and technology.
The Company's exposure to fixed income is largely in shorter dated BBB rated
areas of the market. Outcomes over the year were mixed, with a perpetual issue
from Barclays being the stand out performer with a positive return of +3.7%,
while a corporate hybrid issue from National Grid performed relatively poorly,
driven by the challenges facing the domestic gas industry. This bond delivered
a small negative return of approximately -1.5%. Bonds issued by Heathrow, the
UK airport operator delivered a positive return of +0.64% and continues to
look good value.
As yields rise in the UK your Manager anticipate that more opportunities will
arise for the Company to take advantage of. Credit spreads have remained
reasonably firm and any weakness in that market will be considered a buying
opportunity. The Company's exposure to Scottish and Southern energy via a
corporate hybrid will be replaced during 2022 as the bond is expected to be
called by the issuer.
Portfolio activity
As ever, your Manager's QGM with an income bias investment process has driven
stock selection. New positions in Mortgage Advice Bureau, Clipper Logistics,
Hill & Smith, Greggs, CMC Markets, Procook, Seraphine, Synthomer and
Robert Walters were added during the year.
Positions in 4imprint, James Fisher, Dechra Pharmaceutical, Aveva , Primary
Healthcare Properties, Target Healthcare, Ultra Electronics and Stock Spirits
were sold during the year.
Mortgage Advice Bureau is one of the UK's leading consumer intermediary brands
and specialist appointed representative networks for mortgage intermediaries.
The fast growing platform model allows customers to choose how and when they
want to research, receive advice and transact. Technology is at the heart of
both face to face and telephone advice, helping provide greater speed, ease,
and convenience, and by doing so delivering an increasingly more compelling
customer proposition. Having demonstrated resilience in poor market
environments since flotation in 2014 it is believed that the momentum is set
to build sharply while they convert a strong pipeline of advisers and a number
of long standing technology initiatives come to fruition. Management's lead
generation tool, network management and adviser productivity agendas have the
potential to be transformational to market share gains.
A new position was initiated in Hill & Smith, a decentralised group of
companies focused on the design, manufacture and supply of infrastructure
products and galvanising services. With the arrival of a new Chief Executive
Officer, the business now has the opportunity to leverage a package of
internal and external drivers that should enable the company to deliver higher
sales growth, improved profitability, better portfolio management and a
stronger ESG story in the coming years. The company's end markets are
strengthening, even before the US infrastructure bill in the US starts to
filter through to forecasts. Your Manager conducted an ESG-specific engagement
with the management of Hill and Smith in the last quarter of 2021, covering a
wide range of topics such as Sustainable Products, CO2 Emissions, Health and
Safety, Talent Development and Diversity & Inclusion. The company going
through a transition in terms of its ESG credntials and, whilst initial
findings were positive, the Manager expects to track further progress and
developments, with a stronger ESG story in the coming years.
Greggs was added to the portfolio in view of abrdn's increased conviction on
the stock following improved clarity on the company's direction. Management
also outlined plans to develop the company's multichannel sales by extending
evening trading, building on the success of the delivery channel and improving
customer loyalty via the new Greggs app. Whilst the company's focus on ESG is
not new, your Manager was encouraged by its ESG credentials with the launch of
'The Greggs Pledge" in February 2021. This pledge is a full sustainability
agenda, focusing on all aspects of the company; Stronger, Healthier
Communities; Safer Planet; Better Business. Please refer to the Case Study on
page 35 of the 2021 Annual Report for further details.
The Company participated in the public listing of Seraphine, a leading
maternity and nursing-wear brand. This market niche is poorly served by
incumbent retailers. Seraphine's specialist focus, aspirational, yet
affordable, positioning and digital-first approach enables it to offer a
broad, innovative and relevant product offering. This has supported a long
record of profitable growth, yet the brand still has headroom to grow in the
UK, its most mature market and recent investments should unlock a greater
international opportunity.
The Company also took part in the new listing of kitchenware brand retailer
ProCook. This business is vertically-integrated and run by the founder, with
no debt or external private investors. ProCook has an opportunity to
significantly grow its market share given it is selling quality products at
affordable prices.
Synthomer is a specialist chemical company and one of the world's leading
suppliers of aqueous polymers. The company produces innovative formulations to
support customers in a range of industries, from construction through paints
and coatings to healthcare. Synthomer works closely with its customers and
targets market leadership positions in its core markets. Its understanding of
customer product and process requirements combined with their technology and
process know-how are key to the business' success. The strategy is to
establish Synthomer as a growing global speciality chemical business through
organic growth, investing in innovation to support growth, and M&A. This
high quality business offers strong earnings growth and strong cash returns to
support the dividend yield of around 3%.
Clipper Logistics has a highly differentiated business model, focusing on
delivering the value added components of logistics and advising customers on
carrier selection for haulage. Growth has been rapid, boosted by the pandemic
and despite a tough comparative period, revenue and profits are expected to
rise at a double-digit rate for the next four years. Barriers to entry and
change are high, giving excellent customer retention, market leading margins
and revenue visibility. Management do things 'The Clipper Way', to drive their
success and that of their customers through innovation and collaboration with
all retail partners. ESG is central to Clipper's way of working and driving
environmental and social change is one of its four key strategic pillars. Your
Manager has been encouraged by the strength of the company's ESG credentials.
CMC Markets is primarily a provider of leveraged financial products (contracts
for difference (CFDs), and spread betting) to the retail market; other revenue
streams come from stockbroking and white label contracts. There is a focus on
diversifying the business beyond the leveraged product offering. Management
recently announced the planned launch of a share dealing platform in the UK to
diversify further and the company's ambitions are significant. Management have
an unwavering strategic focus on high quality clients and there has been
record trading performance and profitability in the first half of the year,
driven by increased client trading as a result of higher market volatility and
an increased client base. CMC Markets continue to deliver on strategic
initiatives and maintain a healthy pipeline of projects that create new
revenue streams through further product, channel and geographic
diversification. These initiatives are all supported by technology and through
a wider application of this, the company can extend the offer and deliver
further profitable growth. The Chief Executive Officer owns 60% of the company
and is well aligned with investors' interests. The shares yield around 4% and
the dividend policy is to pay out 50% of profit after tax.
Having sold Robert Walters in the prior year, due to lack of visibility in the
shape or speed of their post- Pandemic recovery a new position has been added
in the professional recruitment consultancy following a return in momentum.
Your Manager believes that this momentum is more than just a temporary
flushing out of pent-up demand, rather the start of something more sustained,
as technology and flexible working changes longer-term dynamics. The global
business historically has always gained share after a downturn. With the
shares yielding over 3% it is believed that the company's prospects now look
promising.
A position in James Fisher was sold as the balance sheet remains troubled and
there were expected earnings downgrades in view of market conditions.
Positions were also exited in 4imprint, where visibility of recovery remains
low. It is not yet clear whether the lasting implications of the Pandemic will
result in structural problems for the business. There were also divestments
from Dechra and Aveva given they are now large cap companies, following many
years of strong performance for the Company, and property companies Target
Healthcare and Primary Healthcare Properties, where the growth prospects were
considered to be lacklustre near term. Lastly, there were divestments from bid
targets Ultra Electronics and Stock Spirits, having received the final
dividends.
Outlook
Your Manager is positive about the outlook and the long-term discipline that
the investment process provides. While there will have been lasting impacts
associated with the UK pandemic, particularly around supply chain and
inflation issues, the QGM process will continue to identify businesses that
can drive up earnings in difficult macro environments. Concerns around supply
chain issues remain a key concern for some sectors, and inflation overall, and
how transitory that is, remains a question. There have been pleasing messages
to customers across the portfolio on the ability to pass through inflation and
protect margins. Also much of the portfolio has limited exposure to logistics
and supply chain concerns, which insulates those names from some market
headwinds. The dividend outlook looks encouraging, with the market broadly and
the Company's portfolio back to strong dividend payments. Dividend growth
could be expected to grow roughly in line with earnings growth, and with
supportive balance sheet strength.
