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RNS

Annual Financial Report

Released 07:00 16-Dec-2016

RNS Number : 0093S
Dunedin Smaller Cos Inv Tst PLC
16 December 2016
 

DUNEDIN SMALLER COMPANIES INVESTMENT TRUST PLC

 

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 OCTOBER 2016

 

 

COMPANY OVERVIEW

 

The Company

Dunedin Smaller Companies Investment Trust PLC ("the Company") is an investment company with its Ordinary shares listed on the premium segment of the London Stock Exchange. The Company is an investment trust and aims to attract long term private and institutional investors wanting to benefit from the growth prospects of UK smaller companies by investment in a relatively risk averse investment trust.

 

Investment Objective

The Company's investment objective is to achieve long term growth from a portfolio of smaller companies in the United Kingdom.

 

Benchmark

The Company's benchmark index is the FTSE SmallCap Index (excluding Investment Companies).

 

Management

The investment management of the Company has been delegated by Aberdeen Fund Managers Limited ("AFML", the "AIFM" or the "Manager") to Aberdeen Asset Managers Limited ("AAML" or the "Investment Manager"). Both companies are wholly owned subsidiaries of Aberdeen Asset Management PLC (the "Aberdeen Group").

 

Website

Up-to-date information can be found on the Company's website: www.dunedinsmaller.co.uk

 

 

COMPANY OVERVIEW - FINANCIAL HIGHLIGHTS

 

Net asset value total return


Share price total return

2016

+7.0%

2016

 +4.1%

2015

+10.7%

2015

+13.7%




FTSE SmallCap Index (ex Investment Companies) total return


Revenue return per share

2016

+6.7%

2016

 5.98p

2015

+13.1%

2015

6.17p




Dividends per shareA


Total assets (million)

2016

6.15p

2016

 £122.6

2015

6.00p

2015

£117.8

 


 

A Dividends declared for the year in which they were earned.



 

 

For further information, please contact:

 

Andrew Leigh

Aberdeen Asset Managers Limited            0207 463 6312



COMPANY OVERVIEW - CHAIRMAN'S STATEMENT

 

Performance

The Company's net asset value ("NAV") total return for the year ended 31 October 2016 was 7.0%, comparing favourably with a total return of 6.7% from our benchmark, the FTSE SmallCap Index (ex Investment Companies). The share price total return for the year was 4.1%, reflecting a slight widening of the discount of the share price to the NAV per share to 17.8%, from 15.0% at the beginning of the year.

 

Although markets increased during the year as a whole, it was a period of significant uncertainty and volatility. Equities were particularly volatile at the beginning of 2016 with concerns of slowing economic growth in China and weakening commodity prices, in particular oil, driving investor sentiment. As the year progressed, investors also became concerned about the UK's referendum on its membership of the EU. The surprise result to exit the EU had a significant impact on markets, and also on Sterling which depreciated significantly against other major currencies. However, the stockmarket recovered quickly and ended the year higher than before the referendum, due principally to the non-Sterling exposure of the earnings of many of the larger UK listed companies, as well as the additional stimulus measures announced by the Bank of England. In the year as a whole, and in the period following the referendum, smaller companies underperformed against their larger counterparts, however they still ended the period in positive territory.

 

The companies in the portfolio have wide and varied geographic exposures and consequently the impact of the referendum at the level of the individual holdings was limited. The positive performance for the year arose from a range of businesses with exposure to diverse end-markets. These included RPC Group, which continued its successful consolidation of the European plastics packaging market. Dechra Pharmaceuticals witnessed very good growth in its US operations whilst also benefitting from efforts to broaden its operations to serve the food producing animal market. Two recent introductions to the portfolio; Smart Metering Systems and Burford Capital also delivered strong performance. In each case a combination of the delivery of better than expected results has combined with an increasing appreciation of their business models by investors to deliver substantial share price gains.  James Fisher, the marine services company, more than offset weakness in its oil and gas exposed businesses with pleasing contract wins in its nuclear, offshore wind and submarine rescue operations.  BBA Aviation and Abcam, a provider of high end research laboratory consumables, are two other businesses that delivered substantial gains during the year as they continued to successfully execute their strategies. In addition, BBA's share price has been a beneficiary of the weakness of Sterling given the vast majority of its revenues are in US Dollars.

 

Of course in any portfolio not everything will be performing as hoped simultaneously. Mothercare has been unfortunate to experience a downturn in trading in its international division at a time when the already troubled UK business has shown signs of improvement. Interserve, the construction and facilities management company, has also struggled, with three loss making construction contracts in the UK. Despite resilient trading throughout the rest of Interserve's business, the uncertainties caused by these have weighed on the share price.

 

More detailed information on performance for the year, including details on changes within the portfolio, is included within the Investment Manager's Review.

 

Dividends

The Company experienced a small decline in earnings per share for the year, to 5.98p, compared to 6.17p for the previous year. The main reason for the decrease was a fall in the amount of special dividends received during the year. This masked the beneficial impact of continuing levels of dividend growth within the portfolio. 

 

An interim dividend of 2.15p per share was paid on 29 July 2016. The Board proposes a final dividend of 4.00p per share (2015 - 3.85p) which, subject to approval at the Annual General Meeting, will be paid on 10 February 2017 to shareholders on the register on 13 January 2017. When combined with the interim dividend, the total dividend for the year will amount to 6.15p (2015 - 6.0p), an increase of 2.5%, and equivalent to a yield of 3.0% based on the year end share price of 202p.

 

As stated in last year's Annual Report, whilst the Company's objective is to achieve long term growth, the Board recognises the importance of income to shareholders and, in order to grow or maintain the dividend in future years, the Board intends, if necessary, to use the Company's substantial revenue and capital reserves to support any portion of the dividend not covered by the year's earnings. Following the payment of the final dividend, revenue reserves per share will amount to 6.08p (2015 - 6.25p), representing 98.9% of the current annual dividend cost.

 

Share Buy Backs

The Company did not purchase any of its own Ordinary shares during the period under review. As stated above, the discount widened to 17.8% during the year, which was in line with a widening of discounts within the Company's peer group and also within the investment trust sector as a whole. The Directors monitor the Company's discount on an ongoing basis and may use its share buyback powers, subject to market conditions, if it feels this to be appropriate. A resolution to renew the Company's share buy-back authority will be put to shareholders at the Annual General Meeting.

 

Gearing

The Company remained ungeared throughout the year on net of cash basis. It has a £5 million revolving credit facility as well as a three year term loan facility of £5 million which is more than offset by cash balances held. The £5 million term loan has a fixed rate of interest of 2.171% and both facilities mature in November 2017.

 

Management Fee Arrangements

The basic management fee payable to the Manager, details of which are shown in note 3 to the financial statements, is 0.4% per annum of the Company's adjusted gross assets.

 

There is also a performance-related fee which, for a number of years, has been calculated on a quarterly basis at a rate of 0.1% per annum (up to a maximum of 0.5% per annum) of the adjusted gross assets for every 1% by which the Company's NAV performance outperforms the capital performance of the benchmark index over the previous rolling 12 month period. However, a consequence of this arrangement is that it would be possible for a performance fee to be paid during a year when the Company underperformed its benchmark.

 

During the year, the Board therefore agreed with the Manager that, with effect from 1 November 2016, the performance-related fee will be calculated on an annual basis in respect of the performance of the Company for the preceding financial year, rather than on a quarterly basis. There are no changes to the rate of performance fee, including the maximum rate per annum, and all other terms of the management agreement are unchanged.

 

Annual General Meeting

The Annual General Meeting will be held at Discovery Point, Dundee on Wednesday 1 February 2017 at 12 noon. In addition to the formal business of the meeting, our portfolio manager, Ed Beal, will provide a presentation on performance for the year and the outlook for smaller companies, and there will also be an opportunity for shareholders to meet informally with the Directors at the conclusion of the meeting.

 

Outlook

Although global growth is expected to improve next year, the risks caused by the UK referendum result and the forthcoming change in the US Administration are likely to cause continuing uncertainties, not only for investors but also for company managements and consumers. This is likely to lead to a slowdown in economic activity in the UK.

 

The Investment Manager has continued to focus on investing in good quality companies run by strong management teams. The Board believes that, notwithstanding the shorter term uncertainties, this approach will be beneficial over the long term and that smaller companies will continue to provide good long term opportunities for shareholders.

 

N M Yarrow

Chairman

15 December 2016

 

 



STRATEGIC REPORT - OVERVIEW OF STRATEGY

 

Business Model

The business of the Company is that of an investment company which seeks to qualify as an investment trust for UK capital gains tax purposes.  The Directors do not envisage any change in this activity in the foreseeable future.

 

Investment Objective

The Company's investment objective is to achieve long term growth from a portfolio of smaller companies in the United Kingdom.

 

Investment Policy

The Company invests primarily in the equity securities of UK smaller companies, with an emphasis on investing in quality companies with good management, strong cash flow, a sound balance sheet and the prospect of dividend growth.

 

The Company does not typically acquire securities that are unquoted or unlisted at the time of investment (with the exception of securities which are about to be listed or traded on a stock exchange). However, the Company may continue to hold securities that cease to be quoted or listed if the Investment Manager considers this to be appropriate.

 

The Directors measure the performance of the portfolio relative to the FTSE SmallCap Index (ex Investment Companies) but the Company is unconstrained as to the market sectors in which it may invest.  As a result the portfolio is likely to diverge, sometimes significantly, from the benchmark.

 

Risk Diversification

The Company maintains a diversified portfolio of investments, typically comprising in the region of 40 to 75 holdings (but without restricting the Company from holding a more or less concentrated portfolio from time to time). It is the policy of the Company to invest no more than 15% of its gross assets in any one company and no more than 15% of its gross assets in other listed investment companies (including listed investment trusts).

 

Gearing

The Directors are responsible for determining the gearing strategy of the Company.  Gearing is used with the intention of enhancing long-term returns and is subject to a maximum level of 20% of gross assets at the time the gearing is incurred.  Any borrowing, except for short-term liquidity purposes, is used for investment purposes. 

 

Delivering the Investment Policy

The Directors are responsible for determining the investment objective and the investment policy of the Company. Day-to-day management of the Company's assets has been delegated, via the AIFM, to the Investment Manager.

