Scot.orntl.smll Regulatory News (SST)

THE SCOTTISH ORIENTAL SMALLER COMPANIES TRUST PLC

Annual Financial Report for the year ended 31 August 2018

Financial Highlights

Chairman's Statement

Scottish Oriental's Net Asset Value ("NAV") per share fell by 2.4 per cent. in total return terms over the 12 months to August while the 'comparative indices', the MSCI AC Asia ex Japan Index and the MSCI AC Asia ex Japan Small Cap Index, rose by 2.2 per cent. and 1.3 per cent. respectively. As usual, we would stress that the Company is not invested with regard to any particular benchmark and these indices are shown to provide some context. You will see from the Financial Highlights above that we have produced figures for the portfolio's active share against the two indices. These figures illustrate the extent to which our portfolio differs from each index; 100 per cent. would indicate that there is no overlap whatsoever. The share price decreased in total return terms by 3.3 per cent. A performance fee was not earned this year.

The income per share was 9.19p compared to 6.77p last year. We are proposing an unchanged dividend of 11.5p. As was the case last year, the shortfall will be taken from the revenue reserve, set out on page 53 of the Annual Report, reflecting our policy of using the reserve when necessary.

During the year, the Company bought back 1,086,379 ordinary shares into Treasury at a total cost of some £10.9 million. 1,539,879 shares were held in Treasury at the year end. The Board continues to have no formal discount control mechanism but will be prepared to buy back shares opportunistically and to issue new shares at a small premium to NAV.

The cash flow statement below shows that the turnover within the portfolio reduced from the comparatively high figure in the previous year. Turnover is likely to continue to fall.

You will see from our Portfolio Managers' Report that last year was disappointing with the exposure to domestic companies in Indonesia, Pakistan, the Philippines and Sri Lanka being the largest negative factor. These countries' currencies weakened over the year creating a difficult operating environment and negatively impacting returns when measured in sterling. However, the outlook for the current year is encouraging, with the portfolio offering better value and faster growth than at the same point last year. Opportunities to add to existing holdings are arising at reasonable valuations and we are optimistic this will allow us to deploy the 5.7 per cent. held in cash at the year end.

This year the Annual General Meeting ("AGM") will be held in London at the offices of First State Investments, Finsbury Circus House, 15 Finsbury Circus. There will be a brief presentation by our Investment Manager and I look forward to seeing shareholders there. In addition to the usual business of the AGM, this year there is a resolution to approve changes to the Company's Investment Policy. Since the launch of the Company, Asian economies and stock markets have grown significantly and the net assets of the Company have risen by more than one thousand per cent. The changes to the Investment Policy will give the Investment Manager flexibility to invest in companies with greater market capitalisations, reflecting the higher valuations now generally prevailing in Asian stock markets. Further details are provided in the Directors' Report on pages 24 and 25 of the Annual Report. The Board believes these changes are in the best interests of shareholders.

James Ferguson

Chairman

15 October 2018

Portfolio Manager's Report

The Market

During the year ending 31 August 2018, the performance of Asian equity markets was lacklustre. Stock markets started the period positively with US dollar weakness and little evidence of inflation resulting in accommodative monetary conditions in most of Asia. This, combined with reasonably strong global growth, saw strong share price performance from many of Asia's companies. However, midway through the period, there was a sell-off in Asian equities. This was caused by expectation of further interest rate increases by the Federal Reserve, which resulted in a strengthening of the US dollar, as well as hostile rhetoric from, and the introduction of trade tariffs by, President Trump.

The strengthening US dollar led to a corresponding weakening in Asian currencies. This currency

weakness was focused on countries with current account deficits - India, Indonesia, Pakistan, the

Philippines and Sri Lanka all saw their currencies weaken notably over the period. With the exception of India, all these markets performed poorly. Surprisingly, India's stock market performed well despite the weakening rupee, although the biggest driver of this performance was its information technology companies which benefit from such currency weakness. Other markets that performed well were Malaysia and Vietnam, both recovering from periods of underperformance; Taiwan, which was boosted by its materials sector; and Thailand, which saw strong performance by its energy sector.

Smaller companies modestly underperformed their larger counterparts over the year with this underperformance most pronounced amongst smaller companies in Hong Kong, India and the Philippines.

The Company's Performance

Scottish Oriental's investment performance over the year was disappointing. The biggest detractor from performance was the Trust's relatively large exposure to domestic companies in the Philippines where declining consumer confidence made revenue growth hard to come by and it was difficult for companies to pass on increased costs resulting from the weakening peso. Given the cheaper valuations resulting from the fall in share prices, we increased Scottish Oriental's exposure to the Philippines over the period, adding to existing portfolio holdings and initiating new positions in companies we believe have pricing power and strong long-term prospects. The Trust was also hurt by stock selection in Indonesia, Malaysia, Pakistan and Sri Lanka where domestically focused companies struggled.

The biggest positive contributor to Scottish Oriental's investment performance was stock selection in China where the Trust's holdings benefited from strong operating performance. However, Scottish Oriental has a relatively low exposure to China and this was not enough to counter the negatives. We further reduced the Trust's China weighting during the period as the strong share price performance of some of our Chinese holdings led to expensive valuations. The Trust also benefited modestly from stock selection in Hong Kong and its large weighting in India. India remains the country to which Scottish Oriental has the largest exposure, and this weighting increased during the year due to investment performance from Indian holdings, as well as additions to existing holdings and new purchases. The Trust's large Indian weighting is a direct result of us finding a large number of high quality companies in this market with strong and growing franchises run by exceptional management teams.

Country Allocation at 31 August (based on geographical area of activity)

*Morgan Stanley Capital International AC Asia ex Japan Index

^Morgan Stanley Capital International AC Asia ex Japan Small Cap Index

Principal Contributors to and Detractors from Performance

Top Five Contributors

Mphasis had a change in its controlling shareholder in 2016 when Blackstone Private Equity acquired majority ownership from Hewlett Packard. Blackstone are happy to invest in the business and it is thriving under the leadership of Nitin Rakesh whom they subsequently appointed as Chief Executive. The company has adapted better than most of its IT outsourcing peers to changes in technologies. The result has been industry-leading profit growth which has seen its valuation re-rated.

Towngas China rose during the period as a result of the company achieving its best annual volume growth in five years. The company is benefiting from a recovery in industrial activity and conversion from coal to gas among its customers as environmental regulations become more stringent in China.

