ASCI.L Regulatory News (ASCI)

Performance Highlights

abrdn Smaller Companies Income Trust plc

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 DECEMBER 2022

Financial Calendar, Dividends and Highlights

Dividends

Financial Highlights

Strategic Report

Chair's Statement

Following the Company's year end the Board commenced a strategic review, announced on 13 February 2023. The Board recognises that whilst the Company has continued to deliver on its investment objective of providing a high and growing dividend, its small size coupled with a persistent and material discount to net asset value (NAV) has created challenges in liquidity and has prevented the Company from growing. The Company received an unsolicited proposal from another investment trust and the Board believes it is in the best interests of shareholders to seek proposals from all potentially interested parties.

The Company has received proposals from a number of investment companies and investment management groups, almost all of which envisage shareholders being offered the option to roll over some or all of their investment into a successor vehicle or to receive cash for some or all of their shareholding through a reconstruction under section 110 of the Insolvency Act. The strategic review process is now at a stage where a short list of candidates have been requested to prepare detailed proposals and responses to the Board's specific questions. The Board will review all the proposals fully and revert to you, as shareholders, with our recommendation as soon as practicable.

The Board's statement on its consideration of the Company's ability to continue as a going concern (with material uncertainty) is on page 44 of the 2023 Annual Report.

Performance

In 2022 investors were faced with two events that most had hoped they would not see in their lifetime; the return of double-digit inflation and a war in Europe as Russia invaded Ukraine. The consequences of the latter sent the price of oil and gas to unprecedented levels, which, coupled with post-pandemic supply issues, has triggered an inflation shock. In financial markets, there were very few places to hide. We witnessed sharp falls at the same time in equity and bond markets, interest rates and bond yields rose dramatically, reversing a 40 year trend, and we saw a widening of investment trust discounts across the sector.

During times of macro uncertainty, there tends to be rotation into the "cheapest" stocks in markets and this factor rotation is driven primarily by top-down influences, (for example, sectors, oil price, FX rates etc.) rather than at the individual company fundamentals level. This rotation in terms of style into 'value' stocks dominated the year and the combination of events meant that the Manager's Quality, Growth and Momentum investment process was out of favour. Despite this we have been pleased with the dividend growth achieved. Against this backdrop, the Company suffered under-performance over one year against its index, the Numis Smaller Companies (excluding investment trusts) Index, returning a NAV total return of -33.2% vs an index return of -17.9%.

Share price performance for the period was -33.7%.

The Company's three and five year performance also now reflects the difficult markets we have endured, with a NAV total return of -16.4% and a share price return of -22.6%, versus a benchmark return of -4.2% over three years and a NAV return of -4.0%, a share price return of -2.6% and a composite index return of -2.8% over the five year period.

The Company's one and three year performance is measured against the Numis Smaller Companies (excluding 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 (excluding investment trusts) Index. Performance over a five year period is therefore measured against a composite of both indices.

Dividend

On a positive note, the Company's revenue return for the year ended 31 December 2022 was 11.24p per share (2021: 9.69p). This represents an increase of almost 16% on last year's figure and is a reflection of the resilience shown by the Company's portfolio holdings. Further details on this are covered in the Investment Manager's Review on pages 11 to 18 of the 2023 Annual Report.

As a result of this increase, we are delighted to be able to declare a rise in this year's dividend to 9.80p (2021: 8.85p). This is, as it was last year, fully covered by a combination of this year's earnings.

With the year end share price at 240.5p, this represents a dividend yield of 4.1%. Over three and five years, the dividend has increased by 18.8% and 39.0% respectively.

The undistributed balance of the revenue account will be added to the Company's revenue reserve and will represent 13.5p per share following payment of the Company's fourth interim dividend. On 3 March the Board declared its first interim dividend for the new financial year to 31 December 2023 of 2.60p per share, which will be payable on 28 April 2023 to shareholders on the register at close of business on 31 March 2023.

Ongoing Charges

The Company's ongoing charges have increased in the year to the end of December 2022 to 1.30%, compared to last year's figure of 1.20%. The principal reason for the increase was the decrease in average net assets during the year. The Company's ongoing charges are subject to regular review by the Board.

Discount

With discounts widening across the sector during 2022, the Company's discount at the end of December 2022 stood at -16.3%, a slight widening to the discount of -15.3% at the end of December 2021.

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 variable interest rate, has remained unchanged, with £7 million of the facility being utilised at the year end. The £5 million variable element of the facility was renewed in April 2022 with the Royal Bank of Scotland International, London Branch for a 2 year period. The Company's £5 million fixed rate loan will expire at the end of April 2023.

The Company's net gearing position as at 31 December 2022 was 8.2%, compared to 4.5% at the end of 2021.

Board Composition

Rosalyn Breedy was appointed to the Board of the Company as an independent Non-Executive Director on 5 January 2022. 

Rosalyn is a corporate, funds and financial services lawyer and has brought with her vast experience of regulated funds, as well as a unique and diverse background which complements the Board's skills and experience. 

At the Company's 2022 Annual General Meeting (AGM), Robert Lister retired from the Board after serving ten years as a Director, with seven years as Chairman. In accordance with the Board's succession plan, I assumed the role of Chair upon his retirement. The Board would like to formally note Robert's contribution to the Company during his tenure and thank him for his stewardship and guidance.

Following these changes, the Board comprises two male and two female independent Non-Executive Directors.

Biographies of each Board member can be found in the Director's Report in page 42 of the 2023 Annual Report.

Environmental, Social and Corporate Governance ("ESG")

The Manager continues its active engagement with portfolio companies on ESG matters on a regular basis and updates are provided to the Board at each Board meeting. As well as being able to draw on a team of 20 individuals in this area, the team also have their own on desk Smaller Companies ESG analyst.

More information concerning the Manager's ESG investment process can be found in the Manager's Review on pages 19 to 21 of the 2023 Annual Report.

Change of Name of abrdn Entities

Following Standard Life Aberdeen plc's change of name to abrdn plc in July 2021, we have, more recently, seen the Company's Manager, Investment Manager and Company Secretary change company name as part of abrdn's rebranding exercise.

You will find the new names for each Company in the Corporate Information section on page 100 of the 2023 Annual Report.

Company Change of Name

As referenced in the last Annual Report, the Board decided to also change the Company's name, from Aberdeen Smaller Companies Income Trust plc to abrdn Smaller Companies Income Trust plc, to align itself with abrdn's new brand. This change came into effect on 7 January 2022.

Change of Lead Fund Manager

Abby Glennie and Amanda Yeaman have co-managed the Company assets since November 2020. Following changes to the Smaller Companies team at abrdn, Amanda has assumed the role of lead manager of the Company's portfolio, supported by Abby. Both individuals are still very much involved in the management of the Company's assets.

abrdn's London Office Move

In December 2022, abrdn relocated its London office to 280 Bishopsgate, London, EC2M 4AG, having been at Bow Bells House for over 13 years. As a result, the Company's forthcoming AGM will be held at a different location to last year and further details can be found below.

Annual General Meeting

The Company's AGM is scheduled to take place at 11:00am on Wednesday 14 June 2023 at Wallacespace, 15 Artillery Lane, London, E1 7HA, a short walk from Liverpool Street Station.