 

Investment Process

The Investment Manager believes that, over the long term, share prices reflect underlying business fundamentals. A bottom-up investment process is followed, which is based on a disciplined evaluation of companies that includes visits by its fund managers.  Company selection is the major source of added value. New investments are not made without the fund managers having first met management of the investee company, undertaken further analysis and written detailed notes to outline the underlying investment merits. A company's value is estimated in two stages: quality then price. Quality is defined with reference to management, business focus, balance sheet and corporate governance. Price is calculated relative to key financial ratios and business prospects.

 

The Investment Manager's portfolio construction relies upon diversification rather than formal controls guiding stock and sector weightings. The Investment Manager's portfolios are generally run conservatively, with an emphasis on traditional buy-and-hold, top-slicing/topping up being preferred to outright trading and this approach results in low turnover within portfolios. Typically, investee companies have a higher return on equity/assets and lower debt to equity than the market averages.

 

At the year end the Company's portfolio consisted of 43 holdings.

 

Benchmark

The Company's benchmark is the FTSE SmallCap Index (excluding Investment Companies).

 

 


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 shown in the following table:

 

KPI

Description

Performance of net asset value ("NAV")

The Board considers the Company's NAV total return to be the best indicator of performance over time and is therefore the main indicator of performance used by the Directors.

Performance against benchmark index and  competitor investment trusts

The Board measures performance against the benchmark index - the FTSE SmallCap Index (excluding Investment Companies). The Board also monitors performance relative to competitor investment trusts over a range of time periods, taking into consideration the differing investment policies and objectives employed by those companies.

Revenue return per Ordinary share

The Board also monitors the Company's net revenue return.

Share price performance

The Board monitors the performance of the Company's share price on a total return basis.

Discount/premium to NAV

The discount/premium relative to the NAV per share represented by the share price is closely monitored by the Board.

Ongoing charges

The Board monitors the Company's operating costs carefully.

 

Principal Risks and Uncertainties

There are a number of risks which, if realised, could have a material adverse effect on the Company and its financial condition, performance and prospects. The risks and uncertainties faced by the Company are reviewed by the Audit Committee in the form of a risk matrix and heat map, and the principal risks and uncertainties facing the Company at the current time, together with a description of the mitigating actions the Board has taken, are set out in the table below. The Board has carried out a robust assessment of these risks, which include those that would threaten its business model, future performance, solvency or liquidity. The principal risks associated with an investment in the Company's shares are published monthly on the Company's factsheet and 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 strategy and objectives - the setting of an unattractive strategic proposition to the market and the failure to adapt to changes in investor demand may lead to the Company becoming unattractive to investors, a decreased demand for its shares and a widening discount.

The Board keeps the level of discount at which the Company's shares trade, as well as the investment objective and policy, under review and holds an annual strategy meeting where it reviews investor relations reports and updates from the Investment Manager and the Company's broker.

 

The Directors are updated at each Board meeting on the composition of, and any movements in, the shareholder register. 

 

Investment management - investing outside of the investment restrictions and guidelines set by the Board could result in poor performance and an inability to meet the Company's objectives, as well as a widening discount.

The Board meets the Manager on a regular basis and keeps investment performance under close review. Representatives of the Investment Manager attend all Board meetings and a detailed formal appraisal of the Aberdeen Group is carried out annually by the Management Engagement Committee.

 

The Board sets and monitors the investment restrictions and guidelines, and receives regular reports which include performance reporting on the implementation of the investment policy, the investment process and application of the guidelines. The Board also monitors the Company's share price relative to the NAV per share.

 

Income/dividends - the level of the Company's dividends and future dividend growth will depend on the performance of the underlying portfolio. Any change in the tax treatment of dividends or interest received by the Company may reduce the level of net income available for the payment of dividends to shareholders.

 

The Directors review detailed income forecasts at each Board meeting. The Company has built up significant revenue reserves which can be drawn upon if required should there be a shortfall in revenue returns.

 

 

Financial obligations - the financial risks associated with the portfolio could result in losses to the Company.

The financial risks associated with the Company include market risk, liquidity risk and credit risk, all of which are mitigated by the Investment Manager. Further details of the steps taken to mitigate the financial risks associated with the portfolio are set out in note 15 to the financial statements.

Gearing - a fall in the value of the Company's investment portfolio could be exacerbated by the impact of gearing. It could also results in a breach of loan covenants. 

 

The Board sets the gearing limits within which the Investment Manager can operate. Gearing levels and compliance with loan covenants are monitored on an ongoing basis by the Manager and at Board meetings. In the event of a possible impending covenant breach, appropriate action would be taken to reduce borrowing levels.

 

In addition, AFML, as alternative investment fund manager, has set overall leverage limits.

 

Regulatory - failure to comply with relevant laws and regulations could result in fines, loss of reputation and potentially loss of an advantageous tax regime.

The Board and Manager monitor changes in government policy and legislation which may have an impact on the Company, and the Audit Committee monitors compliance with regulations by reviewing internal controls reports from the Manager. From time to time the Board employs external advisers to advise on specific matters.

Operational - the Company is dependent on third parties for the provision of all systems and services (in particular, those of the Aberdeen Group) and any control failures and gaps in their systems and services could result in a loss or damage to the Company.

Written agreements are in place with all third party service providers. The Board receives reports from the Manager on its internal controls and risk management throughout the year and receives assurances from all its other significant service providers on at least an annual basis.

 

The Manager monitors closely the control environments, including controls relating to cyber security, and quality of services provided by third parties, which include the depositary and custodian, through service level agreements, regular meetings and key performance indicators.

 

 

 

 

 

 

Promoting the Company

The Board recognises the importance of promoting the Company to prospective investors both for improving liquidity and enhancing the value and rating of the Company's shares. The Board believes an effective way to achieve this is through subscription to and participation in the promotional programme run by the Aberdeen Group on behalf of a number of investment trusts under its management. The Company's financial contribution to the programme is matched by the Aberdeen Group.  The Aberdeen Group Head of Brand reports quarterly to the Board giving analysis of the promotional activities as well as updates on the shareholder register and any changes in the make up of that register.

 

The purpose of the programme is both to communicate effectively with existing shareholders and to gain new shareholders with the aim of improving liquidity and enhancing the value and rating of the Company's shares. Communicating the long-term attractions of the Company is key and therefore the Company also supports the Aberdeen Group's investor relations programme which involves regional roadshows, promotional and public relations campaigns. 

 

Board Diversity

The Board recognises the importance of having a range of skilled, experienced individuals with relevant knowledge in order to allow it to fulfill its obligations. The Board also recognises the benefits, and is supportive, of the principle of diversity in its recruitment of new Board members. However, in making new appointments, the Board's overriding priority is to appoint the most appropriate candidates, regardless of gender or other forms of diversity. The Board has not therefore set any measurable objectives in relation to its diversity.  

 

At 31 October 2016, there were three male Directors and one female Director on the Board.

 

Employee, Social and Human Rights Issues

The Company has no employees as the Board has delegated 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 set out below.

 

Socially Responsible Investment Policy

The Directors, through the Manager, encourage companies in which investments are made to adhere to best practice in the area of corporate governance and socially responsible investing. They believe that this can best be achieved by entering into a dialogue with company management to encourage them, where necessary, to improve their policies in both areas.

 

The Manager's ultimate objective, however, is to deliver superior investment returns for its clients. Accordingly, whilst the Manager will seek to favour companies which pursue best practice in these areas, this must not be to the detriment of the return on the investment portfolio.

 

UK Stewardship Code and Proxy Voting as an Institutional Shareholder

Responsibility for actively monitoring the activities of portfolio companies has been delegated by the Board to the Manager which has sub-delegated that authority to the Investment Manager.

 

The full text of the Company's response to the Stewardship Code may be found on its website.

 

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. 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' Reports) Regulations 2013.

 

Viability Statement

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 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 and uncertainties and the steps taken to mitigate these risks.

-    The ongoing relevance of the Company's investment objective.

-    The Company's portfolio is invested in listed securities.

-    The level of gearing is closely monitored and the financial covenants attached to the Company's borrowings provide for significant headroom.

-    The ability of the Company to refinance or repay its £10 million loan facility on or before its maturity in November 2017.

 

In making its assessment, the Board has considered that there are other matters that could have an impact on the Company's prospects or viability in the future, including a large economic shock, significant stock market volatility, a substantial reduction in the liquidity of the portfolio, and changes in regulation or investor sentiment.

 

Taking into account the Company's current position and the potential impact of its principal risks and uncertainties, the Directors have 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 approval of this Report.

 

Future

Many of the non-performance related trends likely to affect the Company in the future are common across all closed ended investment companies, such as the attractiveness of investment companies as investment vehicles, the impact of regulatory changes (including MiFID II and the Packaged Retail Investment and Insurance Products regulations) and the recent changes to the pensions and savings market in the UK. In addition, the Board considers that there are additional uncertainties caused by the recent referendum in the UK on its membership of the European Union, and the US presidential election. These factors need to be viewed alongside the outlook for the Company, both generally and specifically, in relation to the portfolio. The Board's view on the general outlook for the Company can be found in the Chairman's Statement whilst the Investment Manager's views on the outlook for the portfolio are included in its Review.

 

On behalf of the Board

N M Yarrow

Chairman

15 December 2016

 

 



STRATEGIC REPORT - RESULTS

 

Financial Highlights

 


31 October 2016

31 October 2015

% change

Total assets less current liabilities (before deducting bank loan)

£122,618,000

£117,823,000

4.1

Equity shareholders' funds (Net Assets)

£117,618,000

£112,823,000

4.3

Market capitalisation

£96,672,000

£95,894,000

0.8

Share price (mid market)

202.00p

200.38p

0.8

Net Asset Value per share

245.77p

235.75p

4.3

FTSE SmallCap Index (ex Investment Companies) (capital gains basis)

4,325.05

4,174.82

3.6





Discount (difference between share price and net asset value)

17.81%

15.00%






Gearing




Net cashA

2.65%

0.47%






Dividends and earnings




Total return per shareB

16.02p

23.19p


Revenue return per share

5.98p

6.17p

(3.1)

Dividends per shareC

6.15p

6.00p

2.5

Dividend cover (including proposed final dividend)

0.97

1.03


Revenue reservesD

£4,823,000

£4,832,000






Operating costs




Ongoing charges (excluding performance fees)E

0.81%

0.81%


Ongoing charges (including performance fees)

0.83%

1.03%



A         Calculated in accordance with AIC guidance "Gearing Disclosures post RDR"

B        Measures the total revenue and capital return for the year divided by the weighted average number of Ordinary shares in issue (see Statement of Comprehensive Income).

C         The figures for dividends per share reflect the years in which they were earned (see note 7).