Vitasoy International performed strongly during the year on accelerating sales growth in mainland China which is now its dominant market. Having gained significant scale in mainland China, profitability should improve further as the company benefits from operating leverage on its investment in its brands.

Having made changes to its product portfolio, distribution and marketing strategies over the last few years, Uni-President China saw a return to revenue growth for both its noodle and beverage divisions. Higher margins led to a strong improvement in operating profits and the company's cash generation was also strong.

Sinbon Electronics continued to grow steadily during the period. Its business model bases pricing on a "cost plus" model which insulated the company from the margin pressure that many of its manufacturing peers faced during the year.

Top Five Detractors

Concepcion Industrial was negatively impacted by the depreciation of the peso and an increase in commodity prices which impacted its short term margins. Declining consumer confidence also impacted market growth given that air conditioners and refrigerators are discretionary purchases. However, the company is the market leader in the Philippines and further increased its market share over the year. Having recently completed a significant restructuring, the company is in a strong position to grow, particularly given the Philippines' low penetration of air conditioners, estimated at just 13 per cent. Given the strength of its brands and products, Concepcion Industrial is able to pass on increases in its costs and has recently raised prices. We remain happy with the Trust's holding.

As the largest automobile parts supplier in Indonesia, Astra Otoparts has been challenged by weak vehicle sales volumes and increasing costs and this has been reflected in its earnings. However, the company has grown both revenues and profits in its after-market segment during this time period. The after-market segment is much higher margin than selling parts direct to manufacturers and is a more attractive business given the company has much stronger pricing power here. Astra Otoparts also has profitable joint ventures with a number of global auto manufacturers. We believe the company is well positioned for when demand returns.

Lafarge Malaysia has been hurt by rising costs combined with declining demand for cement in Malaysia. The competitive environment has also been difficult with one operator not following Lafarge Malaysia in increasing prices which saw the company's market share decrease. To add to this, following the recent general election, the new government announced it would review all major infrastructure projects. The resulting delays and potential cancellations will suppress cement volumes in Malaysia. The company trades at an attractive value when compared to its installed capacity. However, given how much patience may be required for this value to be reflected fully given the uncertainty prevailing in Malaysia, we sold the Trust's holding in the company subsequent to the period end.

Blue Star's share price fell following a cool and wet summer in India which led to reduced demand for its air conditioners. However, the company continued to gain market share and the opportunity remains massive given low air conditioning penetration levels in India. We added to Scottish Oriental's holding following this share price weakness and remain very happy with the Trust's position in this company.

Blue Dart Express has faced increased competition in the express logistics market following an influx of venture capital funding into start-up businesses. These start-ups have also poached members of the company's management team. The company has been forced to cut prices and stay out of certain markets, which has hurt growth and profitability. We have concerns about a recent partnership Blue Dart Express entered into and are monitoring the position closely.

Portfolio activity

Portfolio turnover remained high during the year as a result of the sale of a relatively large number of companies, often with smaller than average position sizes. For many of these holdings the earnings outlook had weakened or we reappraised the strength of their businesses. The proceeds of these sales have been invested into both existing holdings and new investments in small companies that we believe offer greater potential to become large companies. The result of this activity is a more focused portfolio of 57 stocks where we have higher conviction and expect faster growth than the 67 stocks held last year.

Purchases

During the year we invested £116m, adding ten new companies to the portfolio.

Hatton National Bank is Sri Lanka's second-largest private bank. Since the new CEO, Jonathan Alles, joined in 2013, there has been a focus on improving internal efficiencies and driving financial performance. The bank's cost-to-income ratio has fallen significantly, and the CEO believes that costs can fall further. In addition, fee income is being targeted for improvement and we expect annual loan growth to be around 15 per cent. over the next three years.

Nien Made Enterprise (Taiwan) makes shutters, blinds and shades, predominantly selling into the US market via retail dealers. A family-owned business that is now in the hands of the third generation, the company has evolved over the years from simple bamboo blinds to higher margin custom-made products, where it is now gaining market share from incumbent Hunter Douglas. It continues to develop new products and has a simple strategy of making its products easy to sell, easy to order and easy to install.

Silergy (Taiwan) is the largest analogue integrated circuit (IC) designer in Asia, a market that has historically been dominated by incumbents in the West (such as Texas Instruments and Maxim). Although Silergy is still small - with only 1.2 per cent. market share in power management IC and 0.5 per cent. market share in analogue IC, we believe that its better-performing products, competitive pricing and strong sales support should help it gain market share.

Dr Lal Pathlabs is India's oldest chain of diagnostic laboratories, with a strong management team and brand. There are close to 100,000 diagnostic and testing laboratories in India, with an estimated US$7 billion total market size. As consumers pay for medical expenses from their own pocket (as opposed to under insurance coverage), both branding and pricing are important criteria. Consumers are increasingly shifting towards organised chains, such as Dr Lal, due to the perception of more accurate results and better services. Therefore, Dr Lal has been gaining share from small operators in this fragmented market, and is also benefiting as demand for diagnostic services as a whole is rising.

SP Apparels is India's second-largest exporter of knitted garments for infants and children, a niche segment of the textile manufacturing market, which allows it to make healthy margins. The company has several longstanding major customers, all of which have been buying SP Apparels' children's wear for 15 to 20 years. The company's 2016 initial public offering has bolstered the balance sheet, which should allow SP Apparels to expand capacity and grow sales.

Commencing commercial production in 1984, Pak Suzuki Motor Company has grown to become Pakistan's largest car manufacturer by volume. Passenger car penetration in Pakistan is extremely low at 15 passenger vehicles per 1,000 population and, despite the huge potential for growth, the value ascribed to the entire Pakistani car manufacturing industry is very low for a country with a population of 200 million. Suzuki dominates the Indian market, showing that it has technology and cars that are attractive in the Indian subcontinent.

Cemex Holdings is the third-largest cement manufacturer in the Philippines. The company has been hit by a cyclical downturn after a period of high discounting led by imports, predominantly from Vietnam. However, volumes are growing steadily; infrastructure spending appears to be recovering; the cement market is undersupplied and in need of additional capacity to replace existing, ageing stock; and the import risk is being reduced due to Vietnamese export levies as well as Philippine import restrictions based on safety concerns. Subsequent to our purchase Cemex raised its selling prices. Given this improved outlook we expect to see an improvement in the company's profitability.

