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RNS

Annual Financial Report

Released 07:00 20-Jun-2018

RNS Number : 9163R
F&C Global Smaller Companies PLC
20 June 2018
 

Date:              20 June 2018

 

Contact:         Peter Ewins                                                   

                        F&C Investment Business Limited                   

                        020 7628 8000                                               

 

 

 

F&C Global Smaller Companies PLC

Audited Statement of Results

for the year ended 30 April 2018

 

 

 

 

Financial highlights

 

 

Diluted Net Asset Value ("NAV") total return of 9.3% beat the Benchmark return of 7.9%

The diluted NAV rose to 1,368.80p from 1,263.52p.

 

Share price total return of 9.1%

The share price rose for the ninth consecutive year ending at 1,375p.

 

Dividend of 14.40 pence

48th consecutive annual increase, up by 17.6%.

 

Shares ended the year at a premium of 0.5%

For most of the year the share price traded at a premium to the diluted NAV.

 

 

 

Chairman's Statement

 

I am pleased to report another year of solid progress for your Company.

 

While geo-political developments continued to create dilemmas for investors over the last year, equity markets recorded advances across the board helped by an acceleration in the global economy. For the first time since the global financial crisis all the major economic blocs are exhibiting decent levels of growth. Better economic growth however, has led to a pick-up in inflationary pressures in some countries. Rising yields in the US government bond market amid a tightening labour market in the country, combined with renewed trade tensions between the US and China, led to some volatility in financial markets in the second half of the year.

 

Smaller company share price returns were slightly lower than those from larger stocks in the US and UK markets. This pattern was reversed in Japan and more materially so in Europe, where the economic recovery and stronger euro tended to favour lower market capitalisation companies. The diluted Net Asset Value ("NAV") rose to 1,368.80p, delivering a total return of 9.3%, beating the Benchmark return of 7.9%. In both cases the bulk of the returns were made in the first half of the year.

 

The Company's Benchmark is a blend of the returns from two indices, the MSCI All Country World ex UK Small Cap Index and the Numis UK Smaller Companies Index in a 70/30% proportion. This has provided a fair measure to assess the investment portfolio performance against while around 30% of the Company's assets have been invested in the UK. With a larger proportion of the investment portfolio likely to be invested outside of the UK in the medium term as global markets continue to evolve, the Board will continue to keep the make-up of the Benchmark under review.

 

With the shares standing at a premium for much of the year and following conversion requests from Convertible Unsecured Loan Stock ("CULS") holders, nearly 2.6 million new shares were issued in the twelve months. The share price ended the year up 8.0% at 1375p (with a total return for the year of 9.1%) and stood at a 0.5% premium to the diluted NAV versus the 0.8% premium a year earlier. The shares have traded at a discount from time to time in recent months, particularly when markets have been under pressure. The Board is keen to reiterate to shareholders that if necessary, it will utilise its shareholder authority to buy back shares to control the discount. This is of course, subject to continued shareholder approval at the AGM.

 

Long term returns remain strong. Shareholders who had been invested for the last 10 years and who had re-invested dividends would have received a compound annual return in share price terms of 14.8% versus the Benchmark return of 11.7%. Of course, there is no guarantee that such returns will be repeatable looking forward, but reflecting the strong returns over recent years and regular share issuance, it's pleasing to report that the Company achieved the scale of market capitalisation to qualify for inclusion in the FTSE 250 Index.

 

Costs

Ongoing charges for the year edged down to 0.83% (2017: 0.84%) excluding performance fees and were 0.83% (2017: 0.86%) including performance fees. The performance fees here relate to our investment in a number of collective funds which themselves pay performance fees. In the last year the collective funds that we invest in did not earn performance fees. Following the change to the management fee arrangements in 2016, we no longer pay a performance to the Manager, FCIB.

 

Dividends

For many years investment income has grown steadily on an underlying basis, indicative of a healthy investment portfolio and the Manager's focus on profit-making companies. This year revenue returns per share rose by 15.4% despite a headwind from a weaker dollar which reduced the sterling value of dollar derived income. The Board is consequently recommending a final dividend payment of 10.00p per share, up 21.2% on last year's payment, making a total dividend for the year of 14.40p per share, up 17.6%. This will be the 48th consecutive year of growth, and the seventh year in a row of double digit percentage increases. The final dividend will be paid on 8 August 2018 to shareholders on the register on 13 July 2018.