At the meeting, shareholders will have the opportunity to hear an update from the Manager and ask questions of the Manager and the Board. We are looking forward to welcoming you to this new venue near abrdn's London office.

As mentioned above, at the time of writing the Board is undergoing a strategic review and will notify shareholders of any updates through an announcement to the London Stock Exchange and on the Company's website. We therefore encourage shareholders to check for such updates.

The Board strongly encourages all shareholders, irrespective of whether they are able to attend the AGM or not, to lodge their proxy votes in advance of the meeting. Should shareholders have any questions that they would like to submit in advance of the meeting, please do so by emailing smallercompaniesincome@abrdn.com.

Outlook

At the time of writing there is uncertainty about how long the bear market will last, notwithstanding the future of the Company, and every cycle that we have experienced has been different. This dynamic makes it harder to say with confidence how any recession or market recovery will develop, not least because there is also uncertainty on what any policy response from central banks will be.

The outlook for both economies and businesses, globally, is tough and, whilst a high degree of earnings forecast reductions have already been seen, areas of risk remain. Smaller Companies indices have sold-off aggressively versus others, particularly within the UK, and so the opportunity for relative strength in the smaller end of the market remains attractive. Whilst market timing is difficult, smaller companies typically lead a market recovery.

Looking to the coming year we believe that the Quality focus will prove relatively resilient in a recessionary environment. The Manager continues to adhere to a long-established investment process that selects high quality smaller companies with resilient earnings that lead to robust dividend payments. Given that we could be entering a recession, it would be unusual if this was dominated by cheaper value cyclical business where earnings are likely to be more challenged over the next year, although the Manager will continue to monitor the likelihood and depth and breadth of a recession as a factor in their decision making.

Dagmar Kent KershawChair27 March 2023

Investment Manager's Review

Overview

After a very challenging 2021 we had hoped for a more stable backdrop for 2022, but one thing we have learned over recent years is to expect shocks and surprises. At the beginning of the year, policymakers still expected inflation to be 'transitory' and commentators and economists expected a contained, if modest post pandemic recovery for the UK economy. Yet what followed was a year dominated by top-down macro factors rather than bottom-up company fundamentals. Russia's invasion of Ukraine, together with the very hawkish pivot of central banks in the US and the UK, meant that any hopes for a controlled recovery from the pandemic were no longer a reality. Markets suffered a number of macroeconomic shocks, most notably the return of inflation and an end to years of record low interest rates. Large increases in the prices of food and energy sparked fears about a 'cost of living' crisis and declines in household disposable incomes. For businesses, investors worried that inflation would result in higher input costs and potentially lower profit margins leading to a reduction in company earnings. In October, analysts delivered the highest proportion of downgrades since June 2020 and the divergence across the market cap bands was pronounced. The FTSE 100 recorded net upgrades thanks to the global dollar earners and energy constituents in the index. In contrast, the Mid 250 stocks suffered twice as many downgrades as upgrades.

Global value stocks performed relatively well as investors rotated away from growth stocks and looked for opportunities among lowly valued, out of favour companies. To some extent, this shift could be seen as a reversal of pandemic trends, when internet and technology stocks were in demand. In terms of currencies, the US dollar was a standout performer, supported by higher interest rates in the US. The result was a UK market that was essentially divided into two camps. The FTSE 100, with its large exposure to oil and gas, banks and mining companies was neutral for the year while the more domestically focused FTSE 250 and Numis Smaller Companies indices declined -19.7% and -17.9% respectively.

The UK also saw political change with Liz Truss' appointment as Prime Minister and the disastrous budget from her Chancellor Kwazi Kwarteng which put further pressure on UK markets. We saw some stability as both Liz Truss and Chancellor Kwarteng were replaced by Rishi Sunak and Jeremy Hunt respectively, who reversed the actions of their predecessors.

Equity capital markets came to a standstill in 2022 with very few IPOs in the year. We believe many IPOs scheduled for 2022 have only been postponed, not cancelled, and will come to the market eventually. Similarly, mergers and acquisitions ("M&A") volumes have declined substantially, often driven by private equity firms deploying less capital than in previous years as well as challenges posed by the rising cost of debt. However, in the global M&A market, the UK was a hot spot of activity. Attracted by a cheap currency and many attractively valued assets, we saw two of the Company's best performers come as a result of bids.

The differing performance of the large and small cap indices was mirrored in fund flows. Large cap funds suffered small outflows in 2022 of c.2.0% of starting assets under management ("AUM"); mid-cap funds tracking the FTSE 250 saw outflows of 18.4% of starting AUM; whereas, Small cap funds saw outflows of 11.8% of starting AUM.

Equity markets were volatile in 2022 and, influenced by multiple exogenous forces, we saw irrational responses to news flow. In 2023, a recession seems inevitable. Central banks have stopped talking about a 'soft landing' and the UK seems to be the first major market to accept that it has already entered a downturn. Even in a recession, there are still opportunities for the market. Stock picking becomes important, and our Quality Growth and Momentum process has historically performed relatively well against this backdrop.

Performance

The UK smaller companies sector as represented by the Numis Smaller Companies including AIM (excluding Investment Companies) Index delivered a total return of -17.9% in the year ended 31 December 2022. This compares with a NAV total return for the Company of -33.2%. Over the same period the FTSE100 Index of the largest UK listed companies returned 4.6%. 

We thank shareholders for their support during a year of market turmoil. It has been impossible to deny that the year has not been painful for investors yet this is no reason to lose faith in holding investment trusts. The volatility for anyone who hasn't lived through a bear market before must have been alarming but we remain resolute in the merits of our long established investment process over the long term, and indeed of the long term performance of smaller companies. Income focused mandates tend to be more value-orientated, as growth stocks tend not to pay out a dividend and our Quality Growth and Momentum process with income bias has not afforded the resilience of income mandates with that Value focus.

The Company's underperformance was most keenly felt in the first half of the year where the market de rating did the most damage. This coincided with the most extreme period of value outperformance and lack of rationality within the market. The second half of the year saw an improvement in the market environment but there were still periods where there was a disconnect between fundamentals and share prices. It wasn't until the final months of the year that the market began to reward Quality, yet Value remains as a positive contributor as well. The market also felt more rational in the final quarter of the year in its reaction to reporting results, which feels like a more manageable environment for us. Typically, market recoveries are characterised by cyclical value names leading the way, yet in the latter months of the year this was not the case. This gives us more comfort to look at each cycle uniquely, and not be overly led by the past. We believe there is potential for a market recovery during a recession and that, particularly given the sharp derating seen in Quality Growth names in the first half of 2022, this could be led by those resilient Growth businesses. Valuations are a consideration in our process.

Portfolio Attribution

Telecom Plus, Alpha Financial Markets Consulting and Games Workshop were the top contributors to performance in the year, while Hilton Foods, Mortgage Advice Bureau and Seraphine were the largest detractors.