Century Pacific Food is a packaged foods business in the Philippines. Having started his career outside the family business, the founder's son, Christopher Po, joined as CEO in 2013. Since then, the company's product portfolio has evolved from being focused on canned tuna to higher value branded products such as coconut water, condiments and frozen meats. Christopher Po's emphasis on hiring high quality professional managers also shows a desire to build a franchise that outlasts the family.

Federal Bank is one of India's oldest private sector banks. Its business was historically concentrated in Kerala, where it remains a leader with 14 per cent. market share. Shyam Srinivasan (the ex-head of Standard Chartered's consumer banking business in India) was appointed CEO in 2010. He has attracted a high quality top management team from HDFC Bank, Standard Chartered and State Bank of India. The new management team has expanded the bank's branch network outside Kerala to diversify its deposit base. It has also exited high-risk lending segments, helping the bank to maintain a gross non-performing loan ratio that is considerably below the industry average. Federal Bank's nationwide market share is currently only 1 per cent. but it should be able to grow this at the expense of the inefficient state owned banks.

Max's Group (Philippines) operates approximately 700 casual dining restaurants. Its brands include Max's (fried chicken), Yellow Cab (pizza), Pancake House and Krispy Kreme Doughnuts. It is majority-owned by the Trota-Fuentabella family, who have grown the business from its founding in 1945 as a single restaurant. After a period of overexpansion and a subsequent decline in profitability, the management team has been professionalised. Ariel Fermin, who spent several years with Jollibee Foods, was appointed Group COO. They have also hired professionals from Nestle, Kraft and KFC to head each of the company's brands. The new management team's target is to double the company's net profit margin. Future store expansion will be led by franchised, rather than company owned stores. This requires less capital expenditure, which should lead to higher free cash flows and lower debt.

Significant additions to existing positions

We added to Scottish Oriental's holdings in several companies following share price weakness which resulted in more attractive valuations. These companies included Astra Otoparts; Concepcion Industrial; Delta Electronics; Minth; Korean advanced image solution provider Vieworks; and Taiwanese networking equipment manufacturer Wistron NeWeb. We continued to build up positions for the Trust in Jyothy Laboratories; Indian auto component and forging business Mahindra CIE Automotive; Indian department store group Shoppers Stop; and Vietnamese conglomerate REE Corp. We added to Scottish Oriental's investments in Hong Kong quick service restaurant operator Fairwood Holdings; Indian holding company for the Godrej family Godrej Industries; Gujarat Gas; Raffles Medical Group; and Indonesian auto component manufacturer Selamat Sempurna on increased conviction in the investment cases for these companies.

Sales

During the year we disposed of 20 holdings.

Seven companies were sold following strong share price performance which resulted in these companies trading on expensive valuations. These were Thai Finance company Aeon Thana Sinsap; logistics provider Container Corp of India; Indian property developer Godrej Properties; Philippines' electronics manufacturer Integrated Microelectronics; Domino's Pizza franchise holder for India Jubilant Foodworks; India's Kansai Nerolac Paints and South Korean testing pin/socket manufacturer Leeno Industrial.

Six companies were sold from the portfolio as a result of their revised earnings outlooks. These were Hong Kong finance companies Aeon Credit Service and Public Financial Holdings; Hong Kong-listed Asia Satellite Telecommunications; Malaysian construction conglomerate IJM Corporation; Taiwanese industrial control system distributor Lumax International; and Taiwanese producer of branded foods and nutritional supplements Standard Foods.

Finally, seven companies were sold following a reappraisal of the strength of their respective businesses. Sri Lankan bank Commercial Bank of Ceylon was sold as we concluded that the prospects for its competitor Hatton National Bank are better; Singapore-listed confectioner Delfi has been losing market share in its key geography of Indonesia as the retail market there modernises; South Korean Tour Operator Hana Tour Service's business model is getting more confusing and it seems unlikely it will make a decent return on its investment in a duty-free franchise; India's Indoco Remedies was sold on concerns regarding quality control and poor execution of its expansion plans; Taiwanese point-of-sale-terminal manufacturer Posiflex Technology was sold after it made its second large acquisition in as many years, which we believed would be dilutive to returns; Taiwanese integrated circuit chip designer Sitronix Technology was sold once it became apparent how tough it was for the company to pass on cost increases to its customers; and textile producer Texwinca Holdings was sold when its results showed a weakening of its balance sheet, leading us to question the sustainability of its dividend.

Significant reductions from existing positions

We reduced Scottish Oriental's holdings in several companies following strong share price appreciation which saw their valuations rise. These companies included Mitra Adiperkasa, an Indonesian operator of franchises in food and beverage, department stores, sportswear and fashion apparel; Mphasis; Towngas China; and Uni-President China. We reduced the Trust's positions in Indian industrial gas company Linde India; Philippines water utility Manila Water; and traditional Chinese medicine company Tong Ren Tang Technologies following a reappraisal of the strength of their respective businesses.

Purchased and subsequently sold

Three companies were purchased during the year and subsequently sold - Godrej Agrovet, the agribusiness subsidiary of Godrej Industries; Chinese fashion brand operator JNBY; and Sumber Alfaria Trijaya, which operates the Alfamart chain of convenience stores in Indonesia. In all three cases, the share prices of these companies rose sharply after the initial purchase.

Ten Largest Equity Holdings at 31 August 2018

Sector Allocation at 31 August 2018

Investment Process

In the two years since Vinay Agarwal took on lead manager responsibilities for Scottish Oriental, the portfolio has been reduced from 76 stocks to 57 stocks. There was a resulting increase in portfolio turnover during this period. As these changes have been completed, portfolio turnover has reduced and should continue to fall. At the margin, Scottish Oriental's portfolio is now more growth oriented, but the central tenet of our investment philosophy remains unchanged in that we think about risk as the risk of losing money as opposed to underperforming a benchmark.

We are conviction-based, bottom-up stock selectors with a strong emphasis on high quality proprietary research. While cultural, political, economic and sectoral influences play an important part in the decision-making process, the availability of attractively-priced, good quality companies with solid long-term growth prospects is the major determinant of Scottish Oriental's portfolio. Country weightings bear no relationship to regional stock market indices and we do not consider ourselves obliged to hold investments in any individual market, sector or company. As a result, the Trust's asset allocation on a country and industry level is a residual of our stock selection process.