D         The revenue reserve figure does not take account of the proposed final dividend amounting to £1,914,000 (2015 - £1,843,000).

E        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 divided by the average cum income net asset value throughout the year. 

 

 



STRATEGIC REPORT - RESULTS

 

Performance

 


1 year

3 year

5 year


% return

% return

% return

Capital return




Share price

+0.8

-6.5

+56.0

Net Asset Value per share

+4.3

+8.8

+71.8

FTSE SmallCap Index (ex Investment Companies)

+3.6

+11.4

+90.3





Total return (Capital return plus dividends paid)



Share price

+4.1

+1.5

+81.1

Net Asset Value per share

+7.0

+16.8

+96.2

FTSE SmallCap Index (ex Investment Companies)

+6.7

+20.6

+118.0

 

 

DIVIDENDS


Rate per share

xd date

Record date

Payment date

Proposed final dividend 2016

4.00p

12 January 2017

13 January 2017

10 February 2017

Interim dividend 2016

2.15p

7 July 2016

8 July 2016

29 July 2016


_______




2016

6.15p





_______




Final dividend 2015

3.85p

14 January 2016

15 January 2016

12 February 2016

Interim dividend 2015

2.15p

2 July 2015

3 July 2015

24 July 2015


_______




2015

6.00p





_______




 

 

TEN YEAR FINANCIAL RECORD

 

Year to 31 October

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Revenue available for Ordinary dividends (£'000)

2,432

2,517

1,525

1,939

2,556A

2,206

2,599

2,555

2,954

2,862

Per share (p)











Net revenue return

4.5

5.2

3.2

4.1

5.3

4.6

5.4

5.3

6.2

6.0

Net dividends paid/proposed

4.25

4.50

4.50

4.60

4.85

5.00

5.15

5.25

6.00

6.15

Revenue reserve after payment of final dividend

6.44

7.43

6.15

5.60

6.09

5.70

5.98

6.07

6.25

6.08

Net asset value

167.0

90.1

117.1

154.2

143.0

168.2

226.0

217.9

235.8

245.8

Total return

4.4

(73.6)

31.4

41.7

(6.5)

30.1

62.8

(2.9)

23.2

16.0


____

____

____

____

____

____

____

____

____

____

Shareholders' funds (£'000)

82,364

43,170

56,020

73,809

68,446

80,499

108,153

104,258

112,823

117,618


____

____

____

____

____

____

____

____

____

____












A Includes interest on VAT recovered.











 

 



STRATEGIC REPORT - INVESTMENT MANAGER'S REVIEW

 

Economic Overview

The year under review got off to a slow start with small companies falling in value during November.  Central banks dominated investor thinking.  The economies of the US and UK were actually continuing with their recoveries as evidenced by the unemployment statistics which by January 2016 had fallen to their lowest levels since 2008 and 2010 respectively.  Indeed by December 2015 the authorities in the US felt able to raise interest rates by 0.25%, the first such increase in nine years.  However, they also cautioned that this rate cycle was likely to be shallower than normal.  Despite there being much noise beforehand as to the potential impact on markets it was notable that investors broadly took the rate increase in their stride.  It was and remains the case though that with so many market practitioners having never experienced a rising rate cycle, we have no real idea how markets will respond should rates start to rise in a more normal manner. 

 

The Chinese economy remained a key area of concern for investors.  However, the authorities still possessed conventional monetary policy tools which reduced the likelihood of a much feared hard landing.  The data eventually showed that the country had grown at 6.9% during 2015.  This represented the slowest performance for 25 years.  The subsequent shift of focus from reform towards fiscal stimulus provided the markets with some confidence that growth would be sustained.

 

Equities had a poor start to 2016 with small companies having a particularly tough time, registering a decline of 5.7%.  Sentiment continued to be dominated by concerns about a slowing of growth in China and the weakness of the oil price which fell below $30 per barrel for the first time in 12 years.  It was not the only commodity price to suffer as copper reached a seven year low during the month.  Investors faced significant uncertainties that, in addition to those outlined above, now also included the potential outcome of the UK's referendum on EU membership and the possible unintended consequences of a move into a world of zero or negative interest rates.  In such an uncertain environment it was unsurprising that volatility was again to the fore. 

 

A theme that had been present throughout the year was that of weakness in commodity prices and in particular Oil & Gas.  This was having a significant impact on the share prices of commodity producers and the support companies that provide services to them.

 

Corporate management teams remained optimistic though with large company merger and acquisition activity a continuing feature.  Although it ultimately failed, the attempt by Pfizer to acquire Allergan would have created the largest pharmaceutical company in the world.  However, by early 2016 there were signs that despite the recovery that was evident across developed markets the confidence of executives was waning.  This could be seen in slowing rates of investment which in turn placed pressure on expectations for future earnings growth.  Indeed across the UK market the forecasts indicated that in aggregate we now faced a fifth consecutive year of declining profits.

 

The Bank of England revised its growth expectations downward for both 2015 and 2016 and with inflation remaining low, so expectations for rate increases in the domestic economy were also pushed into the future.  Mario Draghi and the European Central Bank were taking a different approach and announced a further reduction in interest rates and an extension of the region's Quantitative Easing programme into 2017.  However, that was insufficient to placate markets and many investors were disappointed that they did not go further.  By the New Year Mr Draghi had been forced to refer to a "determination to act". 

 

Come the spring, markets had taken a turn for the better and smaller companies were particularly strong, registering a total return of 4.9% during March and further gains in April and May.  As had been evident over the previous two months there was something of a reversal in performance in the market with lower risk and value propositions doing better than the more highly rated momentum shares.  The European Central Bank announced a further reduction in interest rates and an increase in the asset purchase programme, taking it from €60 billion to €80 billion each month.  Importantly it also amended the programme to allow them to purchase debt from companies other than banks.  It was hoped that this would aid the transmission mechanism by which the liquidity would find its way into the economy. 

 

Emerging market economies were performing a little better, aided by the recovery that was occurring in commodity prices and the belief that US interest rates would rise more slowly than anticipated, thereby reducing the pressures on their currencies.  Meanwhile, the UK economy continued to perform reasonably well registering growth of 2% during the first quarter.  Europe was similarly stable and in the US there were upward revisions to the initially disappointing data.  Indeed the Federal Reserve indicated that an interest rate rise was possible in the very near term.

 

By early summer, the UK's referendum on EU membership was causing significant uncertainty for investors and company managements alike.  A growing number of organisations highlighted the potential risks that would accompany a decision to leave.  The Bank of England joined the list of those warning of lower growth, higher inflation and weaker Sterling.  Such negativity was weighing on investor appetite for risk.  This came to a head in June when initial uncertainty surrounding the referendum gave way to a belief that the UK would vote to remain.  Equities and Sterling strengthened in response.  Consequently markets suffered a significant negative reaction as a result of the surprise news that the result was in fact in favour of leaving the EU.  However, although that meant material uncertainty regarding the prospects for the UK economy one immediate outcome was a substantial weakening of the currency.  Many UK companies, particularly larger ones, were a beneficiary of this.  However, with smaller companies having a greater orientation to the domestic economy they did not perform as strongly as their larger brethren and in June the FTSE SmallCap Index (excluding Investment Companies) declined by 5.3% on a total return basis.  Positively, by late July markets had recouped all their losses and went on to finish the year nicely ahead of their pre referendum levels.  Property companies and in particular smaller developers were particularly hard hit and did not benefit from the improvement in sentiment.  The portfolio has very limited exposure to such businesses.

 

After initially keeping interest rates on hold, the Bank of England subsequently responded to signs of a slowdown in the UK economy.  Interest rates were reduced to 0.25%.  A Term Funding Scheme was created to encourage banks to lend, the existing asset purchase programme for gilts was increased by £60 billion to £435 billion and a small programme of corporate bond purchases was introduced.  It was interesting that the economic data relating to the vote was mixed.  On the one hand, and perhaps unsurprisingly, sentiment indicators were generally weak, pointing to an impending slowdown in the domestic economy.  However, the hard data told a different story with the likes of retail sales and labour market readings all showing no discernible impact from Brexit.

 

Late in the financial year the Conservative Party conference reminded investors that there was still a great deal of uncertainty surrounding Britain's exit from the EU.  The rhetoric surrounding immigration controls and the ruling out of the Norwegian and Swiss models of interaction with the EU raised the probability of so called 'hard Brexit'.  This resulted in further pressure on Sterling which weakened markedly over the month, finishing the year at levels not seen since the 1980s.

 

Portfolio Review

Key contributors to performance for the year included; RPC, Dechra Pharmaceuticals and two recent introductions Burford Capital and Smart Metering Systems. 

 

RPC sells rigid plastic packaging solutions into a wide array of end markets.  The industry is benefitting from the on-going shift from relatively heavy glass and metal packaging to lighter weight plastics. The company has continued to be successful, consolidating the more technically advanced areas of this market and, as a result of a well-established integration process, they have consistently delivered synergies ahead of those originally expected.

 

Dechra Pharmaceuticals is another company that benefits from structural growth in its end markets as more people spend greater amounts on the care of their companion animals.  In addition they have successfully used acquisitions to enter both new geographies and end markets.  The business has built a valuable portfolio and pipeline of novel animal pharmaceuticals in tightly defined niches. These provide protection from some of the more negative features of the pharmaceutical industry.  Namely, costly and complicated research and development followed by the certainty of huge price deflation when products genericise.

 

Burford Capital has enjoyed a very strong period of realisations from its portfolio of litigation assets.  However such events are by definition unpredictable and the management display refreshing honesty when they say that it is frankly impossible to forecast their likely performance on a period by period basis.  However, with a strong balance sheet, high and growing levels of demand for their products and disciplined lending process the company is well set to grow into the future.  It is an increasing appreciation of these characteristics more than the recent trading that has led to a solid performance from the shares.

 

Smart Metering Systems had a good year, successfully executing their contracted order book and securing a healthy stream of long term profits and cash flows for the business.  However, they have had other important successes.  The company has announced that it has signed contracts with several independent utility companies for the provision of residential smart meters.  This will be a very large market and they only need a relatively small share of it to make a very significant difference to the value of the company.  To date they have been more successful than many investors anticipated and this has been reflected in the share price. The ability to deliver on these contracts will be vital and therefore it is pleasing that they have made two relatively small acquisitions that give them control of their installation supply chain and hence a competitive advantage.

 

In terms of investments that detracted from performance these included; Mothercare, Interserve and Savills.

