abrdn.com
abrdn UK Smaller
Companies Growth Trust plc
Annual Report 30 June 2022
Capturing the growth potential of UK smaller companies
Investments in the
Software and Computer
Services sector include
Kainos, Bytes Technology
and Auction Technology.
abrdn UK Smaller Companies Growth Trust plc 1
“For the year ended 30 June 2022, the Company’s
NAV total return, calculated on the basis that all
dividends received are reinvested in additional
shares, was -27.3%. The share price total return,
calculated on the same basis, was -34.3%.”
Liz Airey, Chairman
“The period was a challenging one for performance
for the Company, particularly during the second
half of the financial year, with our style being out
of favour in the market as “top down” global
macro factors have taken the lead over
“bottom up” stock picking”
Harry Nimmo and Abby Glennie,
abrdn
2 abrdn UK Smaller Companies Growth Trust plc
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR
IMMEDIATE ATTENTION. If you are in any doubt about the
action you should take, you are recommended to seek
your own financial advice from your stockbroker, bank
manager, solicitor, accountant or other financial adviser
authorised under the Financial Services and Markets Act
2000 (as amended by the Financial Services Act 2012) if
you are in the United Kingdom or, if not, from another
appropriately authorised financial adviser.
If you have sold or otherwise transferred all your Ordinary
shares in abrdn UK Smaller Companies Growth Trust plc,
please forward this document, together with the
accompanying documents immediately to the purchaser
or transferee, or to the stockbroker, bank or agent through
whom the sale or transfer was effected for transmission to
the purchaser or transferee.
To find out more about abrdn UK Smaller Companies
Growth Trust plc, please visit:
abrdnuksmallercompaniesgrowthtrust.co.uk
Overview
Performance Highlights and Financial Calendar 3
Strategic Report
Chairman’s Statement 8
Overview of Strategy 12
Promoting the Success of the Company 19
Performance 23
Investment Manager’s Review 26
Investment Process 31
Portfolio
Ten Largest Investments 36
Investment Portfolio 37
Sector Distribution of Investments 39
Investment Portfolio by Sector 40
Market Cap Exposure 41
Investment Case Studies 42
Governance
Board of Directors 46
Directors’ Report 49
Directors’ Remuneration Report 60
Audit Committee’s Report 64
Financial Statements
Statement of Directors’ Responsibilities 70
Independent Auditor’s Report 71
Statement of Comprehensive Income 77
Statement of Financial Position 78
Statement of Changes in Equity 79
Statement of Cash Flows 80
Notes to the Financial Statements 81
Alternative Performance Measures 99
Corporate Information
Information about the Investment Manager 103
Investor Information 104
Glossary of Terms 108
Your Company’s Share Capital History 111
AIFMD Disclosures (Unaudited) 114
General
Notice of Annual General Meeting 116
Contact Addresses 121
Contents
abrdn UK Smaller Companies Growth Trust plc 3
Net asset total return
AB
Share price total return
AB
–27.3% –34.3%
2021 +41.9% 2021 +46.9%
Total dividends per share Discount to net asset value
AB
8.10
p
14.6%
2021 7.70p 2021 5.4%
Revenue return per share Ongoing charges ratio
ABC
9.07
p
0.82%
2021 6.43p 2021 0.88%
A
Considered to be an Alternative Performance Measure. See pages 99 to 101 for more information.
B
A Key Performance Indicator (“KPI”). See page 13 for more information on the Company’s KPIs.
C
Calculated in accordance with AIC guidance issued in October 2020 to include the Company’s share of costs of holdings in investment companies on a look-through basis.
Net asset value per share Share price Dividends per share
At 30 June – pence At 30 June – pence Year ended 30 June – pence
552.9
539.5
527.7
738.0
530.4
18 19 20 21 22
500.0
491.5
482.0
698.0
453.0
18 19 20 21 22
7.00
7.70 7.70 7.70
8.10
18 19 20 21 22
Performance Hi
g
hli
g
hts and Financial Calendar
4 abrdn UK Smaller Companies Growth Trust plc
Financial Calendar
Annual General Meeting (London)
20 October 2022
Payment of final dividend for year ending 30 June 2022
28 October 2022
Half year end
31 December 2022
Expected announcement of results for the
six months ending 31 December 2022
February 2023
Payment of interim dividend for year ending 30 June 2023
7 April 2023
Financial year end
30 June 2023
Expected announcement of results for year ending 30 June 2023
September 2023
Performance Hi
g
hli
g
hts and Financial Calendar
Continued
abrdn UK Smaller Companies Growth Trust plc 5
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
Financial Highlights
30 June 2022 30 June 2021 % change
Capital return
Total assets (as defined on page 110) £538.6m £793.2m (32.1%)
Equity shareholders’ funds £498.6m £728.2m (31.5%)
Market capitalisation
A
£425.9m £688.8m (38.2%)
Net asset value per share (as defined on page 109) 530.37p 737.97p (28.1%)
Share price 453.00p 698.00p (35.1%)
Discount to NAV
B
14.6% 5.4%
Net gearing
B
5.1% 5.7%
Reference index 5,520.20 6,977.10 (20.9%)
Dividends and earnings
Revenue return per share
C
9.07p 6.43p 41.1%
Total dividends per share
D
8.10p 7.70p 5.2%
Operating costs
Ongoing charges ratio
BE
0.82% 0.88%
A
Represents the number of Ordinary shares in issue in the Company multiplied by the Company’s share price.
B
Considered to be an Alternative Performance Measure, as defined on pages 99 and 100.
C
Measures the revenue earnings for the year divided by the weighted average number of Ordinary shares in issue (see Statement of Comprehensive Income).
D
The figures for dividend per share reflect the years in which they were earned (see note 8 on page 87).
E
Calculated in accordance with AIC guidance issued in October 2020 to include the Company’s share of costs of holdings in investment companies on a look-through basis.
6 abrdn UK Smaller Companies Growth Trust plc
Strategic
Report
Investments in the Electronics and
Technology Hardware sectors
include XP Power and discoverIE.
abrdn UK Smaller Companies Growth Trust plc 7
The Company is an investment
trust with a premium listing on the
London Stock Exchange.
The Company's objective is to
achieve long-term capital growth
by investment in UK-quoted
smaller companies.
8 abrdn UK Smaller Companies Growth Trust plc
Last year I stated that “underperformance in any period is
obviously disappointing”, but last year that disappointment
was offset somewhat by the positive absolute
performance of more than 40%. This year we are in a
more challenging position; the share price and net asset
value (“NAV”) total returns are both negative and have
also underperformed the reference index.
Performance
For the year ended 30 June 2022, the Company’s NAV
total return, calculated on the basis that all dividends
received are reinvested in additional shares, was -27.3%.
The share price total return, calculated on the same basis,
was -34.3%. By contrast, the total return of the Company’s
reference index, the Numis Smaller Companies plus AIM
(ex investment companies) Index, was -19.0%.
The fall in equity values in the first half of 2022 was a global
phenomenon; most major equity indices were trading at
lower levels on 30 June 2022 than they were in December
2021, on the back of macro-economic concerns related
to the threat of supply-chain issues in the post-Covid
recovery and then the impact of the Russian invasion of
Ukraine in February 2022. The initial reaction to these
concerns was a very severe rotation out of what the
market classifies as “growth” stocks into “value” stocks,
which began at the beginning of 2022. These rotations are
a fact of economic life and take place from time to time.
They are uncomfortable while they last but, thankfully,
they typically do not last for long. The historic phasing and
triggers for these rotations is illustrated in the graph on
page 27, demonstrating the impact on performance in the
current cycle.
The tangible effect of this is that any shareholder who
made an initial investment in the Company in the last two
years will be nursing unrealised losses, and those who
invested at the highs in September 2021 could be over
30% lower on their purchase price. While everyone should
recognise that this is an unavoidable risk of investing in
equities, we appreciate that it is nonetheless deeply
disappointing. However, we should note that this outcome
is not unique to shareholders in the Company; as shown in
the table on page 23, the peer group weighted average
NAV total return for the year was -22.7% and the peer
group weighted average share price total return was -
28.4%. This highlights how the challenging market
backdrop is the significant driver of performance across
the sector.
As the Investment Manager sets out in its report on pages
26 to 30, its expertise is in stock picking using a set of
metrics, which have been rigorously back tested, to
screen companies and help it select those with the desired
growth and quality characteristics for the portfolio. During
a significant rotation such as we are experiencing, the
whole portfolio comes under pressure. The Investment
Manager’s challenge is to identify whether the market is
misjudging and mispricing the outlook for an individual
company, or whether the underlying investment thesis has
changed, and adjust the holdings accordingly. The
Investment Manager believes that the fact the portfolio
holdings are out of favour with the market is explained by
a change in sentiment and not by a change in the
fundamentals of the companies in which the portfolio is
invested, and has confidence in its investment approach.
