Abrdn Uk Small Regulatory News (AUSC)

abrdn UK Smaller Companies Growth Trust plc

Annual Financial Report for the year ended 30 June 2023

Legal Entity Identifier (LEI): 213800UUKA68SHSJBE37

Investment Objective

To achieve long-term capital growth by investment in UK-quoted smaller companies

Reference Index

The Company's reference index is the Numis Smaller Companies plus AIM (ex investment companies) Index.

Website

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

Performance Highlights and Financial Calendar

Financial Highlights

For further information, please contact:

Stephanie Hocking

Evan Bruce-Gardyne

abrdn Fund Managers Limited

0131 372 2200

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.

Chairman's Statement

Performance

I am disappointed to be reporting to shareholders that in the year just ended, the Company has extended its period of underperformance against its benchmark on both a net asset value ("NAV") and share price basis. We are very aware that the effect of this underperformance, over one, three and five years, is that anyone who made their initial investment in the Company in the last five years will most likely have seen a reduction in the value of their investment. This is clearly an uncomfortable position for shareholders, and also for those of us who are responsible for the portfolio and the Company.

For the year ended 30 June 2023, the Company's NAV total return, calculated on the basis that all dividends received are reinvested in additional shares, was -7.4%. The share price total return, calculated on the same basis, was -6.8%. By contrast, the total return of the Company's reference index, the Numis Smaller Companies plus AIM (ex investment companies) Index (the "reference index"), was -2.8%.

The Board and the Manager have discussed the investment strategy at length over the past couple of years but this year, in addition, your Board has spent a lot of time considering the root causes of the underperformance in order to be confident that the Company's investment thesis remains intact. It also carried out a detailed review to assess whether the investment process itself is being robustly implemented.

As a consequence of these reviews, the Board is able to support the Manager's view that the drivers of current underperformance are primarily a confluence of external events. These conditions reflect the weak UK economy, rising inflation and the sequential increases in interest rates we are experiencing as well as the political turbulence. These have created a difficult macro environment for investing in small companies generally, but particularly for the Manager's investment style, which focuses on Quality, Growth and Momentum factors - and we believe does so to a greater extent than any of the peer group companies in the sector. Whereas this favours the performance of the Company in growth oriented markets, it creates very challenging conditions in the market conditions we have seen, which have resulted in periods of rotation and a continual de-rating of the highly rated growth companies which typify our portfolio.

Detailed commentary on markets and performance for the year is contained in the Investment Manager's Review.

Earnings and Dividends

The revenue return per share ("EPS") for the year ended 30 June 2023 was 12.44p (2022: 9.07p). The increase of 37.2% builds on the 41% increase in 2022 and has come from both an increase in the ordinary dividends received, special dividends of £942,000 (7.2% of investment income), and a material increase in interest income, as for the first time since 2008 cash balances are delivering a return. Included in the EPS is the enhancement to earnings of 0.34p per share (2.8%) as a result of share buy backs undertaken during the year.

The Board is pleased to announce that this significant increase in EPS is flowing through to a substantial increase in dividends for shareholders and it is declaring a final dividend of 8.00p per share. Together with the interim dividend of 3.00p per share already paid, the total distribution for the financial year will be 11.00p per share, representing a 35.8% increase on the 8.10p per share paid last year. This still permits a proportion of earnings to be transferred to revenue reserves which will help your Company to withstand any future downturn such as we witnessed in 2020/21 or, indeed, simply manage any reduction in dividend receipts in future as income receipts from smaller companies are generally more variable than those of larger companies.

Following the payment of the final dividend, an amount of approximately 2.0p per share will be transferred to revenue reserves.

Subject to approval by shareholders at the Annual General Meeting ("AGM"), the final dividend will be paid on 30 November 2023 to shareholders on the register on 3 November 2023, with an associated ex-dividend date of 2 November 2023.

Management Fee and Company Secretarial Fee

The Board continually reviews the management fee structure and, during the year, considered that the existing structure of fees paid to the Manager made the Company insufficiently competitive relative to its closest peers. Accordingly, the Board has negotiated a lower fee structure with the Manager. With effect from 1 July 2023 fees will be 0.75% per annum (previously 0.85%) on the first £175 million (previously £250 million) of net assets, 0.65% per annum (unchanged) on net assets between this amount and £550 million (unchanged), and 0.55% per annum (unchanged) on net assets above £550 million (unchanged). In addition, from 1 January 2024 the Manager will no longer charge for the provision of company secretarial services, saving the Company a further £75,000 (+ VAT) per annum. On a pro-forma basis, based on the NAV at 30 June 2023, the change would represent a saving in a full year of around £415,000, or approximately 12% of management fee costs. The Board considers that this makes the fee structure more competitive when compared to the other similar investment trusts in the sector.

Ongoing Charges

The ongoing charges ratio ("OCR") for the year ended 30 June 2023 was 0.95% (2022: 0.82%). As I highlighted last year, we expected that the OCR would increase this year with a fall in the NAV. In addition, the promotional fee, which is set annually, was based on a higher NAV. We expect that the OCR in the coming year will be lower, partly because of the reduction to the fees referred to above and partly because the promotional fee will be lower. There will be a further diminution of cost to come following the Manager's recent decision to discontinue its Share Plan with effect from the end of the year, as your Company currently contributes to the marketing and administration of this Plan which accounts for some 7% of our shareholder base.

Discount Control and Share Buy Backs

At the year end the discount of the share price to the cum income NAV was 14.3% (2022: 14.6%).

Over the year, the Company bought back almost 5.7 million shares, equating to 6.0% of its issued share capital, at a total cost of £25.8 million and a weighted average price of 449.7p per share. The weighted average discount at which the shares were repurchased was 12.8%. The Board calculates that this has added 4.0p per share to the NAV for remaining shareholders.

The Company has been more active in buying back shares in the last 12 months than in any previous year since it last undertook a tender offer in 2015, buying back shares on over 180 days last year. The increased activity has been caused by the level of the discount, which has been wider than the 8% target that the Board is committed to in the long term in normal market conditions.

Given the backdrop has continued to be unfavourable for the UK smaller companies sector as a whole, evidenced by outflows in the open ended sector, it is to be expected that we would see the discount widen as it has across most of our peer group. Whilst the Board takes sector levels into account when implementing its discount control mechanism, it remains committed to its long term target of 8% and will continue to be active in the market when it believes it to be in the best interests of shareholders. 

Full details of the Board's discount control policy can be found in the Overview of Strategy below.

Gearing

The Board has given the Investment Manager discretion to vary the level of gearing between 5% net cash and 25% net gearing (at the time of drawdown). On 1 November 2022 the Company renewed its loan facility with the Royal Bank of Scotland International, giving it access to a £40 million revolving credit facility ("RCF"), £25 million of which was drawn down at the year end. The gross level of borrowings was offset by cash and money market funds of £14.4 million resulting in net gearing at 30 June 2023 of 2.5% (2022: 5.1%).

The Board

After seven years as a Director, Caroline Ramsay has informed the Board that she does not intend to stand for re-election at the Company's AGM in November. Consequently, the Board undertook a search to find a replacement and appointed Manju Malhotra, who joined the Board on 1 May 2023. Manju is a Chartered Accountant and it is intended that she will assume the role of Chair of Audit Committee at the completion of the AGM. On behalf of the Board, I would like to thank Caroline for her contribution over the last few years and we wish her well for the future, and to welcome Manju to the Board. Manju will stand for election at the AGM. This period has also seen the completion in May of the one year term of the Company's first Board Apprentice, Jessica Norell Neeson. We thank Jessica for her pertinent contributions to our discussions and wish her well in the next stage of her career path.

Annual General Meeting

The Company's AGM will be held at 12 noon on Thursday 23 November 2023 at Wallacespace Spitalfields, 15 Artillery Lane, London E1 7HA. The meeting will include a presentation from the Investment Manager and will be followed by a buffet lunch. This is a good opportunity for shareholders to meet the Board and Manager and we would encourage you to attend.

