ASCI.L Regulatory News (ASCI)

ABERDEEN SMALLER COMPANIES INCOME TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2019

STRATEGIC REPORT

1. FINANCIAL HIGHLIGHTS

2. CHAIRMAN'S STATEMENT

Performance

I am pleased to report that your Company's performance against its former benchmark, the FTSE Small Cap (excluding investment trusts), has been good this year, with the Company returning +34.4% versus a benchmark return of +17.7%.

Share price performance was equally pleasing with a return of +57.7% over the year.

The Company's 3 and 5 year NAV performance against the benchmark also remains strong, returning +52.6% and +87.2% respectively, versus benchmark returns of +17.3% and +49.1%.

Change of Benchmark

As you will recall from the half yearly report, we announced a change to the Company's benchmark with effect from 1 January 2020, from the FTSE Small Cap (excluding investment trusts) to the Numis Smaller Companies ex Investment Trusts index, as we felt that this index had more alignment with the stocks held in the Company's portfolio. The returns from the Numis Smaller Companies ex investment trusts index over 1, 3 and 5 years were 25.2%, 26.6% and 55.6% respectively.

Dividend

The Company's revenue return over the period has increased for the year ending 31 December 2019 to 9.98p (2018: 9.03p). This enabled the Company to increase the amount of its total dividend for the year to 8.25p compared to 7.35p for 2018, an increase of 12.2%, compared to an increase of 1.3% in the CPI in the year.

With the year-end share price at 343p, this gave a dividend yield of 2.4%. Over 3 and 5 years, the dividend has increased by 20.4% and 27.9% respectively compared to rises in CPI of 6.5% and 8.4%.

The undistributed balance of the revenue account will be added to the Company's revenue reserve. The revenue reserve account, which will represent 13.86p per share following payment of the fourth interim dividend, continues to provide the Company with flexibility in future years, should the dividend environment be more difficult.

Ongoing Charges

The Company's ongoing charges continue to be an area of focus for the Board and costs in 2019 reduced, resulting in the Company's ongoing charges coming down from 1.28% in 2018 to 1.20% as at 31 December 2019.

Discount

The Company's discount has narrowed this year, starting the year at 21.5% and finishing 2019 at a discount of 8.3%.

Investee Company Stewardship

The Manager continues to meet with its investee companies over the course of the year, which the Board supports and encourages. The Manager's report below provides some examples and further details.

Gearing/Debt

The Company continues to utilise part of its £10 million credit facility, £5 million of which is fixed and £5 million floating. At the year-end £7 million of the facility was being utilized.

The facility has staggered maturity terms for its fixed and floating rate elements, with the floating rate facility being drawn to 2021 and the fixed rate facility to 2023.

This gives the Trust a net gearing position of 7.5%, compared to 6.2% at the end of 2018.

Board Composition

The Board continues to review its composition and to consider its succession and refreshment policies. The Board has commenced a search for a new Board appointment and Barry Rose has kindly agreed to remain on the Board until the recruitment process is complete.

Environmental, Social and Corporate Governance ("ESG")

The Board and the Manager have a very strong focus on ESG principles and the Company's Investment Manager has a robust approach to embedding ESG into its research process in order to make better investment decisions and enhance the value of the Company's investments. More information on the Manager's ESG investment philosophy can be found in the Manager's report.

Manager

Since Abby Glennie took over the management of the Company, she has been repositioning the portfolio towards the Quality Growth Momentum process followed by the ASI Smaller Companies Team.

The change within the management team has added a growth focus to the investment process, which has enhanced and we believe will continue to enhance dividend growth within the portfolio in future years.

Annual General Meeting

The Annual General Meeting will be held at the offices of Aberdeen Standard Investments, 1 Bread Street, London, on Thursday 30 April 2020 at 12 noon. In addition to the formal business of the meeting, our portfolio manager (Abby Glennie) 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 and representatives from the management team at the conclusion of the meeting. An invitation to the meeting is included with the Annual Report and shareholders are requested to complete and return this to the Company Secretary.

In the event that the developing situation surrounding COVID-19 should affect the plans to hold the AGM on 30 April 2020 the Company will update shareholders through an announcement to the London Stock Exchange and will provide further details on the Company's website. The Board would encourage all shareholders to exercise your votes in respect of the meeting in advance. This should ensure that your votes are registered in the event that attendance at the AGM might not be possible.

Continuation Vote

This year the Company's continuation vote, which takes place every 5 years, will be included in the formal business of the Annual General Meeting as an ordinary resolution and we hope that shareholders will vote in favour.

Outlook

Markets were resilient during 2019, despite many uncertainties, few of which have yet resolved themselves. We remain positive that the Manager's investment process is robust and capable of producing sustained dividend growth through the investment cycle.

Robert Lister,

Chairman

12 March 2020

3. OVERVIEW OF STRATEGY

Business Model

The business of the Company is that of an investment company which conducts its affairs in order to qualify as an investment trust for UK capital gains tax purposes.

The Company aims to attract long term private and institutional investors looking to benefit from the income and capital growth prospects of UK smaller companies. The Directors do not envisage any change in this activity in the foreseeable future.