Telecom Plus, the UK's only fully integrated multi-service provider, was the top contributor to performance as the shares responded to five upgrades to earnings during the year, as momentum in the story gathered pace. The business is well positioned in the current economic backdrop and is a 'cost of living crisis' winner as it has accelerated growth in its customer base and benefited from operational leverage. The company has a compelling proposition in a very tough consumer environment. This should drive strong profit growth and dividend growth. The company has a c.3% share of households and so there is plenty of room for the business to be materially larger and more profitable, aided by alternative providers having gone bust and tighter regulation in the industry. Further detail on Telecom Plus can be found in the case study section on page 39 of the 2023 Annual Report.

Alpha Financial Markets Consulting (Alpha FMC) is a global provider of specialist consultancy services to the asset/wealth management industry. Since listing on AIM in October 2017 management have developed a consistent track record of operational delivery and upgrades to earnings estimates and this year was no different. The business had another great year with sustained momentum driving strong organic growth across all regions and service lines. A testament to the strength of the model and end markets where growing demand for consulting services is a powerful structural driver of growth. The outlook from here remains strong, as industry tailwinds remain firmly intact, with Alpha FMC's expansion into insurance, alternative investment areas and the United States.

Games Workshop, the designer and manufacturer of miniature figures and games was also a positive contributor to performance in the year. Whilst not immune from supply chain challenges in the first half of the year, the business delivered an encouraging second quarter update with revenue trends remaining robust and a return to growth in core operating profit. In December, Games Workshop announced that it has agreed in principle with Amazon to develop the company's reach into film and TV, to which the shares responded well. Management gave us a clear signal of confidence by announcing that it will pay a dividend of 45p. This makes a total of 165p declared in the year to 31 December 2022, which compares to 65p in the same period last year. This is encouraging given that the company pays dividends out of 'truly surplus cash'. As a result, dividends are an important signpost for cash generation (and profit performance). Hobbies tend to be recession resilient and Games Workshop's revenues are driven more by the strength of the product launches than the background economy.

Hilton Foods (Hilton) was a detractor from performance as shares fell sharply in response to a downgrade to profitability. This was based on a surge in the price of salmon and other seafood, which has been exacerbated by the war in Ukraine. It is important to note, however, that the company's established meat business model has remained robust in the face of severe cost pressures, protected by the cost-plus nature of its contracts. The warning was largely due to cost inflation in its multi-customer businesses, an area in which the company has increased exposure through acquisitions in recent years. In our meeting with management we took comfort that profitability in these businesses will be restored over the next two years as Hilton increases prices and generates operational efficiencies, while commodities normalise. Importantly, these businesses improve Hilton's overall offering, which will help drive organic growth in its core single customer business. Although underlying volumes in its core business have been affected by a channel rebalancing and a softening consumer outlook, Hilton has a number of levers to offset this over the next few years and a recovery in its multi-customer businesses and the entry into a new geography will make the greatest difference to Hilton's earnings over the next few years. We reduced our holding but retained a position because Hilton's offering is highly valuable to grocers, offering them a way to meaningfully reduce cost, improve the company's supply chains and deepen its product offering. We believe that the issue is short-term and should not distract from future opportunities which allow Hilton to generate exceptional returns on capital.

Mortgage Advice Bureau (MAB) shares fell, as visibility over MAB's shorter term financial outlook was clouded by turmoil in the mortgage market following the mini budget. In a perfect storm of external factors MAB's share price was hit by fears over sterling weakness, gyrations in interest rate expectations and dislocation in mortgage markets. The rationale for retaining the holding is its position at the strategic forefront of the industry, it is not totally at the mercy of market conditions. From here we are likely to see a strategy acceleration as the business tends to gain market share more rapidly in weak market conditions, as advisers have more need of the support which MAB can provide compared to other mortgage networks. The potential to expand the franchise has been significantly augmented by MAB's capacity to generate leads for network members, reinforced by the acquisition of Fluent which materially strengthens access to national lead sources. Analysts' medium term expectations are unchanged.

The retail sector has had a torrid start to the year on fears of a consumer collapse and we have seen material downgrades across the sector. Share prices, in turn, have plummeted in the face of macro concerns and rising costs. Seraphine, the online maternity wear retailer detracted from performance as shares fell sharply following a profit warning due to supply chain pressure and poor management of duties. We exited the position given its poor matrix score, and fears over the ability of the business to manage ongoing supply chain and inflationary challenges against a weakening consumer backdrop.

Portfolio activity

During the year we added eleven new holdings and exited eight.

We added a new position in Pets at Home a leading player in the UK pet care market. The business is set to benefit from post-pandemic trends which will serve to underpin group growth into future years. Its customer centric, omnichannel model, spanning healthcare and retail can not only drive incremental share gains but is also differentiated and difficult to replicate. Notwithstanding short term, industry wide pressures on retailers, the long term story remains intact and the business is generally assumed to have better defensiveness than most retailers from the service levels attaching to pet ownership. Clearly an element of that is discretionary spend and subject to weakness, but Pets at Home is in the buildout phase of a number of major upgrades to warehouse, digital and vet practice systems and these should underpin longer term sales growth at a premium rate to 4% market growth. The shares have an attractive free cashflow yield of 5.5% giving a well-funded 3% dividend yield. The balance sheet is net cash, providing optionality for M&A.

We initiated a holding in gas exploration and production business Energean. The business is founder run with a strong track record of growing reserves and resources. The company's management is focused on maximising production from its large scale gas focused portfolio to deliver material free cash flow and maximise total shareholder return in a sustainable way. Energean is insulated from commodity price volatility because of contracted floor pricing in gas sale and purchase agreements (GSPAs) providing long-term visibility. Management announced the company will pay $1billion back to shareholders at least by 2025 which will see them paying a sector leading dividend. The policy implies a 7.5% yield from Q4 2022, growing to 15% in 2024/25. This is underpinned by a Free Cash Flow yield of around 25% from 2023-2030 and should enable Energean to continue reducing net debt and to retain flexibility for organic and inorganic growth.

We added a new position in high matrix scoring FRP Advisory. A leading mid-market advisory business, which provides services across five different pillars comprising restructuring advisory, corporate finance, debt advisory, forensic services and pensions advisory. FRP benefits from strong regulatory drivers and counter-cyclical services such as litigation, distressed sale and conveyancing. The business is more than just a counter cyclical play, we see a number of levers for growth as FRP provides solutions for the entire corporate lifecycle and its strategy is to develop across five pillars which will help to develop cross-selling capabilities. The market backdrop is becoming more favourable with challenges faced by UK firms greater now than a decade ago. An increase in the number of overleveraged businesses in the UK suggests that a significant proportion are vulnerable to a rise in interest rates and the number of insolvencies and administrations are also slowly increasing as government support ends. The mini budget then caused further market turmoil and heightened near term uncertainty. FRP has highly experienced management, a strong culture and entrepreneurial motivated talent, given them the opportunity to drive its 27% margin higher. Strong cash generation funds the attractive 3.5% dividend yield. FRP has a net cash balance sheet with negligible capex requirements.