Shareholders will be able to submit questions in advance of the AGM at the following email address: abrdnuksmallercompaniesgrowthtrust@abrdn.com. Should you be unable to attend the AGM, the Investment Manager's presentation will be made available on the Company's website shortly after the meeting. The results of the AGM will also be published on the website.

In the meantime, the Board strongly encourages all shareholders to exercise their votes in respect of the AGM in advance of the meeting, and to appoint the Chairman of the meeting as their proxy, by completing the enclosed form of proxy form, or letter of direction for those who hold shares through the abrdn Investment Trust savings plans. This will ensure that your votes are registered.

Outlook

The economic challenges that existed during the year seem set to continue through the current financial year. Although starting to fall, inflation remains high and interest rates have increased since the year end, with further increases expected. This will likely prove again to be a difficult backdrop for investing in smaller UK companies. 

The Board considers the Investment Manager's process to be tried and tested and it has yielded good results over the past two decades albeit interspersed with periods of underperformance at times of market turbulence such as this. Predicting when these challenging market conditions will change is very difficult and we must acknowledge the possibility that they may continue for longer than they have in the past two decades. We must accept that much of this period was characterised by unprecedented low interest rates and loose monetary conditions which is no longer the case.

Notwithstanding this uncertainty, company quality and growth factors should ultimately prove themselves in such an environment, through resilience and earnings delivery. Share price valuations of companies with these characteristics remain very attractive in historic terms, and the Investment Manager believes that this presents a significant opportunity to investors. The Investment Manager has seen positive signs across the portfolio, with a strong reporting season and earnings upgrades for some of our core positions, even though significant economic challenges remain. If continued, over time this should lead to an improvement in investor sentiment to UK equities and the small and mid-cap sector in particular. In summary, the Board continues to believe that there are opportunities for your Company to achieve superior returns over the economic cycle.

Liz Airey Chairman24 August 2023

Overview of Strategy

Business

The Company is an investment trust with a premium listing on the London Stock Exchange.

Investment Objective

The Company's objective is to achieve long-term capital growth by investment in UK-quoted smaller companies.

Investment Policy

The Company intends to achieve its investment objective by investing in a diversified portfolio consisting mainly of UK-quoted smaller companies. The portfolio will normally comprise between 50-60 holdings representing the Investment Manager's highest conviction investment ideas. In order to reduce risk in the Company without compromising flexibility, no holding within the portfolio should exceed 5% of total assets at the time of acquisition.

The Company may use derivatives for portfolio hedging purposes (i.e. only for the purpose of reducing, transferring or eliminating the investment risks in its investments in order to protect the Company's portfolio).

Within the Company's Articles of Association, the maximum level of gearing is 100% of net assets. The Directors have set parameters of between 5% net cash and 25% net gearing (at the time of drawdown) for the level of gearing that can be employed in normal market conditions. The Directors have delegated responsibility to the Investment Manager for the operation of the gearing level within the above parameters.

Board Investment Limits

The Directors have set additional guidelines in order to reduce the risk borne by the portfolio:

- Companies with a market capitalisation of below £50 million should not represent more than 5% of total assets.

- Companies involved in "Blue Sky" products should not represent more than 5% of total assets.

- No more than 50% of the portfolio should be invested in companies that are constituents of the FTSE AIM All-Share Index.

Investment Process

The Investment Manager's investment process combines asset allocation, stock selection, portfolio construction, risk management, and dealing. The investment process has evolved out of the Investment Manager's 'Focus on Change' philosophy and is led by Quality, Growth and Momentum. The Investment Manager's stock selection led investment process involves compiling a shortlist of potential investments using a proprietary screening tool known as "The Matrix" which reflects Quality, Growth and Momentum based factor analysis. The final portfolio is the result of intensive research and includes face to face meetings with senior management of these potential investments. This disciplined process has been employed for many years and has delivered strong long term performance.

Reference Index

The Company's reference index is the Numis Smaller Companies plus AIM (ex investment companies) Index.

Delivering the Investment Objective

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

Promoting the Success of the Company

The Board's statement below describes how the Directors have discharged their duties and responsibilities over the course of the financial year under section 172 (1) of the Companies Act 2006 and how they have promoted the success of the Company for the benefit of the members as a whole.

Key Performance Indicators ("KPIs")

The Board assesses the performance of the Company against the range of KPIs shown below over a variety of timeframes, but has particular focus on the long-term, which the Board considers to be at least five years.

Principal and Emerging Risks and Uncertainties

The Board carries out a regular review of the risk environment in which the Company operates, changes to the environment and individual risks. The Board also considers emerging risks which might affect the Company. During the year, the most significant risks were, political instability, inflation and increasing interest rates and the resultant volatility that this has created in global stock markets. In addition, the conflict in Ukraine has continued to create geo-political uncertainty which has further increased market risk and volatility.

There are a number of other risks which, if realised, could have a material adverse effect on the Company and its financial condition, performance and prospects. The Board has carried out a robust assessment of the Company's principal and emerging risks, which include those that would threaten its business model, future performance, solvency, liquidity or reputation.

The principal risks and uncertainties faced by the Company are reviewed by the Audit Committee in the form of a risk matrix and the Committee also gives consideration to the emerging risks facing the Company.

The principal risks and uncertainties facing the Company at the current time, together with a description of the mitigating actions the Board has taken, are set out in the table below.

In terms of its appetite for risk, the Board has identified what it considers to be the key risks to which the Company is exposed and seeks to take a proportionate approach to the control of these risks. In particular, by considering the likelihood and impact of a specific risk, if the potential exposure is rated as Critical or Significant, the Board ensures that significant mitigation is in place to reduce the likelihood of occurrence whilst recognising that this may not be possible in all cases.

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

Promotional Activities

The Board recognises the importance of promoting the Company to prospective investors both for improving liquidity and enhancing the rating of the Company's shares. The Board believes one effective way to achieve this is through subscription to, and participation in, the promotional programme run by the Manager on behalf of a number of investment trusts under its management. The Company also supports the Manager's investor relations programme which involves regional roadshows, promotional and public relations campaigns. The Manager's promotional and investor relations teams report to the Board on a quarterly basis giving analysis of the promotional activities as well as updates on the shareholder register and any changes in the make-up of that register.

The purpose of the promotional and investor relations programmes is both to communicate effectively with existing shareholders and to gain new shareholders, with the aim of improving liquidity and enhancing the value and rating of the Company's shares. Communicating the long-term attractions of the Company is key. The promotional programme includes commissioning independent paid for research on the Company, most recently from Edison Investment Research Limited. A copy of the latest research note is available from the Company's website.

The cost to the Company of participating in these programmes is matched by the Manager through the provision of the necessary resources to carry out the marketing and promotional activities.

Employees and Human Rights

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 or human rights.

Modern Slavery Act

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

Environmental, Social and Governance ("ESG") Matters

The Board supports the Investment Manager's approach to ESG considerations which are fully embedded into the investment process.

The UK Stewardship Code and Proxy Voting

The Company supports the UK Stewardship Code, and seeks to play its role in supporting good stewardship of the companies in which it invests. Responsibility for actively monitoring the activities of portfolio companies has been delegated by the Board to the Manager which has sub-delegated that authority to the Investment Manager. abrdn plc is a tier 1 signatory of the UK Stewardship Code which aims to enhance the quality of engagement by investors with investee companies in order to improve their socially responsible performance and the long-term investment return to shareholders. While delivery of stewardship activities has been delegated to the Manager, the Board acknowledges its role in setting the tone for the effective delivery of stewardship on the Company's behalf.

The Board has also given discretionary powers to the Manager to exercise voting rights on resolutions proposed by the investee companies within the Company's portfolio. The Manager reports on a quarterly basis on stewardship (including voting) issues.

