ASCI.L Regulatory News (ASCI)

abrdn Smaller Companies Income Trust plc

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2021

STRATEGIC REPORT

1. FINANCIAL HIGHLIGHTS

2. CHAIRMAN'S STATEMENT

Performance

In another year in which the Covid-19 pandemic has dominated the headlines, your Company has delivered strong absolute and relative performance, with a net asset value ("NAV") total return of +30.4% compared to the benchmark, the Numis Smaller Companies (ex Investment Trusts) Index, which returned +21.9%.

Share price performance was also ahead of the benchmark, with a total return (including dividends reinvested) of +22.9% over the period.

Three and five year NAV performance against the benchmark has been equally strong, with returns of +68.2% and +91.0% respectively, versus composite benchmark returns of +37.3% and +36.8%.

The Company's one year performance is measured against the Numis Smaller Companies (ex Investment Trusts) Index, which was introduced by the Company on 1 January 2020. Prior to that date, the Company's benchmark was the FTSE Small Cap (ex Investment Trusts) Index. Performance over three and five year periods is therefore measured against a composite of both indices.

Dividend

It was pleasing to see the Company's revenue return for the year ended 31 December 2021 of 9.69p (2020: 5.60p) recover to similar levels to those seen before the start of the pandemic. This was a reflection of a robust year for UK equity markets, which saw a normalisation of earnings and a return of confidence to companies in the distribution of cash. This resulted in a more positive outlook for investors, boosted by the introduction of a vaccine rollout programme and some lifting of Government restrictions. More information on this can be found in the Manager's Review.

The Company was also able to return to paying a covered dividend this year and to increase the dividend to its highest level in ten years, with the total dividend for the year being 8.85p (2020: 8.24p).

With the year-end share price at 375p, this imputes a dividend yield of 2.4%. Over three and five years, the dividend has increased by 20.4% and 29.2% respectively, compared to rises in Consumer Prices Index ("CPI") of 7.5% and 13.0%.

The undistributed balance of the revenue account will be added to the Company's revenue reserve. The revenue reserve account continues to remain at a healthy level and will represent 12.1p per share following payment of the Company's fourth interim dividend.

Ongoing Charges

The Company's ongoing charges, which are regularly monitored by the Board, decreased during the year to 31 December 2021, to 1.20% from 1.35%.

Discount

At 31 December 2021, the Company's discount stood at -15.3% (2020: -10.3%). While this was disappointing, the widening of the discount was representative of a general trend in the smaller companies sector as a whole.

Gearing/Debt

The Company's use of its £10 million credit facility (£5 million of which is at a fixed interest rate and £5 million at a floating interest rate) has remained unchanged, with £7 million of the facility drawn down at the year end. The £5 million floating element of the facility expires in April 2022 and the Company is already seeking terms for its renewal. The £5 million fixed rate facility expires in April 2023.

The Company's net gearing position as at 31 December 2021 was 4.5%, compared to 7.0% at the end of 2020. This is lower due to short term cash balances held at the year end date.

Board Composition

Further to my update on the Board's composition in the Company's Half-Yearly Report, in which I referred to the retirement of Barry Rose and the appointment of Christopher Metcalfe, I am delighted to advise that on 5 January 2022, we welcomed Rosalyn Breedy to the Board as an independent Non-Executive Director.

Rosalyn is a corporate, funds and financial services lawyer and brings with her a wealth of experience of regulated funds, as well as a unique and diverse background which will complement the Board's skills and experience as a whole. Rosalyn's biography can be found on page 41 of the 2021 Annual Report and both Rosalyn and Christopher, who was appointed to the Board on 7 June 2021, will stand for election at the Company's Annual General Meeting ("AGM") in May 2022.

Having served on the Board of your Company for 10 years, with 7 years as Chairman, I shall be retiring as a Director at the forthcoming AGM and am happy to announce that Dagmar Kent Kershaw, who has served on the Board since 2017, has agreed to be my successor.

Environmental, Social and Corporate Governance ("ESG")

ESG has been embedded in your Manager's investment process for a number of years and the Board is pleased to see that they continue to actively engage with portfolio companies on ESG matters on a regular basis.