We added 4imprint, the direct marketing business which supplies a range of promotional products and branded apparel. It operates primarily in North America. The business has a strong history of organic sales growth in the highly fragmented US market. Low capital employed results in strong cash flow, particularly relative to peers. 4imprint has delivered an impressive step change in marketing efficiency that management believe stems from sustained investment through the pandemic and a mix shift towards brand awareness from print. The success of marketing efficiency has in part driven a number of upgrades to earnings during 2022. Going forward we believe 4imprint is well placed to take a greater share of the market. The business scores well on our stock screening tool the Matrix, has a net cash balance sheet and its shares yield c.3%. Please see the case study section for further detail in the case study section on page 38 of the 2023 Annual Report.

We also added a holding in Smart Metering Services (SMS) the fully integrated energy infrastructure business, who both own and manage meter assets, energy data, grid-scale batteries and other carbon reduction assets. The meters help consumers manage their energy usage and provide inflation linked and visible revenue streams. Inflation linkage has become particularly valuable in the current macro-economic climate. The ongoing roll out of smart meters is predicted to continue to 2025, providing a long term visible revenue stream, and limited need for additional capital. The newer and potentially high growth part of the business is grid like battery storage. The business has a growing pipeline with a huge forecast demand increase for these assets and SMS is well placed to keep a strong share given relationships and experience. We note the increasing debt levels expected over the next few years (from net cash currently), to fund the battery rollout. This is a business which should be able to support structural debt levels given the revenue generating asset base, as its private peers do. The dividend yield is 3.5% with a 10% div CAGR that is 2x cash covered from the existing meter/data assets.

We participated in a placing to add a new holding in Coats Group, a global market leader in the manufacture of sewing thread and supplies. The business has a leading c.23% share of the apparel and footwear thread market, partly thanks to its global scale, colour matching technology and longstanding reputation for quality products. Coats has a strong track record of managing its cost base, through increased manufacturing automation, a higher value mix from greater performance materials thread sales, and other self-help initiatives. While the current macroeconomic backdrop could present near term risks, we are positive on the longer term opportunities. Recent investment in inventory management, digitalisation and ESG credentials have driven further market share gains, as an enabler of moving textile industries towards sustainability. The business is poised for the delivery of its strategic projects, which look to optimise the portfolio and footprint. The shares yield 2.9%.

We added a new holding in high matrix scoring Spirent. The business provides products and services that enable testing and validation of the global wireless and cloud networks. The mission critical nature of this industry makes the barriers to entry high, which has allowed them to earn outsized returns on capital. Owning through a consumer recession makes sense because telecom carriers and network equipment makers are unlikely to materially reduce their multi-year 5G network build-out plans, given the significant capex already spent on spectrum and research and development. The strength of the order book gives visibility and confidence in the outlook for this year and beyond. We've seen well disciplined cost control and selective price increases, which has allowed the company to protect its margins despite inflationary headwinds. This is a clear sign of the company's pricing power and this is all supported by a dividend yield of 2.4%.

We added a new position in defence name Chemring. Over the recent past we watched the management team realign the portfolio and transition to a higher quality business. Strong progress has been made, evidenced by solid earnings growth, strong cash conversion and improved safety metrics. Visibility has improved underpinned by a strong order book and sole source positions on key growth programmes. Such improvements in the business have been evidenced by the delivery of consistent upgrades to earnings. Russia's invasion of Ukraine has seen a sea change in opinion towards defence spending in the West, and it has also seen a reset in terms of how the sector is viewed from an ESG perspective. While there remains much uncertainty as to the speed at which defence spend materialises into orders for the sector, we appear to be entering a multi-year period of elevated defence and security spending and Chemring's refocused portfolio is well aligned to areas of growing spend. In addition to end market strength we see multiple stock specific drivers particularly around 'Roke' a high margin division with expertise around Artificial Intelligence, Machine Learning and Cyber and Data Networks. Chemring's significantly improved balance sheet also provides optionality for M&A alongside returns to shareholders. Chemring has a high matrix score and the shares yield around 2.2%.

We added a new position in the Aberdeen based Serica Energy, a North Sea producer of gas with a strong net cash balance sheet and good cash generation. The management team have a strong track record on the improvement of assets, acquiring those and improving the production, efficiency and profitability relative to expectations. Whilst the gas price is a driver and has proved volatile, the structural lack of storage for gas in the UK provides price support. Whilst Serica was set up to be profitable in a low gas price environment, strongly rising gas prices have translated into a record financial performance this year and a large jump in free cash flow which enabled the balance sheet to continue strengthening. Whilst the windfall taxes on the industry announced in Q4 2022 is negative and reduces valuation, balance sheet strength means that this backdrop could lead to a new set of opportunities for nimble players such as Serica with proven track records to find ways to capitalise. This played out in the last week of December when management announced the proposed deal to buy Tailwind plc to create a more balanced and diversified portfolio of assets with a complementary combination of skills. The transaction marks a new phase for growth as it materially increases reserves and production whilst maintaining a significant net cash position for further potential deals. The shares yield c.3%. ESG credentials are strong, reflected in the MSCI A rating.

We added a new position in Paragon Bank. The specialist buy-to-let lender in the UK, with strong credit quality and resilient stress testing in tougher macro environments. Compared to previous cycles Paragon has a banking license, and is funded by retail deposits, making it a beneficiary of higher interest rates. Paragon is a defensive, well capitalised secured specialist lender benefitting from highly attractive market economics generating consistent and sustainable Return on Tangible Equity (ROTE) of c.15%. Paragon is highly capital generative which in turn supports a rolling buy-back programme. The company has returned capital of c.£675m to shareholders since 2015, which is 50% of the current market cap. Trading on a 7x P/E the valuation remains attractive with a 5.5% dividend yield.

In January we initiated a new position in high matrix scoring and high yielding developer Watkin Jones. End market demand for high quality student accommodation, built-to-rent and affordable housing are supportive. The company's value-add is in site selection, design, and construction, and because it is paid on a percentage of completion basis, the return on capital is very high. In early October 2022, Watkin Jones issued a profit warning relating to the forward sale announcements which did not complete in time for the full year, since transitions came to a standstill following the mini budget. In addition to two forward sales being pushed back beyond the planned September completion and into the end of 2023, management also flagged pricing and margin softness on the sales concluded in the second half of 2022. Moreover, the increasingly difficult outlook for near-term pricing and customers' confidence/ability to contract forward sales also led to a 35% downgrade to FY2023, a significant impact on 2023 profitability. Whilst we've always appreciated that contracts could be lumpy in the business, this was an unwelcome miss and called the quality of the business into question. The net cash balance sheet and the capital light model means the risk of financial distress should be low. However, it has cast doubt over the credibility of the management team and we exited the position.

We exited our position in Moneysupermarket. A series of concerns ranging from management change to regulation to volatile end markets has led to a gradually declining earnings momentum. The business has had to deal with supply shocks in all of its key segments. While the money and travel segments are seeing recovery post pandemic, trading in the home services division remains difficult as a result of the ongoing energy crisis, and regulatory review clouds the outlook for the insurance market. Whilst the forecast free cash flow should be sufficient to support the dividend, the poor matrix score together with concerns over the future trajectory of the competitive landscape lead us to exit the position.