Global Greenhouse Gas Emissions

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

Task Force for Climate-Related financial Disclosures ("TCFD")

Under Listing Rule 15.4.29(R), the Company, as a closed ended investment company, is exempt from complying with the Task Force on Climate-related Financial Disclosures ("TCFD").

Whilst TCFD is currently not applicable to the Company, the Manager has produced a product level report on the Company in accordance with the FCA's rules and guidance regarding the disclosure of climate-related financial information consistent with TCFD Recommendations and Recommended Disclosures. These disclosures are intended to help meet the information needs of market participants, including institutional clients and consumers of financial products, in relation to the climate-related impact and risks of the Manager's TCFD in-scope business. The product level report on the Company is available on the Manager's website at: invtrusts.co.uk. 

Discount Control Policy

The Board operates a discount control mechanism which targets a maximum discount of the share price to the cum-income net asset value of 8% under normal market conditions. In pursuit of this objective, the Board closely monitors the level of the discount and buys back shares in the market when it believes it is in the best interests of shareholders as a whole to do so. At each Annual General Meeting, the Board seeks shareholder approval to buy back up to 14.99% of the Company's share capital. Share buy-backs will only be made where the Board believes it to be in the best interests of shareholders as a whole and the making and timing of share buy-backs will be at the discretion of the Board.

The Board considers that, given the backdrop has continued to be unfavourable for the UK smaller companies sector as a whole, evidenced by outflows in the open ended sector, it is to be expected that the Company's discount would widen as it has across most of the peer group. Whilst the Board takes sector levels into account when implementing its discount control mechanism, it remains committed to its long term target of 8% and will continue to be active in the market when it believes it to be in the best interests of shareholders. 

The Company has a tender offer mechanism in place and the Board intends to continue to seek shareholder approval at each Annual General Meeting to enable it to carry out tender offers on a discretionary basis in circumstances where the Board believes that share buy-backs are not sufficient to maintain the discount at an appropriate level, although it expects that buy-backs should be the primary mechanism for managing the discount.

Viability Statement

The Board considers that the Company, which does not have a fixed life, is a long-term investment vehicle and, for the purposes of this statement, has decided that five years is an appropriate period over which to consider its viability. 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 thanfive years.

Taking into account the Company's current financial position and the potential impact of its principal risks and uncertainties, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for a period of five years from the date of this Report.

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

- The principal risks and uncertainties detailed above and the steps taken to mitigate these risks, together with the emerging risks identified by the Board.

- The Company is invested in listed securities that are readily-realisable in normal market conditions and there is a spread of investments held.

- The Company is closed ended in nature and therefore it is not required to sell investments when shareholders wish to sell their shares.

- The Company's long-term performance record. 

- The Company's level of gearing. The Company had net gearing of 2.5% as at 30 June 2023. The Company has a £40 million unsecured loan facility agreement with The Royal Bank of Scotland International Limited which expires on 1 November 2025. The Board has set overall limits for borrowing and reviews regularly the Company's level of gearing, cash flow projections and compliance with banking covenants. The Board has also performed stress testing and liquidity analysis. In the event that the facility is not refinanced, there is considered to be sufficient portfolio liquidity to enable borrowings to be repaid.

- The Company has cash and money market funds which at 30 June 2023 amounted to £14.4 million. These balances allow the Company to meet liabilities as they fall due.

- The level of ongoing charges (the Chairman's Statement contains details of changes to the management fee arrangements since the end of the year).

- There are no capital commitments currently foreseen that would alter the Board's view.

- The robustness of the operations of the Company's third party service suppliers.

The Directors have also reviewed the revenue and ongoing expenses forecasts for the coming year and considered the Company's Statement of Financial Position as at 30 June 2023 which shows net current liabilities of £11.8 million at that date, and do not consider this to be a concern due to the liquidity of the portfolio which would enable the Company to meet any short term liabilities if required.

In assessing the Company's future viability, the Board has assumed that shareholders will wish to continue to have exposure to the Company's activities in the form of a closed ended entity and the Company will continue to have access to sufficient capital.

In making its assessment, the Board is also aware that there are other matters that could have an impact on the Company's prospects or viability in the future, including the conflict in Ukraine, economic shocks or significant stock market volatility caused by other factors, and changes in regulation or investor sentiment.

Future Strategy

The Board intends to maintain the strategic direction set out in the Strategic Report for the year ending 30 June 2024 as it believes that this is in the best interests of shareholders.

On behalf of the BoardLiz Airey Chairman24 August 2023

Promoting the Success of the Company

Introduction

Section 172 (1) of the Companies Act 2006 (the "Act") requires each Director to act in the way he/she considers, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole.

The Board is required to describe to the Company's shareholders how the Directors have discharged their duties and responsibilities over the course of the financial year under that provision of the Act (the "Section 172 Statement"). This statement provides an explanation of how the Directors have promoted the success of the Company for the benefit of its members as a whole, taking into account, among other things, the likely long-term consequences of decisions, the need to foster relationships with all stakeholders and the impact of the Company's operations on the environment.

The Purpose of the Company and Role of the Board

The purpose of the Company is to act as an investment vehicle to provide, over time, financial returns (both income and capital) to its shareholders. Investment trusts, such as the Company, are long-term investment vehicles and are typically externally managed, have no employees, and are overseen by an independent non-executive board of directors.

The Board, which at the end of the year, comprised six independent non-executive Directors with a broad range of skills and experience across all major functions that affect the Company, retains responsibility for taking all decisions relating to the Company's investment objective and policy, gearing, corporate governance and strategy, and for monitoring the performance of the Company's service providers.

The Board's philosophy is that the Company should operate in a transparent culture where all parties are treated with respect and provided with the opportunity to offer practical challenge and participate in positive debate which is focused on the aim of achieving the expectations of shareholders and other stakeholders alike. The Board reviews the culture and manner in which the Manager and Investment Manager operate at its meetings and receives regular reporting and feedback from the other key service providers. The Board is very conscious of the ways it promotes the Company's culture and ensures as part of its regular oversight that the integrity of the Company's affairs is foremost in the way that the activities are managed and promoted. The Board works very closely with the Manager and Investment Manager in reviewing how stakeholder issues are handled, ensuring good governance and responsibility in managing the Company's affairs, as well as visibility and openness in how the affairs are conducted.

The Company's main stakeholders have been identified as its shareholders, the Manager (and Investment Manager), service providers, investee companies, debt providers and, more broadly, the environment and community at large. 

How the Board Engages with Stakeholders

The Board considers its stakeholders at Board meetings and receives feedback on the Manager's interactions with them.

Specific Examples of Stakeholder Consideration During the Year

While the importance of giving due consideration to the Company's stakeholders is not a new requirement, and is considered during every significant Board decision, the Directors were particularly mindful of stakeholder considerations as part of the following decisions made during the year ended 30 June 2023. Each of these decisions was made after taking into account the short and long-term benefits for stakeholders.

Portfolio and Investment Performance

The Investment Manager's Review details the key investment decisions taken during the year. The overall shape and structure of the investment portfolio is an important factor in delivering the Company's stated investment objective and is reviewed at every Board meeting.

As explained in more detail in the Chairman's Statement, the Board and Manager have discussed the investment strategy at length over the past couple of years but during the year, in addition, the Board spent time considering the root causes of the Company's underperformance in order to be confident that the investment thesis remained intact. It also carried out a detailed review to assess whether the investment process itself was being robustly implemented.

As a consequence of these reviews, the Board was able to support the Investment Manager's view that the drivers of current underperformance are primarily a confluence of external events which have created a difficult macro environment for investing in small companies generally, but particularly for the Investment Manager's investment style, which focuses on Quality, Growth and Momentum factors - and the Board believes does so to a greater extent than any of its peer group companies in the sector. Whereas this favours the performance of the Company in growth oriented markets, it creates very challenging conditions in the market conditions seen recently, which have resulted in periods of rotation and a continual de-rating of the highly rated growth companies which typify the portfolio.