It has been encouraging to see that the number of new issues coming to the
market continues to grow, bringing further diversity and investment
opportunities to the small and mid capital company arena. The start of the
year can traditionally see some reversal in market trends, so it might be
expected to see different aspects dominate markets and the first quarter
reporting season will be key, with earnings results coming through, which is
where
the companies in the portfolio are expected to prove themselves.
2021 was characterised by a more stable environment post-Pandemic, driven by
the reopening of the global economy. However, the Pandemic created a unique
period for markets and has driven various headwinds and volatility in the
global environment, namely the supply chain challenges and inflationary
pressures. This, combined with the conflict with Russia and Ukraine creates
market uncertainty for the year ahead. Your Manager will continue to look to
identify companies in line with our bottom-up QGM process.
Abby Glennie
Aberdeen Asset Managers Limited
14 March 2022
5. RESULTS AND PERFORMANCE
Performance (Total return)
1 year 3 year 5 year
% return % return % return
Net asset value{A} +30.4 +68.2 +91.0
Share price (based on mid price){A} +22.9 +84.0 +114.2
Composite Index{B} +21.9 +37.3 +36.8
Numis Smaller Companies ex Inv Trust Index +21.9 +46.1 +47.8
{A} Considered to be an Alternative Performance Measure. Further
details can be found on page 87 of the 2021 Annual Report.
{B} FTSE Small Cap ex Inv Trust Index up to 31 December 2019 and Numis
Smaller Companies ex Inv Trust Index from 1 January 2020.
DIVIDENDS
Rate per share xd date Record date Payment date
First interim dividend 2.15p 1 April 2021 6 April 2021 23 April 2021
Second interim dividend 2.15p 1 July 2021 2 July 2021 23 July 2021
Third interim dividend 2.15p 7 October 2021 8 October 2021 29 October 2021
Fourth interim dividend 2.40p 6 January 2022 7 January 2022 28 January 2022
2021 8.85p
First interim dividend 2.06p 2 April 2020 3 April 2020 24 April 2020
Second interim dividend 2.06p 2 July 2020 3 July 2020 24 July 2020
Third interim dividend 2.06p 8 October 2020 9 October 2020 30 October 2020
Fourth interim dividend 2.06p 31 December 2020 4 January 2021 29 January 2021
2020 8.24p
PORTFOLIO
TEN LARGEST INVESTMENTS
at 31 December 2021
Sirius Real Estate Morgan Sindall
Leading owner and operator of business parks, offices and industrial complexes UK leading business in construction and regeneration work.
in Germany.
Liontrust Asset Management DiscoverIE Group
UK based asset manager, managing assets across a range of asset classes. International group of businesses that designs, manufactures and supplies
highly differentiated components for electronic applications.
Telecom Plus Safestore
Reseller of telecom and utilities services, under the Utility Warehouse brand. Safestore is the UK's largest and Europe's second largest provider of
self-storage.
Intermediate Capital Group Softcat
Global alternative asset manager in private debt, credit and equity. Value added technology reseller in UK.
Tatton Asset Management Games Workshop
UK discretionary fund manager providing services to UK's financial advisers Global retailer of hobbyist products, selling through own retail stores,
enabling them to provide a better service to their clients. online, and through trade partners. Owner of the IP of Warhammer.
INVESTMENT PORTFOLIO - EQUITY INVESTMENTS
At 31 December 2021
Valuation Total Valuation
2021 portfolio 2020
Company Sector classification £'000 % £'000
Sirius Real Estate Real Estate Investment & Services 4,608 4.5 2,778
Morgan Sindall Construction & Materials 4,284 4.2 2,604
Liontrust Asset Management Investment Banking & Brokerage Services 4,058 4.0 2,905
DiscoverIE Group Technology Hardware & Equipment 3,909 3.8 2,996
Telecom Plus Telecommunications Service Providers 3,347 3.3 2,436
Safestore Real Estate Investment Trusts 3,243 3.2 1,795
Intermediate Capital Group Investment Banking & Brokerage Services 3,213 3.1 3,025
Softcat Software & Computer Services 3,147 3.1 2,632
Tatton Asset Management Investment Banking & Brokerage Services 3,031 3.0 1,434
Games Workshop Leisure Goods 2,876 2.8 3,232
Ten largest investments 35,716 35.0
Bytes Technology Software & Computer Services 2,857 2.8 1,688
Robert Walters Industrial Support Services 2,853 2.8 -
Halfords Retailers 2,761 2.7 1,148
Alpha Financial Markets Consulting Industrial Support Services 2,697 2.6 1,248
Somero Enterprises Industrial Engineering 2,596 2.5 1,218
Strix Group Electronic & Electrical Equipment 2,582 2.5 1,867
Kesko{A} Personal Care, Drug & Grocery Stores 2,326 2.3 1,783
Greggs Personal Care, Drug & Grocery Stores 2,219 2.2 -
Unite Group Real Estate Investment Trusts 2,216 2.2 2,297
Dunelm Retailers 2,155 2.1 1,122
Twenty largest investments 60,978 59.7
Synthomer Chemicals 2,070 2.0 -
Assura Real Estate Investment Trusts 2,051 2.0 2,956
Hollywood Bowl Travel & Leisure 2,050 2.0 2,372
FDM Industrial Support Services 2,044 2.0 1,806
Hilton Food Group Food Producers 2,033 2.0 2,181
AJ Bell Investment Banking & Brokerage Services 2,016 2.0 2,303
Mortgage Advice Bureau Finance & Credit Services 1,957 1.9 -
Impax Asset Management Investment Banking & Brokerage Services 1,909 1.9 905
Polar Capital Holdings Investment Banking & Brokerage Services 1,905 1.9 1,006
XP Power Electronic & Electrical Equipment 1,838 1.8 3,075
Thirty largest investments 80,851 79.2
Close Brothers Banks 1,796 1.8 1,769
Chesnara Life Insurance 1,653 1.6 1,730
Victrex Chemicals 1,608 1.6 1,545
Seraphine Personal Goods 1,522 1.5 -
Forterra Construction & Materials 1,511 1.5 965
MJ Gleeson Household Goods & Home Construction 1,419 1.4 1,456
Rathbone Brothers Investment Banking & Brokerage Services 1,206 1.2 478
Midwich Industrial Support Services 1,161 1.1 1,273
Marshalls Construction & Materials 1,146 1.1 1,237
ProCook Household Goods & Home Construction 1,081 1.1 -
Forty largest investments 94,954 93.1
Gateley Holdings Industrial Support Services 1,058 1.0 606
Hill & Smith Holdings Industrial Metals and Mining 1,015 1.0 -
Severfield Construction & Materials 1,014 1.0 825
RWS Holdings Industrial Support Services 873 0.9 717
Moneysupermarket Software & Computer Services 825 0.8 1,316
CMC Markets Investment Banking & Brokerage Services 640 0.6 -
Clipper Logistics Industrial Support Services 187 0.2 -
Total Equity investments 100,566 98.6
{A} All equity investments are listed on the London Stock Exchange
(sterling based), except those marked, which are listed on overseas exchanges
based in sterling.
INVESTMENT PORTFOLIO - OTHER INVESTMENTS
At 31 December 2021
Valuation Total Valuation
2021 portfolio 2020
Company £'000 % £'000
Corporate Bonds{A}
NGG Finance 5.625% 433 0.3 458
Barclays Bank 9% Perp 346 0.3 364
Heathrow Funding 5.225% 312 0.3 326
SSE 3.625% Var 302 0.3 308
HSBC Holdings 6.5% 224 0.2 238
Total Corporate Bonds 1,617 1.4
Total Investments 102,183 100.0
{A} All investments are listed on the London Stock Exchange
(Sterling based).