For the year ended 30 June 2022, the
Company’s NAV total return,
calculated on the basis that all
dividends received are reinvested in
additional shares, was -27.3%. The
share price total return, calculated on
the same basis, was -34.3%.
The Board considers the Investment Manager’s process to
be tried and tested and it has yielded good results over the
past two decades - as can be seen from the chart on
page 23 - albeit interspersed with periods of
underperformance at times of market turbulence such as
this. The Board monitors the performance, composition of
the portfolio and focus on quality and growth as this is the
basis upon which our shareholders have invested in the
Company. Whilst a cautious approach, including on
gearing, is appropriate as the UK economy faces
significant challenge in the period ahead, any style drift or
process change would increase risk significantly. The
Board continues to believe that the opportunities remain
for superior returns over the cycle.
Chairman’s Statement
abrdn UK Smaller Companies Growth Trust plc 9
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
Earnings and Dividends
The revenue return per share (“EPS”) for the year ended
30 June 2022 was 9.07p (2021: 6.43p). The increase of
41.1% reverses the declines in the past two years and is
the highest EPS the Company has ever generated,
exceeding the 8.80p in 2019. The EPS was enhanced by
0.26p per share (2.9%) as a result of share buy backs
undertaken during the year, but the level of investment
income of £11.1 million is also £1.1 million higher than it
was in 2019. It is helpful to be able to report that the
contribution by special dividends was less than 1.5% of
total income, which provides a degree of confidence in
the potential of the portfolio in the coming year.
This higher level of earnings provides the Board with the
capacity to increase the level of the final dividend, thereby
increasing the total dividend per share for the year, which
has been held at 7.70p for the last three years. The Board
is therefore proposing a final dividend of 5.40p per share,
making a total dividend for the year of 8.10p per share, a
5.2% increase on the dividend for 2021. In addition, over
£1.1 million will be transferred to the Revenue Reserves,
which will equate to approximately 4.0p per share after
the proposed final dividend has been paid.
In making this decision, the Board is very aware of the
challenging outlook for the UK economy and does not
wish to raise the dividend to a level that might prove
unsustainable in future years.
Subject to approval by shareholders at the Annual
General Meeting, the final dividend will be paid on 28
October 2022 to shareholders on the register on 7
October 2022, with an associated ex-dividend date of 6
October 2022.
Ongoing Charges
The ongoing charges ratio (“OCR”) for the year ended 30
June 2022 was 0.82 % (2021: 0.88%). The reduction is
largely a function of a higher average NAV during the year
as compared to 2021, and we would expect to see a
reversal in this ratio in the coming year.
Discount Control and Share Buy Backs
At the year end the discount of the share price to the cum
income NAV was 14.6% (2021: 5.4%).
Over the year, the Board bought back 4.7 million shares,
equating to 4.7% of the Company’s issued share capital, at
a total cost of £29.7 million and a weighted average price
of 632.2p per share. The weighted average discount at
which the shares were repurchased was 9.1%. The Board
calculates that this has added 2.9p per share to the NAV
for remaining Shareholders.
The fall in equity values in the first half
of 2022 was a global phenomenon on
the back of macro-economic
concerns related to the threat of
supply-chain issues in the post-Covid
recovery and then the impact of the
Russian invasion of Ukraine in
February 2022.
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 130 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 references
in normal market conditions.
Given the backdrop has been unfavourable for the UK
smaller companies sector as a whole, it is to be expected
that we would see the discount widen as it has across
most of our peer group. The Board remains committed to
its 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 on page 17 and a five-year chart of the movement
in the discount compared to the peer group and the
discount control mechanism threshold can be found on
page 24. The average discount for the year as a whole
was 8.2%.
10 abrdn UK Smaller Companies Growth Trust plc
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). The Company has
a £40 million revolving credit facility and a £25 million
fixed-rate loan, providing it with total borrowing facilities of
£65 million. At the year-end, £15 million of the revolving
credit facility and the £25 million fixed-rate loan were
drawn. The gross level of borrowings was offset by cash
and cash equivalents of £15.0 million resulting in net
gearing of 5.1% (2021: 5.7%).
The existing facilities will expire on 31 October 2022.
The Board has reviewed its options and a range of
proposals and is expecting to refinance the facilities
when they expire.
The Investment Team
The Board noted the announcement by abrdn on 5
September 2022 that Harry Nimmo is retiring from the
business on 31 December 2022. On behalf of the Board
and shareholders, I would like to thank Harry for all that he
has done for the Company. Harry was appointed as the
portfolio manager of the Company when Standard Life
Investments, as it then was, took on the mandate on 31
August 2003. At that time, the share price was 47.75p and
net assets were £44 million. 19 years later, the share price
was 482p and net assets are almost £500 million. With
dividends reinvested, the total return is over 12 times the
amount invested. To put this in context, the FTSE All-Share
Index has delivered a total return of less than 3 times and
the reference index has returned less than 5 times. We
would like to wish Harry a long and happy retirement.
The mantle for managing the portfolio is being passed to
Abby Glennie who has been co-manager of the portfolio
since November 2020. With Harry’s retirement, Abby will
be supported by Amanda Yeaman as deputy manager.
Their biographies are contained on page 103. The Board
has been working with Abby now for several years and is
pleased to have her and Amanda responsible for the
portfolio and is comfortable that the change in personnel
will not lead to a change of process.
The Board
There have been no changes to the Board which has now
had consistent membership since 2019. We do, however,
continue to review regularly the balance of attributes on
our Board including skills, experience and diversity in all its
forms to ensure the Board retains the right mix to carry out
its role. Following our discussions on rounding out Board
skills and enhancing diversity, we decided to participate in
the Board Apprentice programme. This has been running
for a number of years and is dedicated to increasing
diversity on boards by increasing the pool of board-ready
candidates. After interviewing a number of candidates,
we were pleased to appoint Jessica Norell Neeson in this
role for a 12-month period from May 2022. She will attend
all Board and committee meetings and will take part in
discussions when invited to do so. The role is
unremunerated.
Annual General Meeting
The Company’s Annual General Meeting (“AGM”) will take
place at 12 noon on Thursday 20 October 2022 at the
offices of abrdn plc, Bow Bells House, 1 Bread Street,
London EC4M 9HH. The meeting will include a
presentation from the Investment Manager and will be
followed by lunch. This is a good opportunity for
shareholders to meet the Board and Manager and we
would encourage you to attend. The Notice of the Meeting
is contained on pages 116 to 120.
The Company’s Annual General
Meeting (“AGM”) will take place at
12 noon on Thursday 20 October 2022
at the offices of abrdn plc, Bow
Bells House, 1 Bread Street, London
EC4M 9HH.
Continued
Chairman’s Statement
abrdn UK Smaller Companies Growth Trust plc 11
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
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 to
shareholders 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 should ensure that your votes are registered.
Outlook
Anticipating the future is never easy, but given the
severity of the economic and political turmoil that
exists, giving guidance to shareholders right now is
particularly complex.
The challenges facing Liz Truss as the UK’s new Prime
Minister are multi-fold and daunting, with inflation running
into double digits for the first time in almost 40 years,
expectation of a recession and interest rates on a rising
trajectory. Action will need to be taken urgently on the
cost-of-living crisis, most notably the rapidly rising cost of
energy, but at the time of writing the policy decisions,
which will impact the whole of the UK economy,
are unclear.
The problem for UK policy is that the root causes of these
issues are primarily driven by external events; the energy
crisis caused by the Russian invasion of Ukraine in
February coming on top of existing climate change
challenges and the effects of global policy responses to
the Covid pandemic. The aftermath of Covid has seen
significant global economic disruption and social change
which is still unfolding.
Against this backdrop, markets as a whole are likely to
remain volatile, responding to economic and geo-political
developments as they unfold. However, it is important to
remember that the Investment Manager invests in
companies and their management teams, not in markets,
and the share prices of individual companies, particularly
small cap companies, will not track the market pound for
pound. This is especially the case when the companies are
market leaders in their, often, specialist fields. As a Board,
we will be looking to ensure that the Investment Manager
maintains a laser focus on identifying the next generation
of market leading companies.
Liz Airey
Chairman
7 September 2022
12 abrdn UK Smaller Companies Growth Trust plc
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 a consistency of
performance through economic and market cycles.
Further information on the investment process is
contained on pages 31 to 33.
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 on pages 19 to 22 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.
Overview of Strate
g
y
abrdn UK Smaller Companies Growth Trust plc 13
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
The Board believes that the success of the Company is best served through the
measurement of Key Performance Indicators (“KPIs”), details of which are
included below.
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.
KPI Description
Net asset value (“NAV”) total return performance The Board measures the Company’s NAV total return performance against
the total return of the reference index (the Numis Smaller Companies plus AIM
(ex investment companies) Index) and its peer group of investment trusts.
The figures for this year and for the past three, five and ten years are shown in
the table on page 23.