During the year the Management Engagement Committee decided that the continuing appointment of the Manager is in the best interests of shareholders.

Management Fee

As explained in the Chairman Statement, during the year, the Board considered that the existing structure of fees paid to the Manager made the Company insufficiently competitive relative to its closest peers. Accordingly, the Board negotiated a lower fee structure with the Manager which the Board considers is more competitive when compared to the other similar investment trusts in the sector.

Dividends

The Board is recommending payment of a final dividend for the year of 8.00p per Ordinary share. Following payment of the final dividend, total dividends for the year will amount to 11.00p per Ordinary share, an increase of 35.8% compared to the previous year. Although the Company has a capital growth objective, the Board recognises the importance of dividends to shareholders.

Share Buy Backs

In accordance with the discount control policy included in the Overview of Strategy, during the year the Company bought back 5,682,136 Ordinary shares to be held in treasury, providing a small accretion to the NAV per share and a degree of liquidity to the market at times when the discount to the NAV per share has widened in normal market conditions. It is the view of the Board that this policy is in the interest of all shareholders.

Renewal of Bank Loan

On 1 November 2022 the Company renewed its loan facility with the Royal Bank of Scotland International, giving it access to a £40 million revolving credit facility ("RCF"), £25 million of which was drawn down at the year end. The gross level of borrowings was offset by cash and money market funds of £14.6 million resulting in net gearing at 30 June 2023 of 2.5% (2022: 5.1%).

The Board continues to believe that gearing is beneficial to long term net asset value returns and is one of the benefits of the closed ended investment trust structure.

Consumer Duty

During the year, the FCA's Consumer Duty Regulations came into effect, introducing new rules for FCA regulated firms which manufacture or distribute products and services to retail customers. The Consumer Duty rules do not apply to the Company but do apply to the Manager,

The Board has reviewed the methodology employed by the Manager to assess value of the Company under the Consumer Duty regulations and will review the Manager's assessment of value an ongoing basis.

Board Succession

As explained in the Directors' Report, after seven years as a Director, Caroline Ramsay has informed the Board that she does not intend to stand for re-election at the Company's Annual General Meeting in November. Consequently, following a formal recruitment process, the Board decided to appoint Ms Manju Malhotra as an independent Director on 1 May 2023. New Board appointments seek to achieve a good balance of skills, experience, gender and ethnicity.

The Board believes that 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.

On behalf of the BoardLiz Airey Chairman24 August 2023

Performance

Performance (total return)

Ten Year Financial Record

Investment Manager's Review

The net asset value ("NAV") total return for the Company for the year ended 30 June 2023 was -7.4%, while the share price total return was -6.8%. By comparison, the UK smaller companies sector as represented by the Numis Smaller Companies plus AIM (ex investment companies) Index (the "reference index") delivered a total return of -2.8%.

Equity Markets

During the year under review, markets were volatile and top down driven, with the dominating narrative one of persistent inflation and higher interest rates. Against this backdrop, bottom-up company fundamentals have come second. Whilst the portfolio holdings have been delivering well fundamentally, that has often not been reflected in share prices.

The UK stock market, as represented by the FTSE All-Share Index, gained a small amount of ground over the period, with a total return of 7.9%. The FTSE 100 Index outperformed the FTSE 250 Index (excluding investment companies), the latter of which generated a total return of only 1.9%. Investors have remained cautious around the UK economic picture, which has challenged the more domestically focused small and mid-cap areas of the market.

The period was dominated by high inflation, rising interest rates and fears of a sustained economic downturn. Inflation drivers included the war in Ukraine as well as unsettled supply chains post Covid. Political uncertainty in the UK did little to reduce share-price volatility, with Boris Johnson's resignation as Prime Minister in July and the tax-cutting strategy unveiled by his successor Liz Truss in September adding to market turbulence. Inflation reached 10.1% in July, and the Bank of England ("BoE") warned that price rises could accelerate in the autumn as a result of higher energy costs. The BoE continued to tighten monetary policy by raising interest rates to combat inflation. Through late 2022, data showed successive falls in output in the UK manufacturing sector, while retail spending weakened, and we saw a sharp rise in mortgage rates.

In the aftermath of the disastrous mini-Budget presented by new prime minister Liz Truss and her chancellor Kwasi Kwarteng at the end of September, Truss was forced to sack Kwarteng, reverse her tax-cutting policies and finally resign, to be replaced by Rishi Sunak. These developments were welcomed by markets.

UK small and mid-cap equities enjoyed a positive final quarter of calendar year 2022 as hopes rose that inflation had peaked and central banks would soon slow the pace of monetary-policy tightening. However, there remained significant difficulties and recession risk for the UK economy. The mid-cap FTSE 250 Index rose by 10.6% in the final quarter of 2022, reversing some of the heavy losses seen earlier in the year, whilst the FTSE Small Cap Index returned 8.9%. Officials said rates would continue to increase until inflation was significantly closer to the 2% long-term target, regardless of the short-term economic impact. Late 2022 also saw many industries battling with supply chain challenges, a result of Covid shutdowns combining with increasing re-opening demand. This provided many challenges for companies and was a contributor to the inflationary pressures. As we turned into 2023, many of the supply shortages and logistics challenges had eased - one less headache for companies to try to navigate.

The turn of the year saw the strongest surprises coming through in consumer-exposed companies; consumer spending proving more resilient than expected. The fear of a tough two year recession outlined by the BoE appeared behind us for now. Hopes rose that the pace of interest rate rises would start to slow, while indicators suggested the economy would avoid falling into recession. Disappointingly, inflation remaining stubbornly high. March saw the collapse of Silicon Valley Bank and a loss of confidence in Credit Suisse sparked fears about the resilience of the global financial system. Trading conditions in a number of sectors remained challenging. Mortgage lending declined to its lowest level since 2016 in February, while in March house prices recorded their steepest falls since 2009, a sharp reminder of the broad global challenges.

However, with UK inflation remaining high and above other major geographies, and interest rates continuing to increase, UK share prices lagged major markets in Europe and North America. The big question globally, but particularly in the UK, with GDP numbers proving more resilient than many thought, is whether we get a recession or not.

Performance

Overall through the year, the net asset value ("NAV") fell by 7.4% on a total return basis, underperforming the reference index total return of -2.8%.

We had hoped for a more stable backdrop for the period, yet the dominating market narrative has been one of UK inflation that requires the BoE to increase interest rates. Through the period, policymakers still expected inflation to be benign and central banks to increase rates slowly. This, however, proved to be too complacent as the UK suffered from high persistent inflation and this changed the trajectory of interest rates. Inflation injects uncertainty into stock markets, affecting investor confidence. Value stocks typically have strong current cash flows which are more likely to grow slowly or diminish over time, while growth stocks are likely to represent fast growing companies that have stronger cash flows in the future. When valuing companies' share prices using the discounted cash flow method in times of rising interest rates, growth stocks are hit harder by this effect than value stocks, This has placed our Quality, Growth and Momentum process out of favour.

Our quality focus has ensured that we have invested in companies which have had supportive earnings and resilience. These companies have also demonstrated pricing power with the ability to protect margins. The portfolio has not been entirely immune from macro shocks, but we have seen the overall resilience and growth delivering robust dividend payments.

The final quarter of 2022 saw UK markets rebound sharply, and the portfolio outperformed the reference index. That rally come earlier than many would have expected, given the recession outlook. We believe this highlighted the attractive valuations those growth businesses are trading on, combined with the resilient earnings growth they continue to provide.