DISTRIBUTION OF ASSETS AND LIABILITIES
At 31 December 2021
Valuation at Movement during the year Valuation at
31 December Gains/ 31 December
2020 Purchases Sales (losses) 2021
£'000 % £'000 £'000 £'000 £'000 %
Listed investments
Equity investments 80,354 104.2 35,740 (34,223) 18,695 100,566 102.8
Corporate bonds 2,100 2.7 - (400) (83) 1,617 1.7
82,454 106.9 35,740 (34,623) 18,612 102,183 104.5
Current assets 1,935 2.5 2,968 3.0
Other current liabilities (254) (0.3) (316) (0.3)
Loans (6,991) (9.1) (6,995) (7.2)
Net assets 77,144 100.0 97,840 100.0
Net asset value per Ordinary share 348.91p 442.52p
GOING CONCERN
The Directors believe that it is appropriate to continue to adopt the going
concern basis in the preparation of the financial statements.
The Company's assets consist substantially of securities in companies listed
on recognised stock exchanges and in normal circumstances are realisable
within a short timescale.
The Company's assets comprise mainly readily realisable securities which can
be sold to meet funding commitments if necessary.
The Board has set gearing limits and regularly reviews actual exposures, cash
flow projections and compliance with banking covenants. The Company has a £10
million credit facility comprised of a fixed rate £5 million loan which
expires in 2023 and a variable rate £5 million loan which expires in April
2022. A replacement option for the variable rate loan is currently being
sought. Should the Board decide not to renew this facility, any outstanding
borrowing would be repaid through the proceeds of the sale of investments as
required. £2 million of the variable rate loan was drawn down at the date of
this report.
The Company undertakes a continuation vote every five years. The last
continuation vote was passed at the AGM held in June 2020 with 99.7% of votes
in favour.
The Company's portfolio comprises primarily "Level One" assets (listed on a
recognisable exchange and realisable within a short timescale) and the Company
has a relatively low level of gearing. As such, the Company has the ability to
raise sufficient funds in order to remain within its debt covenants and pay
expenses.
Taking the above factors into consideration, the Directors reasonably believe
that the Company has adequate financial resources to continue in operational
existence for the foreseeable future and has the ability to meet its financial
obligations as they fall due for a period until at least 31 December 2023.
Accordingly the Board continues to adopt the going concern basis in preparing
the financial statements.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report and the
financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law they have elected to prepare the financial
statements in accordance with UK-adopted international accounting standards in
conformity with the Companies Act 2006.
Under company law the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Company and of the profit or loss of the Company for that
period. In preparing these financial statements, the Directors are required
to:
- select suitable accounting policies and then apply them
consistently;
- make judgements and estimates that are reasonable and prudent;
- state whether they have been prepared in accordance with UK-adopted
international accounting standards in conformity with the Companies Act 2006;
and
- prepare the financial statements on the going concern basis unless
it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the Companies
Act 2006. They have general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Company and to prevent
and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, Directors' Report, Directors' Remuneration
Report and Corporate Governance Statement that complies with that law and
those regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
Responsibility statement of the Directors in respect of the annual financial report
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with the applicable
set of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company taken as a
whole; and
- the Strategic 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 they face.
- We consider the annual report and accounts, taken as a whole, is
fair, balanced and understandable and provides the information necessary for
shareholders to assess the Company's position and performance, business model
and strategy.
For and on behalf of
abrdn Smaller Companies Income Trust plc
Robert Lister,
Chairman
14 March 2022
FINANCIAL STATEMENTS
STATEMENT OF COMPREHENSIVE INCOME (AUDITED)
Year ended Year ended
31 December 2021 31 December 2020
Revenue Capital Total Revenue Capital Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on investments at fair value 10 - 21,035 21,035 - (4,361) (4,361)
Income 3
Dividend income 2,741 - 2,741 1,766 - 1,766
Interest income from investments 80 - 80 73 - 73
Other income 1 - 1 2 - 2
2,822 21,035 23,857 1,841 (4,361) (2,520)
Expenses
Investment management fee 4 (203) (472) (675) (158) (369) (527)
Other administrative expenses 5 (394) - (394) (382) - (382)
Finance costs 6 (56) (130) (186) (55) (128) (183)
Profit/(loss) before tax 2,169 20,433 22,602 1,246 (4,858) (3,612)
Taxation 7 (26) - (26) (8) - (8)
Profit/(loss) attributable to equity holders 9 2,143 20,433 22,576 1,238 (4,858) (3,620)
Return per Ordinary share (pence) 9 9.69 92.42 102.11 5.60 (21.97) (16.37)
The total column of this statement represents the Company's Statement of
Comprehensive Income, prepared in accordance with IFRS. The supplementary
revenue and capital columns are both prepared under guidance published by the
Association of Investment Companies. All items in the above statement derive
from continuing operations.
The Company does not have any income or expense that is not included in profit
for the year, and therefore the "Profit attributable to equity holders " is
also the "Total comprehensive income attributable to equity holders" as
defined in IAS 1 (revised).
All of the profit and comprehensive income are attributable to the equity
holders of the Company.
All items in the above statement derive from continuing operations.
The accompanying notes are an integral part of these financial statements.
BALANCE SHEET (AUDITED)
As at As at
31 December 31 December
2021 2020
Notes £'000 £'000
Non-current assets
Equities 100,566 80,354
Corporate bonds 1,617 2,100
Securities at fair value 10 102,183 82,454
Current assets
Cash and cash equivalents 2,592 1,615
Other receivables 11 376 320
2,968 1,935
Current liabilities
Bank loan 12 (2,000) (2,000)
Trade and other payables 12 (316) (254)
(2,316) (2,254)
Net current assets/(liabilities) 652 (319)
Total assets less current liabilities 102,835 82,135
Non-current liabilities
Bank loan 13 (4,995) (4,991)
Net assets 97,840 77,144
Share capital and reserves
Called-up share capital 15 11,055 11,055
Share premium account 11,892 11,892
Capital redemption reserve 2,032 2,032
Capital reserve 69,661 49,228
Revenue reserve 3,200 2,937
Equity shareholders' funds 97,840 77,144
Net asset value per Ordinary share (pence) 16 442.52 348.91
STATEMENT OF CHANGES IN EQUITY (AUDITED)
Year ended 31 December 2021
Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
As at 31 December 2020 11,055 11,892 2,032 49,228 2,937 77,144
Profit for the year - - - 20,433 2,143 22,576
Dividends paid in the year 8 - - - - (1,880) (1,880)
As at 31 December 2021 11,055 11,892 2,032 69,661 3,200 97,840
Year ended 31 December 2020
Share Capital
Share premium redemption Capital Revenue
capital account reserve reserve reserve Total
Notes £'000 £'000 £'000 £'000 £'000 £'000
As at 31 December 2019 11,055 11,892 2,032 54,086 3,595 82,660
(Loss)/profit for the year - - - (4,858) 1,238 (3,620)
Dividends paid in the year 8 - - - - (1,896) (1,896)
As at 31 December 2020 11,055 11,892 2,032 49,228 2,937 77,144
The revenue reserve represents the amount of the Company's reserves
distributable by way of dividend.
The accompanying notes are an integral part of the financial statements.