Investment Objective and Purpose

The objective and purpose of the Company is to provide a high and growing dividend and capital growth from a portfolio invested principally in the ordinary shares of smaller UK companies and UK fixed income securities.

Investment Policy

The Company invests in equities, corporate bonds and preference shares. The primary aim of the Company is to invest in the equity shares of smaller companies listed on a regulated UK stock market in order to gain growth in dividends and capital. The Company employs gearing with the primary intention of enhancing income and to a lesser extent, long-term total returns. The majority of the additional funds raised by gearing is invested in investment grade corporate bonds and preference shares.

Gearing

The level of gearing varies with opportunities in the market and the Board adopts a prudent approach to the use of gearing. The total level of gearing will not exceed 25% of the Company's net assets, at the time it is instigated, and within that gearing limit, the equity portfolio gearing will not exceed 10%, at the time it is instigated.

Risk diversification

The investment risk within the portfolio is managed through a diversified portfolio of equities, corporate bonds and preference shares. The Company does not invest in securities that are unquoted at the time of investment. A maximum of 5% of the Company's total assets can be invested in the securities of one company at the time of purchase. Although the Company is not permitted to invest more than 15% of its total assets in other listed investment companies (including investment trusts), the Board currently does not intend to invest in other listed investment companies.

Benchmark index

Numis Smaller Companies excluding Investment Trusts (total return) -effective from 1 January 2020;

FTSE Small Cap Index (excluding Investment Trusts) (total return) - up to 31 December 2019

Management

The Board has appointed Aberdeen Standard Fund Managers Limited ("ASFML" or "the Manager") to act as the alternative investment fund manager ("AIFM"). The Company's portfolio is managed on a day-to-day basis by Aberdeen Asset Managers Limited ("AAML" or "the Investment Manager") by way of a delegation agreement in place between ASFML and AAML. AAML and ASFML are both wholly owned subsidiaries of Standard Life Aberdeen plc.

Delivering the Investment Policy

Equity Investment Process

The equity investment process is active and bottom-up, based on a disciplined evaluation of companies through company meetings with the Investment Manager. Stock selection is the major source of added value, concentrating on quality, growth and momentum characteristics.

Great emphasis is placed on understanding a company's business and understanding how it should be valued. New investments are not made without the Investment Manager having first met management of the investee company and undertaken further analysis to outline the underlying investment merits. Top-down investment factors are secondary in the equity portfolio construction, with diversification and formal controls guiding stock and sector weights.

Fixed Income Investment Process

The fixed income investment process is an active investment style which identifies value between individual securities. This is achieved by combining bottom-up security selection with a top-down investment approach. Investments in corporate bonds and preference shares are also managed by investment guidelines drawn up by the Board in conjunction with the Investment Manager which include:

No holding in a single fixed interest security to exceed 5% of the total bond issue of the investee company; and

Maximum acquisition cost of an investment grade bond is £1 million and of a non-investment grade bond is £500,000.

Key Performance Indicators ("KPIs")

The Board uses a number of financial performance measures to assess the Company's success in achieving its objective and determining the progress of the Company in pursuing its investment policy. The main KPIs identified by the Board in relation to the Company which are considered at each Board meeting are as follows:

Principal Risks and Uncertainties

There are a number of risks which, if realised, could have a material adverse effect on the Company and its business model, financial position, future performance, solvency or liquidity and prospects. The Board has in place a robust process to identify, assess and monitor the principal risks and uncertainties facing the Company and to identify and evaluate newly emerging risks. A summary of the principal risks together with their mitigating action is set out below.

The Board has adopted a risk matrix which identifies the key risks for the Company and covers strategy, investment management, operations, shareholders, regulatory and financial obligations and third party service providers. This risk matrix is reviewed formally every six months but risks, including emerging risks, are, if appropriate, discussed by the Board at, or between, formal Board quarterly meetings.

The principal risks associated with an investment in the Company's shares are published monthly in the Company's factsheet or they can be found in the pre-investment disclosure document ("PIDD") published by the Manager, both of which are on the Company's website.

In addition to these risks, the Company is exposed to the effects of geopolitical instability or change which could have an adverse impact on stockmarkets and the Company's portfolio. The potential impact of Brexit remains an economic risk for the Company, principally in relation to the underlying companies within the portfolio and on the Manager's operations. Whilst most of the portfolio holdings are UK-based companies, many have operations overseas with broad and geographically diverse earnings streams. Aberdeen Standard Investments has a significant Brexit program in place aimed at ensuring that they can continue to satisfy their clients' investment needs post Brexit.

The outbreak of the recent global COVID-19 virus has resulted in business disruption and stockmarket volatility. The extent of the effect of the virus, including its long term impact, remains uncertain. The Manager has implemented extensive business continuity procedures and contingency arrangements to ensure that they are able to continue to service their clients, including investment trusts.

In all other respects, the Company's principal risks and uncertainties have not changed materially since the year end.

Promoting the Success of the Company

The Board is required to report on how it has discharged its duties and responsibilities under section 172 of the Companies Act 2006 (the "s172 Statement"). Under section 172, the Directors have a duty to promote the success of the Company for the benefit of its members as a whole, taking into account the likely long term consequences of decisions, the need to foster relationships with the Company's stakeholders and the impact of the Company's operations on the environment.