Early 2023 saw market relief as consumers appeared resilient in the face of the cost of living squeeze. This drove the market to focus less on quality, and cheaper rated and more cyclical companies performed well, proving a more difficult start to the calendar year for the Company. As we moved through the remainder of the financial year, macro top down influences continued to drive the direction of the markets, however we have felt more comfortable with the degree of rationalism in share price moves, and the focus towards company fundamentals. Whilst the market remains wary of companies which are trading at high valuations relative to their history, we have seen overall less of a value bias to the market in recent months, and we are seeing more importance placed back on factors such as earnings revisions.

The five leading positive contributors to relative performance during the year were as follows:

- 4imprint 198bps (shares +106%) delivered strong results through the year exceeding expectations on many occasions, and also providing strong dividend growth and a special dividend. Whilst benefitting from increased face to face interactions at events driving promotional product usage, self-help growth has been enabled through spend on marketing in a highly fragmented market, capturing market share and new repeat customers.

- Games Workshop 135bps (shares +60%) has delivered strong growth despite consumer spending challenges globally. Its continued investment in new product innovation and community engagement is paying off, resulting in dividend increases and strong returns for shareholders again this year. The shares were also supported by the announcement of Amazon taking a license for Warhammer for TV production.

- Diploma 99bps (shares +33%) traded well through the year, proving itself as a quality industrial company. To complement organic growth, it has also completed attractive bolt on acquisitions, such as the TIE deal which was partly funded through an equity raise.

- Kainos 95bps (shares + 11%) has successfully navigated the macroeconomic environment this year, delivering consistent growth and pricing power to offset wage inflation. Its customer base is sticky, and digitisation spend remains a priority for corporates. With the departure of long term respected CEO Brendan Mooney, it has also demonstrated strong succession planning.

- discoverIE 88bps (shares + 27%) has proved another quality industrial business, trading strongly through the year. It has proactively chosen exposures to regulatory and structurally growing areas, and with products being designed into its customers' solutions, this provides stickiness of revenue and resultant visibility of earnings. In addition, it has complemented organic growth through bolt on acquisitions.

The five worst contributors to relative performance during the year were as follows:

- Focusrite -130bp (shares -57%) the shares have struggled this year, partly as a normalisation of Covid spending has impacted demand for the company's products. It navigated supply chain issues early in the year and continued to invest in new product solutions to drive demand.

- Hilton Food -111bps (shares -38%) the shares suffered from a short term inability to pass on all input cost inflation in the fish division of the business. This was successfully navigated within a few months, and in the second half of the period the company traded strongly and also announced interesting new customer wins.

- Future -106bps (shares -60%) the shares suffered from a lower advertising spend environment, as well as concerns on consumer spend softening. The CEO also announced her intention to leave the company, which created more market uncertainty over the outlook for the business.

- Mortgage Advice Bureau -99bps (shares -33%) was a casualty of the Truss mini budget, driving interest rates up and causing activity on housing and mortgages to fall sharply. Whilst activity levels and its shares recovered in early 2023, they are still below previous levels, and more recent mortgage rate increases will be challenging in the short term. Over the medium term this remains a very strong business, taking market share and with many levers for growth.

- Marshalls -85bps (shares -46%) has suffered from reduced activity in residential refurbishment and improvement work, as well as lower new build housing activity. The commercial and infrastructure side of the business has remained more resilient, and the management team has taken cost and restructuring action to support the business against the macro-economic challenges currently being faced.

Dealing and Activity

Portfolio turnover was around 15%, which represents an average holding period of almost seven years and is not out of line with previous periods. Over the year, we added eight new positions, and exited eleven holdings. There were no IPO participations this period, in a quiet year in the markets for IPO activity.

We initiated positions in some holdings which have been held historically in the portfolio. Ricardo has transformed its business, now positioned as a leader in environmental and engineering consultancy; working with governments, agencies and corporates to implement sustainability agendas and strategies. Paragon Banking is a specialist lender, with a focus on buy-to-let markets in the UK. The business has demonstrated strong credit quality through the years, and with a strong retail funding model and capital support, it continues to take market share as a specialist, particularly in the professional landlord arena. Smart Metering Systems has two key divisions; household smart meters which provide long term visible and inflation linked revenue streams, along with the new exposure to battery storage in grid networks - an attractive return and growth exposure for the business. FDM Group is a specialist at recruiting, training and deploying IT and business professionals, operating globally. Craneware is a technology specialist operating in the US healthcare market, focused on financial and operational optimisation for hospitals. Coats is a global leader in thread production, with exposure to apparel, footwear and specialty markets. One key growth area for its business is its leading position in sustainable thread, a product increasingly in demand as industries move towards more sustainable production. Alpha Group (previously called Alpha FX) is another business which has expanded into interesting adjacent markets; now half fintech, half consultancy. Whilst its FX (foreign exchange) risk management business for corporates has gone from strength to strength, it has also expanded into banking solutions for alternative asset managers, and the corporate services and fund administration companies that support them. Spirent is a leading provider of automated testing and assurance solutions for networks, security and positioning.

Key tops up in the period included the position in Volution (leading supplier of ventilation products, with global exposure), CVS (vet practices across the UK), and Serica Energy (North Sea gas and oil producer). We also added to 4imprint (US promotional products), Games Workshop (hobby business with Warhammer IP), YouGov (data services business for market research), Gamma Communications (telecommunication and services provider for businesses), Midwich (audio visual value added reseller), Treatt (natural flavours and fragrances), and Tatton Asset Management (a leading provider to the UK's IFA community, including through strong growth in its MPS (managed portfolio services) offering).

Key reductions to positions were in companies across a range of sectors. We trimmed the position in Kainos where the valuation of the business left demanding earnings upgrades required, and the environment has got tougher in some areas such as the NHS. Watches of Switzerland showed resilient demand and order books, but some weakness in its jewellery exposure, and we were conscious that the market was looking to derate this business given consumer concern. We also reduced the holding in Alpha Financial Markets but remain very positive on the outlook and growth of this business. GB Group was challenged by earnings downgrades from the normalisation in cryptocurrency markets. Telecom Plus is a resilient revenue stream business, but its valuation had increased considerably prior to the period, and some market headwinds were increasing. We controlled the position size in Diploma, which continued to deliver strong results, but whose market capitalisation is now quite large. Real Estate was a sector where we trimmed holdings in Safestore and Sirius Real Estate, with the macro environment more challenging, particularly with higher interest rates.

We exited a number of positions over the period, where we no longer felt a high level of conviction in the investment cases. Watkin Jones suffered from the mini budget crisis, which highlighted the lumpiness of the business and the potential macro driven risks. Hotel Chocolat struggled as consumer weakness in the UK, combined with continued Covid disruption in its new market of Japan, meant the revenue weakness drove earnings downgrades, all at the same time as capacity expansion across the manufacturing base. That consumer weakness was a concern across a few of the exits; Moonpig where we felt it made the likelihood of increasing the gift attach rate to orders harder to progress, Gear4Music which had benefitted a lot from the shift to ecommerce during Covid, which was then normalising, Inspecs where we had started to see discretionary spend cause weakness in the demand for glasses, and Jet2 where the cost-of-living crisis presented challenges to the security of demand and the ability to pass on inflationary cost pressures. Molten Ventures struggled with its share price falling, reflecting the concern of investors that the pricing of private assets falling given market conditions wasn't being reflected in the listed market. In the case of Gooch and Housego, supply chain and inflationary pressures were challenging, as well as the need to invest in the business, driving earnings downgrades. With Big Yellow we felt the environment for the business was more challenging, combined with the pressures from higher interest rates. Alliance Pharma's shares were challenged by Covid-related Chinese issues, as well as a historic investigation into the CEO. Lastly, we exited the holding in Intermediate Capital, a company which has done very well for the portfolio over the years but is really now a large company, where the macro environment presented some challenges.