 

Mothercare has again been a negative contributor for the Company.  They have experienced a material slowing in their International business in particular in the Middle East and Russia.  Although perhaps not immediately apparent this is a result of the fall in the oil price.  The Middle East in particular has seen much less stimulation from the ruling authorities and this has fed through to weakened consumer spending which has impacted the company.  It is frustrating that this has happened at a time when the original cause of the company's problems, its UK operations, have shown signs of improvement. 

 

Interserve has a construction division.  In common with many similar businesses it has found the UK a difficult place to secure business and it has ventured into new markets.  These have included the design and building of waste to energy facilities.  These have been much larger and riskier projects than the company is used to fulfilling and in Glasgow in particular they have found themselves unable to satisfy the terms of their contract.  They also surprised the market when having announced a strategic review of their Equipment Service division they then opted to retain it.  We will not speculate on their reasons for doing so but it is clear that had they sold it the proceeds would have given a boost to investor confidence that they could afford to rectify the construction division's problems without over leveraging the balance sheet.

 

Savills is an example of a company whose share price suffered significantly as a result of Brexit.  Whilst the UK real estate operations are likely to experience more difficult conditions the business is much more than this.  It has a global footprint and, importantly, around half the profits come from property management and consultancy services which have a much lower correlation to housing transaction volumes.  As investors have moved away from an initial knee jerk reaction towards a more fundamentally driven view so the share price has staged something of a recovery since the year end.

 

Portfolio Activity

We introduced four new holdings during the year.  Each company is a leader in its respective market and we believe that they bring beneficial diversification to the portfolio.

 

Smart Metering Systems are a leading meter rental company serving the electricity and gas utilities.  They benefit from a highly visible recurring, long term revenue stream underpinned by the blue chip nature of their customer base.  The current and contracted business should provide attractive profits and cash flows.  However, they also have a very significant opportunity with the impending roll out of domestic smart meters.  The company has a strong position in the supply chain which gives confidence that they will be able to execute effectively on a programme that has the potential to be company changing.

 

Cairn Homes is a Dublin-based house builder which listed on the London Stock Exchange in mid-2015.  The two founders bring a combination of Irish housebuilding experience and real estate investing.  The Irish market is experiencing supply shortages of new homes, particularly in and around Dublin.  However, the ability to ameliorate this is restricted because 80% of the best quality development land is owned by the National Asset Management Agency ("NAMA"), an organisation that is unable to develop it.  Meanwhile many of the individuals with the required skills set are precluded from involvement in the market due to personal and bankruptcy proceedings. 

 

The Cairn premise is relatively simple.  Namely to take advantage of a lack of demand for good quality residential building land in order to rapidly acquire a with-planning consent 10,000 unit land bank and then to move to a build out phase running at 1,500 homes annually by 2018.  Assets are being sourced from both NAMA and the banks.  Planning is a minimal issue because assets are bought with consent. 

 

The market sees prices that are still 40% below their 2007 peak.  Demand is running at 25,000 - 30,000 units per annum, supported by a strongly recovering economy, with two thirds of demand coming from the Dublin area.  A lack of credit availability is restricting demand and hence there has been significant growth in volumes and rates in the rental market.  An easing of credit supply would be expected to drive further buying demand.  Build rates are just 10,000 units per annum.

 

The company has largely completed the land bank acquisition phase and will now transition to building it out and hence will become cash generative.  The balance sheet will be run conservatively with a maximum gearing of 25%.  In essence we see this as an opportunity to capitalise on similar dynamics to those that were present in the mainland housebuilding market following the last downturn , whilst also capitalising on valuations of both land and housebuilding companies which are well below those evident elsewhere in the sector.

 

Burford Capital is a provider of litigation financing.  The business was founded by its CEO, Chris Bogart.  There are two key drivers for the take up of this form of financing.  Law firms welcome it because their partnership-based model prevents them accessing external capital to fund lengthy legal cases.  Secondly the litigants are incentivised to use it because it allows them to avoid carrying litigation costs through their profit and loss statements.  Conventional financing can result in the perverse situation whereby winnable cases are not pursued because of the accounting and presentational technicalities.  In such a situation the claimant is often willing to share the proceeds of a successful claim on generous terms with the provider of funding.  The business finances itself with equity and retail bonds and also has some contingent preference share capital available should it be required.  Bank debt is not utilised.

 

We believe that the attractions of the investment are the lack of correlation between Burford's returns and the economic cycle.  US commercial tort costs have grown at nominal GDP +2% since 1950.  In addition the business could be regarded as having characteristics similar to venture capital but with more certainty over the ability to secure an exit.

 

Assura is a UK REIT investing in and developing primary care property.  There has been some yield compression but nothing like the levels seen elsewhere in the real estate sector, meaning that yields in excess of 5% are achievable.  There are almost 9,000 GP buildings so the pool of potential assets is sizeable.  The portfolio has grown very significantly over the last seven years.  Currently 100% of debt is fixed but an increasing amount of floating rate debt will be utilised which will deliver a natural earnings benefit as a result of lower interest costs.  Rents are either inflation linked or subject to open market review which has historically produced increases ahead of inflation.  There is a growing pipeline of development opportunities following an NHS reorganisation that had caused a hiatus over the two prior years.  This is important because newly developed assets with higher rentals drive up market rents for other assets.  The rental stream has the benefit of being quasi government backed and occupancy is in the high 90%'s.   

 

The company has participated in this market since 2003 and the goal is to be the leading investor in the sector. We believe that Assura have two advantages relative to their competitors, namely lower levels of leverage following an equity raise and a medium term loan to value target of 40% - 50%.  Additionally the dividend is better covered by the core earnings of the business. 

 

We sold out of four holdings from the portfolio.  Bellway had been a very successful investment for us.  However as the UK housing market has recovered strongly post the recession so companies like this have done very well.  We believed that the valuation was pricing in a permanently favourable outlook and we considered that this was unduly optimistic.  Although the two decisions were separate, the proceeds from the disposal were utilised to fund the introduction of Cairn Homes.  The Restaurant Group has seen a significant, indeed arguably structural, change to its market.  Specifically, as e-commerce takes a greater share of the retail pie, those assets located on sites where shopping is the key driver of footfall are finding it difficult to sustain, let alone grow, sales.  The company remains a fine operator but we believe that the task of repositioning the business will be complex and lengthy and as such we decided to exit the holding.  Bloomsbury Publishing is a business best known for the Harry Potter franchise.  They have a long term strategy to seek to adjust to their increasingly digitised markets.  We believe that the company faces a prolonged period of low earnings growth with no guarantee that they will be successful in making the necessary transition. Therefore, we felt there were more attractive opportunities for us to invest in.  Numis had been held in the portfolio for over a decade.  We believed that although this was a deeply cyclical business they had an opportunity to build a franchise that was able to deliver through cycle growth and that they had a balance sheet that gave them the flexibility to capitalise on this opportunity.  Falling commission rates for stock brokers have been evident for several years. The situation now looks set to deteriorate further with regulatory interventions reducing the opportunities for the company to make money from institutional broking. With pressures rising on fund managers' margins there will be reduced levels of fees available for research provided by the sell side.  We concluded that the long term prospects for the company were insufficiently attractive for it to warrant a position in the portfolio. 

 

Two of the investments in the portfolio had material capital raisings during year.  In both cases these were to help them fund acquisitions that will support future growth by these companies, hence we participated on each occasion.  Dechra Pharmaceuticals conducted a £50 million placing to aid their purchase of Putney.  This brings them an entry into the US generic animal pharmaceuticals market and secures them scale in that geography.  The US has been growing very strongly for the company and the pipeline of additional medicines should help to secure such growth well into the future. 

 

RPC, the plastic packaging company, conducted a £230 million rights issue to partially finance their acquisition of Global Closure Systems.  This deal is a continuation of their well-worn path that sees them consolidating the European markets.  Such a strategy has to date yielded sizable cost synergies from each purchase and there is every reason to believe that these benefits will continue to accrue to shareholders.

 

Although the equity raising was completed in the prior financial year, BBA Aviation completed their purchase of the Landmark portfolio of fixed base operations during the year.  We think that the logic behind this transaction is sound.  Namely that it will deliver scale in an industry where network density and connectivity is a key competitive advantage.  Although still early days the signs so far are that the benefits are materialising as hoped. 

 

Stewardship

We believe that as long term owners of the businesses in which we are invested it is not sufficient merely to seek out assets that we believe to be undervalued, it is incumbent upon us to take a proactive approach to our stewardship of these companies.  Therefore we engage extensively with our investee companies.  By their very nature, these discussions often take place with a broader constituency than just the executive management teams.  They are frequently sensitive and it would be inappropriate to move beyond generalisations in this report.  However, we believe it is useful to seek to illustrate the depth of our activity in this area.  We have attended a range of meetings with chairmen, non-executive directors and other stakeholders.  Topics covered have included the composition of Boards, an area where we have successfully engineered change.  Risk is a very broad subject that is interpreted in varying manners by different companies.  However, by engaging on this subject we secure a deeper understanding of how the boards of our investee companies perceive and seek to manage these issues.  Such interactions also enable us to push for improved disclosure and better management practices and on occasion different decisions where appropriate.  We have had conversations regarding companies' financing choices.  We find that it is always worthwhile communicating our preference for conservatively structured balance sheets that place a company's long term fortunes ahead of possible short term share price gains.  Such activity is by its nature time consumptive but we regard it as an integral aspect of our role as long term investors.

 

Outlook

Global growth looks set to improve next year aided by an on-going recovery in the US, Russia and Brazil exiting recession and a Chinese economy that increasingly looks to have stabilised, albeit at levels of expansion below those enjoyed previously.  However, the risks posed by Brexit, the fragility of the European banking system alongside various regional elections and the impending change of Administration in the US all mean that there are significant uncertainties facing investors, companies and consumers.

 

The US economy is still making progress as evidenced by solid employment data and indications that interest rates are likely to be raised again later this year.  Brexit has so far been more of a political shock than an economic one in the Eurozone and the region remains on course to grow by around 1.6% this year.  Chinese growth is holding steady but factors such as weak corporate investment and loss of momentum in real estate suggest a need for further stimulus if the current level of expansion is to be maintained. 