The Company consists of four Directors and has no employees or customers in the traditional sense. Without a variety of external stakeholders, the Company can neither exist nor flourish. Our shareholders own us and the Company's Manager, ASFML, provides investment management services. A number of other stakeholders support us by providing regulatory and other services, including secretarial, administration, depositary, custodial, banking and audit services. For example, BNP Paribas is our Depository and E&Y is our auditor.

Our relationship with each is different. We meet the Manager on a quarterly basis but might meet our investors, both institutional and retail, only once a year. We often need to balance the interests of different stakeholders, for example, in agreeing their fees.

The Board's principal concern has been, and continues to be, the interests of the Company's shareholders and potential investors. The Manager undertakes an annual programme of meetings with the largest shareholders and reports back to the Board on issues raised at these meetings. The Board encourage all shareholders to attend and participate in the Company's AGM and can contact the Directors via the Company Secretary. Shareholders and investors can obtain up-to-date information on the Company through its website and the Manager's information services and have direct access to the Company through the Manager's customer services team or the Company Secretary.

The Board believes that one of the key strategies of the Company, for its long-term stability and sustainability, is to develop share ownership among the growing retail and self-directed investors. Approximately 49% of the shares are currently held by such investors. In order to raise and maintain awareness of the Company, the Board participates in the promotional programme run by the Manager on behalf of a number of investment trusts under its management. The purpose of the programme is both to communicate effectively with existing shareholders and to reach more new shareholders, thus improving liquidity and enhancing the value and rating of the Company's shares. Regular reports are provided to the Board on promotional activities as well as analysis of the shareholder register.

As the Company has no employees, the culture of the Company is embodied in the Board of Directors. In seeking to deliver the Company's investment objective for shareholders, our values are trust and fairness while challenging constructively, and in a respectful way, our advisers and other stakeholders.

The Board undertakes a robust evaluation of the Manager, including investment performance and responsible ownership, to ensure that the Company's objective of providing sustainable income and capital growth for its investors is met . The portfolio activities undertaken by the Manager on behalf of the Company can be found in the Manager's Review and details of the Board's relationship with the Manager and other third party providers, including oversight, is provided in the Statement of Corporate Governance in the published 2019 Annual Report.

During the year, the Board focused on the performance of the Manager in achieving the Company's investment objective within an appropriate risk framework. In the last year, our key decisions which affected stakeholders were: the declaration of four quarterly dividends which in total represented an increase of 12.2% versus the previous year, the decision by the Management Engagement committee to continue with the appointment of the Manager and the reappointment of our advisers and service providers.

The Board is supportive of the Manager's philosophy that Environmental, Social and Governance (ESG) factors are fundamental components for responsible investing. ESG considerations are embedded in the investment process undertaken by the Manager and the Manager dedicates a significant amount of time and resource on focusing on the ESG characteristics of the companies in which they invest. Further details of how the Manager have sought to address ESG matters across the portfolio are disclosed in the Statement of Corporate Governance.

The Manager is also a tier 1 signatory of the UK Stewardship Code which aims to enhance the quality of engagement by investors with investee companies in order to improve their socially responsible performance and the long term investment return to shareholders.

The Company is a long term investor and the Board has in place the necessary procedures and processes to continue to deliver the Company's investment proposition and to promote the long term success of the Company for the benefit of its shareholders and stakeholders.

Duration

The Company does not have a fixed life. However, the Company's articles of association require that an ordinary resolution is proposed at every fifth Annual General Meeting to allow the Company to continue as an investment trust for a further five year period. The present five year mandate expires in 2020 and a vote on continuation will therefore be proposed at the forthcoming Annual General Meeting on 30 April 2020.

Board Diversity

The Board recognises the importance of having a range of skilled, experienced individuals with the appropriate knowledge represented on the Board in order to allow the Board to fulfill its obligations. Each Director brings different skills and experience to the Board. The Board also recognises the benefits, and is supportive, of the principle of diversity in its recruitment of new Board members. At 31 December 2019, the Board consisted of three males and one female.

Environmental, Social and Human Rights Issues

The Company has no employees as the Board has delegated the day-to-day management and administrative functions to Aberdeen Standard Fund Managers Limited. There are therefore no disclosures to be made in respect of employees.

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.

Socially Responsible Investment Policy

The Company's socially responsible investment policy is outlined in the Statement of Corporate Governance.

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 Company does not have a formal fixed period strategic plan but the Board formally considers risks and strategy at least annually. The Board considers the Company, with no fixed life, to be a long term investment vehicle, but for the purposes of this viability statement has decided that a period of three years is an appropriate period over which to report. The Board considers that this period reflects a balance between looking out over a long term horizon and the inherent uncertainties of looking out further than three years.