Discount

As at 30 June 2023, the cum-income discount to NAV stood at 14.3%. The simple average discount for the close peers as a whole was 13.6%. Whilst we have been disappointed with the steeper discount, it has not been out of line with the sector. The discount is more or less unchanged from where it was this time last year. The width of the discount is indicative of the issue where UK domestic companies are out of favour with investors as the Company has been active in buying back shares throughout the period. 

Gearing

The level of gearing (net of cash) at 30 June 2023 was 2.5%. Gearing was reduced in late 2022, repaying £15 million of the £40 million previously drawn down under the loan facility. We remain positive on the medium to long-term potential of the asset class and would consider increasing gearing at an appropriate point dependent on macro-economic conditions. We have continued to hold cash in the portfolio due to market uncertainty and to ensure we can participate in market opportunities and are not liquidity constrained. 

Revenue Account

Dividend income generated by the portfolio increased by 18.5% over the year. At the same time, the increase in base rates has had a knock-on effect on the interest income generated on cash balances held by the company. After 10 years of virtually nil returns on cash, we received £526,000 in interest income during the year.

The dividend outlook of the Company, seen through its income generation from the underlying holdings, has remained strong. We were pleased with the resilience seen through the challenging Covid period, and the income generation from companies has continued to strengthen. The earnings resilience and growth being delivered by the companies in the portfolio is being reflected in the dividend growth they are providing. Despite tricky macro-economic conditions, which often temper the wording in company outlook statements, the strong dividend payments from the portfolio companies have been a real sign of the underlying confidence of management teams. The ability to deliver these dividend returns to shareholders has been supported by balance sheet strength.

There are currently eight holdings in the portfolio which we don't expect to be dividend payers in the near future, currently re-investing back into their businesses to drive growth; Auction Technology, Big Technologies, Ergomed, LBG Media, Marlowe, Motorpoint, Team17 and Watches of Switzerland. We have seen special dividends from three holdings this year; Bytes Technology, Hollywood Bowl and 4imprint, which in aggregate amounted to £942,000 or 7.2% of investment income.

Outlook

Stock markets continue to be dominated by macro conditions, predominantly the pathway of inflation and interest rates, globally. The UK appears to be showing stickier inflation than many other key markets. Whilst energy prices have stepped back, we are seeing areas such as food inflation in the UK remain at high levels, and wage inflation and a strong labour market continue to support consumer spending. Without a recession, there remains the challenge of how inflation gets controlled; interest rates having already been increased significantly, but often taking some time to have an impact. UK valuations have derated significantly and are at attractive levels relative to other regions, providing an opportunity for investors to look at the value inherent in the UK market. If UK inflation reduces to a lower level, comparable to the Eurozone and the US, this could drive UK markets to recover and refocus on company fundamentals. Falling inflation could be that catalyst for our style to perform better and cause flows to shift into the UK market.

We'd also remind investors of the geographic exposures of the portfolio companies' revenues. At the time of writing, 51% of revenues are generated in the UK, with 49% overseas. This is not too far away from the exposure within the reference index. Many of the companies in the portfolio, as has been true through time and a result also of our investment process, have strong international growth exposure. Some are global leaders in what they do. Whilst overseas exposure is a positive factor, given healthier economic outlooks in some geographies, and diversification benefits, we are mindful of recent Sterling strength which may cause some currency headwinds for overseas exposures.

In a recession, or low economic growth environment, we believe the market will look towards resilience, reliability, visible revenue streams and strong balance sheets. We've seen these characteristics fundamentally demonstrated by the portfolio companies over this period, clear also through the dividend strength delivered. Where economic growth becomes scarcer, companies which continue to generate strong growth will be rarer assets. Our ability to identify companies which can deliver sustained earnings growth in that environment should be rewarded, and we believe even the last 18 months of challenging market times has shown evidence of our judgement on the fundamental performance of the investee companies.

In a period of more positivity in markets, small and mid-cap stocks tend to lead, and the outlook for the asset class should be attractive. Small and mid-caps in the UK have lagged large companies in the market moves since the start of 2022.

We continue to believe there are opportunities for businesses which deliver well on earnings expectations, to outperform, with many currently trading on undemanding valuations. The valuations currently being paid for growth companies in UK small mid-cap markets remain significantly below historic levels, whereas in other regions the market is now paying a 10 year median valuation for growth businesses again. We therefore believe there is a re-rating opportunity.

Since our appointment as Investment Manager in 2003, including the current downturn, there have been falls in the market of over 40% on three occasions. Markets anticipate improvements, and indeed turning points in the past have always been when the outlook is bleakest. In the UK small and mid-caps sector, the turn of the calendar year looks to have seen the direction of earnings revisions change positively. This isn't out of line with previous market rotations where, on average, markets start to recover a few months before the turn in earnings. We take this as a positive indicator of market direction, although the risks of recession still remain given the macro-economic challenges.

The Company's discount to NAV is at a level not seen since 2009, with both the UK Small Cap sector being out of favour with investors, as well as disappointing underperformance by the Company this year, particularly driven by our style of investment not being favoured in a period where Value has been in focus.

Smaller company markets have higher levels of risk and volatility, which in part reflects the potential for higher returns in the long run. Thus, Smaller Companies as an asset class should be viewed as a long-term multi-year investment to achieve these potential strong returns that have historically been available. Market timing is challenging, particularly in the small cap area, and often it is "time in" rather than "timing" which is critical.

As mentioned in last year's Annual Report, but sadly still an important factor, UK markets really need to see inflation come under control and the shape of any potential imminent recession. The UK is already pricing in a lot of negativity; therein lies the longer term opportunity, particularly when coupled with the Company's current discount level.

Whilst we constantly challenge short-term influences and how macroeconomic conditions impact factors driving the market, we remain confident that our Quality, Growth and Momentum investment process generates strong returns from smaller companies in the long-term. Our process has been seasoned by five economic cycles.

Abby Glennie and Amanda Yeaman abrdn24 August 2023

Investment Portfolio

Sector Distribution of Investments

Directors' Report (extract)

The Directors present their report and the audited financial statements of the Company for the year ended 30 June 2023.

Results and Dividends

The financial statements for the year ended 30 June 2023 are contained below. An interim dividend of 3.00p per Ordinary share was paid on 14 April 2023 and the Directors recommend a final dividend of.8.00p per Ordinary share, payable on 30 November 2023 to shareholders on the register on 3 November 2023. The ex-dividend date is 2 November 2023.

Principal Activity and Status

The Company is registered as a public limited company in Scotland under company number SC145455, is an investment company within the meaning of Section 833 of the Companies Act 2006 and carries on business as an investment trust.

The Company has applied for and has been accepted as an investment trust under Sections 1158 and 1159 of the Corporation Tax Act 2010 and Part 2 Chapter 1 of Statutory Instrument 2011/2999. This approval relates to accounting periods commencing on or after 1 July 2012. The Directors are of the opinion that the Company has conducted its affairs so as to be able to retain such approval.

The Company intends to manage its affairs so that its Ordinary shares continue to be a qualifying investment for inclusion in the stocks and shares component of an Individual Savings Account.

Capital Structure and Voting Rights

The Company's issued share capital at 30 June 2023 consisted of 88,329,911 (2022: 94,012,047) Ordinary shares of 25 pence each and there were 15,834,511 (2022: 10,152,375) Ordinary shares held in treasury, representing 17.9% of the issued share capital as at that date (excluding treasury shares).

During the year, 5,682,136 Ordinary shares were bought back into treasury.

Since the year end, the Company has bought back a further 1,995,572 Ordinary shares into treasury. Accordingly, as at the date of this Report, the Company's issued share capital consisted of 86,334,339 Ordinary shares of 25 pence each and 17,830,083 Ordinary shares held in treasury.

Each ordinary shareholder is entitled to one vote on a show of hands and, on a poll, to one vote for every Ordinary share held.