Although we read about corporate debt levels amongst Asia's corporates and occasionally do meet over-leveraged companies, such companies are not represented in Scottish Oriental's portfolio. Of the 57 stocks held by Scottish Oriental, five are conservatively funded banks/finance companies. Of the remaining 52 companies, 28 have net cash balance sheets. For the 24 companies that have net debt balance sheets, we are very careful to ensure that a company's debt burden is not overly onerous. One of the most indebted of Scottish Oriental's investments is Gujarat Gas, India's largest city gas distributor. Net debt to equity is 125 per cent. However, the company's prior year operating profits are more than three times its interest expense and its operating cash flow is four times. We expect profits and cash flows to grow substantially in the coming years. Having used debt to help roll out its impressive distribution network, the chief executive is now focused on utilising this network to generate free cash flow. The result is a company that can fund ongoing capital expenditure, interest payments and dividends whilst paying down debt. The vast bulk of the company's debt is via term loans with maturities from 2027 to 2029 with staged capital repayments. In this case, the ability to service and repay debt has been well considered and we are happy to back management as it seeks to grow its business further.

As a rule, we avoid politically exposed stocks. Whilst it can be beneficial in the short term to be aligned with a country's leadership, in democratic systems, these leaders frequently change, turning a prior benefit into a current liability. In non-democratic systems there is unlikely to be any right of appeal should a leadership that a company thought it was aligned with have a change of mind. Therefore, we focus on finding apolitical management teams who focus on building a franchise on its own merits. It is simple to highlight examples of companies we would never buy for Scottish Oriental, with the best example being those run by chief executives who focus on knowing the right people to facilitate speedy licences. But there are deeper considerations also. We had a modest concern about Concepcion Industrial given that it is a Filipino company with two major technology partners, based in China and the US respectively. There appeared potential for geopolitical crossfire. However, we are comforted by the fact that these technology partners have formed joint ventures with each other elsewhere, showing operating pragmatism over partisan dogma. Further to this, management has a collaborative style with all its partners, sharing its business thinking to help build long-term relationships that should override politics. Singaporean medical company Raffles Medical Group's decision to make weighty investments into China is also worth highlighting. The company talked and thought about China for a long time before investing and refused to take any short cuts. It will own 100 per cent. of its Chongqing hospital and 70 per cent. of its Shanghai hospital. In Shanghai its 30 per cent. partner is a state-owned developer which has formed joint ventures with a number of reputable foreign companies. We would have been wary if this joint venture had been with a well-connected local businessman instead. Management of Raffles Medical Group will have operational control with its partner merely providing the real estate element to the hospital. This seems reasonable and, we believe, is likely to stand the test of time.

Outlook

In the last year, the outlook has become cloudier and most economic commentators are less positive. There are reasons to be negative. Corporate debt levels in Asia are high by historical standards and much of this debt has been taken on in US dollars by companies with no obvious form of US dollar earnings. With interest rates rising and the US dollar strengthening, this is an uncomfortable position to be in. Politics is messy, to say the least, with an increasing cadre of strongmen presidents competing globally to demonstrate the largest ego. The current result of this is the commencement of a trade war, which, from our perspective, does not appear to be in anybody's best interests. Turkey and Argentina have shown the dangers of poor fiscal management and this has focused recent attention on the vulnerability of Asian countries with current account deficits, namely Bangladesh, India, Indonesia, Pakistan, the Philippines and Sri Lanka. Counterintuitively, these concerns make us more positive as they are well understood and, therefore, we believe are more likely now to be priced into valuations.

There is potential for a trade war to lower growth and impact margins for Asia's exporters. If the worst comes to the worst, there will be few beneficiaries and much dislocation. The exporters Scottish Oriental owns, however, have relatively high margins, which should allow them to continue operating successfully, albeit at reduced levels of profitability. One of Scottish Oriental's investments that has been hit by the trade altercation between the US and China is automobile body part manufacturer Minth. At first glance, a Chinese company with significant sales to the US is vulnerable. However, Minth has manufacturing operations in China, the US, Mexico, Japan, Thailand and Germany, giving it plenty of flexibility. Its operating margins in recent years have been in the high teens, which is impressive. With approximately 20 per cent. of sales generated in its North American operations, a full-on trade war will be unpleasant but not fatal. And as Minth's Chairman recently pointed out to us, his biggest competition comes from German and Japanese companies which are more expensive so there is limited potential for damage - even from any further escalation.

A number of Asian countries have belatedly raised interest rates in an attempt to defend their currencies, with a flurry of interest rate rises over the summer in India, Indonesia, Pakistan and the Philippines. It is probable that further rises will be necessary. This is likely to lead to a cooling of these economies. However, any temporary cooling does not change the long-term case for investing in well-run companies in these markets. Indus Motors and Pak Suzuki Motor Company in Pakistan have suffered this year both from a volatile political outlook and a sharp depreciation of the rupee. However, both have demonstrated their ability to pass on costs, growing their businesses severalfold in US dollar terms over the last two decades, albeit with bumps along the way from economic and political turbulence and a currency that lost 60 per cent. of its value. In addition, Pakistan's 2016 automotive development policy will give a fillip to the industry, with increased localisation; a reduction of second-hand imports; and increased demand as quality and pricing improves. This is not dissimilar to India twenty years ago when the incumbents were initially written off, given the expectation of increased competition, but actually thrived in the new environment. Both companies have net cash balance sheets and trade on highly attractive valuations.

The above examples show that whilst we don't know what the coming months may bring for Scottish Oriental's companies, we have every confidence they will be able to prosper over the coming years. The portfolio trades on a historic price earnings ratio of 19 times with expected earnings growth in the current year of 14 per cent. Whilst this is more expensive than for most of the Trust's history it offers better value and faster growth than at the same point last year. The recent market weakness has created opportunities for us to add to the Trust's positions in some of our favourite companies at more reasonable valuations than we have seen for some time. Despite the cloudy outlook we are cautiously optimistic.

Vinay Agarwal

Wee-Li Hee

Scott McNab

First State Investment Management (UK) Limited, Investment Manager

15 October 2018

Ten Year Record

Capital

Revenue

* The calculation of earnings per share is based on the revenue from ordinary activities after taxation and the weighted average number of ordinary shares in issue.

† Management fee and all other operating expenses, excluding interest, expressed as a percentage of the average daily net assets during the year (2011 and prior: expressed as a percentage of the average month end net assets during the year).

‡ Total assets less current liabilities and all cash and fixed interest securities (excluding convertibles) divided by shareholders' funds.

Ω Total assets less current liabilities divided by shareholders' funds.