In assessing the viability of the Company over the review period the Directors have focused upon the following factors:

- The principal risks detailed in the Strategic Report above and the steps taken to mitigate these risks;

- The investment objective in the current environment remains attractive and the Company has continued to deliver sustained dividend growth as well as good capital growth;

- The outlook for the Company and its portfolio as provided in the Chairman's Statement and the Investment Manager's Review

- The Company is invested in readily realisable listed securities;

- The level of revenue surplus generated by the Company and its ability to achieve its dividend objective;

- The level of gearing is closely monitored. The Company has the ability to renew or repay its gearing:

- The impact of stress testing on the portfolio, including the effects of any substantial future falls in investment values; and

- The feed-back from major shareholders on the five year continuation vote to be proposed at the AGM in April 2020.

When considering the risk of under-performance, the Board reviewed the impact of stress testing on the portfolio, including the effects of any substantial future falls in investment values. The Board also considered matters such as significant economic or stock market volatility, a substantial reduction in the liquidity of the portfolio, or changes in investor sentiment could have an impact on its assessment of the Company's prospects and viability in the future and the period over which the performance of the Trust is monitored. The results of the stress tests have given the Board comfort over the viability of the Company.

Accordingly, taking into account all of these factors, the Company's current position and the potential impact of its principal risks and uncertainties, the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for a period of three years from the date of this Report.

Robert Lister,

Chairman12 March 2020

4. INVESTMENT MANAGER'S REVIEW

Overview

2019 saw a very strong period of performance from the Trust, with outperformance in reasonably buoyant market conditions. This continues the long term track record of the Company. We were pleased to see the discount narrow through the period with a total return increase in the Company's share price by 57.7% over the year, having entered 2019 at wider discount levels.

There were many external uncertainties: Brexit, uncertainty in the UK Parliament, President Trump, and trade tensions between the US and China. Despite these, markets have remained resilient over the period. The general election outcome then provided a relief rally near the end of the year, with particular optimism being reflected in share prices of some of the more domestically exposed smaller companies. Entering the year, valuations on UK equities looked attractive relative to other geographies, but the political uncertainty continued to make investors cautious. Companies and consumers however showed signs of ploughing on with life, perhaps given Brexit fatigue after 3 years of waiting, and economic growth and company reporting remained very solid through 2019. We saw signs of Brexit related issues in the fourth quarter, in particular with increased profit warnings, many of which blamed "Brexit" and also more caution over delayed decision making in both public and private end markets.

It was evident in 2019 that the Smaller Companies universe lagged other categories through the year, with FTSE Small Cap ex IT index delivering a total return of 17.7%, lagging the FTSE 250 ex IT index with a return of 30.8%, and even the FTSE All Share index at 19.2%. The Numis Smaller Companies ex IT index returned 25.2%. This was influenced by the more domestic exposure within the small cap space, and investor sentiment towards the challenges those businesses are facing currently. We did see some relief on that with the general election, and strength in the small cap space, but ,as a whole, 2019 was a year where the strongest performing index was in the Mid Cap space which is more internationally exposed. Investors have looked overseas for areas of growth and resilience, and less volatility; with many believing the uncertainty of Brexit would have significantly negative impacts on UK businesses this year.

The Company's Net Asset Value (NAV) total return was +34.4%, which demonstrates significant outperformance relative to the benchmark return for the FTSE Small Cap ex Investment Companies of +17.7%. Long term performance also remains very favourable over 3 and 5 year time periods, with 3 years NAV growth of +52.6% vs benchmark of +17.3%, and 5 year NAV growth of +87.2% vs benchmark of +49.1%.

The UK market, and sometimes even more so at the small end, contains a wide and diverse range of companies. Through our bottom up stock selection focus we identify businesses which have Quality, Growth and Momentum characteristics, with an income balance. The manager does not look to take macroeconomic calls or time the cycle, but focuses on identifying businesses which they believe have the levers and ability to grow in a sustainable manner, despite any external distractions the economy might experience. In difficult market environments and times when economic growth slows, quality is a characteristic they believe comes into even more focus. Quality businesses, with healthy balance sheets, management teams with a strong pedigree, good corporate governance and strong competitive positions, have the ability to be resilient through more difficult periods, and even improve their positioning when peers may be struggling.

Equity Portfolio

Stock selection was a significant contributor to the outperformance of the Trust over 2019. It is pleasing to see many of the stocks listed as key contributors in the first half of the year have remained so for the full year, showing a consistency of performance. It also highlights part of our investment process which is "Run Your Winners" as we are long term investors in these businesses.