Share price total return performance The Board measures the Company’s share price total return performance
against the total return of the reference index and its peer group of
investment trusts.
The figures for this year and for the past three, five and ten years are shown in
the table on page 23.
Discount/premium to NAV The Board compares the discount or premium of the Ordinary share price to
the NAV per share to the discount of the peer group and also to the threshold
of the Company’s discount target on a rolling 12 month basis.
A summary of the discount for the past ten years is included in the table in
page 25. A chart showing the discount over five years for the Company and
the peer group, measured against the discount target level, is shown in page
24. The average discount for the year as a whole was 8.2%.
Ongoing charges The Board monitors the Company’s ongoing charges ratio against prior years
and other similar sized companies in the peer group.
A summary of the ongoing charges ratio (“OCR”) for the past ten years is
included in the table in page 25. The OCR for the year ended 30 June 2022
was 0.82%, including look-through costs. This compares to the range of the
most recently reported full year OCRs, including performance fees, for
comparable investment trusts in the UK smaller companies sector of between
0.80% and 1.38%.
14 abrdn UK Smaller Companies Growth Trust plc
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 key risk was inflation and
the resultant volatility that it created in global stock
markets. In addition, recent events in Ukraine have
created 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.
Risk Mitigating Action
Strategy - the Company’s objectives or the
investment trust sector as a whole become
unattractive to investors, leading to a fall in
demand for the Company’s shares.
Through regular updates from the Manager, the Board monitors the discount/
premium at which the Company’s shares trade relative to the NAV. It also holds an
annual strategy meeting and receives feedback from the Company’s
Stockbroker and shareholders and updates from the Manager’s investor relations
team at Board meetings.
Investment performance - the appointment or
continuing appointment of an investment
manager with inadequate resources, skills or
experience, or the adoption of inappropriate
strategies in pursuit of the Company’s
objectives could result in poor investment
performance, a loss of value for shareholders
and a widening discount.
The Board meets the Manager on a regular basis and keeps investment
performance under close review. Representatives of the Investment Manager
attend all Board meetings and a detailed formal appraisal of the Manager is
carried out by the Management Engagement Committee on an annual basis.
The Board sets and monitors the investment restrictions and guidelines and
receives regular reports which include performance reporting on the
implementation of the investment policy, the investment process, ESG matters,
risk management and application of the investment guidelines.
Key person risk - a change in the key
personnel involved in the investment
management of the portfolio could impact
on future investment performance and
lead to loss of investor confidence.
The Board discusses key person risk and succession planning with the Manager
and Investment Manager on a regular basis.
The Investment Manager employs a standardised investment process for the
management of the portfolio. The well-resourced smaller companies team has
grown in size over a number of years. These factors mitigate against the impact
of the departure of any one member of the investment team.
Biographies of the team members involved with the management of the
Company’s portfolio are included on page 103.
Overview of Strate
g
y
Continued
abrdn UK Smaller Companies Growth Trust plc 15
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
Risk Mitigating Action
Share price - failure to manage the discount
effectively or an inappropriate marketing
strategy could lead to a fall in the share price
relative to the NAV per share.
The Company operates a discount control mechanism and aims to maintain a
discount level of less than 8% to the cum-income NAV under normal market
conditions. Details of the discount control mechanism are contained on page 17.
The Directors undertake a programme of inviting major shareholders to discuss
issues of governance or strategy with the Chairman or Senior Independent
Director. In addition, the Company participates in the Manager’s investment trust
promotional programme where the Manager has an annual programme of
meetings with institutional shareholders and reports back to the Board on
these meetings.
Financial instruments - insufficient oversight or
controls over financial risks, including market
price risk, liquidity risk and credit risk could result
in losses to the Company.
As stated above, the Board sets investment guidelines and restrictions which
are reviewed regularly and the Manager reports on compliance with them at
Board meetings.
Further details of the Company’s financial instruments and risk management
are included in note 17 to the financial statements.
Financial obligations - inadequate controls over
financial record keeping and forecasting, the
setting of an inappropriate gearing strategy or
the breaching of loan covenants could result
in the Company being unable to meet its
financial obligations, losses to the Company
and impact its ability to continue trading as a
going concern.
At each Board meeting, the Board reviews management accounts and receives a
report from the Administrator, detailing any breaches during the period under
review. The Board sets gearing limits and monitors the level of gearing and
compliance with the main financial covenants at Board meetings. The Company’s
annual financial statements are audited by the Independent Auditor.
The Audit Committee meets representatives from the Manager’s Compliance
and Internal Audit teams on at least an annual basis and discusses any findings
and recommendations relevant to the Company.
Regulatory - failure to comply with relevant
laws and regulations could result in fines, loss
of reputation and potential loss of investment
trust status.
The Board receives updates on relevant changes in regulation from the Manager,
industry bodies and external advisers and the Board and Audit Committee
monitor compliance with regulations by review of checklists and internal control
reports from the Manager. Directors are encouraged to attend relevant external
training courses.
Operational - the Company is dependent on
third parties for the provision of all systems and
services (in particular those of the Manager
and the Depositary) and any control failures
and gaps in their systems and services could
result in a loss or damage to the Company.
The Audit Committee reviews reports from the Manager on its internal controls
and risk management (including an annual ISAE Report) and considers
assurances from all its other significant service providers on at least an annual
basis, including on matters relating to business continuity and cyber security. The
Audit Committee meets representatives from the Manager’s Compliance and
Internal Audit teams on at least an annual basis and discusses any findings and
recommendations relevant to the Company. Written agreements are in place
with all third party service providers.
The Manager monitors closely the control environments and quality of services
provided by third parties, including those of the Depositary, through service level
agreements, regular meetings and key performance indicators.
A formal appraisal of the Company’s main third party service providers is carried
out by the Management Engagement Committee on an annual basis.
The operational requirements of the Company, including its service providers,
were subject to rigorous testing during the Covid-19 pandemic, including
increased use of online communication and out of office working and reporting.
16 abrdn UK Smaller Companies Growth Trust plc
Risk Mitigating Action
Geopolitical - the effects of geopolitical
instability or change could have an adverse
impact on stock markets and the value of the
Company’s investment portfolio.
Current geopolitical risks include the Covid-19 pandemic, climate change, the
war in Ukraine and the impact of increased inflation. The Investment Manager’s
focus on quality companies, the diversified nature of the portfolio and a
managed level of gearing all serve to provide a degree of protection in
times of market volatility.
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. During the
Covid-19 pandemic, a number of events that are usually
held physically were substituted with virtual events. 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.
Environmental, Social and Human
Rights Issues
The Company has no employees as the Board has
delegated the day to day management and
administrative functions to the Manager. There are
therefore no disclosures to be made in respect
of employees.
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 Investment Manager’s approach to ESG matters is
included on page 33. The Board supports the Investment
Manager’s approach to ESG considerations which are fully
embedded into the investment process. A detailed
explanation of the Investment Manager’s overall
approach to ESG was contained in last year’s Annual
Report and will be included on the Company’s website.
Overview of Strate
g
y
Continued
abrdn UK Smaller Companies Growth Trust plc 17
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
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.
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 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 than
five 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 on pages
14 to 16 and the steps taken to mitigate these risks.
· The Company is invested in readily-realisable listed
securities 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 as
shown on page 23.
18 abrdn UK Smaller Companies Growth Trust plc
· The Company’s level of gearing. The Company had net
gearing of 5.1% as at 30 June 2022. The Company has a
£65 million unsecured loan facility agreement with The
Royal Bank of Scotland International Limited which
matures on 31 October 2022. 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. The
Board has reviewed its options and a range of proposals
and is expecting to refinance the facility when it expires.
However, 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 typically has cash balances which,
including money market funds, at 30 June 2022
amounted to £15.0 million. These balances allow the
Company to meet liabilities as they fall due.
· The level of ongoing charges.
· 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.
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, performance will continue to be
satisfactory, 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 current events 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 2023 as it believes that this is in the best
interests of shareholders.
On behalf of the Board
Liz Airey
Chairman
7 September 2022
Overview of Strate
g
y
Continued
abrdn UK Smaller Companies Growth Trust plc 19
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
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 five
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.
Promotin
g
the Success of the Company
20 abrdn UK Smaller Companies Growth Trust plc
Promotin
g
the Success of the Company
Continued
Stakeholder How We Engage
Shareholders Shareholders are key stakeholders and the Board places great importance on
communication with them. The Board welcomes all shareholders’ views and aims to act fairly
to all shareholders. The Manager and Company’s Stockbroker regularly meet with current
and prospective shareholders to discuss performance and shareholder feedback is
discussed by the Directors at Board meetings. In addition, Directors meet shareholders at the
Annual General Meeting and the Chairman offers to meet with the Company’s larger
shareholders to discuss their views.
The Company subscribes to the Manager’s investor relations programme in order to
maintain communication channels with the Company’s shareholder base.