More information on this and the Manager's ESG investment process can be found in the Manager's Review.

The Manager

In July 2021, Standard Life Aberdeen plc changed its name to abrdn plc as part of a rebranding exercise. Following this change, and as advised in the Company's Half-Yearly Report, it is anticipated that the Company's Manager, Investment Manager and Company Secretary (Aberdeen Standard Fund Managers Limited, Aberdeen Asset Managers Limited and Aberdeen Asset Management PLC respectively) will also to change their names in the future.

Change of Name

Following the abrdn name change, the Board made the decision to align itself with the Manager's new brand by changing the Company's name to abrdn Smaller Companies Income Trust plc. This change came into effect on 7 January 2022.

Annual General Meeting

The Company's AGM will take place on Thursday 5 May 2022 at 12 noon and is currently scheduled to be held at the offices of abrdn, Bow Bells House, 1 Bread Street, London EC4M 9HH.

As you will be aware, for the last two years, in order to adhere to Government guidelines, we were unable to hold a physical meeting. This year, we are pleased to advise that we do intend to hold a physical meeting, but would encourage shareholders, in the event of any change to Government guidelines or a change of venue, to continue to check for updates from the Company on its website abrdnsmallercompaniesincome.co.uk or via Company announcements to the London Stock Exchange.

As in previous physical meetings, shareholders will have the opportunity to hear an update from the Manager and to ask questions of the Manager and the Board and we very much look forward to seeing you. I would encourage shareholders (whether or not they intend to attend the AGM in person) to lodge their proxy votes in advance of the meeting. Shareholders are also encouraged to send any questions in advance, by email, to smallercompaniesincome@abrdn.com.

Outlook

Your Manager's investment process has delivered good results for the Company and we are pleased to see the return of a more positive outlook for markets and to see dividend payments resume.

The continuation of a focus on stock selection in line with your Manager's disciplined Quality Growth and Momentum investment process with an income bias, will continue to guide them towards a portfolio of quality growth businesses, which can prove resilient in a variety of environments.

Robert Lister

Chairman

14 March 2022

3. OVERVIEW OF STRATEGY

Business Model

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

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

Investment Objective and Purpose

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

Investment Policy

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

Gearing

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

Risk diversification

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

Benchmark index

Numis Smaller Companies (excluding Investment Trusts) Index (total return) - effective from 1 January 2020; FTSE Small Cap Index (excluding Investment Trusts) Index (total return) - up to 31 December 2019.

Management

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

Delivering the Investment Policy

Equity Investment Process

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

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

Fixed Income Investment Process

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

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

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

Key Performance Indicators ("KPIs")

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

Principal Risks and Uncertainties

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

The Board also regularly identifies and evaluates newly emerging risks, for example the impact of climate change and monitors these closely, as appropriate for the Company. The impact of climate change is not considered to be material to the financial statements as the entire investment portfolio consists of listed equities and corporate bonds and the quoted market (being bid) price is expected to reflect market participants' view of climate change risk.

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

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

Promoting the Success of the Company

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

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

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

The Board's principal concern has been, and continues to be, the interests of the Company's shareholders and potential investors. The Manager undertakes an annual programme of meetings with the largest shareholders and reports back to the Board on issues raised at these meetings. In normal circumstances, the Board encourage all shareholders to attend and participate in the Company's AGM and note that they can contact the Directors via the Company Secretary. Shareholders and investors can obtain up-to-date information on the Company through its website and the Manager's information services and have direct access to the Company through the Manager's customer services team or the Company Secretary. As the normal format of the 2021 AGM was not able to take place due to the government's social distancing restrictions in place, a number of presentations and podcasts by the Manager were made available on the Company's website for shareholders to access.