Cumulative Performance (taking year ended 31 August 2008 as 100)

Strategic Report

The purpose of this report is to provide shareholders with details of the Company's strategy and business model as well as the principal risks and challenges the Company has faced during the year under review. It should be read in conjunction with the Chairman's Statement and the Portfolio Managers' Report which provide a review of the Company's investment activity and a look to the future.

The Board is responsible for the stewardship of the Company, including overall strategy, investment policy, borrowings, dividends, corporate governance procedures and risk management. Biographies of the directors can be found on page 18 of the Annual Report.

The Board assesses its performance in meeting the Company's objectives against the following Key

Performance Indicators, details of which can be found in the Financial Highlights, Ten Year Record,

Chairman's Statement and Portfolio Managers' Report:

· the movement in net asset value per ordinary share on a total return basis;

· the movement in the share price on a total return basis;

· the discount; and

· ongoing charges.

Business and Status

The Company is an investment company within the meaning of section 833 of the Companies Act 2006.

The Company carries on the business of an investment trust. The Company has been approved as an investment trust by HM Revenue and Customs subject to the Company continuing to meet eligibility conditions. The Company intends to conduct its affairs so as to enable it to comply with the ongoing requirements.

Business Model and Strategy for Achieving Objectives

· We aim to maximise the rate of return with due regard to risk. Risk is principally contained by focusing on soundly managed and financially strong companies, and by ensuring that the portfolio is reasonably well diversified geographically and by sector at all times. Quantitative analysis demonstrating the diversification of the Company's portfolio of investments is contained in the country allocation and sector allocation analysis within the Portfolio Managers' Report.

· While cultural, political, economic and sectoral influences play an important part in the decision-making process, the availability of attractively-priced, good quality companies with solid long-term growth prospects is the major determinant of investment policy.

· Our country weightings are not determined by reference to regional stock market indices. We do not consider ourselves obliged to hold investments in any individual market, sector or company.

· Existing holdings are carefully scrutinised to ensure that our corporate performance expectations are likely to be met, and that market valuations are not excessive. Where otherwise, disposals are made.

· Strong emphasis is placed on frequent visits to countries of the Investment Region and on meeting the management of those companies in which the Company is invested, or might invest.

Investment Objective

· The Scottish Oriental Smaller Companies Trust plc aims to achieve long-term capital growth by investing in mainly smaller Asian quoted companies.

Investment Policy

· The Company invests mainly in the shares of smaller Asian quoted companies, that is, companies with market capitalisations of below US$1,500m, or the equivalent thereof, at the time of first investment.

· The Company may also invest in companies with market capitalisations of between US$1,500m and US$3,000m at the time of first investment, although not more than 20 per cent. of the Company's net assets at the time of investment will be invested in such companies.

· To enable the Company to participate in new issues, it may invest in companies which are not quoted on any stock exchange, but only where the Investment Manager expects that the relevant securities will shortly become quoted.

· For investment purposes, the Investment Region includes China, Hong Kong, India, Indonesia, Malaysia, Pakistan, Philippines, Singapore, South Korea, Sri Lanka, Taiwan, Thailand and Vietnam. Countries in other parts of Asia may be considered with approval of the Board.

· With the objective of enhancing capital returns to shareholders, the Directors of the Company will consider the use of long-term borrowings up to a limit of 50 per cent of the net assets of the Company at the time of borrowing.

· The Company invests no more than 15 per cent. of its total assets in other listed investment companies (including listed investment trusts).

· The Company invests no more than 15 per cent. of its total assets in the securities of any one company or group of companies at the time of investment.

· The Company reserves the right to invest in equity-related securities (such as convertible bonds and warrants) of companies meeting its investment criteria. In the event that the Investment Manager anticipates adverse equity market conditions, the Company may invest in debt instruments in any country or currency.

· The majority of the Company's assets are denominated in Asian currencies or US dollars. The Company reserves the right to undertake foreign exchange hedging of its portfolio.

As noted in the Chairman's Statement, the Board is proposing amendments to the Investment Policy to provide the Investment Manager with flexibility to invest in companies with greater market capitalisations. Further details are set out on pages 24 and 25 of the Directors' Report in the Company's Annual Report.

A portfolio review by the Investment Manager is provided above and the investments held at the year end are listed on pages 15 and 16 of the Annual Report.

Investment Manager

First State Investment Management (UK) Limited has been Investment Manager since 20 March 1995. In order to comply with the Alternative Investment Fund Managers Directive, with effect from 2 July 2014 the Company terminated its investment management agreement with First State Investment Management (UK) Limited and appointed First State Investments (UK) Limited as its Alternative Investment Fund Manager ("AIFM"). First State Investments (UK) Limited delegated portfolio management services to First State Investment Management (UK) Limited.

A summary of the terms of the Investment Management Agreement is contained in note 2 of the Accounts on page 51 of the Annual Report.

The Board regularly appraises the performance and effectiveness of the investment management arrangements of the Company. As part of this process, such arrangements are reviewed formally once a year. In relation to the Board's formal review, the performance and effectiveness of such arrangements are measured against certain criteria. These include the Company's growth and return; performance against the Company's peer group; the success of the Company's investment strategy; the effectiveness, quality and standard of investment resource dedicated by the Investment Manager to the Company; and the level of the Investment Manager's fee in comparison to its peer group.

The Board, having conducted its review, considers that the Investment Manager's continued appointment as investment manager to the Company is in the best interests of shareholders.

Principal Risks and Uncertainties

The Board believes that the principal risks facing the Company relate to the Company's investment activities and include market risk, interest rate risk, foreign currency risk, other price risk, liquidity risk and credit risk. An explanation of these risks and how they are managed is contained on pages 56 to 59 of the Annual Report.

Other risks faced by the Company include breach of regulatory rules which could lead to suspension of the Company's London Stock Exchange listing, financial penalties, or a modified audit report. Breach of Section 1158 of the Corporation Tax Act 2010 could lead to the Company losing its approval as an investment trust and being subject to tax on capital gains.

In the mitigation and management of these risks, the Board regularly monitors the investment environment and the management of the Company's investment portfolio, and applies the principles detailed in the guidance provided by the Financial Reporting Council. Compliance with regulatory rules is monitored on a daily basis by the Company Secretary who reports to the Board at each Board Meeting. The Company's internal controls are described in more detail on page 28 of the Annual Report.