 

Market and regional portfolio performance

All parts of the fund delivered positive returns but the stand-out positive highlighted in the chart below, was the strength of performance of the UK portfolio. This delivered the best return despite the UK small cap market lagging most of the other global small cap indices. The Manager once again managed to identify a number of strong performers in the domestic market and avoided several high profile corporate casualties.

 

Our US portfolio also outperformed, albeit by a less significant margin. In 2016/17 the US small cap market had been the best performer in market terms, but in the last year it delivered more modest returns. This was in spite of the benefit to future US corporate earnings resulting from the reduction in corporate tax rates approved in December 2017. Currency movements always have an impact and this year the dollar lost 6.1% against sterling, which held back the sterling performance from both the US portfolio and market. Rising US interest rates during the year also impacted some parts of the local market.

 

 

Geographical performance (total return sterling adjusted)

for the year ended 30 April 2018

 

Portfolio

Local smaller companies index

UK

18.8%

  7.1%

Europe

  4.0%

11.6%

USA

  5.8%

  4.8%

Japan

15.7%

16.4%

Rest of World*

  6.4%

10.4%  (Pacific ex Japan)

11.3%  (Latin America)

Source: F&C

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

 

In the other markets, the portfolio performance ended the year behind the relevant comparative small cap indices. European small cap shares did well in the early part of the year as the Continent's economy picked up pace, the French Presidential result boosted sentiment and the euro rose. Later on, the problems in Catalonia and the more recent inconclusive German and Italian election results, led to something of a reverse. Our performance in Europe fell well short of the return from the European small cap index with a number of holdings failing to meet the investment team's expectations.

 

A feature of recent times has been the better performance of Japanese smaller company equities. This continued in the past year with our portfolio almost matching the mid-teens percentage return from the MSCI Japan Small Cap Index. While GDP growth is never likely to be dynamic given the country's demographic headwind, many small cap companies nevertheless produced strong earnings growth.

 

The other Asian markets also delivered solid returns in the year, though late in the period renewed concerns surrounding US trade policy in relation to China had a negative impact. Sectors and companies dependent on the US for a large proportion of their revenue were understandably under pressure. Although of less significance to the Trust in terms of exposure, returns from Latin American markets were helped by generally stronger commodity prices and lower interest rates in Brazil. Our Rest of World portfolio lagged both the Asian and Latin American small cap indices in the year. Performance across the funds we hold for exposure to these markets was mixed, with widening discounts on two investment trust holdings unhelpful.

 

Further details on the background to performance on a market by market basis is contained in the Manager's Review on pages 16 to 23 in the Report and Accounts.

 

 

Asset Allocation

 

Geographical distribution of the investment portfolio as at 30 April 2018

North America

38.4% (40.7%)

UK

27.6% (27.5%)

Rest of World

12.4% (11.1%)

Europe

11.8% (12.3%)

Japan

  9.8%  (8.4%)

The percentages in brackets are as at 30 April 2017

Source: F&C

 

The chart above and the table below illustrate the geographic allocation of the investment portfolio. Over the year the Manager chose to remain underweight in the UK given concerns around the domestic economic outlook and political risks surrounding the Brexit process. We remained overweight in Europe, where the improving macro-economic picture was felt to be likely to help company profits and market performance. Exposure to the US was reduced on valuation grounds in favour of additions to the Japanese and Asian markets. The overall impact of the geographic market positioning versus the Benchmark was modestly positive over the year.

 

Geographical weightings against Benchmark as at 30 April 2018

UK

-2.4%

Europe

+0.9%

North America

-0.3%

Japan

-1.2%

Rest of World

+0.6%  

Source: F&C

 

Gearing

The Board believes that using borrowings on an ongoing and structural basis will be beneficial to long term returns for investors as markets appreciate over time. Around half of the original CULS have converted into equity and therefore use is now being made of the £30m Revolving Credit Facility put in place last Summer. At the end of April, £24m of this facility had been drawn down in sterling at a blended current cost of approximately 1.3%. Taking account of the residual CULS and netting off cash in hand, effective gearing ended the period at 5.1%, compared to 5.0% at the half year stage.

 

The Board continues to review alternative options in relation to borrowing facilities with only just over a year to run with the existing CULS issue.

 

The Board

There have been no changes to the composition of the Board during the year and all Directors will stand for re-election by shareholders at the Annual General Meeting.