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

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

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

Key decisions and actions during the year to 31 December 2021, which required the Directors to have greater focus on stakeholders included:

Directorate and Succession Planning

The Board has continued to progress its succession plans during the year and, as explained in the Chairman's statement, in light of the retirement of Barry Rose in June 2021 and the retirement of the Chairman in May 2022, has successfully recruited two new Directors in the year, Christopher Metcalfe and Rosalyn Breedy. Dagmar Kent Kershaw has agreed to take the role of Chairman of the Board from May 2022. Shareholders' interests are best served by ensuring a smooth and orderly refreshment of the Board which serves to provide continuity and maintain the Board's open and collegiate style.

Change of Company Name

In light of the Manager's rebrand to 'abrdn' in September 2021, the Board considered the opportunity to leverage the significant promotional activity and agreed that it was in the best interests of the Company to align the Company name with that of its Manager. Accordingly, the name change was effected in January 2022 at the earliest opportunity after the year end.

Renewal of Debt Facility

During the year, the Board approved the renewal of the Company's loan agreement with RBSI to provide it with a £10 million credit facility, £5 million of which is at a fixed interest rate and £5 million at a floating interest rate. The £5 million floating element of the facility expires in April 2022 and the Company is already seeking terms for its renewal. The £5 million fixed rate facility expires in April 2023. The Board believes that the modest use of gearing by the Company is of long term benefit to shareholders.

Board Diversity

The Board recognises the importance of having a range of skilled, experienced individuals with the appropriate knowledge represented on the Board in order to allow the Board to fulfill its obligations. Each Director brings different skills and experience to the Board. The Board takes the benefits of diversity into account in its recruitment of new Board members and this is evidenced in recent Board changes. At 31 December 2021, the Board consisted of three males and one female.

Employee, Environmental, Social and Human Rights Issues

The Company has no employees as the Board has delegated the day-to-day management and administrative functions to the Manager. There are therefore no disclosures to be made in respect of employees. The Company's socially responsible investment policy is outlined in the Statement of Corporate Governance.

Modern Slavery Act

Due to the nature of the Company's business, being a company that does not offer goods and services to customers, the Board considers that it is not within the scope of the Modern Slavery Act 2015 because it has no turnover or employees. The Company is therefore not required to make a slavery and human trafficking statement. In any event, the Board considers the Company's supply chains, dealing predominantly with professional advisers and service providers in the financial services industry, to be low risk in relation to this matter.

Global Greenhouse Gas Emissions

The Company has no greenhouse gas emissions to report from the operations of its business, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Report) Regulations 2013.

The Company qualifies as a "low energy user" under the Streamlined Energy and Carbon Reporting Requirements (SECR), and its energy and carbon information is not disclosed for that reason.

Viability Statement

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

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

- The principal risks detailed in the Strategic Report on pages 19 to 21 of the 2021 Annual Report and the steps taken to mitigate these risks. In particular, the Board has considered the operational ability of the Company to continue in the current environment, which continues to be impacted by the global Pandemic, and the ability of the key third-party suppliers to continue to provide essential services to the Company. Third party services have continued to be provided effectively;

- The investment objective in the current environment remains attractive. A resolution for the continuation of the Company was passed at the AGM in June 2020 demonstrating ongoing support for the Company's mandate. The Company has continued to deliver sustained dividend growth as well as good capital growth over the longer term;

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

- The Company is invested in readily realisable listed securities;

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

- The level of gearing is closely monitored. Covenants are actively monitored and there is adequate headroom in place. The Company has the ability to renew its gearing or repay its borrowings through proceeds from sales of investments. Initial discussions with banks have commenced with a view to renewing the facility; and

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

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

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

Robert Lister,

Chairman

14 March 2022

4. INVESTMENT MANAGER'S REVIEW

Overview

The Company delivered a NAV total return of 30.4% for the year ended 31 December 2021, outperforming the Numis Smaller Companies (ex- Investment Trusts) Index return of 21.9% by 8.5%. This continues the solid long term track record of the Company which, over three and five years, has delivered a NAV total return of 68.2% and 91.0% respectively, outperforming its composite benchmark by 30.9% and 54.2% respectively.

Our investment process of Quality Growth Momentum ("QGM") with an income support performed well over the course of 2021. Following an extraordinary 2020, this year has again proved our ability to identify high quality resilient businesses with levers for growth whilst maintaining the ability to pay dividends.