Aveva was the largest contributor to performance, with share strength remaining consistent given excellent reporting and earnings upgrades through the year. The integration with Schneider has been fairly seamless, with new product innovation using combined skills and technology, a wider addressable market, and signs of successful cross selling. Intermediate Capital shares remained very solid, delivering strong earnings upgrades and also buoyant increases to dividend expectations. Forecasts for Dividend Per Share at the start of the year were around 38p per share, but finished the year around 45p: a significant step up in expectations. This dividend increase also highlights the confidence management have for the outlook of the business. Fundraising by the company through the year has been at attractive levels, increasing the growth potential and visibility of the company. We continue to believe the operational changes made over recent years mean the business is higher quality and less cyclical than historically. They are increasingly asset light, with more third party capital, and with long term closed end funds we view these as lower risk if we go into tougher economic environments. Games Workshop, a holding started early in 2019, was one of the top contributors to performance and has continued to deliver impressive growth. Sales growth is strong across all three channels (retail, trade, online), and the business is increasing its international focus, particularly in the US. A key change for the business has been the focus on marketing and engagement in social media, which has attracted new customers and also helped sustain the attractions for existing customers. Although they don't have a stated dividend payout policy, we were pleased to see the increases in earnings expectations through the year translated into higher dividends than forecast. We also saw strong performance from a number of other long term holdings; Assura, Discoverie, Unite and Dechra. These businesses all continue to evolve, and hold many of the quality growth momentum characteristics we look for in investments. Unite, the student accommodation provider, made a transformational deal this year, acquiring Liberty Living in an earnings accretive deal. There were some attractive low risk synergies by bringing the two businesses together, they dominate the market at over twice the number of beds of the nearest rival, and there now stands a larger more dominant platform from which to grow. Dechra continue to evolve their product portfolio, through both organic and acquisition led investments. They are very geographically diverse now, and increasingly diverse by product reducing the risk around any single product. Assura, one of the higher yielding but lower growth investments, has shown a very strong year of share price performance. They continue to increase their pipeline of acquisition and development opportunities, and have attractions to investors with their low risk profile helped by government backed income, high barriers to entry, and limited risks around the recent general election outcome. Discoverie produced another strong year, with their focus on specific structural growth sectors proving resilient in a period of economic volatility. Another newer holding in the portfolio which performed well was AJ Bell, a consistent performer since IPO. This founder-led business has a strong market positioning and is delivering strong growth through attracting new clients. We feel confident that Andy Bell has instilled a very strong collegiate culture in the firm, which gives it a solid grounding for growth and continued strong customer service. We are very pleased to see a mix of long time holdings and new positions both contributing positively to the top performers, and will continue to look to run our winners where the investment case still remains positive, whether those be new or existing stocks to the portfolio.

By far the most negative contributor to performance in the year was Burford Capital. Burford, the litigation finance business, was hit by a short report from Muddy Waters in August 2019 on which shares fell very heavily. Although the company has responded positively to many of the concerns raised in the report, shares have remained at depressed levels. The nature of the business and the lumpy recognition of profits mean it is very challenging for them to provide evidence fully to dismiss the concerns. The share price fall has been painful and disappointing and with a lack of clarity and conviction on the investment case from here, we have exited the holding. Cineworld was another holding which underperformed over the year. Whilst the investment case of the turnaround of the underinvested Regal cinema business in the US is still in place, the challenge has come from negativity towards the sector. Box office numbers across both the US and UK disappointed versus expectations, which created negative sentiment, but also challenged the revenue growth and free cash flow generation this year.

AG Barr has faced a challenging year, and the holding was exited in the period. They saw sales weakness across a number of their brands despite price cuts driving earnings downgrades. A share buyback helped protect shares in the first half, but a warning in July saw shares fall sharply. Somero faced some challenges in the year, firstly with weather in the US impacting construction activity, and then with some softness in Middle Eastern and European markets. This has impacted the earnings outlook, and lowered dividend expectations. We believe these market impacts are short term in nature, and their niche positioning puts them in a strong position over the long term.

The portfolio repositioning of the Trust started in 2018 continued somewhat through 2019, with portfolio turnover running at 28% in 2019, which is a higher level than we would expect over the long term. The portfolio is focused on investments which deliver attractive income yields, but also which have strong Quality, Growth and Momentum dynamics. The portfolio continues to have an attractive dividend yield, and through investing in faster growing businesses we look to focus on growth of income.

There have been a large number of new holdings over the year; during the first half Kesko, Games Workshop, Paypoint, Somero, MJ Gleeson, Moneysupermarket, Barclays Bank 9% 2023-Perpetual, and more recently Sirius Real Estate, Alpha Financial Market Consultants, 4imprint, Softcat, Marshalls, Forterra and Strixx. These investments exhibit those Quality Growth Momentum dynamics we look for, with attractive yields and score well on our stock screening tool, the Matrix.  Further details of the investment rationale for two of these new holdings are provided in the investment case studies section.

Kesko is a Finnish business with high market share in Finnish food retail. This business has been successfully positioned with a unique offering that has protected it versus competitors, and should provide a solid defensive core. The next stage is an improvement in their Building and Technical business, which is business to business (B2B) and business to consumer (B2C). They have a strong balance sheet, which will allow them to do M&A. Games Workshop are driving strong growth from increasing online customer interaction, increasing trade accounts, new product launches, and store growth with increasingly global exposure. The capacity expansion of the new facility should provide further growth capabilities. They have a net cash balance sheet and the business is highly cash generative. Paypoint, is a relatively defensive player providing retail payment services. They have strong market positions across the service range in the UK, and their Romanian business is also well positioned with good growth opportunities. Their balance sheet is healthy and cash generation good. Somero has a very attractive matrix score and a high dividend yield. This US based manufacturer of concrete "screeds" continues to deliver strong growth and cash generation. Utilising their machinery means the quality of flat concrete flooring is significantly higher, but also the cost and time of laying is reduced, delivering a good return on investment to customers. They pay a good dividend and then supplement that with paying out 50% of cash above $15m. Somero suffered some downgrades post our investment, with weather impacts and weaker end markets. Whilst this has reduced the growth expectations of earnings and dividends, we believe the investment case remains intact given their unique market position and that the weaknesses are short term rather than structural.