Regular updates are provided to shareholders through the Annual Report, Half Yearly Report,
monthly factsheets, Company announcements, including daily net asset value
announcements, and the Company’s website.
The Company’s Annual General Meeting provides a forum, both formal and informal, for
shareholders to meet and discuss issues with the Directors and Manager. The Board
encourages as many shareholders as possible to attend the Company’s Annual General
Meeting and to provide feedback on the Company.
Manager (and Investment Manager) The Investment Manager’s Review on pages 26 to 30 details the key investment decisions
taken during the year. The Investment Manager has continued to manage the portfolio and
other assets in accordance with the mandate agreed with the Company, with oversight
provided by the Board.
The Board regularly reviews the Company’s performance against its investment objective
and the Board undertakes an annual strategy review meeting to ensure that the Company is
positioned well for the future delivery of its objective for its stakeholders.
The Board receives presentations from the Investment Manager at every Board meeting
to help it to exercise effective oversight of the Investment Manager and the
Company’s strategy.
The Board, through the Management Engagement Committee, formally reviews the
performance of the Manager at least annually. More details are provided on page 54.
Service Providers The Board seeks to maintain constructive relationships with the Company’s service providers
either directly or through the Manager with regular communications and meetings.
The Management Engagement Committee conducts an annual review of the performance,
terms and conditions of the Company’s main service providers to ensure they are performing
in line with Board expectations, carrying out their responsibilities and providing value
for money.
abrdn UK Smaller Companies Growth Trust plc 21
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
Investee Companies Responsibility for 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.
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.
Through engagement and exercising voting rights, the Investment Manager actively works
with companies to improve corporate standards, transparency and accountability. Further
details are provided on page 17.
The Board monitors investments made and divested and questions the rationale for
investment and voting decisions made.
Debt Providers On behalf of the Company, the Manager maintains a positive working relationship with The
Royal Bank of Scotland International Limited, the provider of the Company’s loan facility, and
provides regular updates on business activity and compliance with its loan covenants.
Environment and Community The Board and Manager are committed to investing in a responsible manner and the
Investment Manager embeds Environmental, Social and Governance (“ESG”) considerations
into its research and analysis as part of the investment decision-making process. Further
details are provided on page 33.
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 2022. Each of these
decisions was made after taking into account the short
and long-term benefits for stakeholders.
Portfolio
The Investment Manager’s Review on pages 26 to 30
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. Accordingly, at each Board meeting
the Directors discuss performance in detail with the
Investment Manager. In addition, during the year, the
Board considered in detail how the Investment Manager
incorporates ESG issues into its research and analysis
work that forms part of the investment decision process.
As explained in more detail on page 54 during the year,
the Management Engagement Committee decided that
the continuing appointment of the Manager is in the best
interests of shareholders.
Dividends
The Board is recommending payment of a final dividend
for the year of 5.40p per Ordinary share. Following
payment of the final dividend, total dividends for the year
will amount to 8.10p per Ordinary share, an increase of
5.2% compared to the previous year.
Share Buy Backs
In accordance with the discount control policy included on
page 17, during the year the Company bought back
4,670,519 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.
22 abrdn UK Smaller Companies Growth Trust plc
Promotin
g
the Success of the Company
Continued
‘Meet the Manager’ Presentation
In order to give shareholders an opportunity to meet the
Board and the Investment Manager, the Board held an
investor presentation in the Manager’s office in London on
20 May 2022. The event was well attended and a number
of questions were asked and responded to by the
Investment Manager.
The Board places a great deal of importance on
communications with shareholders and believes that
events such as this provide good opportunities for it to
receive feedback from shareholders.
Board Apprentice
To help grow the pool of young diverse candidates
available to serve as non-executive directors of listed
companies, during the year the Board conducted a
process that resulted in the recruitment of a Board
Apprentice, Jessica Norell Neeson, for a period of 12
months. Further details are provided in the Chairman’s
Statement on page 10.
On behalf of the Board
Liz Airey
Chairman
7 September 2022
abrdn UK Smaller Companies Growth Trust plc 23
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
Performance (total return)
1 year return 3 years return 5 years return 10 years return
% % % %
Net asset value
AB
–27.3 +2.7 +26.9 +184.1
Share price
B
–34.3 –3.7 +13.1 +159.9
Reference Index –19.0 +10.1 +10.8 +133.7
Peer Group weighted average (NAV) –22.7 +7.4 +15.6 +167.7
Peer Group weighted average (share price) –28.4 +2.9 +16.9 +189.8
A
Cum-income NAV with debt at fair value.
B
Considered to be an Alternative Performance Measure (see pages 100 and 101).
Source: Thomson Reuters Datastream
Long Term Total return of NAV v Share Price v Reference Index
(rebased to 100 at 31 August 2003)
100
200
300
400
500
600
700
800
900
1000
1100
1200
1300
1400
1500
1600
1700
1800
1900
2000
2100
2200
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22
Source: Thomson Reuters Datastream
Share price total return Net asset value total return Reference Index total return
Performance
24 abrdn UK Smaller Companies Growth Trust plc
Premium/(discount) of Share Price to NAV v Peer Group
Five years ended 30 June 2022
-15%
-10%
-5%
0%
5%
30/06/17 29/06/18 28/06/19 30/06/20 30/06/21 30/06/22
Source: Thomson Reuters Datastream
Company premium/(discount) Peer group discount Discount control mechansim threshold
Performance
Continued
abrdn UK Smaller Companies Growth Trust plc 25
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
Ten Year Financial Record
Year to 30 June 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Per Ordinary share (p)
Net revenue return 4.58 5.05 6.76 6.76 6.42 7.24 8.80 6.74 6.43 9.07
Ordinary dividends paid/proposed 4.05 4.50 5.80 6.60 6.70 7.00 7.70 7.70 7.70 8.10
Net asset value
A
281.58 298.92 336.89 345.43 456.60 552.93 539.54 527.73 737.97 530.37
Share price 280.50 281.25 300.00 316.00 431.00 500.00 491.50 482.00 698.00 453.00
Discount(%)
A
0.4 5.9 10.9 8.5 5.6 9.6 8.9 8.7 5.4 14.6
Ongoing charges ratio (%)
B
1.28 1.19 1.19 1.13 1.08 1.04 0.90 0.91 0.88 0.82
Gearing ratio (%)
C
8.8 (4.6) 4.1 3.6 1.7 3.6 1.5 (0.3) 5.7 5.1
Shareholders’ funds (£m)
D
193 219 243 241 324 408 543 528 728 499
Revenue reserves (£m)
E
3.69 4.34 5.83 6.50 6.26 8.30 10.87 8.80 7.53 8.81
A
Calculated with debt at par value and diluted for the effect of Convertible Unsecured Loan Stock conversion from 31 March 2011 until 30 June 2017. From 30 June 2018, net asset
value is calculated with debt at par value.
B
Calculated as an average of shareholders’ funds throughout the year and in accordance with updated AIC guidance issued in October 2020, to include the Company’s share of
costs of holdings in investment companies on a look-through basis.
C
Net gearing ratio calculated as debt less cash invested in AAA-rated money market funds and short-term deposits divided by net assets at the year end.
D
Increase in 2018 included the effect of the merger with Dunedin Smaller Companies Investment Trust PLC.
E
Revenue reserves are reported prior to paying the final dividend for the year.
26 abrdn UK Smaller Companies Growth Trust plc
The net asset value (“NAV”) total return for the Company
for the year ended 30 June 2022 was -27.3%, while the
share price total return was -34.3%. 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 -
19.0%. Over the same period, the FTSE 100 Index of the
largest UK listed companies delivered a total return of 5.8%.
abrdn has managed the Company since 1 September 2003.
The Company’s share price at that time was 47.75p,
compared to 453.0p at 30 June 2022. The share price total
return over that period was 1,153.1% compared with the
reference index’s total return of 452.2%. The FTSE 100
Index’s total return was 245.3% over the same period.
Equity Markets
The UK stock market, as represented by the FTSE All-
Share Index, gained a small amount of ground over the
year under review with a total return of 1.6%,
outperforming many of its international counterparts. The
picture is more mixed beneath the positive headline figure.
Whilst the FTSE 100 Index of the UK’s largest companies
proved resilient, smaller companies, which are typically
more focused on the domestic economy, came under
significant pressure from the start of 2022. Investors
continued to grapple with the fallout from the Covid-19
pandemic during the spring of 2021. Nonetheless, the
easing of lockdown restrictions following an effective
vaccine rollout built economic and stock market
momentum for most of the period until the end of 2021,
other than occasional market sell-offs as Covid-19 cases
flared up.
Investors generally brushed off the threat of the Omicron
variant at the end of 2021. The highly transmissible variant
spread globally in December, with record daily cases in
the US and most of Europe.