The June 2022 update from retailer ProCook revealed that, while the company is winning market share, the kitchenware sector has struggled in recent months given weaker footfall and conversion. The business has good long term growth prospects; however, the lack of conversion and the uncertainty around how quickly consumer behaviour normalises led us to exit the position. We expect that the company will suffer a decline in its earnings progression this year.

We exited our position in language translation business RWS following a strategic review that pointed to slower growth for the business, and near-term margin pressure. We also exited our position in Clipper Logistics following the bid from US listed GXO.

The position in Synthomer was sold off on concerns around elevated risks of destocking, margin pressure and balance sheet debt, compounded by an uncertainty in the nitrile market outlook. We suspect that increased competitor expansion could lead to some market share loss. The company subsequently posted weak interim results, suggesting a slower recovery in nitriles and a poor outlook, validating our decision to exit.

Since 31 December 2022, we have exited our small position in CMC Markets (CMC). While cost overruns are becoming a feature of trading updates in the year, the size of this one was unexpected at CMC. While the business is making progress on its strategic initiative to broaden out and increase visibility, which is the right thing to do longer term, profit warnings and poor communication with the market are becoming a trend so we decided to exit the position.

Halfords management has made progress against its strategy to become an increasingly services led multi-channel specialist, it is leaning into favourable secular trends, and it has strategic and operational initiatives; however, we took the decision to exit the position in view of the consumer backdrop and headwinds from inflation.

We also exited our position in Strix, the global leader in the design, manufacture and supply of kettle safety controls, heating controls and water filtration technologies. Due to COVID-19 ("COVID") disruption in China, and demand disruption outside China the company advised that profit after tax was expected to be lower than expected. This was the second cut to earnings in as many months and we were surprised that the first cut wasn't enough. Whilst the dividend yield is high and well covered, supply chain issues in China, linked to the pandemic, are difficult to assess, since the company relies partly on the Chinese zero-COVID policy. This means that earnings visibility will remain low throughout the first half of 2023.

Dividends

Despite the difficult backdrop, the Company has made good progress on dividend income. This is aligned with our sentiment, earlier in the report, that the reporting overall from companies in the portfolio, and the earnings growth being delivered, remains strong. The combination of more cautious attitudes, as well as earnings pressures mean that we are entering a period of earnings, therefore dividend risk, and we are pleased to report resilient dividend income projections for our holdings in these challenging marketing conditions. Seven stocks in the Company's portfolio have issued special dividends this year, a testament to the quality focus within the portfolio.

Fixed Income Portfolio

2022 proved to be the worst year for bond markets in living memory. Stubborn inflation led to higher interest rates across jurisdictions as policymakers swung into action after an extended period of relatively easy monetary policy. The impact of Russia's invasion of Ukraine and the continued effects of COVID were cited as major inflationary forces along with de-globalisation and already tight labour markets. Bond yields rose significantly as a result and corporate bond spreads were wider through the first nine months of the year as a risk-off tone prevailed. The final quarter brought some respite as risk assets rallied and bond yields stabilised, helped by suggestions and evidence that inflation has peaked. In the UK, headline data suggests that price rises are more challenging but even here markets are pricing-in some respite over the coming months. Although policy rates have not yet peaked, financial markets are pricing-in a less aggressive path for the months ahead and potentially some more dovish action from some major central banks.

The bonds in the trust are largely short-dated which provided some defence against the worst bond market outcomes. While the overall sterling market (measured by the BAML Corporate and Collateralised index) was down almost 20% over the course of the year, the bonds in the Company's portfolio fared materially better. While four year bonds issued by Informa and Anglian Water were down 7% and 10% respectively short dated bonds issued by Heathrow and HSBC fared much better with the former generating a positive return over the period. The holdings in the Company are of relatively high quality and the issuers held have performed well over the course of the year.

With policy rates potentially peaking and spreads at relatively wide levels compared to historic averages, bonds appear to offer some good value as we enter the new year. Many investors have avoided the asset class for some time as a result of the low yields on offer and are now being tempted back into the market. Additionally, there is evidence that both pension funds and insurance companies have begun allocating money into the asset class at the end of 2022 and at the start of the new year. This positive technical backdrop is pushing spread levels down once again. A lingering threat of economic slowdown hangs over financial markets but bond markets seem set to deliver some positive returns for the period ahead.

Outlook

UK valuations have de-rated significantly and are at attractive levels relative to other regions. Within that, UK small and mid cap companies look very attractive relative to large caps, with the strong sector focus in the FTSE 100 Index combined with the "risk-off" trade driving significant divergence in index returns this year. The last couple of months has seen the market test some of these levels and we've seen a strong bounce in UK SMID cap stocks through October and November 2022. With some more political stability in the UK, company valuations attractive relative to other geographies, and also a solid degree of overseas revenue exposure in the index, we are starting to see international investors look towards their UK allocations, which have been rock bottom for some time.

We caveat this with some caution; there are still many areas of challenge including inflation, consumer squeeze, China supply uncertainty and many of these might be testing again over the winter period. We were not surprised to see markets decline in December 2022 and believe that may continue before we begin to see a more sustained recovery. Russia's invasion of Ukraine remains an overhang for markets, particularly given its inflationary impacts, and for social and humanitarian reasons more than any, we would be pleased to see a peaceful resolution.

At the time of writing, signals are pointing towards a shallower and perhaps shorter recession than many expected, and the Bank of England has also relaxed its degree of caution stated in November 2022. In the UK we've seen strong reporting from retailers and travel businesses, providing some optimism that the UK consumer is not as cash strapped as the media might suggest.

The UK didn't enter this cycle from peak earnings due to sentiment relating to Brexit and GDP growth relative to other regions over recent years. Therefore, there are reasons to believe UK earnings could be nearer troughs than other geographies, and that UK markets could recover earlier in this cycle than we have often seen historically.

There could be a range of outcomes for 2023 and as uncertainty remains, we think our quality focus will prove relatively resilient. In late 2022 there were broad areas of downgrades across the market, although there were, conversely, lots of areas of resilience and strength in the Company's portfolio. This is due to our quality focus, as well as the companies in the portfolio being more self-fulfilling in their growth strategies; which we believe is increasingly valuable when growth becomes scarcer. Lastly, with the derating of growth businesses seen throughout 2022, many of our quality growth businesses are trading on significantly lower valuations than historically and have been taking part strongly in the recent market recovery. This gives us some confidence in relative performance potential during a market recovery,

At this early stage in the economic cycle, we continue to believe many cheaper value cyclical businesses will see earnings pressures over the short term; however, with sentiment low for many sectors in this space, a lighter recession may see share price strength amongst some areas.

The level of uncertainty continues into 2023; however, we expect a lot of the most painful changes in market conditions, seen in early 2022, are behind us. As such, we would hope for a more settled environment, where stock focus returns to markets, and share price returns are less dependent on top-down macro factors. Whilst inflation persists, more stabilisation in interest rate expectations has been observed, and the degree of macro surprise seems far less than in 2022, which we think is supportive for markets.

Amanda Yeaman & Abby Glennieabrdn Investments Limited27 March 2023

ESG Engagement by the Manager

Introduction

Whilst ESG factors are not the over-riding criteria in relation to the investment decisions taken by the Manager for the Company, significant prominence is given to ESG throughout the Manager's investment process. The following section highlights the way that ESG factors are considered by the Manager. These processes are reviewed regularly and liable to change. The latest information is available on the Company's website.