CASH FLOW STATEMENT (AUDITED)
Year ended Year ended
31 December 2021 31 December 2020
Notes £'000 £'000
Cash flows from operating activities
Dividend income received 2,699 1,757
Interest income received 98 73
Other income received 1 2
Investment management fee paid (650) (533)
Other cash expenses (379) (358)
Cash generated from operations 1,769 941
Interest paid (166) (177)
Overseas taxation suffered (38) (26)
Net cash inflows from operating activities 1,565 738
Cash flows from investing activities
Purchases of investments (20,109) (21,204)
Sales of investments 21,401 23,197
Net cash inflow from investing activities 1,292 1,993
Cash flows from financing activities
Equity dividends paid 8 (1,880) (1,896)
Net cash outflow from financing activities (1,880) (1,896)
Net increase in cash and cash equivalents 977 835
Analysis of changes in cash and cash equivalents during the year
Opening balance 1,615 780
(Decrease)/increase in cash and cash equivalents as above 977 835
Closing balances 2,592 1,615
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2021
1. Principal activity
The Company is a closed-end investment company, registered in Scotland No
SC137448, with its Ordinary shares being listed on the London Stock Exchange.
2. Accounting policies
(a) Basis of accounting. The financial statements of the Company have been
prepared in accordance with UK-adopted International Accounting Standards.
The Company's assets consist substantially of equity shares in companies
listed on recognised stock exchanges and in most circumstances are realisable
within a short timescale. The Board has set limits for borrowing and regularly
reviews actual exposures, cash flow projections and compliance with banking
covenants. The Company has a £10 million credit facility comprised of a
fixed rate £5 million loan which expires in 2023 and a revolving £5
million loan which expires in April 2022. A replacement option for the
revolving element of the facility is currently being sought but, should the
Board decide not to renew this facility, any outstanding borrowing would be
repaid through the proceeds of investment sales as required. The Company
undertakes a continuation vote every five years. The last continuation vote
was passed at the AGM held in June 2020 with 99.7% of votes in favour. Having
taken these factors into account as well as the impact of Covid-19 and having
assessed the principal risks set out in the Strategy Report on pages 19 to 21
of the 2021 Annual Report, the Directors believe that, after making enquiries,
the Company has adequate financial resources to continue in operational
existence for the foreseeable future and has the ability to meet its financial
obligations as they fall due for a period until at least 31 December 2023.
Accordingly, they continue to adopt the going concern basis of accounting in
preparing the financial statements.
In preparing these financial statements the Directors have considered the
impact of climate change risk as an emerging risk as set out on page 20 of the
2021 Annual Report, and have concluded that it does not have a material impact
on the Company's investments. In line with IFRS investments are valued at fair
value, which for the Company are quoted bid prices for investments in active
markets at the Balance Sheet date and therefore reflect market participants
view of climate change risk.
The financial statements have also been prepared in accordance with the
Statement of Recommended Practice (SORP), "Financial Statements of Investment
Trust Companies and Venture Capital Trusts" issued in April 2021 to the extent
that it is consistent with IASs.
Significant accounting judgements, estimates and assumptions. The preparation
of financial statements requires the use of certain significant accounting
judgements, estimates and assumptions which requires the Board to exercise its
judgement in the process of applying the accounting policies and are
continually evaluated. One area of judgement includes the assessment of
whether special dividends should be allocated to revenue or capital based on
their individual merits. The Directors do not consider there to be any
significant estimates within the financial statements.
New and amended accounting standards and interpretations. The Company
applied for the first time certain standards and amendments, which are
effective for annual periods beginning on or after 1 January 2021. The
adoption of these standards and amendments did not have a material impact on
the financial statements:
Standards
IAS 39, IFRS 4, 7, 9 and 16 Amendments - Interest Benchmark Reform Phase 2
Future amendments to standards and interpretations. At the date of
authorisation of these financial statements, the following amendments to
Standards and Interpretations were assessed to be relevant and are all
effective for annual periods beginning on or after 1 January 2022 and are not
expected to have a material impact on the financial statements:
Standards
IAS 1 Amendments - Classification of Liabilities as Current or Non-Current
(effective from 1 January 2023)
IAS 1 Amendments - Disclosure of Accounting Policies (effective from 1 January
2023)
IAS 8 Amendments - Definition of Accounting Estimates (effective from 1
January 2023)
(b) Investments. The Company has adopted the classification and measurement
provisions of IFRS 9 'Financial Instruments'.
The Company classifies its equity investments and debt instruments based on
their contractual cash flow characteristics and the Company's business model
for managing the assets. Equity investments fail the contractual cash flows
test so are measured at fair value. For debt instruments, the business model
is the determining feature and they are managed, performance monitored and
risk evaluated, on a fair value basis. The Manager is also compensated based
on the fair value of the Company's assets. Consequently, all investments are
measured at fair value through profit or loss.
Investments are recognised and de-recognised at trade date where a purchase or
sale is under a contract whose terms require delivery within the timeframe
established by the market concerned, and are measured at fair value. For
listed investments, the valuation of investments at the year end is deemed to
be bid market prices or closing prices for SETS (London Stock Exchange's
electronic trading service) stocks sourced from the London Stock Exchange.
Gains and losses arising from the changes in fair value are included in net
profit or loss for the period as a capital item. Transaction costs are treated
as a capital cost.
(c) Income. Dividend income from equity investments, including preference shares
which have a discretionary dividend is recognised when the shareholders'
rights to receive payment have been established, normally the ex-dividend
date. Special dividends are allocated to revenue or capital based on their
individual merits.
Interest from debt securities, and income from preference shares which do not
have a discretionary dividend are accounted for on an accruals basis. Any
write-off of the premium or discount on acquisition as a result of using this
basis is allocated against the revenue reserve in accordance with the SORP.
Interest receivable on AAA rated money market funds and short term deposits
are accounted for on an accruals basis.
(d) Expenses. All expenses are accounted for on an accruals basis. In respect of
the analysis between revenue and capital items presented within the Statement
of Comprehensive Income, all expenses have been presented as revenue items
except those where a connection with the maintenance or enhancement of the
value of the investments held can be demonstrated. Accordingly the management
fee and finance costs have been allocated 30% to revenue and 70% to capital
(2020 - same), in order to reflect the Directors' expected long-term view of
the nature of the investment returns of the Company. This allocation is
reviewed on a regular basis.
(e) Cash and cash equivalents. Cash comprises cash in hand and demand deposits.
Cash equivalents includes bank overdrafts repayable on demand and short term,
highly liquid investments, that are readily convertible to known amounts of
cash and that are subject to an insignificant risk of change in value. Cash
equivalents are held to meet short term cash commitments.
(f) Borrowings. At and after initial measurement, bank borrowings are measured at
amortised cost. Amortised cost is calculated by taking into account any
discount or premium on issue, and costs that are an integral part of the
effective interest rate. The finance costs of such borrowings are accounted
for on an accruals basis using the effective interest rate method and are
charged 30% to revenue and 70% to capital in the Statement of Comprehensive
Income to reflect the Company's investment policy and prospective income and
capital growth.
(g) Taxation. The tax expense represents the sum of tax currently payable and
deferred tax. Any tax payable is based on the taxable profit for the year.
Taxable profit differs from net profit as reported in the Statement of
Comprehensive Income because it excludes items of income or expense that are
taxable or deductible in other years and it further excludes items that are
never taxable or deductible. The Company's liability for current tax is
calculated using tax rates that were applicable at the Balance Sheet date.
Deferred tax is recognised in respect of all temporary differences at the
Balance Sheet date, where transactions or events that result in an obligation
to pay more tax in the future or right to pay less tax in the future have
occurred at the Balance Sheet date. This is subject to deferred tax assets
only being recognised if it is considered more likely than not that there will
be suitable profits from which the future reversal of the temporary
differences can be deducted. Deferred tax assets and liabilities are measured
at the rates applicable to the legal jurisdictions in which they arise, using
tax rates that are expected to apply at the date the deferred tax position is
unwound.