2021 was a strong year for global equities, including UK stocks. The Covid-19 pandemic (the "Pandemic") continued to put strain on the economy, particularly with the discovery of new variants, while investors grappled with the economic fallout. However, markets had largely adapted to this constrained environment, and were also underpinned by ongoing government and central bank support. Investor sentiment also improved on the back of a highly successful domestic vaccine rollout, positive economic data and robust corporate earnings.

At the end of December 2020, more than three-quarters of the UK's population were under the most severe restrictions yet markets were optimistic over the vaccine success as roll outs began around the world. The positive momentum took a brief pause in January 2021, and UK equities dipped slightly, before picking up in February and again thereafter. Supportive government policy, with Chancellor Rishi Sunak pledging an additional £65 billion in emergency support measures for workers and businesses, drove markets upwards. Easing lockdown restrictions, positive earnings results and an impressive vaccine rollout also benefited UK equities.

Equities were supported in the second half of the year by the continued easing of the Pandemic restrictions. Although the Government delayed 'freedom day' by four weeks, due to an uptick in infections caused by the Delta variant, all lockdown restrictions were eventually lifted at the end of July. This brought a welcome recovery in economic activity in August, however, this also put strain on supply chains. Supply chain pressure continued to build in September and proved one of the market's biggest challenges in the second half of the year while the disruption caused by a fuel shortage also dented sentiment. In October, equities were weighed down by soaring energy prices, with several small UK energy firms going bust as a result. Stocks fell back dramatically at the end of November after the discovery of a new variant of Covid-19 in South Africa, sparking fears around vaccine efficacy and the return of restrictions. Unlike some European countries, the UK has not seen a dramatic rise in hospitalisations. Concerns about rising inflation and less-supportive monetary policy were also reflected in investor sentiment at the end of the year.

In UK economic news, third-quarter growth figures showed that the UK has lagged behind other rich economies. The Bank of England held its benchmark interest rate at the all-time low of 0.1%, while maintaining the current rate of its asset-purchasing programme. Meanwhile, UK CPI continued to rise through the year, reaching 5.4% year on year in December - its highest level f many years.

The new issues market remained buoyant. As smaller companies investors it has been pleasing to see the UK market hosting vibrant new growth businesses. abrdn has enjoyed meeting prospective listed businesses, but has remained selective and true to our QGM investment process with an income bias.

Performance

Your Manager has run its QGM investment process for over 20 years and adheres to this process in all environments. The Company's portfolio is positioned to deliver outperformance over the cycle. Value rallies are the most challenging time for this process and it is believed that the extreme market volatility experienced last year, and the value rally of late 2020 into early 2021, is now behind us. The portfolio has delivered a NAV total return of 30.4%, outperforming the Numis Smaller Companies (ex- Investment Trusts) return of 21.9% for the year ended 31 December 2021. Effective company engagement remains key to identification of the QGM businesses that the Company invests in. In particular, your Manager looks for businesses that have many angles to their growth opportunities, giving them a greater ability to continue to grow, whether it be through areas like complimentary products and services, new geographies, or investments funded by the strength of their quality balance sheets.

Having paid a dividend of 8.85p per share for the year, the Company is pleased to report a Dividend Yield of 2.4%, higher than its benchmark which yielded 2.1%.

Equity Portfolio

Stock selection was a significant contributor to the outperformance of the Company over 2021. Earnings seasons have brought positive updates from the names held in the Company's portfolio and share prices have responded accordingly. Encouragingly, balance sheets are healthy and there is dividend growth coming through. Accordingly, your Manager believes that the dividend situation across the portfolio is now normalising.

Financials Liontrust and Tatton Asset Management were top contributors over the year having enjoyed sustained net inflows throughout 2021. Both companies are focused on the UK intermediary community as their core audience (IFAs, wealth managers) but the real point of differentiation is the simplicity and consistency of their investment management processes. Specifically, Liontrust delivered sustained net inflows in the period, with 21% growth in headline Assets under Management ("AuM"). The fund management process is clear and well-articulated, giving advisers confidence in the fundamental strength of stock selection and portfolio management discipline. It finished the year with the acquisition of institutional asset manager Majedie which boosted AuM further, and provides institutional growth opportunities. Liontrust's AuM is now in excess of £40 billion having delivered consistent organic growth on a diverse range of funds (equities, fixed income, multi-asset) and is increasingly diversified, having completed selective and accretive bolt-on acquisitions.