Social, Community and Human Rights Issues

The Company has given discretionary voting powers to the Investment Manager. The Board supports the integration by the Investment Manager of environmental, social and governance issues in its investment decision making. In the Investment Manager's view, this assists the sustainable performance of the Company.

The Board and Outlook

The Company has five Directors. Two are women and three are men. The Company has no employees.

The Chairman provides an outlook for the Company in his statement above.

On behalf of the Board

PATAC Limited

Company Secretary

15 October 2018

Statement of Directors' Responsibilities

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

Company law requires the Directors to prepare accounts for each financial year.

Under that law the Directors have elected to prepare the Accounts in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), including FRS102 "The Financial Reporting Standard applicable in the UK and Republic of Ireland". Under company law the Directors must not approve the Accounts unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position and the profit or loss of the Company for that period. In preparing these Accounts, the Directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgments and accounting estimates that are reasonable and prudent; and

· state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Accounts.

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 Accounts and the Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors confirm that suitable accounting policies, applied consistently and supported by reasonable and prudent judgements and estimates, have been used in the preparation of the Accounts and that applicable accounting standards have been followed.

The Directors consider that the Annual Report and Accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's position and performance, business model and strategy. In reaching this conclusion, the Directors have assumed that the reader of the Annual Report and Accounts has a reasonable level of knowledge of the investment industry.

The Accounts are published on the Company's website www.scottishoriental.com which is maintained by the Investment Manager. The maintenance and integrity of the corporate and financial information relating to the Company is the responsibility of the Investment Manager. The work carried out by the auditor does not involve consideration of the maintenance and integrity of this website and, accordingly, the auditor accepts no responsibility for any changes that may have occurred to the Accounts since they were initially presented on the website. Visitors to the website need to be aware that legislation in the United Kingdom governing the preparation and dissemination of accounts may differ from legislation in other jurisdictions.

Each of the Directors confirms that to the best of his or her knowledge:

· the Accounts, prepared in accordance with applicable United Kingdom accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

· the Strategic Report and the 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.

By order of the Board

James Ferguson

Chairman

15 October 2018

Income Statement for the year ended 31 August 2018 (audited)

2018 2017

* The total column of this statement is the Profit and Loss Account of the Company. The revenue and capital columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

There are no items of other comprehensive income, therefore this statement is the single statement of comprehensive income of the Company.

The Board is proposing a dividend of 11.50p per share for the year ended 31 August 2018 (2017: 11.50p per share) which, if approved, will be payable on 18 January 2019 to shareholders recorded on the Company's shareholder register on 7 December 2018.

The accounting policies and the notes on the Accounts can be found below.

All revenue and capital items derive from continuing operations.

Summary Statement of Financial Position as at 31 August 2018 (audited)

 The accounting policies and the notes to the Accounts can be found below.

Summary Cash Flow Statement for the year ended 31 August 2018 (audited)

Accounting Policies

Basis of accounting

(a) The Scottish Oriental Smaller Companies Trust plc is a public company limited by shares, incorporated and domiciled in Scotland, and carries on business as an investment trust. Details of the Company's registered office can be found on page 67 of the Annual Report.

These Accounts have been prepared in accordance with applicable accounting standards and under the historical cost convention (modified to include the revaluation of fixed asset investments which are recorded at fair value), the Companies Act 2006, UK Generally Accepted Accounting Practice ("UK GAAP"), including FRS 102, and the Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued in November 2014 (the "SORP"). These Accounts are prepared on a going concern basis.

In order to better reflect the activities of the Company and in accordance with guidance issued by the AIC, supplementary information which analyses the Profit and Loss Account between items of revenue and capital nature has been presented in the Income Statement.

The Accounts have also been prepared on the assumption that approval as an investment trust will continue to be granted.

The functional and reporting currency of the Company is pounds sterling as most investors in the Company are based in the United Kingdom.

Income

(b) Dividends on securities are recognised on the date on which the security is quoted "ex dividend'' on the stock exchange in the country in which the security is listed. Foreign dividends include any withholding taxes payable to the tax authorities. Where a scrip dividend is taken in lieu of cash dividends, the net amount of the cash dividend declared is credited to the revenue account. Any excess in the value of shares received over the amount of cash dividend foregone is recognised as capital. Interest on securities is accounted for on a time apportioned basis so as to reflect the effective yield on the investment.

(c) Overseas income is recorded at rates of exchange ruling at the date of receipt.

(d) Bank interest receivable is accounted for on an accruals basis and taken to revenue.

Expenses

(e) Expenses are accounted for on an accruals basis and are charged through the revenue column of the Income Statement.

(f) The investment management fee has been charged in full to the revenue column of the Income Statement. The performance fee is chargeable in full to the capital column of the Income Statement.

Financial Instruments

(g) The Company has elected to adopt Sections 11 and 12 of FRS 102 in respect of financial instruments.

(h) Financial assets and liabilities are recognised in the Company's Statement of Financial Position when it becomes party to the contractual provisions of the instrument.

(i) Listed investments have been designated upon initial recognition as fair value through profit or loss. Investments are recognised and de-recognised at trade date where a purchase or sale is under a contract whose terms require delivery within the time frame established by the market concerned, and are initially measured at cost. Subsequent to initial recognition, investments are valued at fair value which for listed investments is deemed to be bid price or last traded price. Gains and losses arising from changes in fair value are included as a capital item in the Income Statement and are ultimately recognised in the Capital Reserve. Gains and losses arising on realisation of investments are shown in the Capital Reserve.

(j) Equities include ordinary shares and warrants.

(k) Cash and cash equivalents include cash at hand, deposits held on call with banks and other short term highly liquid investments with maturities of three months or less.

(l) Debtors and creditors do not carry any interest, are short term in nature, and are stated as nominal value less any allowance for irrecoverable amounts as appropriate. This is deemed to be the recoverable amount for debtors and the settlement amount for creditors.

(m) Long-term borrowings are initially measured at proceeds less transaction costs and subsequently measured at amortised cost using the effective interest method. Finance costs of such borrowings are charged to revenue in the period in which they are incurred. Interest costs incurred on long-term borrowings are charged to revenue on a time apportioned basis over the life of the liability. Breakage costs on long-term borrowings are charged to capital.

Foreign currency

(n) Exchange rate differences on capital items are included in the Capital Reserve, and on income items in the Revenue Reserve.

(o) All assets and liabilities denominated in foreign currencies have been translated at year end exchange rates.

Dividends

(p) Interim dividends are recognised in the period in which they are paid and final dividends are recognised in the period in which they are approved by the Company's shareholders.