It has been a tough time for global stock markets in 2022,
with investors rattled by soaring inflation, rising interest
rates and the shock of the Russian invasion of Ukraine.
Tensions escalated in Eastern Europe in early February
when Russia deployed its armed forces to Ukraine’s
borders. However, the sharpest market falls came on 24
February when the invasion commenced. The macro
driven impacts of steep inflation and rising interest rates
have started to impact demand, particularly across
consumer exposed areas, with a squeeze on disposable
incomes, and a cost of living crisis for many in the UK on
lower incomes. Whilst the UK large cap stock market has
displayed relative resilience, small cap markets have been
challenging. The FTSE 100 Index is home to many energy
and mining companies, whose shares have benefited
from high commodity prices, particularly after the Russian
invasion. The small cap market in the UK has sold off
sharply however, driven by the ‘risk-off’ trade where
investors typically make a flight towards the perceived
safety of larger cap areas. Smaller Companies also do not
benefit from the support of the large weightings in areas
such as resources, banks and energy that are prevalent
within the FTSE 100 Index.
Inflation has continued to rise in the UK, with annual
consumer price inflation hitting a 40-year high of 9.4% for
the 12 month period to 30 June 2022. Soaring energy costs
compounded by the war in Ukraine, post-pandemic
supply problems and labour shortages are among the
main reasons for escalating prices. The Bank of England
(“BoE”) reacted to rising inflation by steadily increasing
base rates. Most recently, in August, it increased the rate
by 50 basis points (“bps”), taking it to a 13-year high of
1.75%. Further interest rate rises are expected this year.
The period was a challenging one for
performance for the Company,
particularly during the second half of
the financial year, with our style being
out of favour in the market as “top
down” global macro factors have
taken the lead over “bottom up” stock
picking.
Performance
The period was a challenging one for performance for the
Company, particularly during the second half of the
financial year, with our style being out of favour in the
market as “top down” global macro factors have taken the
lead over “bottom up” stock picking. Smaller companies
markets have been difficult, seeing dramatic falls during
2022 after having been relatively stable in the second half
of 2021. The first half of the period was stronger for our
process, with quality growth names holding up well given
the fragility and stop/start of the Covid-19 recovery.
However, there has been a strong value tilt to the market
since the turn of the year, with investors favouring
cheaper, value driven companies. Profit taking has
occurred extensively in our typical quality growth
businesses despite their earnings resilience and continuing
growth.
Investment Mana
g
er’s Review
abrdn UK Smaller Companies Growth Trust plc 27
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
It is disappointing that our investment process has not
provided resilience in a bear market, which has been
typical in the past. The difference this time has been the
market’s focus on the “top-down”, as inflation has risen,
exacerbated by the implications of the continuing war in
Ukraine.
The chart below goes some way to highlight the
environments where, historically, we have relatively
underperformed, and our investment process and style
have been out of favour. These are typically environments
which are macro driven, and where top-down factors are
the key drivers of stock markets. Often, these are in the
first periods of recovery following a market collapse, when
the market favours value and recovery stocks, economic
growth is on an improving pathway and markets typically
care less about quality and areas such as balance sheet
strength. 2022 has been a different environment, where
we have seen a strong sell off, but characterised by a
market focused on inflation and interest rate rises, and an
economic environment where investors have discounted
growth stocks.
The five leading performers during the year were
as follows:
· Telecom Plus 118bps* (shares +72%): supportive end
market conditions given the exit of low-priced
competitors from the industry, and the strong position
the nPower contract has in Utility Warehouse’s pricing
offering. Sales force fully engaged again post Covid-19.
Strong cash generation and dividends. An investment
case study for Telecom Plus is included on page 42.
· Safestore 90bps* (+12%): solid demand in the self-
storage industry with the constant of the 3Ds (divorce,
death, dislocation). Rate increases and strong utilisation
have ensured consistent earnings and dividend growth.
· Alpha Financial Markets 77bps* (+10%): continues to take
market share as consultant specialists in asset
management, as well as expanding into insurance and
alternatives through the acquisition of Lionpoint.
28 abrdn UK Smaller Companies Growth Trust plc
· Clipper Logistics 51bps* (+4%): strong growth through
new and improving relationships with a range of
retailers, given its full service offering and strong
customer service proposition. Clipper was bid for by
GXO Logistics during the year.
· Hilton Food 40bps* (-6%): resilient demand in the food
industry, with a broad global presence, and with strong
contracts and relationships with the supermarkets
ensuring margin protection. Hilton has expanded in the
fish protein market through acquisitions.
The five worst performers during the year were as follows:
· Gamma Communications -102bps* (shares -46%):
disappointing growth in Europe given a slow recovery in
corporate decision making and investment post Covid-
19. However, Gamma offers a reliable and resilient
revenue stream with high visibility, and continues to
innovate in the latest service offerings.
· XP Power -94bps* (-49%): has navigated the challenges
of the supply chain and Vietnam factory challenges well,
to ensure continued delivery of products to customers.
Shares were hit by the loss of a legal dispute, which
came through an acquisition.
· Future -90bps* (-45%): has continued to deliver strong
earnings growth, however the shares have been hit by
sentiment around consumer exposure, as well as
headwinds from energy and paper costs. Future
continues to drive growth opportunities, both organically
and through bolt on acquisitions.
· Impax Asset Management -82bps* (-46%): despite
resilient asset inflows, the shares have been de-rated
given the earnings downgrades from lower market
levels. Impax continues to be a highly respected asset
manager in the ESG space, which remains a growth
market.
· GB Group -80bps* (-52%): whilst the Company’s
performance has remained solid, the shares were hit by
a poorly managed placing to fund the Acuant
acquisition. Since then, there has been a continued solid
execution from the business, and good integration of
the deal.
(* relative to the reference index)
Dealing and Activity
Turnover remained modest during the year, not out of line
with previous periods. Over the year we have added nine
new positions into the portfolio, and exited ten holdings.
We participated in two IPOs during the year; Big
Technologies, the electronic monitoring tag business
predominantly for the criminal justice system, operating
globally; and LBG Media, the digital media business
operating under brands including Lad Bible. Both are
founder run businesses, in growth end markets, where
they have strong market positions. LBG Media is a leading
multi-brand, multi-channel digital content publisher, with a
global audience of 264 million social media followers. As
well as creating and distributing bespoke content through
its ten brands, LBG also work directly with brands, creating
content as a producer. Big Technologies produces
industry leading electronic monitoring systems, and
through its long-term contracts with governments and
justice systems globally, has strong revenue visibility. New
positions included Volution (leading supplier of ventilation
products), YouGov (data services provider, a key business
globally with products such as BrandIndex, and Profiles),
Marlowe (UK leader in business-critical services and
software), and Tatton Asset Management (discretionary
fund management platform delivering strong growth).
We also added new holdings in Watkin Jones (developer,
builder and manager of new homes for rent across the UK
and Ireland), Alliance Pharma (leading international
healthcare business) and Serica Energy (North Sea
producer of natural gas).
Turnover remained modest during the
year, not out of line with previous
periods. Over the year we have added
nine new positions into the portfolio,
and exited ten holdings.
Other significant purchases included CVS (veterinary
practices and services) where we see improving
execution and structural growth trends, Robert Walters
(global recruitment company) which is well positioned in a
positive environment given active recruitment markets
and candidate confidence to move, and Hollywood Bowl
(ten pin bowling and mini-golf leisure) which is delivering
strong trading and cash generation post Covid-19.
We exited three holdings in the portfolio which were
subject to bid approaches; Sumo (video games
development) which was acquired by Tencent which
already held 9.99% of the shares, Sanne (fund
administration) which was acquired in a competitive bid
process won by Apex), and Clipper Logistics (logistics for
the retail industry) which was bid for by US peer GXO
Investment Mana
g
er’s Review
Continued
abrdn UK Smaller Companies Growth Trust plc 29
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
Logistics in a cash and shares deal. As holders, we would
have ended up with US listed equity so we exited the
holding following the bid.
We exited the holdings in AO World and Avon Protection
after they initially reported earnings downgrades, from
fundamental operational challenges in their businesses. In
neither case did we foresee a near term resolution, so
moved on from these investments. These proved to be the
correct decisions, with both companies subsequently
experiencing continued downgrades and strategic reviews.
Trustpilot and Victorian Plumbing are both IPOs that we
took part in, but we have since moved on. Trustpilot
management are not showing a focus and discipline on
profitability, rather choosing to focus on top line growth,
which does not sit with our investment process. Victorian
Plumbing profits were heavily impacted by supply chain
disruptions and tight consumer spending.
We exited James Fisher (marine services) where
management change and control of the business were a
concern, and AB Dynamics (simulation and testing for
autonomous vehicles) where the near term looked
challenging and required investment. We also chose to
exit RWS following the departure of the CEO, and the
acquisition of SDL where we were unsure of the natural fit.