(h) Foreign currencies. Monetary assets and liabilities and non-monetary assets
held at fair value denominated in foreign currencies are converted into
sterling at the rate of exchange ruling at the reporting date. Transactions
during the year involving foreign currencies are converted at the rate of
exchange ruling at the transaction date. Gains or losses arising from a change
in exchange rates subsequent to the date of a transaction are included as a
currency gain or loss in revenue or capital in the Statement of Comprehensive
Income, depending on whether the gain or loss is of a revenue or capital
nature.
(i) Nature and purpose of reserves
Share premium account. The balance classified as share premium includes the
premium above nominal value from the proceeds on issue of any equity share
capital comprising ordinary shares of 50p per share. This reserve is not
distributable.
Capital redemption reserve. The capital redemption reserve is used to record
the amount equivalent to the nominal value of any of the Company's own shares
purchased and cancelled in order to maintain the Company's capital. This
reserve is not distributable.
Capital reserve. This reserve reflects any gains or losses on investments
realised in the period along with any increases and decreases in the fair
value of investments held that have been recognised in the Statement of
Comprehensive Income. These include gains and losses from foreign currency
exchange differences. Additionally, expenses, including finance costs, are
charged to this reserve in accordance with (e) above. This reserve is not
distributable except for the purpose of funding share buybacks to the extent
that gains are deemed realised.
Revenue reserve. This reserve reflects all income and costs which are
recognised in the revenue column of the Statement of Comprehensive Income. The
revenue reserve represents the amount of the Company's reserves distributable
by way of dividend.
(j) Dividends payable. Interim dividends are recognised in the financial
statements in the period in which they are paid.
(k) Segmental reporting. The Directors are of the opinion that the Company is
engaged in a single segment of business activity, being investment business.
Consequently, no business segmental analysis is provided.
3. Income
2021 2020
£'000 £'000
Income from investments
Dividend income from UK equity securities 2,136 1,295
Dividend income from overseas equity securities 403 271
Property income distributions 202 200
2,741 1,766
Interest income from investments 80 73
2,821 1,839
Other income
Bank interest - 2
Interest from AAA-rated money market funds 1 -
Total revenue income 2,822 1,841
4. Management fee
2021 2020
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Management fee 203 472 675 158 369 527
For the year ended 31 December 2021 management services were provided by
Aberdeen Standard Fund Managers Limited ("ASFML"). The management fee was
calculated at an annual rate of 0.75% of the net assets of the Company,
calculated and paid monthly. The balance due to ASFML at the year end was
£119,000 (2020 - £94,000). The fee is allocated 30% (2020 - 30%) to revenue
and 70% (2020 - 70%) to capital.
The agreement is terminable on twelve months' written notice from the Company
or the Manager, however, the Company may terminate the agreement on immediate
notice on the payment to the Manager of six months' fees in lieu of notice.
5. Other administrative expenses
2021 2020
£'000 £'000
Directors' fees 117 117
Auditor's remuneration:
- fees payable for the audit of the annual accounts 36 32
Promotional activities 49 44
Legal and professional fees 38 23
Registrars' fees 17 21
Printing and postage 22 22
Broker fees 36 36
Directors' & Officers' liability insurance 8 7
Trade subscriptions 31 27
Other expenses 40 53
394 382
Expenses of £49,000 (2020 - £44,000) were paid to ASFML in respect of the
promotion of the Company. The balance outstanding at the year end was £37,000
(2020 - £22,000).
All of the expenses above, with the exception of the auditor's remuneration,
include irrecoverable VAT where applicable. The VAT charged on the auditor's
remuneration is included within other expenses.
6. Finance costs
2021 2020
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Bank loans 56 130 186 55 128 183
7. Taxation
(a) Analysis of charge for the year 2021 2020
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Overseas withholding tax 26 - 26 8 - 8
Total tax charge for the year 26 - 26 8 - 8
(b) Factors affecting tax charge for the year
The UK corporation tax rate was 19% throughout the year (2020 - same). The tax
assessed for the year is lower than the corporation tax rate. The differences
are explained below:
2021 2020
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Profit/(loss) before tax 2,169 20,433 22,602 1,246 (4,858) (3,612)
Taxation of profit/(loss) at the effective standard rate of corporation tax 412 3,882 4,294 237 (923) (686)
Effects of:
Non taxable UK dividend income (406) - (406) (246) - (246)
Capital (gains)/losses disallowed for the purposes of corporation tax - (3,997) (3,997) - 829 829
Non taxable overseas income not subject to tax (77) - (77) (51) - (51)
Excess management expenses not utilised 71 115 186 60 94 154
Irrecoverable overseas withholding tax 26 - 26 8 - 8
Total tax charge for the year 26 - 26 8 - 8
(c) Factors that might affect future tax charges. No provision for deferred tax
has been made in the current or prior accounting year. The Company has not
provided for deferred tax on capital gains or losses arising on the
revaluation or disposal of investments as it is exempt from tax on these items
because of its status as an investment trust company.
At the year end, the Company has for taxation purposes only, accumulated
unrelieved management expenses and loan relationship deficits of £16,503,000
(2020 - £15,534,000). It is unlikely that the fund will generate sufficient
taxable profits in the future to utilise these amounts and therefore no
deferred tax asset has been recognised.
8. Dividends
2021 2020
£'000 £'000
Amounts recognised as distributions to equity holders in the period:
Fourth interim dividend for 2020 of 2.06p (2019 - 2.40p) per Ordinary share 455 531
First interim dividend for 2021 of 2.15p (2020 - 2.06p) per Ordinary share 475 455
Second interim dividend for 2021 of 2.15p (2020 - 2.06p) per Ordinary share 475 455
Third interim dividend for 2021 of 2.15p (2020 - 2.06p) per Ordinary share 475 455
1,880 1,896
The fourth interim dividend of 2021 of 2.40p (2020 - 2.06p) per share has not
been included as a liability in these financial statements.
The following table sets out the total dividends payable in respect of the
financial year, which is the basis on which the requirements of Sections
1158-1159 of the Corporation Tax Act 2010 are considered. The revenue
available for distribution by way of dividend for the year is £2,143,000
(2020 - £1,238,000).
2021 2020
£'000 £'000
First interim dividend for 2021 of 2.15p (2020 - 2.06p) per Ordinary share 475 455
Second interim dividend for 2021 of 2.15p (2020 - 2.06p) per Ordinary share 475 455
Third interim dividend for 2021 of 2.15p (2020 - 2.06p) per Ordinary share 475 455
Fourth interim dividend for 2021 of 2.40p (2020 - 2.06p) per Ordinary share 531 455
1,956 1,820
9. Earnings per Ordinary share
2021 2020
p p
Revenue return 9.69 5.60
Capital return 92.42 (21.97)
Total return 102.11 (16.37)
The returns per share are based on the following figures:
2021 2020
£'000 £'000
Revenue return 2,143 1,238
Capital return 20,433 (4,858)
Total return 22,576 (3,620)
Weighted average number of shares in issue 22,109,765 22,109,765
During the year there were no (2020 - same) dilutive shares in issue.
10. Non-current assets - securities at fair value
2021 2020
£'000 £'000
Listed on recognised stock exchanges:
United Kingdom 95,248 80,671
Overseas 6,935 1,783
102,183 82,454
2021 2020
£'000 £'000
Opening book cost 60,215 56,436
Investment holdings gains 22,239 32,372
Opening fair value 82,454 88,808
Analysis of transactions made during the year
Purchases 20,095 21,204
Sales - proceeds (21,401) (23,197)
Gains/(losses) on investments 21,035 (4,361)
Closing fair value 102,183 82,454
Closing book cost 69,027 60,215
Closing investment holdings gains 33,156 22,239
Closing fair value 102,183 82,454
The Company received £21,401,000 (2020 - £23,197,000) from investments sold
in the year. The book cost of these investments when they were purchased were
£11,283,000 (2020 - £17,425,000). These investments have been revalued over
time and until they were sold any unrealised gains/losses were included in the
fair value of the investments.