Moneysupermarket has had a difficult couple of years, but both end markets and their operational strategy are seeing improvements. Under new management, they have reinvested in technology, with a real focus on personalisation. Building closer customer relationships means long term they should be able to spend less on customer acquisition. This would improve the quality of the revenue stream, through more repeat business, and also drive operational leverage. Shares sit on a discount to other platform stocks, and their free cash flow generation is very attractive. With a strong net cash balance sheet, they have announced a capital return to shareholders, however unfortunately the Trust struggled to build a full position in advance of this due to illiquidity, given that multiple funds were trading. They have an attractive core yield, supplemented this year by a special dividend. Results since we invested have been a little lacklustre, with some cyclical pressures in the Money segment, and impacts from Google algorithms in Insurance. We believe their competitive position remains strong, and the cash generation should provide an attractive source of income going forward. MJ Gleeson was added after another good meeting with management. It has an attractive score on our screening tool, the Matrix, with a dividend yield over 4%. Whilst shares do get impacted by sentiment on housebuilders, MJ Gleeson has a very unique market position; their affordability, simple operational structure, unique client base and ability to expand their model into new regions through replication. They have a well-placed strategic land business in the South, which can either generate a steady profit stream over years or could be sold and generate an upfront monetisation of that business, which we expect might be returned to shareholders. It trades at a cheap valuation of 14x P/E for solid high single/low double digit EPS growth. We also added a holding in Barclays Bank 9% 2023 bond (Perpetual rated BB+/Ba2/BBB). The upside in holding Barclays comes from the potential for early redemption prior to the Oct 2023 first call date, as the bond is non-compliant for capital adequacy purposes post January 2022.

Sirius Real Estate is a Germany based real estate company who buy and let a range of real estate assets, with a focus on improving capacity utilisation of sites. Focus is on regional space in Tier 1-2 cities, with a mix of usage (office, storage, production, smartspace etc). Their flexibility in usage allows them to utilise as much of the space as possible, and also be flexible through cycles. They should be able to continue to deploy their balance sheet into acquiring new assets, and also recently started a joint venture structure with Axa.

Alpha Financial Markets Consulting is a founder-run consultancy, focused on financial markets. They are a challenger in the space to the large consultants, and are taking market share. Utilisation levels of consultants remain high, with a broad spread of customers, and growth driven by both existing customers and new business wins. The end market environment with regulation drivers and consolidation are a positive for them. In tougher markets cost pressures on customers might help activity levels, with project work and outsourcing of niche work.

4imprint is a platform for the sale of promotional materials, across the US. In a very fragmented market they have around a 3% market share, which makes them the leader, so there is plenty of room for growth. They continue to have seen both strong organic growth and attractive returns on their incremental marketing investment. Revenue growth is driven by volumes (new and existing customers), with marginally positive average order value. They have a consistent track record of beating forecasts and driving earnings upgrades, and their dividend forecasts have been upgraded. Their balance sheet is strong with net cash, and they did also pay a special dividend in 2018. Risks are focused around economic slowdown in the US and Trump tariffs, however with a leading but still small market share in a fragmented industry this provides some growth protection in a downturn.

Forterra, the bricks manufacturer, is delivering growth despite being capacity constrained in their Bricks and Blocks business. They have some pricing power, and also are making operational efficiencies. The acquired Bison business is bringing new product development and growth opportunities. They have a healthy balance sheet and have increased their pay-out ratio to 45% (from 40%) as the next couple of years are lower growth before the capacity expansion in bricks is in production (+16% capacity in bricks), and with good cash generation in the ongoing business they want to reward shareholders for waiting. Concerns from the market would be around cyclicality, but the peers are very controlled as well on capital allocation and expansion, and there looks to be continued support in terms of supply/demand, particularly in new build housing, to support capacity utilisation at high levels and allow price rises.

Strix, the global market leading kettle safety component manufacturer, has a 30 year track record of profitability. They have a new highly cost-competitive range being rolled out that should ensure their market dominance is maintained. Strix delivers high margins reflecting a high service element, acting as a design and solutions intermediary between brand owners, retailers and the Chinese companies that dominate OEM manufacture. Strix's IP creates a barrier to entry, which means the business should be capable of maintaining good margins into the foreseeable future. Market leadership means they can invest in R&D to keep ahead of the cost curve as well as being at the forefront of new developments, including more niche products and electronic thermostatic controls. In addition to the cash generative core business, management are investing in new product development to provide growth.