We also reduced exposure to AJ Bell over the period, with
the platform industry businesses all requiring investment,
which pressures margins in a declining fee industry.
Sector Exposure
The sector exposures remain broadly consistent to the
position at the interim stage. The leading sector exposures
are to Financials, Media, Software and Industrial Support
Services. We have reduced exposure to Financials,
through reducing exposure to asset managers. We have
also reduced exposure to Software, but have increased
the weighting to Media where the portfolio holds a diverse
mix of companies. We have increased the exposure in
Telecoms through increasing exposure to Telecom Plus
(multi utility provider to consumers). The portfolio
continues to have low exposures to Resources, Personal
Goods, Electronics, and Construction.
Discount
As at 30 June 2022, the cum-income discount to NAV
stood at 14.6%. The simple average discount for the close
peers as a whole was 13.6%. Whilst we have been
disappointed with the widening of the discount during the
year, it has not been out of line with the sector. As
explained in more detail in the Chairman’s Statement, the
Company has been active in buying back shares.
The leading sector exposures are to
Financials, Media, Software and
Industrial Support Services. The
Portfolio continues to have low
exposures to Resources, Personal
Goods, Electronics, and Construction.
Gearing
The level of gearing at 30 June 2022 was 5.1%. We expect
gearing to remain around current levels, reflecting our
positive view over the medium to long-term of the asset
class. We have held higher cash positions in recent
months due to our caution of a short-term market sell-off.
Dividends
The dividend outlook of the Company, seen through its
income generation from underlying holdings, improved
through the year. The earnings resilience and growth
being delivered by the companies in the portfolio is being
reflected in the dividend growth they are providing. The
confidence in the outlooks for the companies has also
been emphasised by management teams’ conviction in
continuing strong dividend payments to shareholders,
aided by balance sheet strength.
Whilst companies have broadly returned to their pre-
Covid dividend policies, the portfolio, at time of writing,
held ten positions which were non-dividend payers during
the year. These companies constitute around 15% of the
portfolio. Hotel Chocolat has focused on continued
investment in its business for growth post Covid and
therefore not returned to paying dividends yet. However,
many of the others are more recent listings to the stock
market over the past couple of years and, whilst they have
the potential to pay dividends in the future, are not yet
doing so.
One risk, if we do enter a recessionary period, is that the
combination of more cautious attitudes, as well as
earnings pressures in some markets, may see a more
challenging dividend environment.
30 abrdn UK Smaller Companies Growth Trust plc
Outlook
At the time of writing, the market is dominated by macro
conditions, particularly the direction of interest rates and
inflation. Control of Covid-19 remains an issue in some
regions, particularly China. The Russian invasion of Ukraine
sadly rumbles on. The combination of these factors
creates a very uncertain environment, which continues to
see markets selling off.
We see two potential environments emerging, and in both
scenarios we believe the Company has a place to play.
We remain confident that our
unchanged quality, growth and
momentum investment process
generates strong returns from smaller
companies in the long-term. Our
process has been seasoned by four
full economic cycles.
In a recessionary environment, or continued low
economic growth, we believe the market will look to move
more towards quality; resilience, reliability, visible revenue
streams and strong balance sheets. In which case, on a
relative basis, our Quality focus should become
increasingly attractive to the market. In that economic
situation where growth becomes scarcer, what growth is
around tends to become more valuable. Our ability to
identify companies which can deliver sustained earnings
growth in that environment should be rewarded. In the
Global Financial Crisis, the market cared about quality and
earnings; it did not care about value seen through the
underperformance of perceived cheap stocks.
In a recovery phase, small and mid-cap stocks tend to
lead that market recovery, and we believe the outlook for
the asset class would be attractive. Particularly in this
cycle, we have seen small and mid-caps in the UK heavily
underperform large caps. This disparity has been wider
than seen in other geographical markets, accentuated by
the sector composition of FTSE 100 Index towards oil and
gas, energy, resources and banks. In that environment, we
believe the small cap asset class can produce some
attractive return potential, as markets recover and as the
disparity to large cap narrows.
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.
During the banking crisis in November 2008, it looked quite
likely that the world banking system was in danger of
collapse. 2009, however, saw a swift recovery with super
normal profits available for the brave (it must be stressed,
however, that future performance does not reflect past
performance). The Company’s discount to NAV is at a
level not seen since 2009. It is also the case that the share
price has traded at a premium to the NAV from time to
time over the past decade.
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.
Our investment process features quality and resilience. It is
fair to say that, so far in this downturn, the holdings in the
portfolio are, on the whole, trading well, and some indeed
are seeing earnings forecast upgrades even in these
difficult times. Markets really need to see inflation come
under control and the shape of any potential imminent
recession. A resolution to the very serious geo-political
issues and a proper end to the Covid-19 emergency in the
Far East would also be helpful. Clarity, particularly, on the
first issue could see a sharp turn in markets. However, we
may be some months away from that occurring.
We remain confident that our unchanged Quality, Growth
and Momentum investment process generates strong
returns from smaller companies in the long-term. Our
process has been seasoned by four full economic cycles.
Harry Nimmo and Abby Glennie
abrdn
7 September 2022
Investment Mana
g
er’s Review
Continued
abrdn UK Smaller Companies Growth Trust plc 31
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
abrdn UK Smaller Companies Growth
Trust plc offers an actively managed
portfolio of equity shares of smaller
and mid-sized companies listed in the
UK. Over the longer term, smaller
company returns have outstripped
those of their large-cap peers.
Management
The Company’s Manager is abrdn Fund Managers Limited
(“aFML”, the “AIFM” or the “Manager”). aFML is a wholly
owned subsidiary of abrdn plc. 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. Harry Nimmo
has been the Portfolio Manager since 2003 and Abby
Glennie was appointed as Co-manager in November
2020. They are part of a team focusing on investing in
smaller and mid-sized companies.
Investment Philosophy and Process
The Board has identified that abrdn has a proven and
repeatable investment process, which has delivered
strong returns to shareholders over the last 19 years. The
investment process adheres to the abrdn Smaller
Companies’ Quality, Growth and Momentum led
philosophy. The Investment Manager aims to select lower
risk smaller companies in growing markets where
business momentum is positive, predictable and
improving. The Investment Manager has a long-term
investment horizon, aiming to maximise returns by running
winners in the long-term and cutting losers. The
investment process embeds abrdn’s Environmental, Social
and Governance principles.
The Matrix
In managing the Company’s investment portfolio, the
Quality, Growth and Momentum philosophy is enhanced
by using abrdn’s proprietary screening tool, ‘The Matrix’, to
focus research efforts and the stock selection process.
The Matrix is a quantitative screening tool assessing
potential and current investments on 12 separate proven
indicators of financial performance. It is a powerful tool in
helping the Investment Manager identify a shortlist of
investable stocks for further analysis and monitoring the
performance and prospects of the portfolio. Stocks that
are identified in this way are then subjected to further
analysis and may be selected for the portfolio following
discussions with company management.
Investment Process
32 abrdn UK Smaller Companies Growth Trust plc
When building a portfolio of smaller
companies, the Investment Manager
screens stocks using the Matrix and
also considers a number of qualitative
factors to help identify the best
investment opportunities.
1. Sustainable growth
Companies in the portfolio will often produce niche
products or services where demand is forecast to rise as
these characteristics are the most predictive of future
earnings and dividend growth.
2. Quality
The strength of each company’s relationships with its
customers or clients, the existence and importance of
long-term contracts and the degree to which the
company has any element of pricing power is important
as it allows the company to pass on any cost increases
and thereby maintain margins. The Investment Manager
will typically avoid companies with high or unsustainable
levels of debt.
3. Buy for the long-term
Identify the great companies of tomorrow and then hold
them for the long-term. This reduces the financial drag of
high trading volumes.
4. Concentrate the effort
The Matrix helps identify the likely candidates for inclusion
in the portfolio and reduces the risk that effort is spent on
stocks that will not fulfil the criteria for inclusion within
the portfolio.
5. Management longevity
Founders retaining positions of authority within the
companies after flotation, along with longevity of tenure
by CEOs are a positive signal.
6. Valuation is secondary
Invest in companies which demonstrate positive earnings
momentum as the team believes that it is a reliable
predictor of future performance.
Investment Process
Continued
abrdn UK Smaller Companies Growth Trust plc 33
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
Although environmental, social and
governance (“ESG”) factors are not
the over-riding criteria in relation to
the investment decisions taken by the
Investment Manager, significant
prominence is placed on ESG and
climate related factors throughout the
investment process.
ESG Factors
The Investment Manager considers ESG risks and
opportunities for all of its investments and thus, ESG
considerations are inextricably embedded into the
investment process in order to achieve a successful and
sustainable performance for the longer term. There is a
broad understanding within abrdn and the Smaller
Companies Team that a full and thorough assessment of
ESG factors allows better investment decisions to be
made that lead to better outcomes for clients; with ESG
aspects considered alongside other financial and
fundamental factors in order to make the best possible
investment decisions at a stock picking and at a portfolio
construction level.