Transaction costs. During the year expenses were incurred in acquiring or
disposing of investments classified as fair value through profit or loss.
These have been expensed through capital and are included within
gains/(losses) on investments in the Statement of Comprehensive Income. The
total costs were as follows:
2021 2020
£'000 £'000
Purchases 76 74
Sales 16 15
92 89
The above transaction costs are calculated and disclosed in line with the AIC
SORP. The transaction costs in the Company's Key Information Document are
calculated on a different basis and in line with the PRIIPs regulations.
11. Other receivables
2021 2020
£'000 £'000
Accrued income & prepayments 376 320
376 320
None of the above amounts are overdue.
12. Current liabilities
2021 2020
£'000 £'000
(a) Short-term loan 2,000 2,000
The Company has in place a £10 million loan facility with Royal Bank of
Scotland International, London Branch (RBSI) which is comprised of two £5
million tranches. Tranche A is a one year £5 million multi-currency revolving
credit facility which expires in April 2022 and £2 million was drawn down at
31 December 2021 at a rate of 0.98713% until 26 January 2022.
The Directors are of the opinion that the fair value of the short term bank
loan at 31 December 2021 is not materially different from the book value.
2021 2020
(b) Trade and other payables £'000 £'000
Investment management fee 119 94
Interest payable 44 29
Amounts due to brokers 5 -
Sundry creditors 148 131
316 254
13. Non-current liabilities
2021 2020
£'000 £'000
Fixed rate loan 4,995 4,991
The Company has in place a £10 million loan facility with Royal Bank of
Scotland International, London Branch (RBSI) which is comprised of two £5
million tranches. Tranche B is a five year £5 million fixed rate loan
facility and was fully drawn down on 28 April 2018. The interest on Tranche B
is fixed at 2.825% per annum payable quarterly in arrears.
All financial liabilities are measured at amortised cost. The fair value of
the fixed rate loan has been calculated as £5,105,000 (2020 - £5,177,000)
and would be classified as a Level 2 liability under Fair Value Hierarchy
guidance of IFRS 13 'Fair Value Measurement'.
14. Analysis of changes in financing liabilities during the year
The following table shows the movements during the year of financing
liabilities in the Balance Sheet:
2021 2020
£'000 £'000
Opening balance at 1 January 6,991 6,987
Amortisation of arrangement costs 4 4
Closing balance at 31 December 6,995 6,991
15. Called-up share capital
Ordinary shares
of 50 pence each
Number £'000
Authorised 35,000,000 17,500
Allotted and fully paid
At 31 December 2021 and 31 December 2020 22,109,765 11,055
16. Net asset value per share
The net asset value per Ordinary share and the net asset value attributable to
the Ordinary shares at the year end were as follows:
2021 2020
Net asset value attributable (£'000) 97,840 77,144
Number of Ordinary shares in issue 22,109,765 22,109,765
Net asset value per share (p) 442.52 348.91
At the year end there were no (2020 - same) dilutive shares in issue.
17. Financial instruments and risk management
The Company's investment activities expose it to various types of financial
risk associated with the financial instruments and markets in which it
invests. The Company's financial instruments comprise UK and overseas listed
equities and corporate fixed interest bonds, cash balances, debtors and
creditors that arise directly from its operations; for example, in respect of
sales and purchases awaiting settlement, and debtors for accrued income. The
Company may enter into derivative transactions for the purpose of managing
market risks arising from the Company's activities though there was no
exposure to derivative instruments during the year.
The Board has delegated the risk management function to Aberdeen Standard Fund
Managers Limited ("the AIFM" or "ASFML") under the terms of its management
agreement with ASFML (further details of which are included under note 3). The
Board regularly reviews and agrees policies for managing each of the key
financial risks identified with the Manager. The types of risk and the
Manager's approach to the management of each type of risk, are summarised
below. Such approach has been applied throughout the year and has not changed
since the previous accounting period.
Risk management framework. The directors of ASFML collectively assume
responsibility for ASFML's obligations under the AIFMD including reviewing
investment performance and monitoring the Company's risk profile during the
year.
ASFML is a fully integrated member of the abrdn plc group of companies
(referred to as "the Group"), which provides a variety of services and support
to ASFML in the conduct of its business activities, including in the oversight
of the risk management framework for the Company. The AIFM has delegated the
day to day administration of the investment policy to Aberdeen Asset Managers
Limited, which is responsible for ensuring that the Company is managed within
the terms of its investment guidelines and the limits set out in FUND 3.2.2R
(details of which can be found on the Company's website). The AIFM has
retained responsibility for monitoring and oversight of investment
performance, product risk and regulatory and operational risk for the Company.
The AIFM conducts its risk oversight function through the operation of the
Group's risk management processes and systems which are embedded within the
Group's operations. The Group's Risk Division supports management in the
identification and mitigation of risks and provides independent monitoring of
the business. The Division includes Compliance, Business Risk, Market Risk,
Risk Management and Legal. The team is headed up by the Group's Head of Risk,
who reports to the Chief Executive Officer of the Group. The Risk Division
achieves its objective through embedding the Risk Management Framework
throughout the organisation using the Group's operational risk management
system ("SHIELD").
The Group's Internal Audit Department is independent of the Group's Risk
Division and reports directly to the Chief Executive Officer and to the Audit
Committee of the Group's Board of Directors. The Internal Audit Department is
responsible for providing an independent assessment of the Group's control
environment.
The Group's corporate governance structure is supported by several committees
to assist the board of directors of the Group, its subsidiaries and the
Company to fulfil their roles and responsibilities. The Group's Risk Division
is represented on all committees, with the exception of those committees that
deal with investment recommendations. The specific goals and guidelines on the
functioning of those committees are described on the committees' terms of
reference.
Risk management. The main risks the Company faces from its financial
instruments are (i) market risk (comprising interest rate risk and price
risk), (ii) liquidity risk and (iii) credit risk.
(i) Market risk. The fair value or future cash flows of a financial instrument
held by the Company may fluctuate because of changes in market prices. This
market risk comprises two elements - interest rate risk and price risk.
Interest rate risk. Interest rate risk is the risk that interest rate
movements will affect:
- the fair value of the investments in fixed interest rate securities;
- the level of income receivable on cash deposits;
- interest payable on the Company's variable rate borrowings.
Management of the risk. The Board will monitor the effects of interest
movements closely when making investment and borrowing decisions.
The Board reviews on a regular basis the values of the fixed interest rate
securities.
Interest rate profile. The interest rate risk profile of the portfolio of
financial assets and liabilities (excluding equity shares) at the Balance
Sheet date was as follows:
Weighted Weighted
average average
period interest Fixed Floating
rate is fixed rate rate rate
As at 31 December 2021 Years % £'000 £'000
Assets
Corporate bonds 30.72 5.56 1,617 -
Investments in AAA-rated money market funds 0.19 - 2,406
Cash - - - 186
Total assets - - 1,617 2,592
Liabilities
Short-term bank loan 0.07 0.85 (2,000) -
Fixed rate bank loan 1.32 2.83 (5,000) -
Total liabilities - - (7,000) -
Total - - (5,383) 2,592
Weighted Weighted
average average
period interest Fixed Floating
rate is fixed rate rate rate
As at 31 December 2020 Years % £'000 £'000
Assets
Corporate bonds 25.57 5.02 2,100 -
Cash - - - 1,615
Total assets - - 2,100 1,615
Liabilities
Short-term bank loan 0.07 0.99 (2,000) -
Fixed rate bank loan 2.32 2.83 (5,000) -
Total liabilities - - (7,000) -
Total - - (4,900) 1,615
The weighted average interest rate is based on the current yield of each
asset, weighted by its market value. The weighted average interest rate on the
bank loan is based on the interest rate payable, weighted by the total value
of the loan. The maturity date of the Company's loan is shown in note 12 to
the financial statements.