Softcat, a value added reseller of IT equipment operating in the UK, has a #2 market position with 7% share, slightly behind Computacenter. In recent years they have outgrown the market, all via organic growth. The market is very fragmented and with their excellent service levels, a good reputation, and good access and terms for product, we think they can continue to gain share. The business is very broadly spread in terms of products it sells, and has a diverse customer base across Enterprise/Governments/SMEs. The average spend is £14k, so whilst they might have some larger customers and people spending heavily on an upgrade project, a lot of their exposure is on day to day IT spend. Softcat have an extremely strong culture, something they are protective of. In a competitive sales organisation, having a strong culture is critical. The business is capital light, they don't really need to hold stock, they have no debt and have a net cash balance sheet. They grow their ordinary dividend broadly in line with earnings, and then look to return excess cash through special dividends. They have paid special dividends every year since 2016.

Marshalls, the block paving business, has a strong track record of earnings upgrades, a high quality management team, a strong balance sheet position and attractive returns on capital. Our engagement with management has been very encouraging for the ability to continue to grow at attractive growth rates. Their product innovation continues to create new growth opportunities, and they feel many of their end markets are in structural growth (new build housing, infrastructure, water management etc.). This growth delivers strong cash generation, and a build-up of cash is forecast. In reality this won't happen; they will invest organically, they will look to acquire and have a strong pipeline although timing is hard to judge, or they will return cash if these deals do not come through. They have a number of operational productivity improvements, such as restructuring of manufacturing sites and distribution savings. There are many differences from the last downturn (balance sheet, product diversity, ability to flex capacity, banking facilities in place) which gives us encouragement about the resilience Marshalls should have if the environment toughens. Management are now focused on 2025 plans, showing their commitment to the business long term.

We exited holdings in Scandinavian Tobacco, Victoria, Smart Metering Systems, Elementis, Genus, Anglian Water bonds, RPC (post bid) all in the first half of the year. More recently we also exited positions in Euromoney, Stock Spirits, Cairn Homes, Oxford Instruments, Hostelworld, AG Barr and Manx Telecom (post bid). We also exited the four preference share holdings; Balfour Beatty convertibles, Aviva, General Accident and Ecclesiastical. Whilst the yields on these preference shares was appealing, we felt we could obtain attractive yields in equities while also achieving growth in income for the portfolio.

We have exited the position in Hostelworld, the online booking platform focused on the hostel market. Whilst the new CEO has been implementing his strategy, we have seen earnings downgrades from weak performance and cost investment. Management are pinning a lot on the TiPi acquisition and the technology it brings being rolled out across the hostel estate. Our concerns are that this is a blue sky vision. A key concern around the environment is the increase in pay per click advertising, which is causing significant margin pressure, and we think could be considered to be structural. We also have a concern that their high dividend pay-out ratio is not conducive to their desire to invest in the business, as we may see that level reduced.

We exited holdings in AG Barr (earnings downgrades driven by volume pressures across brands) and Cairn Homes (earnings downgrades from tougher pricing and demand). Euromoney, Stock Spirits, and Oxford Instruments joined the list of less preferred names from the first half of 2019, with these businesses failing our Quality, Growth, Momentum focus. We felt there were more attractive investment opportunities elsewhere in the universe, so used these names as a source of cash. We switched out of the Anglian Water bond, into Barclays Bank. The yield was more attractive and the switch reduced the duration by 3 years, driving less sensitivity to changes in government bond yields.

Whilst we continue to run our winners, we did take some profit in names such as Aveva and Dechra to keep position sizes under control.

Environmental Social Governance (ESG)

ESG analysis is embedded throughout our investment process; in our research and in our engagement with management teams. We believe ESG is a financially material aspect of investment, truly a driver of returns. In our ESG focus we analyse both risks and opportunities within our companies, and areas where through our engagement with these businesses we can engage and advise companies to improve their ESG exposures or disclosures. These cases are opportunities to drive stock re-ratings. Within smaller companies we think there is real opportunity to add value in ESG, where these businesses are often under covered by external ESG research and also where businesses sometimes lack internally focused ESG expertise. As fund managers we work closely with our well invested ESG team internally, so are well resourced for ESG analysis and engagement.

Investee Company Stewardship

We have engaged with Burford Capital on a number of occasions post the release of the Muddy Waters short selling note. The importance we placed on their governance had already been conveyed to the management on previous interactions, and we believed they were making progress. This has been accelerated post the Muddy Waters research. They have appointed a new CFO, moved towards a dual US listing, adjusted some senior roles, planned changes to the board and are looking to improve disclosure of management remuneration arrangements. However, despite progress, we decided to exit the holding post the period end.

Engagement works in both directions, and Softcat were keen to meet with us. The Chair was keen to get our feedback on the quality of the management team, as well as discuss views on his tenure as Chairman. Current Chairman Martin Hellawell was previously CEO of the business for 12 years, stepping up in 2018.

We met with the recently appointed Chair of Moneysupermarket to discuss strategy, board development and risk. The new Chair has been on the board for a number of years and is supportive of the strategy and the executive team. The company is progressing with its Reinvest strategy and the board has set specific milestones to monitor in terms of their personalisation and growth agendas. On risk, cyber-security is a key focus and is watched closely by the board, as is the competitive environment. The company also continues to seek to develop the board through recruitment of key non-executive director roles.

