Following the Company's year end, the Board commenced a strategic review, announced on 13 February 2023. The Board recognises that whilst the Company has continued to deliver on its investment objective of providing a high and growing dividend, its small size coupled with a persistent and material discount to net asset value (“NAV”) has created challenges in liquidity and has prevented the Company from growing.

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

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

Performance

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

During times of macro uncertainty, there tends to be rotation into the “cheapest” stocks in markets and this factor rotation is driven primarily by top-down influences, (for example, sectors, oil price, FX rates etc.) rather than at the individual company fundamentals level. This rotation in terms of style into ‘value’ stocks dominated the year and the combination of events meant that the Manager’s Quality, Growth and Momentum investment process was out of favour. Despite this we have been pleased with the dividend growth achieved.

Against this backdrop, the Company suffered underperformance over one year against its index, the Numis Smaller Companies (excluding investment trusts) Index, returning a Net Asset Value (“NAV”) total return of -33.2% vs an index return of -17.9%.

Share price performance for the period was -33.7%. The Company’s three and five year performance also now reflects the difficult markets we have endured, with a NAV total return of -16.4% and a share price return of  -22.6%, versus a benchmark return of -4.2% over three years and a NAV return of -4.0%, a share price return of  -2.6% and a composite index return of -2.8% over the five year period.

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

Dividend

On a positive note, the Company’s revenue return for the year ended 31 December 2022 was 11.24p per share (2021: 9.69p). This represents an increase of almost 16% on last year’s figure and is a reflection of the resilience shown by the Company’s portfolio holdings. Further details on this are covered in the Investment Manager’s Review on pages 11 to 18. As a result of this increase, we are delighted to be able to declare a rise in this year’s dividend to 9.80p (2021: 8.85p). This is, as it was last year, fully covered by a combination of this year’s earnings.  With the yearend share price at 240.5p, this represents a dividend yield of 4.1%. Over three and five years, the dividend has increased by 18.8% and 39.0% respectively.

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

Ongoing Charges

The Company’s ongoing charges have increased in the year to the end of December 2022 to 1.30%, compared to last year’s figure of 1.20%. The principal reason for the increase was the decrease in average net assets during the year. The Company’s ongoing charges are subject to regular review by the Board.  Discount With discounts widening across the sector during 2022, the Company’s discount at the end of December 2022 stood at -16.3%, a slight widening to the discount of -15.3% at the end of December 2021.

Gearing/Debt

The Company’s use of its £10 million credit facility,  £5 million of which is at a fixed interest rate and £5 million at a variable interest rate, has remained unchanged, with £7 million of the facility being utilised at the year end. The £5 million variable element of the facility was renewed in April 2022 with the Royal Bank of Scotland International, London Branch for a 2 year period. The Company’s £5 million fixed rate loan will expire at the end of April 2023. The Company’s net gearing position as at 31 December 2022 was 8.2%, compared to 4.5% at the end of 2021. Board Composition Rosalyn Breedy was appointed to the Board of the Company as an independent Non-Executive Director on 5 January 2022.  

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

At the Company’s 2022 Annual General Meeting (AGM), Robert Lister retired from the Board after serving ten years as a Director, with seven years as Chairman. In accordance with the Board’s succession plan, I assumed the role of Chair upon his retirement. The Board would like to formally note Robert’s contribution to the Company during his tenure and thank him for his stewardship and guidance. Following these changes, the Board comprises two male and two female independent Non-Executive Directors.  Biographies of each Board member can be found in the Director’s Report in page 42 of this report.

Environmental, Social and Corporate Governance (“ESG”)

The Manager continues its active engagement with portfolio companies on ESG matters on a regular basis and updates are provided to the Board at each Board meeting. As well as being able to draw on a team of 20 individuals in this area, the team also have their own on desk Smaller Companies ESG analyst.  More information concerning the Manager’s ESG investment process can be found in the Manager’s Review on pages 19 to 21 of this report. 

Change of Name of abrdn Entities

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

You will find the new names for each Company in the Corporate Information section on page 100 of this report. 

Company Change of Name 

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

Change of Lead Fund

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

abrdn’s London Office Move In

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

Annual General Meeting

The Company’s AGM is scheduled to take place at 11:00am on Wednesday 14 June 2023 at Wallacespace, 15 Artillery Lane, London, E1 7HA, a short walk from Liverpool Street Station. At the meeting, shareholders will have the opportunity to hear an update from the Manager and ask questions of the Manager and the Board. We are looking forward to welcoming you to this new venue near abrdn’s London office. As mentioned above, at the time of writing the Board is undergoing a strategic review and will notify shareholders of any updates through an announcement to the London Stock Exchange and on the Company’s website. 

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

Outlook

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

The outlook for both economies and businesses, globally, is tough and, whilst a high degree of earnings forecast reductions have already been seen, areas of risk remain. Smaller Companies indices have sold-off aggressively versus others, particularly within the UK, and so the opportunity for relative strength in the smaller end of the market remains attractive. Whilst market timing is difficult, smaller companies typically lead a market recovery. Looking to the coming year we believe that the Quality focus will prove relatively resilient in a recessionary environment.

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

 

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