Taxation

(q) Current tax payable is based on taxable profit for the year. In accordance with the SORP, any tax relief on expenses is allocated between capital and revenue on the marginal basis using the Company's effective rate of corporation tax for the year.

Deferred taxation is provided using the liability method on all timing differences, calculated at the rate at which it is anticipated the timing differences will reverse. Deferred tax assets are recognised only when, on the basis of available evidence, it is more likely than not that there will be taxable profits in the future against which the deferred tax asset can be offset.

Owing to the Company's status as an investment trust, and the intention to continue to meet the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation of investments.

Significant judgements and estimates

(r) The preparation of the Company's financial statements requires the Directors to make judgements, estimates and assumptions that affect the reported amounts recognised in the financial statements and disclosure of contingent liabilities. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in future periods. There have been no significant judgements, estimates or assumptions for the current or preceding financial year.

Reserves

Share premium account

(s) The share premium represents the difference between the nominal value of new ordinary shares issued and the consideration the Company receives for these shares. This account is non-distributable.

Capital redemption reserve

(t) The capital redemption reserve represents the nominal value of ordinary shares bought back for cancellation. This reserve is non-distributable.

Capital reserve

(u) Gains and losses on the realisation of investments, realised exchange differences of a capital nature and returns of capital are accounted for in this reserve. Increases and decreases in the valuation of investments held at the year end and unrealised exchange differences of a capital nature are also accounted for in this reserve. The cost of shares bought back to be held in Treasury is also deducted from this reserve. The articles of the Company stipulate that this reserve is non-distributable. However, subject to a change to the Company's articles approved by shareholders, this reserve could be made distributable should the need arise.

Revenue reserve

(v) Any surplus/deficit arising from the net revenue return for the year is taken to/from this reserve. This reserve is distributable to shareholders by way of dividend.

NOTES ON THE ACCOUNTS (audited):

(1) Income

Income from investments relates to dividends. Other income relates to bank deposit interest.

(2) Investment Management Fee

Management

First State Investment Management (UK) Limited has been Investment Manager since 20 March 1995. In order to comply with the Alternative Investment Fund Managers Directive, with effect from 2 July 2014 the Company terminated its investment management agreement with First State Investment Management (UK) Limited and appointed First State Investments (UK) Limited as its Alternative Investment Fund Manager. First State Investments (UK) Limited delegated portfolio management services to First State Investment Management (UK) Limited.

The terms of the Agreement provide for payment of a base fee of 0.75 per cent per annum of the Company's net assets payable quarterly in arrears. In addition an annual performance fee may be payable to the Investment Manager. The total fee payable to the Investment Manager is capped at 1.5 per cent per annum of the Company's net assets.

The performance fee is based on the Company's share price total return (''SPTR''), taking the change in share price and dividend together, over a three year period. If the Company's SPTR exceeds the SPTR of the MSCI AC Asia ex Japan Index over the three year period plus ten percentage points, a performance fee is payable to the Investment Manager. The objective of the performance fee is to give the Investment Manager ten per cent of the additional value generated for shareholders by such outperformance. No performance fee (2017: £nil) is due to be paid for the year ended 31 August 2018.

The Investment Manager's appointment is subject to termination on one year's notice. The

Company is entitled to terminate the Investment Manager's appointment on less than the specified notice period subject to compensation being paid to the Investment Manager for the period of notice not given. The compensation in the case of the Investment Manager's termination is based on 0.75% of the value of the Company's net assets up to the date of termination on a pro rata basis. In addition, a termination performance fee amount may be due to the Investment Manager based on the Company's three year performance up to the date of termination and paid on a pro rata basis.

The Agreement sets out matters over which the Investment Manager has authority and the limits above which board approval is required. In addition, the Board has a formal schedule of matters specifically reserved to it for decision. This includes determination and monitoring of the Company's investment objectives and policy and its future strategic direction, gearing policy, matters relating to the buy-back and issuance of the Company's shares, appointment and removal of third party service providers, review of key investment and financial data and the Company's corporate governance and risk control arrangements.

(3) Other Administrative Expenses

Company Secretary

PATAC Limited provides company secretarial, accounting and administrative services. The fee for the year ended 31 August 2018, which is payable quarterly in advance and linked to the movement in the Retail Price Index annually, was £115,000 (2017: £111,000). The appointment is terminable on three months' notice.

(4) Finance Costs of Borrowing

The £20,000,000 loan was repaid in full including all interest on 1 June 2017.

(5) Taxation

(b) Factors affecting the tax charge for the year

The tax assessed for the period is different from that calculated when corporation tax is applied to the total return. The differences are explained below:

Under changes enacted in the Finance Act 2009, dividends and other distributions received from foreign companies from 1 July 2009 are largely exempt from corporation tax.

(c) Provision for deferred tax

The Company has a deferred tax asset of £5,867,000 (2017: £5,227,000) at 31 August 2018 in respect of unrelieved tax losses carried forward. This asset has not been recognised in the Accounts as it is unlikely under current legislation that it will be capable of being offset against future taxable profits.

6) Dividends

The below proposed dividend in respect of the financial year is the basis upon which the requirements of section 1158 of the Corporation Tax Act 2010 are considered. The proposed dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these Accounts.

(7) Return per Ordinary Share

(11) Share Capital

The allotted and fully paid capital is £7,853,416 (2017: £7,853,416) represented by 31,413,663 ordinary shares of 25p each (2017: 31,413,663). During the year the Company bought back 1,086,379 (2017: 60,000) ordinary shares at a cost of £10,946,000 (2017: £541,000), all of which are held in Treasury. The Company held 1,539,879 ordinary shares in Treasury at the year end (2017: 453,500), being 4.9 per cent of share capital, with a nominal value of £384,970 (2017: £113,375). There have been no shares issued or bought back since the year end.

The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This will include:

- the level of equity shares in issue; and

- the extent to which revenue in excess of that which is required to be distributed should be retained.

The capital of the Company is the ordinary share capital and the other reserves. It is managed in accordance with its investment policy in pursuit of its investment objective, which is detailed on page 20 of the Annual Report.

(12) Net Asset Value per Ordinary Share

Net assets per share are based on total net assets of £345,400,000 (2017: £369,256,000) divided by 29,873,784 (2017: 30,960,163) ordinary shares of 25p each in issue (excludes shares held in Treasury).