 

During the year, the Board performed an evaluation of the Chairman, all Directors, the Committees and the working of the Board as a whole. While it was concluded that all aspects of the Board's activities were operating effectively and that all Directors make an effective contribution to the running of the Company, it was recognised that three of the Directors have served for over nine years. Discussions have therefore commenced as to the need for a structured and orderly succession plan for the Directors. While this plan is being developed and implemented, the Board has concluded that none of the current Directors' independence has been impaired by length of service.

 

Annual General Meeting

The Annual General Meeting of the Company will revert to the Chartered Accountants Hall, 1 Moorgate Place, London EC2R 6EA on Thursday 26 July 2018 at 12 noon. We hope as many shareholders as possible will attend. The Manager will as usual give a review of the year together with his outlook. A map of the venue is included in the Notice of Annual General Meeting on page 77 of the Report and Accounts.

Outlook

Current economic momentum is supportive for markets heading into the new year but as usual, there are many uncertainties looking forward at the macro level both on a global and more local level. Rising bond market yields as Central Bank support from markets is withdrawn is something that could undermine equities, as could further moves on the tariffs front. The lack of clarity surrounding the UK government's negotiating position and objectives in relation to the future customs arrangements with the EU clearly remains a concern as we approach the formal exit in less than a year.

 

The Manager continues to meet companies across the industrial spectrum, seeking to maintain a portfolio of high quality and prudently financed smaller company stocks. While political risk remains elevated and at some stage a market setback is always possible, the Board remains optimistic for the medium term.

 

 

 

Anthony Townsend
Chairman
19 June 2018

 

 

Principal Risks and Future Prospects

 

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

 

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

Unchanged throughout the year under review.

 

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

The Board also monitors efficiency of service providers' processes.

 

Actions taken in the year: The Audit and Management Engagement Committee regularly reviews the Company's risk management framework with the assistance of the Manager. Supervision of third party service providers has been maintained by F&C and includes assurances regarding IT security and increasing cyber threats. The Board received a presentation from the Custodian during the year on its own cyber security controls. The Depositary reported to the Board quarterly on its oversight of custody of investments and cash and raised no matters of concern for the Company. The Board has engaged with the Manager and Registrar to ensure that the new General Data Protection Regulations will be properly and fully implemented for the safeguarding of all personal data held by the Company.

 

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

Unchanged throughout the year under review.

 

Mitigation: The Board regularly reviews overall strategy and in considering investment policy reviews reports from the Manager at each Board meeting. The Board assesses investor needs through targeted research and marketing, the effectiveness of which is kept under continuous review. The Manager structures its recruitment and remuneration packages in order to retain key staff and works closely with the Board on any significant management changes. The Manager's appointment can be terminated at six months' notice.

Performance KPIs are monitored by the Board.

 

Actions taken in the year: The Board continually measures the Manager's investment performance against the Key Performance Indicators set out on page 13 of the Report and Accounts and is satisfied that the Manager's long-term performance remains in line with expectations. The Lead Manager's review on pages 16 to 23 on the Report and Accounts explains the changes to the portfolio in the year. Marketing campaigns continued throughout the year, including promotion across financial and other relevant websites and publications.

 

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

Unchanged throughout the year under review.

 

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

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

 

Actions taken in the year: The Company's share price traded at a premium to diluted NAV for most of the year. Shares were issued regularly at a moderate premium to diluted NAV to satisfy demand from investors.

Five Year Horizon

 

Through a series of connected stress tests based on historical information, but forward looking over the five years commencing 1 May 2018, the Board assessed the risks of:

 

• potential illiquidity of the Company's portfolio;

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

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

 

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

 

 

 

Statement of Directors' Responsibilities in Respect of the Financial Statements

 

In accordance with Chapter 4.1.12 of the Disclosure Guidance and Transparency Rules the Directors confirm, in respect of the annual report for the year ended 30 April 2018 of which this statement of results is an extract, to the best of their knowledge that:

 

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

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

 

 

 

On behalf of the Board

Anthony Townsend

Chairman

19 June 2018

 

Income Statement

                                                                                                                             

 

for the year ended 30 April

2018

2017

 

Revenue

Capital

Total

Revenue

Capital

Total

 

£'000s

£'000s

£'000s

£'000s

£'000s

£'000s

 

 

 

 

 

 

 