Management Agreement

The Company has appointed abrdn Fund Managers Limited ("aFML"), a wholly owned subsidiary of abrdn plc, as its Alternative Investment Fund Manager (the "Manager"). aFML has been appointed to provide investment management, risk management, administration and company secretarial services, and promotional activities to the Company. The Company's portfolio is managed by abrdn Investment Management Limited (the "Investment Manager") by way of a group delegation agreement in place between it and aFML. In addition, aFML has sub-delegated administrative and secretarial services to abrdn Holdings Limited and promotional activities to abrdn Investments Limited.

During the year, the management fee was calculated quarterly in arrears as 0.85% per annum applying to the first £250 million of the Company's net assets, 0.65% per annum applying to net assets above this threshold until £550 million, and 0.55% applying to net assets above this threshold. In addition, the Manager received a secretarial and administration fee of £75,000 plus VAT.

The Manager also receives a separate fee for the provision of promotional activities to the Company. This fee amounted to £301,000 plus VAT for the year (2022: £246,000 plus VAT).

Further details of the fees payable to the Manager are shown in notes 4 and 5 to the financial statements and the Chairman's Statement contains details of changes to the management fee arrangements since the end of the year.

The management agreement is terminable on not less than six months' notice. In the event of termination by the Company on less than the agreed notice period, compensation is payable to the Manager in lieu of the unexpired notice period.

Directors

Manju Malhotra was appointed as an independent non-executive Director of the Company on 1 May 2023. Liz Airey is the Chairman and Tim Scholefield is the Senior Independent Director.

Manju Malhotra will stand for election at the Annual General Meeting on 23 November 2023. Other than Caroline Ramsay, all of the other Directors will retire and, being eligible, will offer themselves for re-election at the Annual General Meeting. As explained in the Chairman's Statement, Caroline Ramsay will retire as a Director following the conclusion of the Annual General Meeting. 

The Directors attended scheduled Board and Committee meetings during the year ended 30 June 2023 as follows (with their eligibility to attend the relevant meetingsin brackets):

A Liz Airey is not a member of the Audit Committee but attends the meetings by invitation

The Board meets more frequently when business needs require. During the year ended 30 June 2023 this included a Board meeting to approve the appointment of a new Director. In addition, there were two Board Committee meetings to approve the annual and half yearly financial statements. All Directors attended the Annual General Meeting held on 20 October 2022.

The Board believes that all the Directors seeking re-election remain independent of the Manager and free from any relationship which could materially interfere with the exercise of their judgement on issues of strategy, performance, resources and standards of conduct. The Board believes that each Director has the requisite high level and range of business, investment and financial experience which enables the Board to provide clear and effective leadership and proper governance of the Company. Following formal performance evaluations, each Director's performance continues to be effective and demonstrates commitment to the role, and their individual performances contribute to the long-term sustainable success of the Company. In addition, all Directors have demonstrated that they have sufficient time to fulfil their directorial roles with the Company. The Board therefore recommends the re-election of each of the Directors at the Annual General Meeting.

External Agencies

The Board has contractually delegated to external agencies, including the Manager and other service providers, certain services including: the management of the investment portfolio, the day-to-day accounting and company secretarial requirements, the depositary services (which include cash monitoring, the custody and safeguarding of the Company's financial instruments and monitoring the Company's compliance with investment limits and leverage requirements) and the share registration services. Each of these contracts was entered into after full and proper consideration by the Board of the quality and cost of services offered in so far as they relate to the affairs of the Company. In addition, ad hoc reports and information are supplied to the Board as requested.

Board Diversity

The Board recognises the importance of having a range of skilled and experienced individuals with the right knowledge represented on the Board in order to allow it to fulfil its obligations. The Board also recognises the benefits and is supportive of the principle of diversity in its recruitment of new Board members. The Board will not display any bias for age, gender, race, sexual orientation, socio-economic background, religion, ethnic or national origins or disability in considering the appointment of its Directors. In view of its size, the Board will continue to ensure that all appointments are made on the basis of merit against the specification prepared for each appointment. In doing so, the Board will take account of the targets set out in the FCA's Listing Rules, which are set out in the tables below.

The Board has resolved that the Company's year end date is the most appropriate date for disclosure purposes. The following information has been provided by each Director through the completion of questionnaires. There have been no changes since the year end.

Board Gender as at 30 June 2023

Board Ethnic Background as at 30 June 2023

Notes:

1. Meets target of at least 40% as set out in LR 9.8.6R (9)(a)(i)

2. Meets target of at least 1 as set out in LR 9.8.6R (9)(a)(iii)

3. The Company considers that the role of Chairman, Senior Independent Director ("SID") who is also Chairman of the Management Engagement Committee, and the chairmen of the Audit Committee and Nomination Committee are senior positions. 

Board's Policy on Tenure

In normal circumstances, it is the Board's expectation that Directors will not serve beyond the Annual General Meeting following the ninth anniversary of their appointment. However, the Board takes the view that independence of individual Directors is not necessarily compromised by length of tenure on the Board and that continuity and experience can add significantly to the Board's strength. The Board believes that recommendation for re-election should be on an individual basis following a rigorous review which assesses the contribution made by the Director concerned, but also taking into account the need for regular refreshment and diversity. 

It is the Board's policy that the Chairman of the Board will not normally serve as a Director beyond the Annual General Meeting following the ninth anniversary of his or her appointment to the Board. However, this may be extended in certain circumstances or to facilitate effective succession planning and the development of a diverse Board. In such a situation the reasons for the extension will be fully explained to shareholders and a timetable for the departure of the Chairman clearly set out.

The Role of the Chairman and Senior Independent Director

The Chairman is responsible for providing effective leadership to the Board, by setting the tone of the Company, demonstrating objective judgement and promoting a culture of openness and debate. The Chairman facilitates the effective contribution and encourages active engagement by each Director. In conjunction with the Company Secretary, the Chairman ensures that Directors receive accurate, timely and clear information to assist them with effective decision-making. The Chairman acts upon the results of the Board evaluation process by recognising strengths and addressing any weaknesses and also ensures that the Board engages with major shareholders and that all Directors understand shareholder views.

The Senior Independent Director acts as a sounding board for the Chairman and acts as an intermediary for other Directors, when necessary. Working closely with the Nomination Committee, the Senior Independent Director takes responsibility for an orderly succession process for the Chairman, and leads the annual appraisal of the Chairman's performance. The Senior Independent Director is also available to shareholders to discuss any concerns they may have.

Management of Conflicts of Interest

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

No Director has a service contract with the Company although all Directors are issued with letters of appointment. Other than the deeds of indemnity referred to above, there were no contracts during, or at the end of the year, in which any Director was interested.

The Company has a policy of conducting its business in an honest and ethical manner. The Company takes a zero-tolerance approach to bribery and corruption and has procedures in place that are proportionate to the Company's circumstances to prevent them. The Manager also adopts a group-wide zero-tolerance approach and has its own detailed policy and procedures in place to prevent bribery and corruption. Copies of the Manager's anti-bribery and corruption policies are available onits website.

In relation to the corporate offence of failing to prevent tax evasion, it is the Company's policy to conduct all business in an honest and ethical manner. The Company takes a zero-tolerance approach to facilitation of tax evasion whether under UK law or under the law of any foreign country and is committed to acting professionally, fairly and with integrity in all its business dealings and relationships.

Directors' and Officers' Liability Insurance

The Company's Articles of Association provide for each of the Directors to be indemnified out of the assets of the Company against any liabilities incurred by them as a Director of the Company in defending proceedings, or in connection with any application to the Court in which relief is granted. In addition, the Company has entered into separate deeds of indemnity with each of the Directors, reflecting the scope of the indemnity in the Articles. Directors' and Officers' liability insurance cover has been maintained throughout the financial year at the expense of the Company.