 

It is not only investors that do not know what the post Brexit landscape will look like, company management teams and consumers are equally unsure.  A period of slower activity is therefore to be expected and some of the economic and confidence surveys that have been released since the vote support this.  As a result of this uncertainty companies that have actually traded quite well during 2016 find themselves having to inject caution into their outlook statements.  However, that does not mean that the long term prospects for the economy have been irretrievably damaged.  Whilst earnings expectations have declined slightly compared to forecasts pre the vote, they have not declined by anything like as much as the more negative commentary for the outlook for the economy as a whole would suggest.  Indeed it is notable that as more data has become available some of the most downbeat commentators have been forced to shift to a less extreme position. 

 

In the meantime Sterling weakness is being regarded as a positive for the profitability of many UK companies and hence equity markets.  That holds true to a point but devaluing the currency is not a panacea and brings with it the risk of future inflation with some economists now forecasting that it will reach 3% by the middle of 2017.  That could be problematic given the difficulty of using conventional policy to address the issue.  As we consider the companies in the portfolio we note that although trading is generally fine they too are suffering from the uncertainty that surrounds the shape of our future relationship with Europe.  A temporary hiatus is manageable but a prolonged period of constrained investment will impact the medium term prospects.

 

Ed Beal

Aberdeen Asset Managers Limited

15 December 2016

 

 

 

 

 

 

 

 

 

 

 

 

GOVERNANCE - DIRECTORS' REPORT (EXTRACT)

 

The Directors present their report and the audited financial statements for the year ended 31 October 2016.

 

Results and Dividends

An interim dividend of 2.15p (2015 - 2.15p) per share was paid on 29 July 2016 and the Board recommends that a final dividend of 4.00p (2015 - 3.85p) per share is paid on 10 February 2017 to shareholders on the register on 13 January 2017. The ex-dividend date is 12 January 2017. A resolution in respect of the final dividend will be proposed at the Annual General Meeting.

 

Investment Trust Status

The Company is registered as a public limited company (registered in Scotland No. SC014692) and is an investment company within the meaning of Section 833 of the Companies Act 2006. The Company has been approved by HM Revenue & Customs as an investment trust subject to it continuing to meet the relevant eligibility conditions of Section 1158 of the Corporation Tax Act 2010 and the ongoing requirements of Part 2 Chapter 3 Statutory Instrument 2011/2999 for all financial years commencing on or after 1 November 2012.  The Directors are of the opinion that the Company has conducted its affairs for the year ended 31 October 2016 so as to enable it to comply with the ongoing requirements for investment trust status.

 

Individual Savings Accounts

The Company has conducted its affairs in such a way as to satisfy the requirements as a qualifying security for Individual Savings Accounts. The Directors intend that the Company will continue to conduct its affairs in this manner.

 

Capital Structure

At 31 October 2016, the Company had 47,857,317 fully paid Ordinary shares of 5p each (2015 - 47,857,317 Ordinary shares). There have been no changes in the Company's issued share capital subsequent to the year end and up to the date of this Report. 

 

Voting Rights

Each Ordinary share holds one voting right and shareholders are entitled to vote on all resolutions which are proposed at general meetings of the Company. The Ordinary shares, excluding any treasury shares, carry a right to receive dividends.  On a winding up or other return of capital, after meeting the liabilities of the Company, the surplus assets will be paid to Ordinary shareholders in proportion to their shareholdings.

There are no restrictions on the transfer of Ordinary shares in the Company other than certain restrictions which may be applied from time to time by law.

 

Management Agreement

The Company has appointed Aberdeen Fund Managers Limited, a wholly owned subsidiary of Aberdeen Asset Management PLC, as its alternative investment fund manager. AFML has been appointed to provide investment management, risk management, administration and company secretarial services to the Company as well as to carry out promotional activities on the Company's behalf.  The Company's portfolio is managed by Aberdeen Asset Managers Limited by way of a group delegation agreement in place between AFML and AAML.  In addition, AFML has sub-delegated promotional activities to AAML and administrative and secretarial services to Aberdeen Asset Management PLC. Fees payable for promotional activities are shown in note 4 to the financial statements.

 

The basic management fee, details of which are shown in note 3 to the financial statements, is 0.4% per annum of adjusted gross assets. There is also a performance-related fee which, during the year, was calculated quarterly in arrears at a rate of 0.1% per annum (up to a maximum of 0.5% per annum) of the adjusted gross assets for every 1% by which the Company's net asset value performance outperformed the capital performance of the benchmark index over the previous 12 month period.

 

As disclosed in the Chairman's Statement, the Board has agreed with the Manager that, with effect from 1 November 2016, the performance-related fee will be calculated on an annual basis in respect of the performance of the Company for the preceding financial year, rather than on a quarterly basis. There are no changes to the rate of performance fee, including the maximum rate per annum, and all other terms of the management agreement are unchanged.

 

The management agreement may be terminated by either party on three months' written notice. In the event of termination by the Company on less than the agreed notice period, compensation is payable to the Manager in lieu of the unexpired notice period.

 

 

 

Substantial Interests

As at 31 October 2016 the following interests in the issued Ordinary share capital of the Company had been disclosed in accordance with the requirements of the FCA's Disclosure Guidance and Transparency Rules:

 

Shareholder

Number of shares held

% held

Aberdeen Asset Managers Retail PlansA

12,268,165

25.6

Aberdeen Asset Managers

7,676,334

16.0

Derbyshire County Council

3,269,000

6.8

D C Thomson & Company Ltd

2,030,000

4.2

A Non-beneficial interests

 

Since the end of the year, Aberdeen Asset Managers has disclosed that its holding has changed to 7,643,834 shares (15.9%). There have been no other changes notified to the Company as at the date of approval of this Report.

 

Directors

The Board consists of four independent non-executive Directors.

 

The Directors attended scheduled Board and Committee meetings during the year ended 31 October 2016 as follows (with their eligibility to attend the relevant meeting in brackets):

 

Director

Board Meetings

Audit Committee
 Meetings

Management  Engagement  Committee Meetings

N M Yarrow (Chairman)

4 (4)

2 (2)

1 (1)

T J K Barnes

3 (4)

2 (2)

1 (1)

A Henderson

4 (4)

2 (2)

1 (1)

C M D Thomson

4 (4)

2 (2)

1 (1)

 

Having served for more than nine years, Mr T J K Barnes and Mr N M Yarrow retire at the Annual General Meeting and, being eligible, offer themselves for re-election.

 

The Board believes that Messrs Barnes and Yarrow remain independent of the Manager and free of any relationship which could materially interfere with the exercise of their judgement on issues of strategy, performance, resources and standards of conduct and confirms that, following formal performance evaluations, the individuals' performance continues to be effective and demonstrates commitment to the role. The Board therefore recommends the re-election of Messrs Barnes and Yarrow at the Annual General Meeting. 

 

Directors' & Officers' Liability Insurance

The Company maintains insurance in respect of Directors' & Officers' liabilities in relation to their acts on behalf of the Company. Furthermore, each Director of the Company is entitled to be indemnified out of the assets of the Company to the extent permitted by law against all costs, charges, losses, expenses and liabilities incurred by them in the actual or purported execution and/or discharge of their duties and/or the exercise or purported exercise of their powers and/or otherwise in relation to or in connection with their duties, powers or office. These rights are included in the Articles of Association of the Company and the Company has granted indemnities to the Directors on this basis.

 

Management of Conflicts of Interest

The Board has a procedure in place to deal with a situation where a Director has a conflict of interest. As part of this process, each Director prepares a list of other positions held and all other conflict situations that may need to be authorised either in relation to the Director concerned or his or her connected persons. The Board considers each Director's situation and decides whether to approve any conflict, taking into consideration what is in the best interests of the Company and whether the Director's ability to act in accordance with his or her wider duties is affected. Each Director is required to notify the Company Secretary of any potential, or actual, conflict situations that will need authorising by the Board. Authorisations given by the Board are reviewed at each Board meeting.

 

No Director has a service contract with the Company although all Directors are issued with letters of appointment. There were no contracts during the year in which any Director was interested.

 

The Board takes a zero tolerance approach to bribery and has adopted appropriate procedures designed to prevent bribery. The Manager also takes a zero tolerance approach and has its own detailed policy and procedures in place to prevent bribery and corruption.

 

 

Corporate Governance

The Company is committed to high standards of corporate governance. The Board is accountable to the Company's shareholders for good governance and this statement describes how the Company applies the principles identified in the UK Corporate Governance Code (the "UK Code"), as published in September 2014 and effective for financial years commencing on or after 1 October 2014, which is available on the Financial Reporting Council's website: frc.org.uk.

 

The Board has also considered the principles and recommendations of the AIC Code of Corporate Governance as published in February 2015 (the "AIC Code") by reference to the AIC Corporate Governance Guide for investment Companies (the "AIC Guide"). The AIC Code, as explained by the AIC Guide, addresses all the principles set out in the UK Code, as well as setting out additional principles and recommendations on issues that are of specific relevance to investment trusts. The AIC Code and AIC Guide are available on the AIC's website: theaic.co.uk.

 

The Board considers that reporting in accordance with the principles and recommendations of the AIC Code, and by reference to the AIC Guide (which incorporates the UK Code), will provide better information to shareholders.

 

The Board confirms that, during the year, the Company complied with the recommendations of the AIC Code and the relevant provisions of the UK Code, except as set out below.

 

The UK Code includes provisions relating to:

 

-   the role of the chief executive (A.1.2);

-   executive directors' remuneration (D.1.1 and D.1.2); and

-   the need for an internal audit function (C.3.6).

 

For the reasons set out in the AIC Guide, and as explained in the UK Code, the Board considers that these provisions are not relevant to the position of the Company, being an externally managed investment company. In particular, all of the Company's day-to-day management and administrative functions are outsourced to third parties. As a result, the Company has no executive directors, employees or internal operations. The Company has therefore not reported further in respect of these provisions.

 

The full text of the Company's Corporate Governance Statement can be found on the Company's website.

 

Board Committees

The Directors have appointed a number of Committees as set out below. Copies of the terms of reference, which clearly define the responsibilities and duties of each Committee, are available upon request from the Company or from the Company's website. The terms of reference of each of the Committees are reviewed and re-assessed by the Board for their adequacy on an ongoing basis.

 

Audit Committee

The Audit Committee's Report will be included in the full Annual Report.  

 

Management Engagement Committee

The Management Engagement Committee comprises all of the Directors and is chaired by Mr N M Yarrow. The Committee reviews the performance of the Manager and its compliance with the terms of the management and secretarial agreement. The terms and conditions of the Manager's appointment, including an evaluation of performance and fees, are reviewed by the Committee on at least an annual basis. In addition, the Committee conducts an annual review of the performance, terms and conditions of the main third party suppliers.