Responsible investing - integration of ESG into the Manager's investment process

"By embedding ESG factors into our active equity investment process we aim to reduce risk, enhance potential value for our investors and foster companies that can contribute positively to the world." abrdn

Core beliefs: assessing risk, enhancing value

Whilst the management of the Company's investments is not undertaken with any specific instructions to exclude certain asset types or classes, the consideration of ESG factors is a fundamental part of the Manager's investment process and has been for over 30 years. It is one of the key dimensions on which the Manager assesses the investment case for any company in which it invests for three key reasons:

"We believe that the market systematically undervalues the importance of ESG factors. We believe that in-depth ESG analysis is part of both fundamental company research and portfolio construction and will lead to better client outcomes." abrdn

Researching companies: deeper company insights for better investor outcomes

The Manager conducts extensive and high-quality fundamental and first-hand research to fully understand the investment case for every company in its global universe. A key part of the Manager's research involves focusing its extensive resources on analysis of ESG issues. The Manager's investment managers, ESG Equity Analysts and central ESG Investment Team collaborate to generate a deep understanding of the ESG risks and opportunities associated with each company. Stewardship and active engagement with every company are also fundamental to the investment process helping to produce positive outcomes that lead to better risk-adjusted returns.

The Manager's global ESG infrastructure

abrdn has around 150 equity professionals globally. Each systematically analyses ESG risks and opportunities as part of the Manager's research output for each company. Its central team and ESG equity analysts support the investment managers' first-hand company analysis, producing research into specific themes (e.g. labour relations or climate change), sectors (e.g. forestry) and ESG topics to understand and highlight best practice. Examples of thematic and sector research can be found on abrdn.com/corporate/corporate-sustainability.

From laggards to best in class: rating company ESG credentials

A systematic and globally-applied approach to evaluating stocks allows the Manager to compare companies consistently on their ESG credentials - both regionally and against their peer group. The Manager captures the findings from its research and company engagement meetings in formal research notes. Some of the key questions include:

Which ESG issues are relevant for this company, how material are they, and how are they being addressed?

What is abrdn's assessment of the quality of this company's governance, ownership structure and management?

Are incentives and key performance indicators aligned with the company's strategy and the interests of shareholders?

Having considered the regional universe and peer group in which the company operates, the Manager's equity team then allocates it an ESG Quality score ("ESG Q Score") between one and five (see below) which will be applied across every stock that the Manager covers globally.

The Manager also uses a combination of external and proprietary in-house quantitative scoring techniques to complement and cross-check analyst-driven ESG assessments. ESG analysis is peer-reviewed within the equities team, and ESG factors impacting both sectors and stocks are discussed as part of the formal sector reviews. To be considered 'best in class', the management of ESG factors must be a material part of the company's core business strategy. It must provide excellent disclosure of data on key risks. It must also have clear policies and strong governance structures, among other criteria.

Working with companies: staying engaged, driving change

Once abrdn invests in a company, it is committed to helping that company maintain or raise their ESG standards further, using the Manager's position as a shareholder to press for action as needed. abrdn actively engages with the companies in which it invests to help them stay good companies and become even better businesses.

The Manager sees this programme of regular engagement as a necessary fulfilment of its duty as a responsible steward of clients' assets. It is also an opportunity to share examples of best practice seen in other companies and to use the Manager's influence to effect positive change. The Manager's engagement is not limited to the company's management team. It can include many other stakeholders such as non-government agencies, industry and regulatory bodies, as well as activists and the company's clients. What gets measured gets managed - so the Manager strongly encourages companies to set clear targets or key performance indicators on all material ESG risks where appropriate.

The investment process consists of four interconnected and equally important stages.

ESG considerations within abrdn's Smaller Companies team investment process

abrdn's Smaller Companies team (the "Team") considers ESG risks and opportunities for all of its investments and thus, ESG considerations are inextricably embedded into the investment process in order to achieve a successful and sustainable performance for the longer term. There is a broad understanding within abrdn and the Team that a full and thorough assessment of ESG factors allows better investment decisions to be made that lead to better outcomes for clients; with ESG aspects considered alongside other financial and fundamental factors in order to make the best possible investment decisions at a stock picking and at a portfolio construction level.

ESG analysis is a core constituent in the "Quality" analysis of the Team's fundamental research. Especially for smaller companies, both risks and opportunities matter, and thus the research approach and analysis reviews this accordingly. As stated above, all of the analysts are required to undertake an ESG quality assessment (ESG Q Score analysis) which will be reflected in the research note provided for each of the companies under coverage. The ESG Q Score of a company is one of the core considerations in ensuring that the traditionally lower risk investment approach continues and portfolios will be weighted towards companies with higher scores.

The Team has a very close relationship with the ESG specialists within abrdn, while at the same time having an on-desk ESG analyst to assist in the above research process and ESG engagements with companies. Tzoulianna Leventi is the on-desk ESG analyst for the Smaller Companies team, having joined the team in 2020. Through the utilisation of third party provided research such as MSCI and, more recently abrdn's in-house ESG rating tools, the Team is able to identify, where appropriate, leaders and laggards, areas of weakness and areas of strength. Ratings processes for smaller companies can be less accurate given data availability and coverage, and therefore the engagement and fundamental research the Managers and ESG Equity Analyst do with the investee companies is critical in adding value and ensuring the most important ESG risks and opportunities are well identified. Given the importance of ESG matters these factors are reviewed on an ongoing basis in addition to monitoring the actions of companies to assess the need for further engagement and/or changes to the internal investment view. Finally, as part of broader stewardship activities, the team participates actively in the voting process of the holdings, in line with best practice.

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 AFML (the "Manager") to act as the alternative investment fund manager ("AIFM"). The Company's portfolio is managed on a day-to-day basis by abrdn Investments Limited ("AIL" or the "Investment Manager") by way of a delegation agreement between AFML and AIL. Both the Manager and the Investment Manager are 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 undertaking 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 geopolitical risks, and monitors these closely, as appropriate for the Company.

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 Board currently comprises 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, AFML, 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 Trust Corporation UK Limited is the Company's Depository and Ernst & Young LLP is the Company's external auditor.

The Board's relationship with each stakeholder 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 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.

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 2022, which required the Directors to have greater focus on stakeholders included:

Strategic Review

The Board keeps under review the strategic direction of the Company, particularly in view of the prolonged period in which the Company's shares have traded at a material discount to their net asset value which, coupled with the Company being of a small scale, presents challenges in its ability to grow. An announcement was made on 13 February 2023 that the Board intends to undertake a strategic review, including consideration of the combination of the Company's assets with another suitable investment trust, possibly coupled with a cash exit.

Renewal of Debt Facility

The Company has a 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 variable interest rate. The £5 million fixed element of the facility expires at the end of April 2023. During the year, the Board approved the renewal of the £5 million variable rate facility, which will expire in April 2024. The Board believes that the modest use of gearing by the Company is of long term benefit to shareholders.