(13) Cash Flow Statement

(14) Risk Management, Financial Assets and Liabilities

The Company invests mainly in smaller Asian quoted companies. Other financial instruments comprise cash balances and short-term debtors and creditors. The Investment Manager follows the investment process outlined on page 20 of the Annual Report and in addition the Board conducts quarterly reviews with the Investment Managers. The Investment Manager's Risk and Compliance department monitors the Company's investment and borrowing powers to ensure that risks are controlled and minimised. Additionally, its Compliance and Risk Committee reviews risk management processes monthly.

The main risks that the Company faces from its financial instruments are market risk (comprising interest rate, currency and other price risks) and credit risk. As the Company's assets are mainly in readily realisable securities, other than in exceptional circumstances there is no significant liquidity risk. The Board, in conjunction with the Investment Manager, regularly reviews and agrees policies for managing each of these risks. The Investment Manager's policies for managing these risks are available on the website and summarised below.

Market Risk

The fair value of, or future cash flows from, a financial instrument held by the Company will fluctuate because of changes in market prices.

To mitigate this risk, the Investment Manager focuses on investing in soundly managed and financially strong companies with good growth prospects and ensures the portfolio is diversified geographically and by sector at all times. Existing holdings are scrutinised to ensure corporate performance expectations are met and valuations are not excessive. The portfolio valuation and transactions undertaken by the Investment Manager are regularly reviewed by the Board.

Interest Rate Risk

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.

The Company is exposed to interest rate risk on interest receivable from bank deposits and interest payable on bank overdraft positions. The interest rate risk profile of the Company at 31 August is show below.

Interest Rate Risk Profile

Interest Rate Sensitivity

Considering effects on cash balances and fixed rate borrowings, an increase of 50 basis points in interest rates would have increased net assets and total return for the period by £95,000 (2017: £164,000). A decrease of 50 basis points would have had an equal but opposite effect. The calculations are based on the cash balances at the date of the Statement of Financial Position and are not representative of the year as a whole.

Foreign Currency Risk

The majority of the Company's assets, liabilities and income were denominated in currencies other than sterling (the currency in which the Company reports its results) as at 31 August 2018. The Statement of Financial Position therefore can be significantly affected by movements in foreign exchange rates. It is not the Company's policy to hedge this risk on a continuing basis but the Company reserves the right to undertake foreign exchange hedging of its portfolio. The revenue account is subject to currency fluctuation arising on dividends paid in foreign currencies. The Company does not hedge this currency risk.

Foreign Currency Risk Exposure by Currency of Denomination

Currency Risk Sensitivity

At 31 August 2018, if sterling had strengthened by 5% in relation to all currencies, with all other variables held constant, total net assets and total return on ordinary activities would have decreased by the amounts shown below. A 5% weakening of sterling against all currencies, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts. The analysis is performed on the same basis for 2017.

Other Price Risk

Changes in market prices, other than those arising from interest rate or currency risk, will affect the value of quoted investments. It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular country or sector. The Investment Manager monitors market prices throughout the year and reports to the Board on a regular basis.

Other Price Risk Sensitivity

If market values at the date of the Statement of Financial Position had been 10% higher or lower with all other variables remaining constant, the return attributable to ordinary shareholders for the year ending 31 August 2018 would have increased/(decreased) by £32,572,800 (2017: increased/(decreased) by £33,838,500) and equity reserves would have increased/(decreased) by the same amount.

Liquidity Risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not significant as the majority of the Company's assets are investments in quoted securities that are readily realisable. The Company has the power to take out borrowings, which could give it access to additional funding when required.

The contractual maturities of financial liabilities at the year end, based on the earliest date on which payment can be required, are as follows:

Credit Risk

This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in a loss to the Company.

Investment transactions are carried out with a large number of approved brokers, whose credit-standing is reviewed periodically by the Investment Manager. Transactions are ordinarily done on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed.

Cash exposures are carefully managed to ensure that money is placed on deposit with reputable counterparties meeting a minimum credit rating.

None of the Company's financial assets are past due or impaired.

In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit

risk at 31 August 2018 was as follows:

Fair Value Hierarchy

Investments insecurities and financial assets designated at fair value through profit or loss on initial recognition. In accordance with FRS102, these investments are analysed using the fair value hierarchy below. Short term balances are excluded as their carrying value at the reporting date approximates their fair value.

The levels are determined by the lowest (that is, the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:

Level 1 - investments with prices quoted in an active market;

Level 2 - investments whose fair value is based directly on observable current market prices or is indirectly being derived from market prices; and

Level 3 - investments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or are not based on observable market data.

All of the Company's investments were categorised as Level 1 for the year to 31 August 2018 (2017: All investments Level 1).

15. Related Party Transactions

The Directors' fees for the year are detailed in the Directors' Remuneration Report on pages 29 to 31 of the Annual Report. An amount of £19,000 was outstanding to the Directors at the year end (2017: £22,000). No Director has a contract of service with the Company. During the year no Director had any related party transactions requiring disclosure under section 412 of the Companies Act 2006.

Alternative Investment Fund Managers Directive

Under the Alternative Investment Fund Managers Directive the Company is required to publish maximum exposure levels for leverage on a 'Gross' and 'Commitment' basis. The process for calculating exposure under each method is largely the same, except that, where certain conditions are met, the Commitment method allows instruments to be netted off to reflect 'netting' or 'hedging' arrangements and the Company's leverage exposure would then be reduced. The AIFM set maximum leverage levels of 3.0 and 1.7 times the Company's net asset value under the 'Gross' and 'Commitment' methods respectively. At the Company's year end the levels were respectively 0.97 and 1.00 times the Company's net asset value.

The Alternative Investment Fund Managers Directive requires the AIFM to make available certain remuneration disclosures to investors. This information is available from the AIFM on request.

The financial information contained within this announcement does not constitute statutory accounts as defined in sections 434 and 435 of the Companies Act 2006. The results for the years ended 31 August 2018 and 2017 are an abridged version of the statutory accounts for those years. The Auditor has reported on the 2018 and 2017 accounts, their reports for both years were unqualified and did not contain a statement under sections 495 to 498 of the Companies Act 2006. Statutory accounts for 2017 have been filed with the Registrar of Companies and those for 2018 will be delivered in due course.

The 2018 Annual Report will be posted to shareholders in October 2018 and copies will be available from the Company's website www.scottishoriental.com and the Company Secretary's office at 21 Walker Street, Edinburgh, EH3 7HX.

16 October 2018