ESG analysis is a core constituent in the “Quality” analysis
of the team’s fundamental research. Especially for smaller
companies, both risks and opportunities matter, and thus
the research approach and analysis reviews this
accordingly. All of the team’s equity analysts are required
to carry out an ESG quality assessment which will be
reflected in the research note provided for each of the
companies under coverage.
The Smaller Companies Team has a very close
relationship with the ESG specialists within abrdn, while at
the same time having an on-desk ESG analyst to assist in
the research process and ESG engagements with
companies. Through the utilisation of third party provided
research such as MSCI and, more recently abrdn’s in-
house ESG rating tools, the team is able to identify, where
appropriate, leaders and laggards, areas of weakness and
areas of strength. Ratings processes for smaller
companies can be less accurate given data availability
and coverage, and therefore the engagement and
fundamental research the Investment Manager and ESG
equity analyst do with the investee companies is critical in
adding value and ensuring the most important ESG risks
and opportunities are well identified. Given the
importance of ESG matters, these factors are reviewed on
an ongoing basis in addition to monitoring companies’
actions to assess the need for further engagement and/or
changes to the internal investment view. Finally, as part of
broader stewardship activities, the team participates
actively in the voting process of the holdings, in line with
best practice.
34 abrdn UK Smaller Companies Growth Trust plc
Portfolio
Investments in the Food
Producers sector include
Hilton Food and Cranswick.
abrdn UK Smaller Companies Growth Trust plc 35
The Investment Manager aims to select
lower risk smaller companies in growing
markets where business momentum is
positive, predictable and improving. The
Investment Manager has a long-term
investment horizon, aiming to maximise
returns by running winners in the long-
term and cutting losers.
36 abrdn UK Smaller Companies Growth Trust plc
As at 30 June 2022
Safestore
Kainos
Safestore is a self-storage business
operating in the UK and France.
Kainos is a digital services company
offering information technology products
and services to clients in a range of
markets, including government,
healthcare and financial services.
Telecom Plus
Alpha Financial Markets
Telecom Plus is a multi-utility provider to
UK consumers, operating through a
direct sales channel.
Alpha Financial Markets is a founder-led
consultancy firm, with a focus on asset
management and insurance industries. It
is UK and US focused and is growing
through organic growth and
complementary accretive bolt
on acquisitions.
Hilton Food
Cranswick
Hilton Food is a founder-run beef and fish
packer. It works closely with food
retailers across Europe and Australasia.
Cranswick is a high quality vertically
integrated pork and chicken products
company operating in the UK.
Focusrite
Mortgage Advice Bureau
Focusrite provides software and
hardware for audio content creation and
is a global leader in its market.
Mortgage Advice Bureau is a leading
mortgage network as well as the UK's
most recognised intermediary network
of advisers.
Future
Ergomed
Future publishes special-interest
consumer magazines, applications
and websites.
Ergomed provides specialised services to
the pharma industry, around clinical
research and regulatory demands.
Ten Lar
g
est Investments
abrdn UK Smaller Companies Growth Trust plc 37
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
As at 30 June 2022
Valuation Total Valuation
2022 portfolio 2021
Company Sector £’000 % £’000
Safestore Real Estate Investment Trusts 21,795 4.2 19,471
Kainos Software and Computer Services 21,199 4.0 30,624
Telecom Plus Telecommunications Service Providers 20,999 4.0 9,706
Alpha Financial Markets Industrial Support Services 20,033 3.8 18,451
Hilton Food Food Producers 18,858 3.6 20,313
Cranswick Food Producers 14,181 2.7 19,659
Focusrite Leisure Goods 14,143 2.7 16,344
Mortgage Advice Bureau Finance and Credit Services 13,733 2.6 16,634
Future Media 13,377 2.6 37,256
Ergomed Pharmaceuticals and Biotechnology 13,189 2.5 13,338
Top ten investments 171,507 32.7
XP Power Electronic and Electrical Equipment 13,121 2.5 26,674
Diploma Industrial Support Services 13,064 2.5 18,621
Bytes Technology Software and Computer Services 12,934 2.5 17,141
Marshalls Construction and Materials 12,567 2.4 16,733
Next 15 Communications Media 12,477 2.4 14,722
JTC Investment Banking and Brokerage Services 12,196 2.3 11,861
Watches of Switzerland Personal Goods 12,018 2.3 12,992
Sirius Real Estate Real Estate Investment and Services 11,855 2.3 13,427
discoverIE Group Technology Hardware and Equipment 11,662 2.2 17,266
Gamma Communications Telecommunications Service Providers 11,110 2.1 31,807
Top twenty investments 294,511 56.2
Morgan Sindall Construction and Materials 10,896 2.1 12,900
Hill & Smith Industrial Metals and Mining 10,841 2.1 14,011
Auction Technology Software and Computer Services 10,204 1.9 15,414
Midwich Industrial Support Services 10,012 1.9 10,082
GlobalData Media 9,593 1.8 15,479
Treatt Chemicals 8,921 1.7 12,769
CVS Consumer Services 8,715 1.7 7,145
Big Technologies Software and Computer Services 8,701 1.7 –
GB Group Software and Computer Services 8,570 1.6 16,628
Impax Asset Management Investment Banking and Brokerage Services 8,451 1.6 22,322
Top thirty investments 389,415 74.3
Investment Portfolio
38 abrdn UK Smaller Companies Growth Trust plc
As at 30 June 2022
Valuation Total Valuation
2022 portfolio 2021
Company Sector £’000 % £’000
Robert Walters Industrial Support Services 8,363 1.6 7,302
4imprint Media 8,336 1.6 8,155
Big Yellow Real Estate Investment Trusts 8,036 1.5 8,005
Henry Boot Real Estate Investment and Services 7,942 1.5 7,011
Hollywood Bowl Travel and Leisure 7,923 1.5 3,554
Games Workshop Leisure Goods 7,770 1.5 18,736
Intermediate Capital Investment Banking and Brokerage Services 7,370 1.4 13,682
Team 17 Leisure Goods 7,264 1.4 17,502
Mattioli Woods Investment Banking and Brokerage Services 6,118 1.2 6,380
Marlowe Industrial Support Services 5,861 1.1 –
Top forty investments 464,398 88.6
Liontrust Asset Management Investment Banking and Brokerage Services 5,769 1.1 14,567
Jet2 Travel and Leisure 5,731 1.1 7,482
Hotel Chocolat Food Producers 5,513 1.0 4,327
Moonpig Retailers 4,685 0.9 4,900
AJ Bell Investment Banking and Brokerage Services 4,663 0.9 14,052
Inspecs Personal Goods 3,703 0.7 5,481
Gooch & Housego Technology Hardware and Equipment 3,649 0.7 5,982
Motorpoint Retailers 3,640 0.7 6,701
Serica Energy Oil, Gas and Coal 3,483 0.7 –
LBG Media Media 3,451 0.7 –
Top fifty investments 508,685 97.1
Watkin Jones Household Goods and Home Construction 2,900 0.5 –
Tatton Asset Management Investment Banking and Brokerage Services 2,555 0.5 –
Volution Construction and Materials 2,458 0.5 –
YouGov Media 2,265 0.4 –
Molten Ventures (previously
known as Draper Esprit)
Investment Banking and Brokerage Services 2,211 0.4 –
Alliance Pharma Pharmaceuticals and Biotechnology 1,819 0.4 –
Gear4Music Leisure Goods 1,244 0.2 9,321
Total portfolio 524,137 100.0
All investments are equity investments.