Directorate and Succession Planning

The Board has continued to progress its succession plans during the year and, following the appointment of Rosalyn Breedy in January 2022 and the retirement of the Chairman in May 2022, there were no requirements for any further action in the financial year. 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.

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 fulfil 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 recent Board changes reflect an appropriate mix of diversity, skills and experience. At 31 December 2022, the Board consisted of two female and two male directors.

Employee, Environmental, Social andHuman 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 Directors have made an assessment of the viability of the Company, in order to meet the requirements of the UK Code, notwithstanding the announcement on 13 February 2023 of a strategic review and the material uncertainty identified in relation to this matter.

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 24 to 25 of the 2023 Annual Report and the steps taken to mitigate these risks. In particular, the Board has considered the operational resilience of the Company to continue in the current environment and the ability of key third party suppliers to continue to provide essential services to the Company. Third party services have continued to be provided effectively;

- The strategic review announced by the Company on13 February 2023, the outcomes of which have not been determined as of the date of this Report.

- Notwithstanding the strategic review, the investment objective in the current environment remains attractive. 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 are detailed in the Chair's Statement and the InvestmentManager'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; and

- 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.

Following the strategic review, should the Board conclude that a merger or liquidation is not in the best interests of shareholders, the Board believes that the Company remains in a position to continue to generate attractive returns for all shareholders, the Company's long-term performance is satisfactory, and the Company will continue to have access to sufficient capital.

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 ofthe Company.

Accordingly, taking into account all of these factors, the Company's current position and the potential impact of its principal risks and uncertainties, notwithstanding the outcome of the strategic review, 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.

Dagmar Kent Kershaw,Chair27 March 2023

Performance

Performance (total return)

Cumulative PerformanceA

Rebased to 100 at 31 December 2012

Ten Year Financial Record

Ten Largest Investments

As at 31 December 2022

Equity Investments

Other Investments

Distribution of Assets and Liabilities

Investment Case Studies

4imprint

4imprint is a direct marketing business which supplies a range of promotional products and branded apparel to individuals in all business areas within all types of organisation. It operates primarily in North America and has a small business in the UK.

The business has a strong history of organic sales growth in the highly fragmented US market. It has its own proprietary ordering & distribution technology and customer satisfaction drives customer loyalty. 4imprint is a high quality business that is financially strong. Low capital employed results in strong cash flow, particularly relative to peers.

4imprint has delivered an impressive step change in marketing efficiency that management believe stems from sustained investment through the pandemic and a mix shift towards brand awareness from print (enabling it to also exit marginal search engine activity). This has been enhanced by prioritised access to product supply amid supply chain strains in the first half of 2022, plus broader post pandemic rebound trends. Still, marketing efficiency has changed significantly, which has produced a number of upgrades to earnings during 2022.

Whilst we have upgraded revenues, the key driver of profit growth is margins. Operating profit is increasing due to increased revenue, the productivity of the reconfigured marketing portfolio and operational gearing relating to semi‐variable and fixed costs in the business. In addition, the shift from catalogues to TV in the marketing mix is driving an increase in the revenue per marketing dollar.

We believe that the strength of the model is such that we expect the business to continue the current (and significant) upgrade cycle. Whilst we do acknowledge that the business ultimately sells into cyclical corporate marketing budgets, 4imprint should be better placed for a recession given the macro outlook. We think marketing cost (and therefore earnings) will react very differently to 2009. This ultimately relates to diversification: print, which dominated marketing spend then, is not flexible and does not benefit from material cost reductions in a downturn; however, in contrast, the television (brand) and online business, which dominate now, are flexible and do. Estimates are cautiously set with prudent assumptions about the US economy.

The company's continued investment in marketing over the pandemic, with stronger emphasis on brand, is paying off. Going forward, we believe 4imprint is well placed to take a greater share of the market.

We had an encouraging ESG specific meeting with management to learn more about their sustainability, supply chain due diligence, data protection, carbon neutrality plans and development of staff.

4imprint scores well on our stock screening tool the Matrix, the business has a net cash balance sheet and shares yield around 3%.

Telecom Plus

As the UK's only fully integrated multi-service provider, Telecom Plus derives significant ongoing operating efficiencies by spreading a single set of overheads across multiple revenue streams it receives from its customers. The business has a unique route to market that uses a highly motivated network of over 50,000 self-employed partners and word of mouth to drive customer numbers.

Trading under the brand name 'Utility Warehouse', the customer proposition is compelling. The company bundles together customers' home services - energy, broadband, mobile and insurance - into one, great value, monthly bill, saving customers time and money by providing all their home services in one. The model is based on the motivation of a self-employed salesforce to generate a second income from selling Utility Warehouse services. Salesforce motivation gains momentum when the cost of living rises and a second income increases in significance.

As is evident from performance in 2022, we expect new partner sign ups and new customer sign ups, driving revenue from the bundled services sold, to deliver a growing gross profit. This in turn delivers capacity for investment in further growth. This combination is the perfect situation for Telecom Plus, with direct positive consequences for the company and its shareholders through a generous dividend policy.

The business remains in a strong position post the Energy Price Guarantee (EPG). The government action to cap customer bills using the EPG until April 2024 has a number of important ramifications for Telecom Plus. It effectively embeds the company's competitive advantage in terms of customer growth and it means that the company's churn should be minimal, thus protecting its existing customer base. It also materially reduces the potential for bad debts, which we saw as a key risk this winter. Importantly, the action has no impact on Telecom Plus' long-term wholesale energy supply agreement, which should continue to work well for both parties.

The stock scores well on our stock screening tool, the "Matrix", and with their compelling customer offer and a highly motivated partner network, the company is at the early stages of a multi-year growth opportunity.

As a sizeable supplier of electricity and gas to households throughout the UK, the company has a significant role to play in the transition to net zero. Recognising the challenge ahead, management is fully committed to playing an active part in reducing the company's impact on the climate. Management's ambitions and commitments align with the UN Sustainable Development Goals.

Directors' Report

The Directors present their report and the audited financial statements for the year ended 31 December 2022.

Results and Dividends

The financial statements for the year ended 31 December 2022 are outlined below.

A fourth interim dividend of 2.60p per share was declared by the Board in December 2022 with a record date of 6 January 2023 and ex dividend date of 5 January 2023. It was paid on 27 January 2023. Under accounting standards this dividend will be accounted for in the financial year ended 31 December 2023.

Investment Trust Status

The Company is registered as a public limited company and is an investment company within the meaning of Section 833 of the Companies Act 2006. The Company's registration number is SC137448. The Company has been approved by HM Revenue & Customs as an investment trust subject to the Company continuing to meet the relevant eligibility conditions of Section 1158 of the Corporation Tax Act 2010 and the on-going requirements of Part 2 Chapter 3 Statutory Instrument 2011/2999 for all financial years commencing on or after 1 January 2012. The Directors are of the opinion that the Company has conducted its affairs for the year ended 31 December 2022 so as to enable it to comply with the on-going requirements for investment trust status.

Individual Savings Accounts ("ISAs")

The Company has conducted its affairs so as to satisfy the requirements as a qualifying security for ISAs. The Directors intend that the Company will continue to conduct its affairs in this manner in the future.