The cash assets consist of cash deposits on call earning interest at
prevailing market rates.
Short-term debtors and creditors, with the exception of bank loans, have been
excluded from the above tables.
All financial liabilities are measured at amortised cost.
Interest rate sensitivity. The sensitivity analysis below has been determined
based on the exposure to interest rates for non-derivative instruments at the
Balance Sheet date and the stipulated change taking place at the beginning of
the financial year and held constant throughout the reporting period in the
case of instruments that have floating rates.
If interest rates had been 25 basis points higher or lower (based on the
current parameter used by the Manager's Investment Risk Department on risk
assessment) and all other variables were held constant, the Company's;
- revenue return for the year ended 31 December 2021 would decrease/increase by
approximately £11,000 (2020 - decrease/increase by £14,000). This is mainly
attributable to the Company's exposure to interest rates on its floating rate
cash balances. These figures have been calculated based on cash positions at
each year end.
- The capital return would decrease/increase by £105,000 (2020 -
increase/decrease by £134,000) using VaR ("Value at Risk") analysis based on
100 observations of weekly VaR computations of fixed interest portfolio
positions at each year end.
Price risk. Price risks (i.e. changes in market prices other than those
arising from interest rates) will affect the value of the quoted investments.
The Company's stated objective is to provide a high and growing dividend with
capital growth from a portfolio invested principally in the ordinary shares of
smaller UK companies and UK fixed income securities.
Management of the risk. It is the Company's policy to hold an appropriate
spread of investments in the portfolio in order to reduce the risk arising
from factors specific to a particular sector. The allocation of assets to
specific sectors and the stock selection process, as detailed on pages 89 and
90 of the 2021 Annual Report, both act to reduce market risk. The Manager
actively monitors market prices throughout the year and reports to the Board,
which meets regularly in order to review investment strategy. All of the
investments held by the Company are listed on the London Stock Exchange, with
the exception of its holding in Kesko, which is traded on the Helsinki
exchange.
Price sensitivity. If market prices at the Balance Sheet date had been 10%
higher while all other variables remained constant, net capital gains
attributable to ordinary shareholders for the year ended 31 December 2021
would have increased by £10,057,000 (2020 - £8,035,000). If market prices at
the Balance Sheet date had been 10% lower while all other variables remained
constant, net capital gains attributable to ordinary shareholders for the year
ended 31 December 2021 would have decreased by £10,057,000 (2020 -
£8,035,000).This is based on the Company's equity investments held at each
year end.
(ii) Liquidity risk. This is the risk that the Company will encounter difficulty
raising funds to meet its cash commitments as they fall due. Liquidity risk
may result from either the inability to sell financial instruments quickly at
their fair value or from the inability to generate cash inflows as required.
Management of the risk. Liquidity risk is not considered to be significant as
the Company's assets comprise mainly readily realisable securities, which can
be sold to meet funding commitments if necessary. Short-term flexibility is
achieved through the use of loan facilities (note 12).
Maturity profile. The maturity profile of the Company's financial liabilities
at the Balance Sheet date was as follows:
Within Within Within Within
1 year 1-2 years 2-3 years 3-4 years
At 31 December 2021 £'000 £'000 £'000 £'000
Trade and other payables (316) - - -
Bank loans (2,000) (5,000) - -
Interest on bank loans (143) (70) - -
(2,459) (5,070) - -
Within Within Within Within
1 year 1-2 years 2-3 years 3-4 years
At 31 December 2020 £'000 £'000 £'000 £'000
Trade and other payables (254) - - -
Bank loans (2,000) - (5,000) -
Interest on bank loans (143) (141) (70) -
(2,397) (141) (5,070) -
(iii) Credit risk. This is failure of the counter party to a transaction to
discharge its obligations under that transaction that could result in the
Company suffering a loss.
Management of the risk. The Company considers credit risk not to be
significant as it is actively managed as follows:
- where the Manager makes an investment in a bond, corporate or otherwise, the
credit rating of the issuer is taken into account so as to minimise the risk
to the Company of default;
- investments in quoted bonds are made across a variety of industry sectors so
as to avoid concentrations of credit risk;
- investment transactions are carried out on a delivery versus payment basis
with a large number of brokers, whose credit-standing is reviewed periodically
by the Manager, and limits are set on the amount that may be due from any one
broker;
- the risk of counterparty exposure due to failed trades causing a loss to the
Company is mitigated by the review of failed trade reports on a daily basis.
In addition, both stock and cash reconciliations to the custodian's records
are performed on a daily basis to ensure discrepancies are investigated on a
timely basis. The Manager's compliance department carries out periodic reviews
of the custodian's operations and reports its finding to the Manager's risk
management committee.
- cash is held only with reputable banks with high quality external credit
ratings.
None of the Company's financial assets are secured by collateral or other
credit enhancements.
Credit risk exposure. In summary, compared to the amounts in the Balance
Sheet, the maximum exposure to credit risk at 31 December was as follows:
2021 2020
Balance Maximum Balance Maximum
Sheet exposure Sheet exposure
£'000 £'000 £'000 £'000
Non-current assets
Quoted convertibles, bonds and preference shares at fair value through profit 1,617 1,617 2,100 2,100
or loss
Current assets
Accrued income 376 376 320 320
Cash and cash equivalents 2,592 2,592 1,615 1,615
4,585 4,585 4,035 4,035
None of the Company's financial assets are past due and the application of the
expected credit loss model for impairment under IFRS 9 has not had a material
impact on the Company.
Credit ratings. The table below provides a credit rating profile using Fitch's
credit ratings for the quoted bonds at 31 December 2021 and 31 December 2020:
2021 2020
£'000 £'000
A+ 224 238
A- 312 732
BB+ 302 308
BBB 346 364
BBB- 433 458
1,617 2,100
Fair value of financial assets and liabilities. The book value of cash at bank
and short-term bank loans and overdrafts included in these financial
statements approximate to fair value because of their short-term maturity. The
carrying values of fixed asset investments are stated at their fair values,
which have been determined with reference to quoted market prices and have
been categorised as Level 1 and Level 2 within the Fair Value Hierarchy table
on page 83. For details of bond maturities and interest rates, see page 33 of
the 2021 Annual Report. For all other short-term debtors and creditors, their
book values approximate to fair values because of their short-term maturity.
The fair value of the long-term loan has been calculated at £5,105,000 as at
31 December 2021 (2020 - £5,177,000) compared to an accounts value in the
financial statements of £4,995,000 (2020 - £4,991,000) (note 13). The fair
value of each loan is determined by aggregating the expected future cash flows
for that loan discounted at a rate comprising the borrower's margin plus an
average of market rates applicable to loans of a similar period of time and
currency.
Gearing. The Company has in place a £10 million unsecured loan facility of
which £7 million has been drawn down. Although this gearing increases the
opportunity for gain, it also increases the risk of loss in falling markets.
The risk of increased gearing is managed by retaining the flexibility to
reduce short term borrowings as appropriate. Gearing levels are monitored so
that they remain within guidelines set by the Board.
18. Fair value hierarchy
Under IFRS 13 'Fair Value Measurement' an entity is required to classify fair
value measurements using a fair value hierarchy that reflects the significance
of the inputs used in making the measurements. The fair value hierarchy has
the following levels:
- Level 1: quoted prices (unadjusted) in active markets for
identical assets or liabilities;
- Level 2: inputs other than quoted prices included within Level 1
that are observable for the assets or liabilities, either directly (ie as
prices) or indirectly (ie derived from prices); and
- Level 3: inputs for the asset or liability that are not based on
observable market data (unobservable inputs).