Tatton Asset Management has maintained impressive net inflows, benefiting from reduced social distancing restrictions which has allowed them to resume more meaningful face-to-face marketing, including the return of its annual conference. It has a clear portfolio asset allocation, with a number of variants (both risk rated and specialist - like ethical) which allows the solution to be tailored, aided by an attractive pricing position. The company's AuM has now broken the £11 billion mark driven by sustained monthly inflows. This has been complemented by the acquisition of the Verbatim funds, adding further AuM and also bringing a strategic partnership with Fintel. Tatton Asset Management has a broad reach providing discretionary fund management services to over 700 firms acting for in excess of 80,000 underlying investment accounts, a number which is continually growing.

Morgan Sindall added value following a number of upgrades to earnings guidance for the year in spite of widespread inflation in the supply chain and shortages of materials and labour. The UK construction business is benefiting from structural growth in infrastructure from increased investment, and heightened demand to help companies adapt offices to future ways of working. Forward visibility continues to strengthen and recent margin improvement reflected the continued focus on long-term relationships, operational delivery, and strong risk management. Your Manager remains confident in the growth potential on offer alongside the company's attractive yield.

It is unusual to be writing about Games Workshop as a detractor from performance for the year. In fact the company had an exceptional year in terms of sales demand, demonstrating excellent performance given that the comparative period last year included the successful launch of Warhammer 40,000 and pent-up demand after the Pandemic. Although all these numbers are promising, there were a number of headwinds in relation to pressures on freight costs and currency exchange rates. Supply chain constraints meant the company had to delay releases of new products. The company's stores and those of the trade accounts were impacted by government restrictions on opening and operating. This materially impacted sales in the channel as well as the ability to offer introductory games. Sales to Europe were impacted by the UK leaving the EU ("Brexit") and the company had to give refunds when delivery was impacted. Nevertheless the company made a confident outlook statement, with the focus on growing sales, given the planned increases in manufacturing and distribution capacity. This provided some insight into the company's thoughts on the sustainability of potential demand. Despite the share price weakness, your Manager believes that there has been no change in the long term investment case, namely that the niche category Games Workshop operates in will continue to thrive, their competitive position within this category remains strong and multiple longer term opportunities are available to the group. Without global supply issues your Manager is confident that the quality of the business and the top line growth opportunity will continue to provide strong earnings growth in coming years, which in turn will drive dividend growth.

There was a disappointing update from Seraphine shortly after its flotation, namely a warning on supply chain challenges. During their second quarter, supply constraints impacted availability which, in turn, weighed on new customer acquisition. This diluted marketing spend and led to fewer new customers which subsequently challenged revenues. The shares responded negatively to the downgrades to earnings. The update was reflective of some of the post-Pandemic supply chain difficulties facing the sector during the middle of the year; these were more challenging for smaller brands and retailers to mitigate. The company's update in December was encouraging, indicating that revenue growth had re-accelerated due to stock levels recovering and marketing spend being redirected (with customer acquisition costs returning to historic levels). There was also progress in the US with the Zalando partnership progressing well and a new agreement in place with Next. This encouraging update, suggested that the second quarter was abnormal and the business is getting back on track to delivering on its growth agenda.

Synthomer is a chemicals business that had a super normal year thanks to the Pandemic-related increase in demand for nitrile which is used in the production of latex gloves. Towards the end of the year there were some management changes and the unknown around the normalisation of demand for nitrile following the peak-of-cycle profitability, which weighed on the shares. Looking forward, the business is in a strong position. Management are confident that the benefits of the recent acquisitions of Eastman Chemical, an adhesive technology business, together with investment in new capacity, further efficiency measures and a proven strategy will underpin future growth. The balance sheet remains strong and flexible to support the group's dividend.