Fixed Income portfolio

Government bond yields fell during 2019 as economic data remained soft and US/China trade tensions persisted. The US Federal Reserve cut rates on three occasions reversing some of its tightening of previous years. While a number of other central banks also eased policy measures in response to slower activity levels the Bank of England maintained policy rates at 0.75%, although it did continue its asset purchase programme designed to limit volatility in bond markets. Credit spreads were tighter during the period with markets taking comfort from benign economic performance of developed economies and from the support of central banks. UK credit lagged other markets until the final quarter and, more specifically, the period after the general election.

UK corporate bond spreads tightened by approximately 45 basis points over the year with all areas of the market attracting positive investor flows. The short end - where the Trust's holdings are concentrated - continues to benefit from flows out of money market funds as investors hunt for higher yields. Although the market has enjoyed a strong year, the outlook remains reasonably constructive with the main risk being an economic slowdown. Bonds issued by banks and insurers were amongst the best performers of 2019, along with lower quality and cyclical corporates.

The Trust's holdings performed well in this environment. The risk premium (spread) of the Barclays 9% perpetual bond tightened over 60 basis points over the period with UK banks rallying particularly in the final quarter. The outcome of the UK general election and the results of the Bank of England's stress tests were both very positive for the sector. The very short dated Scottish and Southern Electric hybrid bond was also very strong after the election. The election outcome was also helpful for this bond with Labour's nationalisation policy on utilities previously overhanging the sector. The spread of this bond tightened significantly (over 150 basis points) and it is still expected to be called in 2020. For the time being the yield remains attractive although alternative investment opportunities will be considered over the coming months.

The outlook for fixed income, like other asset classes, is uncertain. Yields are likely to stay low and policy rates will be accommodative, which is supportive for investment grade credit. Shorter dated credit appears relatively attractive and investment grade bonds in this sector will continue to enjoy an environment of low volatility.

Outlook

We have enjoyed many years of strong economic growth and bull markets, and investors globally are aware that can't last forever. We believe we are certainly nearer the next economic slowdown than the last one. Within the UK specifically, it is difficult to tell at this stage whether some of the areas of slowdown we saw in Q4 will continue throughout 2020, or were short term driven by the general election uncertainty.

Our investment process is focused on fundamental, bottom up, research. We are not taking portfolio decisions based on macroeconomic views. Stock analysis remains the key driver of our decision making process. Recent periods have given us confidence that this remains a long term driver of outperformance. Looking back to the 2016 Brexit vote, small caps were heavily de-rated in the aftermath panic. In hindsight this was an excellent buying opportunity as they have rallied strongly since. Companies have been resilient despite these external factors. We believe in our investment process. This process guides us to invest in companies which have strong management teams leading their strategies, which have a number of growth levers to pull, which can drive growth independent of external conditions and which are resilient and have strong financial positions. A critical part of our research is also analysing the environment, social and governance characteristics of businesses and looking for both risks and opportunities. We believe companies who can exhibit strong ESG credentials are higher quality, and lower risk investments.

The UK smaller companies universe remains a wide, diverse grouping of businesses and investment opportunities. Our process drives us towards investing in a range of different businesses, and both domestic and international exposures. The investment process followed by our team has been utilised for well over 20 years and tried and tested through various economic cycles. The 'Matrix' remains a core part of that process, and has provided a consistent backing through the years. This gives us confidence that despite what factors we may see externally, our process will focus us towards backing businesses which can drive sustained long-term outperformance across the portfolio.

Aberdeen Asset Managers Limited*

12 March 2020

*on behalf of Aberdeen Standard Fund Managers Limited.

Both companies are subsidiaries of Standard Life Aberdeen plc

5. RESULTS AND PERFORMANCE

DIVIDENDS

PORTFOLIO

Investment Portfolio - Equity Investments

As at 31 December 2019

Investment Portfolio - Other Investments

As at 31 December 2019

GOING CONCERN

The Company's assets comprise mainly readily realisable securities which can be sold to meet funding commitments if necessary. The Board has set gearing limits and regularly reviews actual exposures, cash flow projections and compliance with banking covenants. The Company has a £10 million credit facility of which £5 million expires in 2021 and £5 million expires in 2023. Based on feed-back from major shareholders, the  Directors consider that it is reasonable to assume that the the continuation vote will be passed at the AGM to be held in April 2020 and therefore that the Company will continue. 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 annual report and accordingly, continue to adopt the going concern basis in preparing the financial statements.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with IFRSs as adopted by the EU and applicable law.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

- select suitable accounting policies and then apply them consistently;

- make judgements and estimates that are reasonable and prudent;

- state whether they have been prepared in accordance with IFRSs as adopted by the EU; and

- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Responsibility statement of the Directors in respect of the annual financial report

We confirm that to the best of our knowledge:

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

- the Strategic Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that they face.

We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

For and on behalf of Aberdeen Smaller Companies Income Trust PLC

Robert Lister,

Chairman

12 March 2020

FINANCIAL STATEMENTS

STATEMENT OF COMPREHENSIVE INCOME (AUDITED)

BALANCE SHEET (AUDITED)

STATEMENT OF CHANGES IN EQUITY (AUDITED)

Year ended 31 December 2019

CASH FLOW STATEMENT (AUDITED)

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31 December 2019