Corporate Governance

The Company is committed to high standards of corporate governance. The Board is accountable to the Company's shareholders for good governance and this statement describes how the Company has applied the principles identified in the UK Corporate Governance Code as published in July 2018 (the "UK Code"), which is available on the Financial Reporting Council's (the "FRC") website: frc.org.uk

The Board has also considered the principles and provisions of the AIC Code of Corporate Governance as published in February 2019 (the "AIC Code"). The AIC Code addresses the principles and provisions set out in the UK Code, as well as setting out additional provisions on issues that are of specific relevance to the Company. The AIC Code is available on the AIC's website: theaic.co.uk. It includes an explanation of how the AIC Code adapts the principles and provisions set out in the UK Code to make them relevant for investment companies.

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

The UK Code includes provisions relating to:

- interaction with the workforce (provisions 2, 5 and 6);

- the role and responsibility of the chief executive (provisions 9 and 14);

- the need for an internal audit function (provision 25);

- previous experience of the chairman of a remuneration committee (provision 32); and

- executive directors' remuneration (provisions 33 and 36 to 41).

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

The Board considers that reporting against the principles and provisions of the AIC Code, which has been endorsed by the FRC, provides more relevant information to shareholders. Full details of the Company's compliance with the AIC Code of Corporate Governance can be found on its website.

Matters Reserved for the Board

The Board sets the Company's objectives and ensures that its obligations to its shareholders are met. It has formally adopted a schedule of matters which are required to be brought to it for decision, thus ensuring that it maintains full and effective control over appropriate strategic, financial, operational and compliance issues.

These matters include:

- the maintenance of clear investment objectives and risk management policies;

- the monitoring of the business activities of the Company ranging from analysis of investment performance through to review of quarterly management accounts;

- monitoring requirements such as approval of the Half-Yearly Report and Annual Report and financial statements and approval and recommendation of any dividends;

- setting the range of gearing in which the Manager may operate;

- major changes relating to the Company's structure including share buy-backs and share issuance;

- Board appointments and removals and the related terms;

- authorisation of Directors' conflicts or possible conflicts of interest;

- terms of reference and membership of Board Committees;

- appointment and removal of the Manager and the terms and conditions of the Management Agreement relating thereto; and

- London Stock Exchange/Financial Conduct Authority - responsibility for approval of all circulars, listing particulars and other releases concerning matters decided by the Board.

Full and timely information is provided to the Board to enable it to function effectively and to allow the Directors to discharge their responsibilities.

Substantial Interests

Information provided to the Company by major shareholders pursuant to the FCA's Disclosure, Guidance and Transparency Rules are published by the Company via a Regulatory Information Service.

The table below sets out the interests in 3% or more of the issued share capital of the Company, of which the Board was aware as at 30 June 2023.

The Company has not been notified of any changes to the above holdings since the end of the year.

Going Concern

The Company's assets consist mainly of equity shares in companies listed on recognised stock exchanges and are considered by the Board to be realisable within a short timescale under normal market conditions. The Board has set overall limits for borrowing and reviews regularly the Company's level of gearing, cash flow projections and compliance with banking covenants. The Board has also performed stress testing and liquidity analysis.

As at 30 June 2023, the Company had a £40 million unsecured revolving credit facility with The Royal Bank of Scotland International Limited which expires on 1 November 2025.

The Directors are mindful of the Principal Risks and Uncertainties disclosed in the Strategic Report and they believe that the Company has adequate financial resources to continue in operational existence for a period of not less than 12 months from the date of approval of this Report. They have arrived at this conclusion having confirmed that the Company's diversified portfolio of realisable securities is sufficiently liquid and could be used to meet short-term funding requirements were they to arise. The Directors have also reviewed the revenue and ongoing expenses forecasts for the coming year and considered the Company's Statement of Financial Position as at 30 June 2023 which shows net current liabilities of £11.8 million at that date, and do not consider this to be a concern due to the liquidity of the portfolio which would enable the Company to meet any short term liabilities if required.

Taking all of this into account, the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.

Accountability and Audit

The Directors who held office at the date of approval of this Directors' Report confirm that, so far as they are each aware, there is no relevant audit information of which the Company's Auditor is unaware and each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Company's Auditor is aware of that information.

Independent Auditor

Shareholders approved the re-appointment of KPMG LLP as the Company's Independent Auditor at the AGM on 20 October 2022 and resolutions to approve its re-appointment for the year to 30 June 2024 and to authorise the Directors to determine its remuneration will be proposed at the Annual General Meeting.

Financial Instruments

The financial risk management objectives and policies arising from financial instruments and the exposure of the Company to risk are disclosed in note 16 to the financial statements.

Relations with Shareholders

The Directors place a great deal of importance on communications with shareholders. Shareholders and investors may obtain up to date information on the Company through its website and the Manager's Customer Services Department (see Contact Addresses).

abrdn Holdings Limited has been appointed Company Secretary to the Company. Whilst abrdn Holdings Limited is a wholly owned subsidiary of abrdn plc, there is a clear separation of roles between the Manager and Company Secretary with different board compositions and different reporting lines in place. The Board notes that, in accordance with Market Abuse Regulations, procedures are in place to control the dissemination of information within the abrdn plc group of companies when necessary. Where correspondence addressed to the Board is received there is full disclosure to the Board. This is kept confidential if the subject matter of the correspondence requires confidentiality.

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

The Company's Annual General Meeting provides a forum for communication primarily with private shareholders and is attended by the Board. The Investment Manager makes a presentation at the meeting and all shareholders have the opportunity to put questions to both the Board and the Manager at the meeting. The Board also hosts a regular 'Meet the Manager' session at which the Investment Manager and members of the Board are present and to which all shareholders are invited, last held in May 2022.

The notice of the Annual General Meeting is sent out at least 20 working days in advance of the meeting. All shareholders have the opportunity to put questions to the Board and Manager at the meeting.

Additional Information

Where not provided elsewhere in the Directors' Report, the following provides the additional information required to be disclosed by Part 15 of the Companies Act 2006.

There are no restrictions on the transfer of, or voting rights attaching to, Ordinary shares in the Company other than certain restrictions which may from time to time be imposed by law (for example, the Market Abuse Regulation). The Company is not aware of any agreements between shareholders that may result in a transfer of securities and/or voting rights.

The Company's Articles of Association may only be amended by a special resolution passed at a general meeting of shareholders.

The Company is not aware of any significant agreements to which it is a party that take effect, alter or terminate upon a change of control of the Company following a takeover. Other than the management agreement with the Manager, the Company is not aware of any contractual or other agreements which are essential to its business which could reasonably be expected to be disclosed in the Directors' Report.

Annual General Meeting

The Notice of the Annual General Meeting ("AGM") will be held at 12 noon on Thursday, 23 November 2023.

By order of the Boardabrdn Holdings Limited Company Secretary1 George StreetEdinburgh EH2 2LL24 August 2023

Statement of Directors' Responsibilities in Respect of the Annual Report and the Financial Statements

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 Accounting Standards, including FRS 102 'The Financial Reporting Standard Applicable in the UK and Republic of Ireland' and applicable law.

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

In preparing these financial statements, the Directors are required to: 

- select suitable accounting policies and then apply them consistently; 

- make judgments and estimates that are reasonable, relevant and reliable;

- state whether applicable UK accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements;

- assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and 

- prepare the financial statements on the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.

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 its financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

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

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website, but not for the content of any information included on the website that has been prepared or issued by third parties. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation inother jurisdictions.

Responsibility Statement of the Directors in Respect of the Annual Financial Report

The Directors confirm that to the best of their knowledge:

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

- the Strategic Report and Directors' Report include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces; and

- the Annual Report taken as a whole, is fair, balanced and understandable and it provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy.

On behalf of the BoardLiz Airey Chairman24 August 2023

Statement of Comprehensive Income

Statement of Financial Position

Statement of Changes in Equity

Statement of Cash Flows

Notes to the Financial Statements

For the year ended 30 June 2023