Gains on investments

-

66,345

66,345

-

162,084

162,084

Foreign exchange (losses)/gains

(13)

(277)

(290)

47

1,050

1,097

Income

12,344

-

12,344

10,416

-

10,416

Management fee

(971)

(2,914)

(3,885)

(815)

(2,447)

(3,262)

Other expenses

(848)

(19)

(867)

(701)

(22)

(723)

Net return before finance costs and taxation

10,512

63,135

73,647

8,947

160,665

169,612

Finance costs

(382)

(1,145)

(1,527)

(442)

(1,327)

(1,769)

Net return on ordinary activities before

taxation

 

10,130

 

61,990

 

72,120

 

8,505

 

159,338

 

167,843

Taxation on ordinary activities

(682)

-

(682)

(666)

-

(666)

Net return attributable to equity shareholders

9,448

61,990

71,438

7,839

159,338

167,177

 

 

 

 

 

 

 

Return per share (basic) - pence

16.17

106.13

122.30

13.99

284.39

298.38

 

 

 

 

 

 

 

Return per share (diluted) - pence

15.92

102.40

118.32

13.80

267.79

281.59

 

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

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

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

 

 

Statement of Changes in Equity

 

 

 

 

for the year ended 30 April 2018

 

 

 

 

 

 

 

 

Called up

 

 

Share

 

 

Capital

 

 

Equity

 

 

 

 

Total

 

share

premium

redemption

component

Capital

Revenue

shareholders'

 

capital

account

reserve

of CULS

reserves

reserve

funds

 

£'000s

£'000s

£'000s

£'000s

£'000s

£'000s

£'000s

 

 

 

 

 

 

 

 

Balance at 30 April 2017

14,284

160,243

16,158

1,169

527,523

13,905

733,282

Movements during the year

ended 30 April 2018

 

 

 

 

 

 

 

Dividends paid

-

-

-

-

-

(7,330)

(7,330)

Shares issued

305

15,937

-

-

-

-

16,242

Conversion of Convertible

Unsecured Loan Stock

("CULS")

 

 

344

 

 

13,296

 

 

-

 

 

(441)

 

 

-

 

 

-

 

 

13,199

Net return attributable to equity

shareholders

 

-

 

-

 

-

 

-

 

61,990

 

9,448

 

71,438

Balance at 30 April 2018

14,933

189,476

16,158

728

589,513

16,023

826,831

 

 

 

for the year ended 30 April 2017

 

 

 

 

 

 

 

Called

up

 

Share

 

Capital

 

Equity

 

 

 

Total

 

share

premium

redemption

component

Capital

Revenue

shareholders'

 

capital

account

reserve

of CULS

reserves

reserve

funds

 

£'000s

£'000s

£'000s

£'000s

£'000s

£'000s

£'000s

 

 

 

 

 

 

 

 

Balance at 30 April 2016

13,853

141,046

16,158

1,307

368,185

12,643

553,192

Movements during the year

ended 30 April 2017

 

 

 

 

 

 

 

Dividends paid

-

-

-

-

-

(6,577)

(6,577)

Shares issued

323

15,079

-

-

-

-

15,402

Conversion of Convertible

 

 

 

 

 

 

 

Unsecured Loan Stock

 

 

 

 

 

 

 

("CULS")

108

4,118

-

(138)

-

-

4,088

Net return attributable to equity

shareholders

 

-

 

-

 

-

 

-

 

159,338

 

7,839

 

167,177

Balance at 30 April 2017

14,284

160,243

16,158

1,169

527,523

13,905

733,282

 

 

 

 

 

 

 

Balance Sheet

 

 

at 30 April

 

2018

 

2017

 

£'000s

£'000s

£'000s

£'000s

Fixed assets

 

 

 

 

Investments

 

868,469

 

761,269

Current assets

 

 

 

 

Debtors

4,343

 

4,462

 

Cash at bank and in hand

7,532

 

10,061

 

 

11,875

 

14,523

 

 

 

 

 

 

Creditors: amounts falling due within

one year

 

 

 

 

Bank loans

(24,000)

 

-

 

Creditors

(7,640)

 

(7,813)

 

 

(31,640)

 

(7,813)

 

Net current (liabilities)/assets

 

(19,765)

 

6,710

Total assets less current liabilities

 

848,704

 

767,979

Creditors: amounts falling due after more

than one year

 

 

 

 

Convertible Unsecured Loan Stock

 