 

In the opinion of the Board, the Aberdeen Group has the appropriate secretarial, administrative and promotional skills required for the effective operation and administration of the Company. Furthermore, the Board remains satisfied with the capability of Aberdeen to deliver satisfactory investment performance. Accordingly, the Board believes that the continuing appointment of the Manager on the terms agreed is in the interests of shareholders as a whole.

 

Nomination Committee

Given the size of the Board, the Board as a whole acts as a Nomination Committee with the Senior Independent Director acting as Chairman.

 

 

 

 

Remuneration Committee

As the Company has no employees and the Board is comprised wholly of non-executive Directors and, given the size and nature of the Company, the Board has not established a separate Remuneration Committee.  Directors' remuneration is determined by the Board as a whole.

 

Going Concern

The Company's assets consist substantially of equity shares in companies traded on the London Stock Exchange which are, in most circumstances, 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. Borrowings of £10 million are committed to the Company until 24 November 2017 and the Board believes that the Company will be able to refinance or repay the borrowings at that time. As such, the Directors believe that the Company has adequate financial resources to continue in operational existence for the foreseeable future and at least 12 months from the date of this Report. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

 

Accountability and Audit

Each Director confirms that, so far as they are aware, there is no relevant audit information of which the Company's auditor is unaware, and they have taken all the steps that they could reasonably be expected to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information. 

 

Independent Auditor

The Company's auditor, KPMG LLP, has indicated its willingness to remain in office. The Directors will place resolutions before the Annual General Meeting to re-appoint KPMG LLP as auditor for the ensuing year and to authorise the Directors to determine its remuneration.

 

Relations with Shareholders

The Directors place a great deal of importance on communication with shareholders. Shareholders and investors may obtain up to date information on the Company through its website and the Manager's information service.

 

The Board's policy is to communicate directly with shareholders and their representative bodies without the involvement of the management group (either the Company Secretary or the Manager) in situations where direct communication is required and representatives from the Board meet with major shareholders on at least an annual basis in order to gauge their views.

 

In addition, the Company Secretary only acts on behalf of the Board, not the Manager, and there is no filtering of communication. At each Board meeting the Board receives full details of any communications from shareholders to which the Chairman responds personally as appropriate.

 

The Notice of the Annual General Meeting included within the Annual Report is sent out at least 20 working days in advance of the meeting. All shareholders have the opportunity to put questions at the Company's Annual General Meeting. 

 

Participants in the Aberdeen Investment Trust Share Plan and ISA, whose shares are held in the nominee name of the plan administrator, are given the opportunity to vote at the Annual General Meeting by means of a Letter of Direction enclosed with the Annual Report. When forwarded to the plan administrator, the voting instructions given in the Letter of Direction will in turn be reflected in the proxy votes lodged by the plan administrator.

 

Annual General Meeting

The Annual General Meeting will be held at Discovery Point, Discovery Quay, Dundee DD1 4XA on 1 February 2017 at 12 noon.

 

By order of the Board

Aberdeen Asset Management PLC

Company Secretary

40 Princes Street

Edinburgh EH2 2BY

15 December 2016

 

 

 

 

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 the Directors have elected to prepare the financial statements in accordance with UK Accounting Standards, including FRS 102 'The Financial Reporting Standard' applicable in the UK and Republic of Ireland. 

 

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 judgments and estimates that are reasonable and prudent;

-    state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; 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 proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its 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 Statement of Corporate Governance that comply 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.

 

We confirm that to the best of our knowledge:

 

-    the financial statements, prepared in accordance with the applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company;

-    in the opinion of the Directors, the Annual Report and Accounts taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Company's position and performance, business model and strategy; and

-    the Strategic Report and Directors' Report include 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 the Company faces.

 

On behalf of the Board

N M Yarrow

Director

15 December 2016

 

 



STATEMENT OF COMPREHENSIVE INCOME

 



Year ended 31 October 2016

Year ended 31 October 2015



Revenue

Capital

Total

Revenue

Capital

Total



return

return

return

return

return

return


Notes

£'000

£'000

£'000

£'000

£'000

£'000

Gains on investments

9

-

5,278

5,278

-

8,847

8,847

Income

2

3,459

-

3,459

3,538

-

3,538

Investment management fee

3

(116)

(377)

(493)

(117)

(595)

(712)

Administrative expenses

4

(450)

-

(450)

(432)

-

(432)

Currency losses


-

(4)

(4)

-

-

-



_____

_____

_____

_____

_____

_____

Net return before finance costs and taxation


2,893

4,897

7,790

2,989

8,252

11,241









Finance costs

5

(31)

(93)

(124)

(35)

(105)

(140)



_____

_____

_____

_____

_____

_____

Return on ordinary activities before taxation


2,862

4,804

7,666

2,954

8,147

11,101









Taxation

6

-

-

-

-

-

-



_____

_____

_____

_____

_____

_____

Return on ordinary activities after taxation


2,862

4,804

7,666

2,954

8,147

11,101



_____

_____

_____

_____

_____

_____









Return per Ordinary share (pence)

8

5.98

10.04

16.02

6.17

17.02

23.19











_____

_____

_____

_____

_____

_____






The total column of this statement represents the profit and loss account of the Company.

All revenue and capital items in the above statement derive from continuing operations.

The accompanying notes are an integral part of the financial statements.

 

 



STATEMENT OF FINANCIAL POSITION

 



As at

As at



31 October

31 October



2016

2015


Notes

£'000

£'000

Non-current assets




Investments at fair value through profit or loss

9

114,441

113,158



_______

_______

Current assets




Debtors and prepayments

10

328

305

Cash and short term deposits


8,122

5,529



_______

_______



8,450

5,834



_______

_______





Creditors: amounts falling due within one year




Other creditors

11

(273)

(1,169)



_______

_______

Net current assets


8,177

4,665



_______

_______

Total assets less current liabilities


122,618

117,823





Creditors: amounts falling due after more than one year




Bank loan

11

(5,000)

(5,000)



_______

_______

Net assets


117,618

112,823



_______

_______





Capital and reserves




Called-up share capital

12

2,393

2,393

Share premium account


30

30

Capital redemption reserve


2,233

2,233

Capital reserve

13

108,139

103,335

Revenue reserve


4,823

4,832



_______

_______

Equity shareholders' funds


117,618

112,823



_______

_______





Net asset value per Ordinary share (pence)

14

245.77

235.75



_______

_______

 

The accompanying notes are an integral part of the financial statements



STATEMENT OF CHANGES IN EQUITY

 

For the year ended 31 October 2016











Share

Capital






Share

premium

redemption

Capital

Revenue




capital

account

reserve

reserveA

reserve

Total


Notes

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 October 2015


2,393

30

2,233

103,335

4,832

112,823

Return on ordinary activities after taxation


-

-

-

4,804

2,862

7,666

Dividends paid

7

-

-

-

-

(2,871)

(2,871)



______

______

_______

______

______

______

Balance at 31 October 2016


2,393

30

2,233

108,139

4,823

117,618



______

______

_______

______

______

______









For the year ended 31 October 2015











Share

Capital






Share

premium

redemption

Capital

Revenue




capital

account

reserve

reserveA

reserve

Total


Notes

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 October 2014


2,393

30

2,233

95,188

4,414

104,258

Return on ordinary activities after taxation


-

-

-

8,147

2,954

11,101

Dividends paid

7

-

-

-

-

(2,536)

(2,536)



______

______

_______

______

______

______

Balance at 31 October 2015


2,393

30

2,233

103,335

4,832

112,823



______

______

_______

______

______

______









A See note 13 for further details on the capital reserve.


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.

 

 



STATEMENT OF CASH FLOWS

 



Year ended

Year ended



31 October 2016

31 October 2015


Notes

£'000

£'000

Operating activities




Net return ordinary activities before finance costs and taxation


7,790

11,241

Adjustment for:




Gains on investments


(5,278)

(8,847)

Increase in accrued dividend income


(27)

(53)

Decrease/(increase) in other debtors


4

(15)

Increase/(decrease) in creditors


16

(2)



_______

_______

Net cash flow from operating activities


2,505

2,324





Investing activities




Purchases of investments


(15,754)

(18,255)

Sales of investments


18,837

22,775



_______

_______

Net cash inflow from investing activities


3,083

4,520





Financing activities




Interest paid


(124)

(121)

Equity dividends paid

7

(2,871)

(2,536)



_______

_______

Net cash flow used in financing activities


(2,995)

(2,657)



_______

_______

Increase in cash and cash equivalents


2,593

4,187



_______

_______





Analysis of changes in cash and cash equivalents during the year



Opening balance


5,529

1,342

Increase in cash above


2,593

4,187



_______

_______

Closing balance


8,122

5,529



_______

_______





The accompanying notes are an integral part of the financial statements.

 

 



NOTES TO FINANCIAL STATEMENTS

 



1.

Accounting policies


(a)

Basis of accounting



The financial statements have been prepared in accordance with Financial Reporting Standard 102 and with the Statement of Recommended Practice: 'Financial Statements of Investment Trust Companies and Venture Capital Trusts'. The financial statements are prepared in sterling which is the functional currency of the Company and rounded to the nearest £'000. The have also been prepared on a going concern basis and on the assumption that approval as an investment trust will continue to be granted.






The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further information is included in the Directors' Report.






These financial statements are the first since FRS 102 'The Financial Reporting Standard' applicable in the UK and Republic of Ireland came into effect for the accounting periods beginning on or after 1 January 2015. An assessment of the impact of adopting FRS 102 has been carried out and found that no restatement of balances as at the transition date, 1 November 2014, or comparative figures in the Statement of Financial Position or the Statement of Comprehensive Income is considered necessary. The Company has early adopted 'Amendments to FRS 102 - Fair Value Hierarchy Disclosures', issued by the Financial Reporting Council in March 2016.





(b)

Revenue, expenses and interest payable



Income from equity investments (other than special dividends), including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend. Special dividends are credited to revenue or capital according to the circumstances. Foreign income is converted at the exchange rate applicable at the time of receipt. Interest receivable on short term deposits, expenses and interest payable are accounted for on an accruals basis. Income from underwriting commission is recognised as earned.






Expenses are charged to capital when they are incurred in connection with the maintenance or enhancement of the value of investments. In this respect, the investment management fee and relevant finance costs are allocated between revenue and capital in line with the Board's expectation of returns from the Company's investments over the long term in the form of revenue and capital respectively (see notes 3 and 5). Performance fees are allocated wholly to capital.