Fixed Income Portfolio

Fixed income markets endured a more challenging period in 2021 as government bond yields rose in response to stronger inflation data in many jurisdictions. Having expected to be more transitory in nature the prolonged impact of the Pandemic and the support being provided to economies have ultimately had a dramatic impact on prices and the data is now forcing policymakers into a more hawkish response. Policy rates did rise modestly in the UK at the end of 2021 and are expected to be raised again in the coming months, both in the UK and further afield. The impact of policy action, despite the recognition that inflation is largely caused by supply side issues, has pushed yields higher. Credit spreads remain relatively tight when compared to historical levels although further moves from government bonds could easily lead to a re-pricing of these markets and some volatility was noted in markets during the final quarter of the year.

Throughout most of the year, demand for investment grade credit was robust with investors being attracted by the positive yields on offer. As a result, the asset class outperformed government markets despite some volatility. Lower quality areas of the market performed better than higher quality credit, largely as a result of the higher yields on offer although weakness was notable in sectors such as energy, basic materials and technology.

The Company's exposure to fixed income is largely in shorter dated BBB rated areas of the market. Outcomes over the year were mixed, with a perpetual issue from Barclays being the stand out performer with a positive return of +3.7%, while a corporate hybrid issue from National Grid performed relatively poorly, driven by the challenges facing the domestic gas industry. This bond delivered a small negative return of approximately -1.5%. Bonds issued by Heathrow, the UK airport operator delivered a positive return of +0.64% and continues to look good value.

As yields rise in the UK your Manager anticipate that more opportunities will arise for the Company to take advantage of. Credit spreads have remained reasonably firm and any weakness in that market will be considered a buying opportunity. The Company's exposure to Scottish and Southern energy via a corporate hybrid will be replaced during 2022 as the bond is expected to be called by the issuer.

Portfolio activity

As ever, your Manager's QGM with an income bias investment process has driven stock selection. New positions in Mortgage Advice Bureau, Clipper Logistics, Hill & Smith, Greggs, CMC Markets, Procook, Seraphine, Synthomer and Robert Walters were added during the year.

Positions in 4imprint, James Fisher, Dechra Pharmaceutical, Aveva , Primary Healthcare Properties, Target Healthcare, Ultra Electronics and Stock Spirits were sold during the year.

Mortgage Advice Bureau is one of the UK's leading consumer intermediary brands and specialist appointed representative networks for mortgage intermediaries. The fast growing platform model allows customers to choose how and when they want to research, receive advice and transact. Technology is at the heart of both face to face and telephone advice, helping provide greater speed, ease, and convenience, and by doing so delivering an increasingly more compelling customer proposition. Having demonstrated resilience in poor market environments since flotation in 2014 it is believed that the momentum is set to build sharply while they convert a strong pipeline of advisers and a number of long standing technology initiatives come to fruition. Management's lead generation tool, network management and adviser productivity agendas have the potential to be transformational to market share gains.

A new position was initiated in Hill & Smith, a decentralised group of companies focused on the design, manufacture and supply of infrastructure products and galvanising services. With the arrival of a new Chief Executive Officer, the business now has the opportunity to leverage a package of internal and external drivers that should enable the company to deliver higher sales growth, improved profitability, better portfolio management and a stronger ESG story in the coming years. The company's end markets are strengthening, even before the US infrastructure bill in the US starts to filter through to forecasts. Your Manager conducted an ESG-specific engagement with the management of Hill and Smith in the last quarter of 2021, covering a wide range of topics such as Sustainable Products, CO2 Emissions, Health and Safety, Talent Development and Diversity & Inclusion. The company going through a transition in terms of its ESG credntials and, whilst initial findings were positive, the Manager expects to track further progress and developments, with a stronger ESG story in the coming years.