(21,873)

 

(34,697)

Net assets

 

826,831

 

733,282

Capital and reserves

 

 

 

 

Called up share capital

 

14,933

 

14,284

Share premium account

189,476

 

160,243

 

Capital redemption reserve

16,158

 

16,158

 

Equity component of CULS

728

 

1,169

 

Capital reserves

589,513

 

527,523

 

Revenue reserve

16,023

 

13,905

 

 

 

811,898

 

718,998

Total shareholders' funds

 

826,831

 

733,282

 

 

 

 

 

Net asset value per share (basic) - pence

 

1,384.22

 

1,283.42

 

 

 

 

 

Net asset value per share (diluted) - pence

 

1,368.80

 

1,263.52

 

 

Statement of Cash Flows

 

 

for the year ended 30 April

 

 

2018

2017

 

 

 

£'000s

£'000s

Cash flows from operating activities before dividends received and interest paid

 

 

 

(4,919)

 

(5,131)

Dividends received

 

 

11,903

10,352

Interest paid

 

 

(1,647)

(1,769)

Cash inflows from operating activities

 

 

5,337

(3,452)

Investing activities

 

 

 

 

Purchases of  investments

 

 

(263,773)

(238,411)

Sales of investments

 

 

223,308

222,867

Other capital charges

 

 

(23)

(18)

Cash outflows from investing activities

 

 

(40,488)

(15,562)

Cash outflows before financing activities

 

 

(35,151)

(12,110)

Financing activities

 

 

 

 

Ordinary dividends paid

 

 

(7,330)

(6,577)

Proceeds from issue of shares

 

 

16,242

15,402

Movement in loans

 

 

24,000

-

Cash inflows from financing activities

 

 

32,912

8,825

Net movement in cash and cash equivalents

 

 

(2,239)

(3,285)

Cash and cash equivalents at the beginning of the year

 

 

10,061

12,249

Effect of movement in foreign exchange

 

 

(290)

1,097

Cash and cash equivalents at the end of the year

 

 

7,532

10,061

 

 

 

 

 

Represented by:

 

 

 

 

Cash at bank and in hand

 

 

7,532

10,061

 

 

 

Notes

 

 

1    Dividend

 

The Directors have proposed a final dividend in respect of the year ended 30 April 2018 of 10.00 pence per share, payable on 8 August 2018 to all shareholders on the register at close of business on 13 July 2018. The recommended final dividend is subject to approval by shareholders at the Annual General Meeting.

 

2    Financial Risk Management

 

The Company is an investment company, listed on the London Stock Exchange, and conducts its affairs so as to qualify in the United Kingdom (UK) as an investment trust under the provisions of section 1158 of the Corporation Tax Act 2010. In so qualifying, the Company is exempted in the UK from corporation tax on capital gains on its portfolio of fixed asset investments.

 

The Company invests in smaller companies worldwide in order to secure a high total return. In pursuing the objective, the Company is exposed to financial risks which could result in a reduction of either or both of the value of the net assets and the profits available for distribution by way of dividend. These financial risks are principally related to the market (currency movements, interest rate changes and security price movements), liquidity and credit. The Board, together with the Manager, is responsible for the Company's risk management.

 

The full details of financial risks are contained in note 24 of the Report and Accounts.

 

3    Annual general meeting

 

The Annual General Meeting will be held at the Chartered Accountants Hall, 1 Moorgate Place, London EC2R 6EA on Thursday 26 July 2018 at 12 noon.

 

4    Report and Accounts

 

This statement was approved by the Board on 19 June 2018. It is not the Company's statutory accounts. The statutory accounts for the financial year ended 30 April 2018 have been approved and audited, and received an independent auditors' report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report. The statutory accounts for the financial year ended 30 April 2017 also received an independent auditors' report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report.

 

The Report and Accounts for the year ended 30 April 2018 will be posted to shareholders and made available on the website www.fandcglobalsmallers.com. Copies may also be obtained from the Company's registered office, Exchange House, Primrose Street, London EC2A 2NY.

 

Legal Entity Identifier: 2138008RRULYQP8VP386

 

Information disclosed in accordance with Disclosure Guidance and Transparency Rule 4.1

 

 

 

By order of the Board

F&C Investment Business Limited, Secretary

Exchange House, Primrose Street, London EC2A 2NY

19 June 2018

 


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Annual Financial Report - RNS