(c)

Investments



Investments have been designated upon initial recognition at fair value through profit or loss. Investments are 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 initially at fair value. Subsequent to initial recognition, investments are recognised at fair value through profit or loss. For listed investments, this is deemed to be bid market prices or closing prices for SETS stocks, sourced from the London Stock Exchange. SETS is the London Stock Exchange electronic trading service covering most of the market including all FTSE All-Share and the most liquid AIM constituents. Gains or losses arising from changes in fair value are included in net profit or loss for the period as a capital item in the Statement of Comprehensive Income and are ultimately recognised in the capital reserve.





(d)

Dividends payable



Interim and final dividends are recognised in the period in which they are paid.





(e)

Taxation



Deferred taxation is provided on all timing differences that have originated but not reversed at the Statement of Financial Position date where transactions or events that result in an obligation to pay more or a right to pay less tax in the future have occurred at the Statement of Financial Position date measured on an undiscounted basis and based on enacted tax rates. 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 underlying timing differences can be deducted. Timing differences are differences arising between the Company's taxable profits and its results as stated in the financial statements which are capable of reversal in one or more subsequent periods.






Owing to the Company's status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval in the future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.





(f)

Nature and purpose of reserves



Called up share capital



The Ordinary share capital on the Statement of Financial Position relates to the number of shares in issue. Only when the shares are cancelled is a transfer made to the capital redemption reserve.






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 5p.






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.






Capital reserve



Gains and losses on disposal of investments and changes in fair values of investments are transferred to the capital reserve. The capital element of the management fee and relevant finance costs are charged to this reserve. Any associated tax relief is also credited to this reserve.






Revenue reserve



This 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.





(g)

Cash and cash equivalents



Cash and cash equivalents comprises cash at banks.





(h)

Significant estimates and judgements



Disclosure is required of judgements and estimates made by management in applying the accounting policies that have a significant effect on the financial statements. There are no significant estimates of judgements which impact these financial statements.

 



2016

2015

2.

Income

£'000

£'000


Income from investments




UK dividend income

2,992

3,125


Overseas dividend income

349

288


Property income distributions

97

85



_______

_______



3,438

3,498



_______

_______


Other income




Deposit interest

12

6


Underwriting commission

9

34



_______

_______



21

40



_______

_______


Total income

3,459

3,538



_______

_______

 



2016

2015



Revenue

Capital

Total

Revenue

Capital

Total

3.

Management fee

£'000

£'000

£'000

£'000

£'000

£'000


Management fee

116

350

466

117

350

467


Performance fee

-

27

27

-

245

245



_______

_______

_______

_______

_______

_______



116

377

493

117

595

712



_______

_______

_______

_______

_______

_______










The management fee paid to the Manager is calculated at 0.4% per annum of the gross assets of the Company after deducting current liabilities and excluding commonly managed funds ('adjusted gross assets'). The sum due to the Manager at the year end was £131,000 (2015 - £116,000).




In addition, the Manager is entitled to a performance-related fee calculated quarterly in arrears at a rate of 0.1% per annum (up to a maximum of 0.5% per annum) of the adjusted gross assets for every 1% by which the Company's net asset value performance outperforms the capital performance of the FTSE SmallCap Index (ex Investment Companies) over the preceding twelve month period. The sum due to the Manager at the year end was £nil (2015 - £nil). Changes to the performance-related fee which apply with effect from 1 November 2016 are disclosed in the Directors' Report.




The management agreement between the Company and the Manager is terminable by either party on three months' notice.




The management fee is chargeable 75% to capital and 25% to revenue. The performance-related fee is allocated wholly to capital.

 



2016

2015

4.

Administrative expenses

£'000

£'000


Directors' fees

86

87


Auditor's remuneration - fees payable to the Company's auditor for:




-     audit of the Company's annual accounts

16

16


-     the review of the Company's half yearly accounts

5

5


Secretarial fee

101

100


Promotional activities

56

51


Share plan costs

30

29


Registrar's fees

14

13


Advisory fees

40

36


Legal fees

-

5


Other expenses

102

90



_______

_______



450

432



_______

_______






A secretarial fee of £101,000 (2015 - £100,000) was paid to the Manager. The sum due to the Manager at the year end was £25,000 (2015 - £25,000).




Expenses of £56,000 (2015 - £51,000) were paid to the Manager in respect of promotional activities for the Company. The sum due to the Manager at the year end was £18,000 (2015 - £17,000).




All of the expenses above, with the exception of Auditor's remuneration, include irrecoverable VAT where applicable. For Auditor's remuneration this amounted to £4,000 (2015 - £4,000).

 



2016

2015



Revenue

Capital

Total

Revenue

Capital

Total

5.

Finance costs

£'000

£'000

£'000

£'000

£'000

£'000


Bank loan interest

31

93

124

35

105

140



_______

_______

_______

_______

_______

_______

 

6.

Taxation


There is no liability to corporation tax for the year (2015 - £nil).




The corporation tax rate was 20% during the year. For the year ended 31 October 2015 the effective rate of corporation tax was 20.42% (corporation tax rate 21% from 1 November 2014 until 31 March 2015 and then 20% thereafter).





2016

2015



Revenue

Capital

Total

Revenue

Capital

Total


Factors affecting tax charge for the year

£'000

£'000

£'000

£'000

£'000

£'000


Net revenue before taxation

2,862

4,804

7,666

2,954

8,147

11,101



_______

_______

_______

_______

_______

_______










Corporation tax of 20% (2015 - effective rate of 20.42%)

572

961

1,533

603

1,664

2,267


Effects of:








Non-taxable UK dividend income

(598)

-

(598)

(638)

-

(638)


Non-taxable overseas dividends

(70)

-

(70)

(50)

-

(50)


Gains on investment not taxable

-

(1,055)

(1,055)

-

(1,807)

(1,807)


Expenses not deductible for tax purposes

-

-

-

1

-

1


Excess management expenses not utilised

96

94

190

97

143

240


Income taxable in different periods

-

-

-

(13)

-

(13)



_______

_______

_______

_______

_______

_______



-

-

-

-

-

-



_______

_______

_______

_______

_______

_______










At the year end, after offset against income taxable on receipt, there is a potential deferred tax asset of £6,222,000 (2015 - £6,032,000) in relation to surplus management expenses. It is unlikely that the Company will generate sufficient taxable profits in future to utilise these amounts and therefore no deferred tax asset has been recognised.

 



2016

2015

7.

Dividends

£'000

£'000


Amounts recognised as distributions to equity holders in the period:




Final dividend for 2015 - 3.85p (2014 - 3.15p)

1,843

1,508


Interim dividend for 2016 - 2.15p (2015 - 2.15p)

1,029

1,029


Return of unclaimed dividends

(1)

(1)



_______

_______


Dividends paid in the year

2,871

2,536



_______

_______






The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.




The table below sets out the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Sections 1158-1159 Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £2,862,000 (2015 - £2,954,000).







2016

2015



£'000

£'000


Interim dividend for 2016 - 2.15p (2015 - 2.15p)

1,029

1,029


Proposed final dividend for 2016 - 4.00p (2015 - 3.85p)

1,914

1,843



_______

_______



2,943

2,872



_______

_______

 



2016

2015

8.

Return per Ordinary share

p

p


Revenue return

5.98

6.17


Capital return

10.04

17.02



_______

_______


Total return

16.02

23.19



_______

_______


Weighted average number of Ordinary shares in issue

47,857,317

47,857,317



_________

_________

 



Listed

Listed



in UK

in UK



2016

2015

9.

Investments

£'000

£'000


Fair value through profit or loss:




Opening fair value

113,158

107,695


Opening fair value gains on investments held

(31,745)

(30,626)



_______

_______


Opening book cost

81,413

77,069


Purchases at cost

14,842

19,167


Sales - proceeds

(18,837)

(22,551)


Sales - gains on sales

6,765

7,728



_______

_______


Closing book cost

84,183

81,413


Closing fair value gains on investments held

30,258

31,745



_______

_______


Closing fair value

114,441

113,158



_______

_______







2016

2015


Gains on investments

£'000

£'000


Gains on sales of equities

6,765

7,728


Movement in fair value gains on investments held

(1,487)

1,119



_______

_______



5,278

8,847



_______

_______






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 on investments in the Statement of Comprehensive Income. The total costs were as follows:







2016

2015



£'000

£'000


Purchases

72

87


Sales

18

17



_______

_______



90

104



_______

_______

 



2016

2015

10.

Debtors: amounts falling due within one year

£'000

£'000


Net dividends and interest receivable

307

280


Other debtors and prepayments

21

25



_______

_______



328

305



_______

_______

 

11.

Creditors

2016

2015


(a)

Amounts falling due within one year - Other creditors

£'000

£'000



Amounts due to brokers

-

912



Investment management fee

131

116



Sundry creditors

142

141




_______

_______




273

1,169




_______

_______







(b)

Amounts falling due after more than one year - Bank loan





The Company currently has a £5 million revolving facility agreement as well as a three year £5 million term loan facility, both with Scotiabank Europe. At the year end, £5 million was drawn down from the term loan facility at a fixed interest rate of 2.171% until 24 November 2017. The terms of the loan facilities contain covenants that the minimum net assets of the Company are £50 million and the percentage of borrowings against net assets is less than 25%.

 



2016

2015

12.

Called-up share capital

£'000

£'000


Allotted, called-up and fully paid:




47,857,317 Ordinary shares of 5p each (2015 - same)

2,393

2,393



_______

_______

 



2016

2015

13.

Capital reserve

£'000

£'000


At 1 November

103,335

95,188


Gains on realisation of investments at fair value

6,765

7,728


Movement in fair value gains on investments held

(1,487)

1,119


Management fees

(377)

(595)


Finance costs

(93)

(105)


Currency losses

(4)

-



_______

_______


At 31 October

108,139

103,335



_______

_______






The capital reserve includes investment holding gains amounting to £30,258,000 (2015 - £31,745,000), as disclosed in note 9.

 

14.

Net asset value per share

2016

2015


Equity shareholders' funds

£117,618,000

£112,823,000


Number of Ordinary shares in issue at year end

47,857,317

47,857,317


Equity shareholders' funds per share

245.77p

235.75p

 

15.

Financial instruments


Risk Management


The Company's objective is to achieve long term growth from a portfolio of smaller companies in the United Kingdom.




The impact of security price volatility is reduced by diversification. Diversification is achieved by investment in the stocks and shares of companies in a range of industrial, commercial and financial sectors. The management of the portfolio is conducted according to investment guidelines, established by the Board after discussion with the Manager, which specify the limits within which the Manager is authorised to act.