Corporate Governance

The Statement of Corporate Governance, which forms part of the Directors' Report is provided on pages 46 to 48 of the 2023 Annual Report.

Capital Structure

At 31 December 2022, the Company had 22,109,765 fully paid Ordinary shares of 50p each (2021- 22,109,765 Ordinary shares). There have been no changes in the Company's issued share capital subsequent to the year end, up to the date of this Report. Each Ordinary share holds one voting right and shareholders are entitled to vote on all resolutions which are proposed at general meetings of the Company. The Ordinary shares carry a right to receive dividends. On a winding up or other return of capital, after meeting the liabilities of the Company, the surplus assets will be paid to Ordinary shareholders in proportion to their shareholdings. There are no restrictions on the transfer of Ordinary shares in the Company other than certain restrictions which may be applied from time to time by law.

Management Agreement

The Company has appointed abrdn Fund Managers Limited ("AFML" or the "Manager"), a wholly owned subsidiary of abrdn plc, as its alternative investment fund manager ("AIFM"). AFML has been appointed to provide investment management, risk management, administration and company secretarial services as well as promotional activities. The Company's portfolio is managed by abrdn Investments Limited ("AIL" or the "Investment Manager") by way of a group delegation agreement in place between AFML and AIL. In addition, AFML has sub-delegated promotional activities to AIL and administrative and secretarial services to abrdn Holdings Limited. The management fee, details of which are shown in note 4 to the financial statements, is 0.75% per annum of net assets. The Company is entitled to terminate the management agreement upon giving the AIFM twelve months' prior notice in writing, or immediately upon the payment to the AIFM of six months' fees in lieu of notice.

Substantial Interests

The Board has been advised that the following shareholders owned 3% or more of the issued Ordinary share capital of the Company at 31 December 2022:

In the period between 31 December 2022 and 27 March 2023, the Company was notified that Philip J Milton & Company Plc held 1,550,853 shares (7.0% of shares in issue) as at 14 February 2023. There have been no other changes to the above interests in the Company's shares notified as at 27 March 2023.

Going Concern with a Material Uncertainty

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 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 facility which expires in April 2023 and a variable rate £5 million loan facility which expires in April 2024. 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. £7 million was drawn down (£5 million fixed rate and £2 million variable interest rate) at the date of writing this report.

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 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 March 2024.

Material Uncertainty

The Company announced a strategic review on 13 February 2023. This followed an unsolicited proposal from another investment trust, which led the Board to initiate a formal process in order to ensure that shareholders receive the best possible outcome.

Since the announcement of the strategic review the Company has received proposals from a number of investment companies and investment management groups, almost all of which envisage shareholders being offered the option to roll over some or all of their investment into a successor vehicle or to receive cash for some or all of their shareholding. The strategic review process is now at a stage where a short list of candidates have been requested to prepare detailed proposals and responses to the Board's specific questions. The Board currently believes that it is likely that the strategic review will result in the Company being liquidated and a rollover being implemented pursuant to a tax efficient scheme of reconstruction under section 110 of the Insolvency Act 1986. However, there can be no certainty that this will be the outcome within twelve months from the date of approval of these financial statements and therefore, while there remains a material uncertainty, the Board has prepared the financial statements on a going concern basis.

Accountability and Audit

The respective responsibilities of the Directors and the auditor in connection with the financial statements appear on page 63 of the 2023 Annual Report. In accordance with Section 418 (2) of the Companies Act 2006, the Directors confirm that, so far as each Director is aware, there is no relevant audit information of which the Company's auditor is unaware, and they have taken all the steps that they could reasonably be expected to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information. Additionally, there have been no important events since the year end.

Annual General Meeting

The Annual General Meeting ("AGM") is scheduled to be held on 14 June 2023 at 11.00 am. The Notice of Annual General Meeting and related notes are set out on pages 104 to 107 of the 2023 Annual Report. Amongst the resolutions to be considered at the AGM are:

Section 551 authority to allot shares

Resolution 10, which is an ordinary resolution, will, if approved, give the Directors a general authority to allot new securities up to an aggregate nominal value of £3,684,111, representing approximately one third of the total Ordinary share capital of the Company in issue as at the date of this document, such authority to expire on 30 June 2024 or, if earlier, at the conclusion of the next AGM of the Company (unless previously revoked, varied or extended by the Company in general meeting).

Disapplication of Pre-emption Provisions

Resolution 11 is to enable the Directors to issue new shares and to resell shares held in treasury up to an aggregate nominal amount of £1,105,488 (representing approximately 10 per cent of the total Ordinary share capital in issue). Resolution 11, which is a special resolution, will, if approved, give the Directors power to allot Ordinary shares (including Ordinary shares held in treasury) for cash, otherwise than pro rata to existing shareholders, up to a maximum aggregate nominal amount of £1,105,488. Ordinary shares would only be issued for cash at a price not less than the net asset value per share. This authority will expire on 30 June 2024 or, if earlier, at the conclusion of the next AGM of the Company (unless previously revoked, varied or extended by the Company in general meeting). As noted, this disapplication of pre-emption rights also applies in respect of treasury shares which the Company may sell. The Company has no shares held in treasury as at the date of this report.

Purchase of the Company's own Ordinary Shares

Resolution 12, which is a special resolution, will be proposed to renew the Company's authorisation to make market purchases of its own shares. The maximum number of Ordinary shares which may be purchased pursuant to the authority shall be 14.99% of the issued share capital of the Company as at the date of the passing of the resolution (3,314,253 Ordinary shares). The minimum price which may be paid for an Ordinary share (exclusive of expenses) shall be 50p. The maximum price for an Ordinary share (again exclusive of expenses) shall be an amount not more than the higher of (i) 105% of the average of the middle market quotations for the Company's Ordinary shares for the five business days immediately preceding the date of purchase and (ii) the higher of the price of the last independent trade and the highest current independent bid relating to an Ordinary share on the trading venue where the purchase iscarried out.

This authority, if conferred, will only be exercised if to do so would enhance the net asset value per share and is in the best interests of shareholders generally. Shares so repurchased will be held in treasury. No dividends will be paid on treasury shares and no voting rights attach to them. Any purchase of shares will be made within guidelines established from time to time by the Board. This authority will expire on 30 June 2024 or, if earlier, at the conclusion of the next AGM of the Company (unless previously revoked, varied or extended by the Companyin general meeting.

Recommendation

The Directors believe that the resolutions to be proposed at the AGM are in the best interests of the Company and its shareholders as a whole and recommend that shareholders vote in favour of the resolutions, as the Directors intend to do in respect of their own beneficial shareholdings totalling 31,786 Ordinary shares, representing 0.1% of the issued Ordinary share capital of the Company.

By order of the BoardDagmar Kent Kershaw,Chair27 March 2023

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.

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 in accordance with IAS 8 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; 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 SmallerCompanies Income Trust plcDagmar Kent Kershaw,Chair27 March 2023

Statement of Comprehensive Income

Balance Sheet

Statement of Changes in Equity

Statement of Cash Flows

Notes to the Financial Statements

For the year ended 31 December 2022