Greggs was added to the portfolio in view of abrdn's increased conviction on the stock following improved clarity on the company's direction. Management also outlined plans to develop the company's multichannel sales by extending evening trading, building on the success of the delivery channel and improving customer loyalty via the new Greggs app. Whilst the company's focus on ESG is not new, your Manager was encouraged by its ESG credentials with the launch of 'The Greggs Pledge" in February 2021. This pledge is a full sustainability agenda, focusing on all aspects of the company; Stronger, Healthier Communities; Safer Planet; Better Business. Please refer to the Case Study on page 35 of the 2021 Annual Report for further details.

The Company participated in the public listing of Seraphine, a leading maternity and nursing-wear brand. This market niche is poorly served by incumbent retailers. Seraphine's specialist focus, aspirational, yet affordable, positioning and digital-first approach enables it to offer a broad, innovative and relevant product offering. This has supported a long record of profitable growth, yet the brand still has headroom to grow in the UK, its most mature market and recent investments should unlock a greater international opportunity.

The Company also took part in the new listing of kitchenware brand retailer ProCook. This business is vertically-integrated and run by the founder, with no debt or external private investors. ProCook has an opportunity to significantly grow its market share given it is selling quality products at affordable prices.

Synthomer is a specialist chemical company and one of the world's leading suppliers of aqueous polymers. The company produces innovative formulations to support customers in a range of industries, from construction through paints and coatings to healthcare. Synthomer works closely with its customers and targets market leadership positions in its core markets. Its understanding of customer product and process requirements combined with their technology and process know-how are key to the business' success. The strategy is to establish Synthomer as a growing global speciality chemical business through organic growth, investing in innovation to support growth, and M&A. This high quality business offers strong earnings growth and strong cash returns to support the dividend yield of around 3%.

Clipper Logistics has a highly differentiated business model, focusing on delivering the value added components of logistics and advising customers on carrier selection for haulage. Growth has been rapid, boosted by the pandemic and despite a tough comparative period, revenue and profits are expected to rise at a double-digit rate for the next four years. Barriers to entry and change are high, giving excellent customer retention, market leading margins and revenue visibility. Management do things 'The Clipper Way', to drive their success and that of their customers through innovation and collaboration with all retail partners. ESG is central to Clipper's way of working and driving environmental and social change is one of its four key strategic pillars. Your Manager has been encouraged by the strength of the company's ESG credentials.

CMC Markets is primarily a provider of leveraged financial products (contracts for difference (CFDs), and spread betting) to the retail market; other revenue streams come from stockbroking and white label contracts. There is a focus on diversifying the business beyond the leveraged product offering. Management recently announced the planned launch of a share dealing platform in the UK to diversify further and the company's ambitions are significant. Management have an unwavering strategic focus on high quality clients and there has been record trading performance and profitability in the first half of the year, driven by increased client trading as a result of higher market volatility and an increased client base. CMC Markets continue to deliver on strategic initiatives and maintain a healthy pipeline of projects that create new revenue streams through further product, channel and geographic diversification. These initiatives are all supported by technology and through a wider application of this, the company can extend the offer and deliver further profitable growth. The Chief Executive Officer owns 60% of the company and is well aligned with investors' interests. The shares yield around 4% and the dividend policy is to pay out 50% of profit after tax.

Having sold Robert Walters in the prior year, due to lack of visibility in the shape or speed of their post- Pandemic recovery a new position has been added in the professional recruitment consultancy following a return in momentum. Your Manager believes that this momentum is more than just a temporary flushing out of pent-up demand, rather the start of something more sustained, as technology and flexible working changes longer-term dynamics. The global business historically has always gained share after a downturn. With the shares yielding over 3% it is believed that the company's prospects now look promising.

A position in James Fisher was sold as the balance sheet remains troubled and there were expected earnings downgrades in view of market conditions. Positions were also exited in 4imprint, where visibility of recovery remains low. It is not yet clear whether the lasting implications of the Pandemic will result in structural problems for the business. There were also divestments from Dechra and Aveva given they are now large cap companies, following many years of strong performance for the Company, and property companies Target Healthcare and Primary Healthcare Properties, where the growth prospects were considered to be lacklustre near term. Lastly, there were divestments from bid targets Ultra Electronics and Stock Spirits, having received the final dividends.