The financial assets and liabilities measured at fair value in the Balance
Sheet are grouped into the fair value hierarchy at 31 December 2021 as
follows:
Level 1 Level 2 Level 3 Total
Note £'000 £'000 £'000 £'000
Financial assets at fair value through profit or loss
Quoted equities a) 100,566 - - 100,566
Quoted bonds b) - 1,617 - 1,617
Total 100,566 1,617 - 102,183
As at 31 December 2020
Level 1 Level 2 Level 3 Total
Note £'000 £'000 £'000 £'000
Financial assets at fair value through profit or loss
Quoted equities a) 80,354 - - 80,354
Quoted bonds b) - 2,100 - 2,100
Total 80,354 2,100 - 82,454
a) Quoted equities. The fair value of the Company's investments in quoted
equities has been determined by reference to their quoted bid prices at the
reporting date. Quoted equities included in Fair Value Level 1 are actively
traded on recognised stock exchanges.
b) Quoted bonds. The fair value of the Company's investments in quoted
convertibles, bonds and preference shares has been determined by reference to
their quoted bid prices at the reporting date. Investments categorised as
Level 2 are not considered to trade in active markets.
There have been no transfers of assets or liabilities between levels of the
fair value hierarchy during any of the above periods.
19. Related party transactions
Directors fees and interests. Fees payable during the year to the Directors
and their interests in the shares of the Company are disclosed within the
Directors' Remuneration Report on pages 52 and 53 and fees payable also within
note 5 on page 72 of the 2021 Annual Report.
Transactions with the Manager. Management, promotional activities, secretarial
and administration services are provided by ASFML with details of transactions
during the year and balances outstanding at the year end disclosed in notes 4
and 5 of the 2021 Annual Report.
20. Capital management policies and procedures
The objective of the Company is to provide a high and growing dividend and
capital growth from a portfolio invested principally in the ordinary shares of
smaller UK companies and UK fixed income securities.
The Company manages its capital to ensure that it will be able to continue as
a going concern while maximising the return to shareholders through the
optimisation of the debt and equity balance.
The Board monitors and reviews the broad structure of the Company's capital on
an ongoing basis. This review includes:
- the planned level of gearing, which takes account of the
Investment Manager's views on the market;
- the level of equity shares in issue; and
- the extent to which revenue in excess of that which is required
to be distributed should be retained.
The Company's objectives, policies and processes for managing capital are
unchanged from the preceding accounting period.
The Company does not have any externally imposed capital requirements.
ADDITIONAL NOTES TO THE ANNUAL FINANCIAL REPORT
The financial information set out above does not constitute the Company's
statutory accounts for the years ended 31 December 2021 or 2020 but is derived
from those accounts. Statutory accounts for 2020 have been delivered to the
registrar of companies, and those for 2021 will be delivered in due course.
The auditor has reported on those accounts; their reports were (i)
unqualified, (ii) did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying their report and
(iii) did not contain a statement under section 498 (2) or (3) of the
Companies Act 2006
The statutory accounts for the financial year ended 31 December 2021 were
approved by the Directors on 14 March 2022 but will not be filed with the
Registrar of Companies until after the Company's Annual General Meeting which
is to be held at 12.00pm on 5 May 2022 at Bow Bells House, One Bread Street,
London EC4M 9HH.
The Annual Report will be posted to shareholders in March 2022 and additional
copies will be available from the Manager (Investor Helpline - Tel. 0808 500
4000) or by download from the Company's webpage
(www.abrdnsmallercompaniesincome.co.uk
(http://www.abrdnsmallercompaniesincome.co.uk) )
Please note that past performance is not necessarily a guide to the future and
that the value of investments and the income from them may fall as well as
rise. Investors may not get back the amount they originally invested.
ALTERNATIVE PERFORMANCE MEASURES
Alternative performance measures are numerical measures of the Company's
current, historical or future performance, financial position or cash flows,
other than financial measures defined or specified in the applicable financial
framework. The Company's applicable financial framework includes IFRS and the
AIC SORP. The Directors assess the Company's performance against a range of
criteria which are viewed as particularly relevant for closed-end investment
companies.
Discount to Net Asset Value per Ordinary Share
Discount to Net Asset Value per Ordinary Share is the amount by which the
market price per Ordinary share is lower than the net asset value per Ordinary
share, expressed as a percentage of the net asset value per Ordinary share.
2021 2020
NAV per Ordinary share (p) a 442.52 348.91
Share price (p) b 375.00 313.00
Discount (b-a)/a -15.3% -10.3%
Dividend cover
Dividend cover is the revenue return per share divided by total dividends per
share, expressed as a ratio.
2021 2020
Revenue return per share a 9.69p 5.60p
Dividends per share b 8.85p 8.24p
Dividend cover a/b 1.09 0.68
Net gearing
Net gearing measures the total borrowings less cash and cash equivalents
dividend by shareholders' funds, expressed as a percentage. Under AIC
reporting guidance cash and cash equivalents includes amounts due to and from
brokers at the year end as well as cash and cash equivalents.
2021 2020
Borrowings (£'000) a 6,995 6,991
Cash (£'000) b 186 1,615
Investments in AAA-rated money market funds c 2,406 -
Amounts due to brokers (£'000) d 5 -
Amounts due from brokers (£'000) e - -
Shareholders' funds (£'000) f 97,840 77,144
Net gearing (a-b-c+d-e)/f 4.5% 7.0%
Ongoing charges
The ongoing charges ratio has been calculated in accordance with guidance
issued by the AIC as the total of investment management fees and
administrative expenses and expressed as a percentage of the average daily net
asset values with debt at fair value published throughout the year.
2021 2020
Investment management fees (£'000) 675 528
Administrative expenses (£'000) 393 382
Less: non-recurring charges{A} (£'000) (25) (24)
Ongoing charges (£'000) 1,043 886
Average net assets (£'000) 89,659 70,608
Ongoing charges ratio (excluding look-through costs) 1.16% 1.25%
Look-through costs{B} 0.04% 0.10%
Ongoing charges ratio (including look-through costs) 1.20% 1.35%
{A} Professional services comprising new Director recruitment costs
and legal fees considered unlikely to recur.
{B} Calculated in accordance with AIC guidance issued in October
2020 to include the Company's share of costs of holdings in investment
companies on a look-through basis.
The ongoing charges ratio provided in the Company's Key Information Document
is calculated in line with the PRIIPs regulations, which includes financing
and transaction costs.
Total return
NAV and share price total returns show how the NAV and share price has
performed over a period of time in percentage terms, taking into account both
capital returns and dividends paid to shareholders. Share price and NAV total
returns are monitored against open-ended and closed-ended competitors, and the
benchmark, respectively.
Share
Year ended 31 December 2021 NAV Price
Opening at 1 January 2021 a 348.9p 313.0p
Closing at 31 December 2021 b 442.6p 375.0p
Price movements c=(b/a)-1 26.8% 19.8%
Dividend reinvestment{A} d 3.6% 3.1%
Total return c+d +30.4% +22.9%
Share
Year ended 31 December 2020 NAV Price
Opening at 1 January 2020 a 373.9p 343.0p
Closing at 31 December 2020 b 348.9p 313.0p
Price movements c=(b/a)-1 -6.7% -8.7%
Dividend reinvestment{A} d 2.6% 3.6%
Total return c+d -4.1% -5.1%
{A} NAV total return involves investing the net dividend in the NAV
of the Company with debt at fair value on the date on which that dividend goes
ex-dividend. Share price total return involves reinvesting the net dividend in
the share price of the Company on the date on which that dividend goes
ex-dividend.
For abrdn Smaller Companies Income Trust plc
Aberdeen Asset Management PLC, Company Secretary
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