Investment Portfolio
Continued
abrdn UK Smaller Companies Growth Trust plc 39
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
As at
30
June
2022
Portfolio wei
g
htin
g
2022 2021
% %
Basic Materials 3.8 3.5
Chemicals 1.7 1.7
Industrial Metals and Minin
g
2.1 1.8
Consumer Discretionary 24.7 27.4
Consumer Services 1.7 0.9
Household Goods and Home Construction 0.5 –
Leisure Goods 5.8 9.2
Media 9.5 9.8
Personal Goods 3.0 2.4
Retailers 1.6 3.6
Travel and Leisure 2.6 1.5
Consumer Staples 7.3 5.8
Food Producers 7.3 5.8
Ener
g
y 0.7 –
Oil, Gas and Coal 0.7 –
Financials 12.0 15.8
Finance and Credit Services 2.6 2.2
Investment Bankin
g
and Brokera
g
e Services 9.4 13.6
Health Care
2.9 1.7
Pharmaceuticals and Biotechnolo
g
y 2.9 1.7
Industrials 18.4 19.7
Aerospace and Defence – 0.8
Construction and Materials 5.0 3.9
Electronic and Electrical Equipment 2.5 3.5
Industrial En
g
ineerin
g
– 0.3
Industrial Support Services 10.9 11.0
Industrial Transportation – 0.2
Real Estate 9.5 6.3
Real Estate Investment and Services 3.8 2.7
Real Estate Investment Trusts 5.7 3.6
Technolo
g
y 14.6 14.4
Software and Computer Services 11.7 11.4
Technolo
g
y Hardware and Equipment 2.9 3.0
Telecommunications 6.1 5.4
Telecommunications Service Providers 6.1 5.4
Total 100.0 100.0
Sector Distribution of Investments
40 abrdn UK Smaller Companies Growth Trust plc
24.7%
18.4%
14.6%
12.0%
9.5%
7.3%
6.1%
3.8%
2.9%
0.7%
Consumer Discretionary
Industrials
Technology
Financials
Real Estate
Consumer Staples
Telecommunications
Basic Materials
Health Care
Energy
Sector allocation 2022
27.4%
19.7%
15.8%
14.4%
6.3%
5.8%
5.4%
3.5%
1.7%
Sector allocation 2021
Consumer Discretionary
Industrials
Financials
Technology
Real Estate
Consumer Staples
Telecommunications
Basic Materials
Health Care
Investment Portfolio by Sector
abrdn UK Smaller Companies Growth Trust plc 41
Strategic Report Governance Overview General Portfolio Corporate Information Financial Statements
66.7%
25.3%
6.6%
1.4%
Market cap exposure 2022
Numis Smaller Companies plus AIM (ex investment companies)
FTSE 250*
FTSE AIM*
FTSE 100*
57.7%
28.8%
10.9%
1.8%
0.8%
Market cap exposure 2021
Numis Smaller Companies plus AIM (ex investment companies)
FTSE 250*
FTSE AIM*
FTSE 100*
Other**
* Consists of holdings which are not constituents of the Numis Smaller Companies plus AIM (ex investment companies) Index.
** Companies which have come to the market since the last rebalancing of the above indices
Market Cap Exposure
42 abrdn UK Smaller Companies Growth Trust plc
Telecom Plus
As the UK’s only fully integrated multi-service provider,
Telecom Plus derives significant ongoing operating
efficiencies by spreading a single set of overheads across
multiple revenue streams it receives from its customers.
The business has a unique route to market that uses a
highly motivated network of around 48,000 self-employed
partners and word of mouth to drive customer numbers.
Trading under the brand name ‘Utility Warehouse’, the
customer proposition is compelling. The company bundles
together customers’ home services - energy, broadband,
mobile and insurance - into one, great value, monthly bill,
saving customers time and money by providing all their
home services in one. The company has a unique buying
contract with npower that works on the basis of a circa
15% discount to the price cap, so effectively moves with
the cap. This means the company’s profit increases as the
price increases. We are obviously in unprecedented times
and so account will need to be taken of any government
decisions to protect households from price increases, but
the Investment Manager believes that the outcome should
be broadly unchanged for Telecom Plus.
General public perception of utility markets and providers
is changing, and switching suppliers to achieve short-term
savings has become just one factor to be considered,
alongside the stability and continuity of supply (especially
in relation to broadband). The energy supply market has
also gone through fundamental change, with half of the
suppliers ceasing to trade last year and Ofgem
recognising that a reset is required. Now, Ofgem will no
longer allow businesses to be funded by customer
deposits. There will be far greater regulatory scrutiny of
new market entrants - a marked contrast to the previous
‘free-for-all’ regime. Telcom Plus’s business model should
be ideally placed to succeed in these market conditions.
Against this backdrop, the Investment Manager believes
that the business is at the start of a material upgrade
cycle. Telecom Plus has a 2.5% share of UK households, so
there is considerable space for growth. Market share
gains are likely to be organic and achieved by leveraging
the partner network.
As a sizeable supplier of electricity and gas to households
throughout the UK, the company has a significant role to
play in the transition to net zero. Recognising the
challenge ahead, management is fully committed to
playing an active part in reducing the company’s impact
on the climate. Management’s ambitions and
commitments align with the UN Sustainable
Development Goals.
Investment Case Studies
abrdn UK Smaller Companies Growth Trust plc 43
Watches of Switzerland
The market for luxury brands is largely immune from the
vagaries of economic cycles and so offers investors a
source of steady and reliable returns. Close relationships
with its high-quality brand suppliers, an ambitious
management team and clear ESG commitments
combine to ensure that Watches of Switzerland (“WOS”)
continues to operate impressively.
WOS operates in a relatively stable market where
demand far outstrips supply. The average waiting list for
the Rolex, Patek Philippe, Cartier and Breitling
masterpieces it sells is often measured in years. Luxury
watches never go out of fashion and, despite their hefty
price tags, demand is largely immune from dips in
economic prosperity.
The success of UK-based WOS has been built by the
management team as painstakingly as Swiss
watchmakers craft the timepieces that the company sells.
WOS nurtures very close relationships with leading watch
brands and demonstrates its commitment to these
relationships through the outstanding customer service it
offers to watch owners. In fact, WOS is an authorised
dealer for more Swiss brands than any other retailer in the
UK. Its 2,000-strong workforce is based at stores,
warehouses and offices in the UK and US. The company is
now expanding further into Europe and into selling
branded jewellery.
The Investment Manager added the holding to the
portfolio at the beginning of 2021, impressed by the quality
of the management team and clear evidence of its
leadership succession planning. Management has
displayed both operational talent and strong investor
communications, enabling the Investment Manager to
regularly discuss with the team the challenges it faces,
such as the evolution of smartwatches and how it plans to
continue building the business.
The company scrutinises its supply chain to ensure there is
sustainability and transparency. Luxury goods such as
expensive watches fit the circular economy model well,
and the pre-owned market for them is buoyant. As a
result, coveted and long-lasting timepieces avoid the
‘make, use, dispose’ pattern familiar across much of the
retail sector. Instead, each watch’s extended lifespan
reduces the need to constantly replenish product ranges.
This eases the depletion of the planet’s raw-material
sources and cuts down the ‘carbon miles’ required for
their production and distribution.
44 abrdn UK Smaller Companies Growth Trust plc
Governance
Investments in the Construction and
Materials sector include Marshalls and
Morgan Sindall.
abrdn UK Smaller Companies Growth Trust plc 45
The Company is committed to high
standards of corporate governance and
applies the principles identified in the UK
Corporate Governance Code and the
AIC Code of Corporate Governance.
All Directors are considered by the Board
to be independent of the Company and
the Manager and free of any material
relationship with the Manager.
46 abrdn UK Smaller Companies Growth Trust plc
Liz Airey
Independent Non-Executive Chairman
Experience:
Liz Airey was, until March 2020, non-executive Chairman
of Jupiter Fund Management plc. She is a non-executive
director of BlackRock Frontiers Investment Trust plc and
Kirk Lovegrove & Company Limited, an advisory board
member of Ownership Capital BV, a member of the
Investments Committee of the Institute of Chartered
Accountants in England and Wales, and Chair of Trustees
of the Rolls-Royce UK Pension Fund. She has previously
been a non-executive director of Tate & Lyle plc, Dunedin
Enterprise Investment Trust plc, JP Morgan European
Smaller Companies Trust plc, Zetex plc and AMEC plc. In
her executive career, Liz was Finance Director of
Monument Oil and Gas plc, a post she held from 1990 until
the sale of the company to Lasmo plc in 1999.
Length of service:
3 years, appointed a Director on 21 August 2019 and
Chairman on 31 March 2020
Committee membership:
Management Engagement Committee and Nomination
Committee (Chairman)
Contribution:
The Board has reviewed the contribution of Liz Airey in
light of her proposed re-election at the AGM and has
concluded that she has chaired the Company expertly
since her appointment as Chairman on 31 March 2020,
fostering a collaborative spirit between the Board and
Manager whilst ensuring that meetings remain focused on
the key areas of stakeholder relevance. In addition, she
has provided significant insight to the Board through her
financial and corporate experience and knowledge of the
investment management sector.
Ashton Bradbury
Independent Non-Executive Director
Experience:
Ashton Bradbury has previously held roles at
Charterhouse Tilney, Hill Samuel Investment Management
and HSBC Asset Management Europe and was, until 2014,
a fund manager with Old Mutual Global Investors Limited,
where he established its Small and Mid-Cap equities team.
Ashton is currently a non-executive director of British Golf
Association Limited and is non-executive Chairman of
Golf Union of Wales Limited. Ashton holds a BSc in Banking
and Finance from Loughborough University of
Technology.
Length of service:
4 years, appointed a Director on 2 July 2018
Committee membership:
Audit Committee, Management Engagement Committee
and Nomination Committee
Contribution:
The Board has reviewed the contribution of Ashton
Bradbury in light of his proposed re-election at the AGM
and has concluded that he continues to provide significant
investment insight to the Board and knowledge of the
investment management sector.
Board of Directors