The Company's financial instruments comprise securities and other investments, cash balances, loans and 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 also has the ability to enter into derivative transactions for the purpose of managing currency and market risks arising from the Company's activities.




The Manager has a dedicated investment management process, which ensures that the investment policy is followed. Stock selection procedures are in place based on the active portfolio management and identification of stocks. The portfolio is reviewed on a periodic basis by a Senior Investment Manager and also by the Manager's Investment Committee.




The Company's Manager has an independent Investment Risk department which reviews the investment risk parameters of the Company's portfolio on a regular basis. The department reports to the Manager's Performance Review Committee which is chaired by the Manager's Chief Investment Officer. The department's responsibility is to review and monitor ex-ante (predicted) portfolio risk and style characteristics using best practice, industry standard multi-factor models.




Additionally, the Manager's Compliance department continually monitors the Company's investment and borrowing powers and reports to the Manager's Risk Management Committee.




The main risks the Company faces from its financial instruments are (i) market risk (comprising interest rate risk, currency risk and other price risk), (ii) liquidity risk and (iii) credit risk.




The Board regularly reviews and agrees policies for managing each of these risks. The Manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term debtors and creditors, other than for currency disclosures.




(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 three elements - interest rate risk, currency risk and other price risk. 




Interest rate risk


Interest rate movements may 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.




The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.




It is the Company's policy to increase its exposure to equity market price risk through the judicious use of borrowings.  When borrowed, funds are invested in equities, the effect is to magnify the impact on shareholders' funds of changes - both positive and negative - in the value of the portfolio.




The Company has borrowing facilities by way of a £5 million revolving facility agreement as well as a three year £5 million term loan facility, both with Scotiabank Europe. Details of drawn down borrowings as at 31 October 2016 are shown in note 11.




Interest risk profile


The interest rate risk profile of the portfolio of financial assets and liabilities at the Statement of Financial Position date was as follows:





Weighted






average

 Weighted





period for

average





which

interest

Floating

Fixed



rate is fixed

rate

rate

rate


At 31 October 2016

Years

%

£'000

£'000


Assets






Cash deposits

-

-

8,122

-



_______

_______

_______

_______


Total assets

-

-

8,122

-



_______

_______

_______

_______


Liabilities






Bank loans

1.07

2.17

-

(5,000)



_______

_______

_______

_______


Total liabilities

-

-

-

(5,000)



_______

_______

_______

_______









Weighted






average

Weighted





period for

average





which

interest

Floating

Fixed



rate is fixed

rate

rate

rate


At 31 October 2015

Years

%

£'000

£'000


Assets






Cash deposits

-

0.15

5,529

-



_______

_______

_______

_______


Total assets

-

-

5,529

-



_______

_______

_______

_______


Liabilities






Bank loans

2.07

2.17

-

(5,000)



_______

_______

_______

_______


Total liabilities

-

-

-

(5,000)



_______

_______

_______

_______








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 bank loans is based on the interest rate payable, weighted by the total value of the loans. The maturity dates of the Company's loans are shown in note 11 to the financial statements.




The floating rate assets consist of cash deposits on call earning interest at prevailing market rates.




The Company's equity portfolio and short-term debtors and creditors (excluding bank loans) have been excluded from the above tables.




All financial liabilities are measured at amortised cost.




Maturity profile


The maturity profile of the Company's financial assets and liabilities at the Statement of Financial Position date was as follows:





Within

 More than



1 year

 1 year


At 31 October 2016

£'000

 £'000


Fixed rate




Bank loan

-

(5,000)






Floating rate




Cash

8,122

-



_______

_______


Total

8,122

(5,000)



_______

_______







Within

More than



1 year

1 year


At 31 October 2015

£'000

 £'000


Fixed rate




Bank loan

-

(5,000)






Floating rate




Cash

5,529

-



_______

_______


Total

5,529

(5,000)



_______

_______






Interest rate sensitivity


The sensitivity analyses below have been determined based on the exposure to interest rates at the Statement of Financial Position date and with 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 100 basis points higher or lower and all other variables were held constant, the Company's:


-     profit for the year ended 31 October 2016 would increase/decrease by £81,000 (2015 - increase/decrease by £55,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances.




The Company does not hold any financial instruments that will have an impact on equity reserves.




In the opinion of the Directors, the above sensitivity analyses are not representative of the year as a whole, since the level of exposure changes frequently as part of the interest rate risk management process used to meet the Company's objectives.




Other price risk


Other price risks (i.e. changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments.




It is the Board'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 and the stock selection process 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. The investments held by the Company are listed on the London Stock Exchange.




Other price risk sensitivity


If market prices at the Statement of Financial Position date had been 10% higher or lower while all other variables remained constant, the return attributable to Ordinary shareholders for the year ended 31 October 2016 would have increased/decreased by £11,444,000 (2015 - £11,316,000). This is based on the Company's equity portfolio at each year end.




In the opinion of the Directors, the above sensitivity analysis is representative of the year as a whole, since the level of exposure has remained fairly constant as part of the other price risk management process used to meet the Company's objectives.




(ii) Liquidity risk


This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. 




Liquidity risk is not considered to be significant as the Company's assets comprise mainly cash, short term deposits, placements and listed securities, which can be sold or realised to meet funding commitments if necessary.




The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions, and reviews these on a regular basis. Borrowing facilities comprise a £5 million revolving facility agreement as well as a three year £5 million term loan facility, both with Scotiabank Europe. At the year end the Company had drawn down borrowings of £5 million (see note 11) and this amount is reviewed on an ongoing basis.




Flexibility is achieved through the use of loan and overdraft facilities, details of which can be found in note 11. Under the terms of the loan facilities, the Manager provides the lender with loan covenant reports on a monthly basis, to provide the lender with assurance that the terms of the facilities are not being breached. The Manager will also review the credit rating of a lender on a regular basis. Details of the Board's policy on gearing is shown in the interest rate risk section of this note.




(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.




The risk is 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;


-     investment transactions are carried out with a large number of brokers, whose credit rating is reviewed periodically by the Manager so as to minimise the risk to the Company of default;


-     investment transactions are carried out with a large number of brokers 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 custodians' records are performed on a daily basis to ensure discrepancies are identified and 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. This review will also include checks on the maintenance and security of investments held;




Cash is held only with reputable banks with high quality external credit enhancements. The Board has set limits of cash that may be held with any one institution.




None of the Company's financial assets are secured by collateral or other credit enhancements.




Credit risk exposure


In summary, the maximum exposure to credit risk at 31 October 2016 was considered to be the same as the carrying amount of the financial assets in the Statement of Financial Position.





2016

2015



£'000

£'000


Non-current assets




Securities at fair value through profit or loss

114,441

113,158


Current assets




Trades and other receivables

21

25


Accrued income

307

280


Cash and cash equivalents

8,122

5,529



_______

_______



122,891

118,992



_______

_______






None of the Company's financial assets are past due or impaired.




Fair values of financial assets and financial liabilities


The book value of cash at bank and bank loans and overdrafts included in these financial statements approximate to fair value because of their short-term maturity. Investments held as dealing investments are valued at fair value. The carrying values of fixed asset investments are stated at their fair values, which have been determined with reference to quoted market prices. For all other short-term debtors and creditors, their book values approximate to fair values because of their short-term maturity.

 

16.

Fair value hierarchy


FRS 102 requires an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The Company has early adopted 'Amendments to FRS 102 - Fair Value Hierarchy Disclosures' issued by the Financial Reporting Council in March 2016. This has not resulted in any reclassifications in levelling and the prior year comparative has been disclosed under the new hierarchy. The fair value hierarchy has the following classifications:




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 assets or liabilities that are not based on observable market data (unobservable inputs).




All of the Company's investments are in quoted equities (2015 - same) actively traded on recognised stock exchanges, with their fair value being determined by reference to their quoted bid prices at the reporting date. The total value of the investments as at the year end of £114,441,000 (2015 - £113,158,000) have therefore been deemed as Level 1.




Financial liabilities in the form of short-term borrowings are held at amortised cost. The fair value is considered to approximate the carrying value and is categorised as Level 2.




There were no transfers of assets or liabilities between levels of the fair value hierarchy during 2016 and 2015.

 

17.

Capital management policies and procedures


The Company's capital management objectives are:


-     to ensure that the Company will be able to continue as a going concern; and


-     to maximise the capital return to its equity shareholders through an appropriate balance of equity capital and debt.




The capital of the Company consists of equity, comprising issued share capital, reserves and retained earnings.




The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the Manager's views on the market and the extent to which revenue in excess of that which is required to be distributed should be retained. The Company is not subject to any externally imposed capital requirements.

 

18.

Related party transactions and transactions with the Manager


Fees payable during the year to the Directors and their interests in shares of the Company will be disclosed within the Directors' Remuneration Report.




The Company has an agreement in place with Aberdeen Fund Managers Limited ("AFML") for the provision of management and administration services, promotional activities and secretarial services. Details of transactions during the year and balances outstanding at the year end are disclosed in notes 3 and 4. Changes to the performance-related fee which apply with effect from 1 November 2016 are disclosed in the Directors' Report.

 

Additional Notes to Annual Financial Report

The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 31 October 2016 are an abridged version of the Company's full accounts, which have been approved and audited with an unqualified report. The 2015 and 2016 statutory accounts received unqualified reports from the Company's auditors and did not include any reference to matters to which the auditors drew attention by way of emphasis without qualifying the reports, and did not contain a statement under S498 of the Companies Act 2006. The financial information for 2015 is derived from the statutory accounts for the year ended 31 October 2015 which have been delivered to the Registrar of Companies. The accounts for the year ended 31 October 2016 will be filed with the Registrar of Companies in due course.

 

The Annual General Meeting will be held at 12 noon on 1 February 2017 at Discovery Point, Discovery Quay, Dundee DD1 4XA. 

 

The Annual Report is expected to be posted to shareholders at the end of December 2016 and additional copies will be available from the registered office of the Company and on the Company's website, www.dunedinsmaller.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 and may be affected by exchange rate movements.  Investors may not get back the amount they originally invested.

 

By order of the Board

Aberdeen Asset Management PLC

Secretary

15 December 2016

 

 

* Neither the Company's website nor the content of any website accessible from hyperlinks on the Company's website (or any other website) is (or is deemed to be) incorporated into, or forms (or is deemed to form) part of this announcement.

 

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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Annual Financial Report - RNS