Outlook

Your Manager is positive about the outlook and the long-term discipline that the investment process provides. While there will have been lasting impacts associated with the UK pandemic, particularly around supply chain and inflation issues, the QGM process will continue to identify businesses that can drive up earnings in difficult macro environments. Concerns around supply chain issues remain a key concern for some sectors, and inflation overall, and how transitory that is, remains a question. There have been pleasing messages to customers across the portfolio on the ability to pass through inflation and protect margins. Also much of the portfolio has limited exposure to logistics and supply chain concerns, which insulates those names from some market headwinds. The dividend outlook looks encouraging, with the market broadly and the Company's portfolio back to strong dividend payments. Dividend growth could be expected to grow roughly in line with earnings growth, and with supportive balance sheet strength.

It has been encouraging to see that the number of new issues coming to the market continues to grow, bringing further diversity and investment opportunities to the small and mid capital company arena. The start of the year can traditionally see some reversal in market trends, so it might be expected to see different aspects dominate markets and the first quarter reporting season will be key, with earnings results coming through, which is where

the companies in the portfolio are expected to prove themselves.

2021 was characterised by a more stable environment post-Pandemic, driven by the reopening of the global economy. However, the Pandemic created a unique period for markets and has driven various headwinds and volatility in the global environment, namely the supply chain challenges and inflationary pressures. This, combined with the conflict with Russia and Ukraine creates market uncertainty for the year ahead. Your Manager will continue to look to identify companies in line with our bottom-up QGM process.

Abby Glennie

Aberdeen Asset Managers Limited

14 March 2022

5. RESULTS AND PERFORMANCE

DIVIDENDS

PORTFOLIO

INVESTMENT PORTFOLIO - EQUITY INVESTMENTS

INVESTMENT PORTFOLIO - OTHER INVESTMENTS

GOING CONCERN

The Directors believe that it is appropriate to continue to adopt the going concern basis in the preparation of the financial statements.

The Company's assets consist substantially of securities in companies listed on recognised stock exchanges and in normal circumstances are realisable within a short timescale.

The Company's assets comprise mainly readily realisable securities which can be sold to meet funding commitments if necessary.

The Board has set gearing limits and regularly reviews actual exposures, cash flow projections and compliance with banking covenants. The Company has a £10 million credit facility comprised of a fixed rate £5 million loan which expires in 2023 and a variable rate £5 million loan which expires in April 2022. A replacement option for the variable rate loan is currently being sought. Should the Board decide not to renew this facility, any outstanding borrowing would be repaid through the proceeds of the sale of investments as required. £2 million of the variable rate loan was drawn down at the date of this report.

The Company undertakes a continuation vote every five years. The last continuation vote was passed at the AGM held in June 2020 with 99.7% of votes in favour.

The Company's portfolio comprises primarily "Level One" assets (listed on a recognisable exchange and realisable within a short timescale) and the Company has a relatively low level of gearing. As such, the Company has the ability to raise sufficient funds in order to remain within its debt covenants and pay expenses.

Taking the above factors into consideration, the Directors reasonably believe that the Company has adequate financial resources to continue in operational existence for the foreseeable future and has the ability to meet its financial obligations as they fall due for a period until at least 31 December 2023. Accordingly the Board continues to adopt the going concern basis in preparing the financial statements.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

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

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with UK-adopted international accounting standards in conformity with the Companies Act 2006.

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

- select suitable accounting policies and then apply them consistently;

- make judgements and estimates that are reasonable and prudent;

- state whether they have been prepared in accordance with UK-adopted international accounting standards in conformity with the Companies Act 2006; and

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

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

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

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

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

We confirm that to the best of our knowledge:

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

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

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

For and on behalf of

abrdn Smaller Companies Income Trust plc

Robert Lister,

Chairman

14 March 2022

FINANCIAL STATEMENTS

STATEMENT OF COMPREHENSIVE INCOME (AUDITED)

BALANCE SHEET (AUDITED)

STATEMENT OF CHANGES IN EQUITY (AUDITED)

CASH FLOW STATEMENT (AUDITED)

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31 December 2021