Performance 

I am disappointed to be reporting to shareholders that in the year just ended, the Company has extended its period of underperformance against its benchmark on both a net asset value (“NAV”) and share price basis. We are very aware that the effect of this underperformance, over one, three and five years, is that anyone who made their initial investment in the Company in the last five years will most likely have seen a reduction in the value of their investment. This is clearly an uncomfortable position for shareholders, and also for those of us who are responsible for the portfolio and the Company. For the year ended 30 June 2023, the Company’s NAV total return, calculated on the basis that all dividends received are reinvested in additional shares, was -7.4%. The share price total return, calculated on the same basis, was -6.8%. By contrast, the total return of the Company’s reference index, the Numis Smaller Companies plus AIM (ex-investment companies) Index (the “reference index”), was -2.8%. The Board and the Manager have discussed the investment strategy at length over the past couple of years but this year, in addition, your Board has spent a lot of time considering the root causes of the underperformance in order to be confident that the Company’s investment thesis remains intact. It also carried out a detailed review to assess whether the investment process itself is being robustly implemented. As a consequence of these reviews, the Board is able to support the Manager’s view that the drivers of current underperformance are primarily a confluence of external events. These conditions reflect the weak UK economy, rising inflation and the sequential increases in interest rates we are experiencing as well as the political turbulence. These have created a difficult macro environment for investing in small companies generally, but particularly for the Manager’s investment style, which focuses on Quality, Growth and Momentum factors - and we believe does so to a greater extent than any of the peer group companies in the sector. Whereas this favours the performance of the Company in growth oriented markets, it creates very challenging conditions in the market conditions we have seen, which have resulted in periods of rotation and a continual de-rating of the highly rated growth companies which typify our portfolio. The chart below illustrates how the Company’s share price has performed against the reference index over the past five years. Gearing does play a small part in this, but the key characteristic is that the Company invests in growth companies. 

Earnings and Dividends 

The revenue return per share (“EPS”) for the year ended 30 June 2023 was 12.44p (2022: 9.07p). The increase of 37.2% builds on the 41% increase in 2022 and has come from both an increase in the ordinary dividends received, special dividends of £942,000 (7.2% of investment income), and a material increase in interest income, as for the first time since 2008 cash balances are delivering a return. Included in the EPS is the enhancement to earnings of 0.34p per share (2.8%) as a result of share buy backs undertaken during the year. The Board is pleased to announce that this significant increase in EPS is flowing through to a substantial increase in dividends for shareholders and it is declaring a final dividend of 8.00p per share. Together with the interim dividend of 3.00p per share already paid, the total distribution for the financial year will be 11.00p per share, representing a 35.8% increase on the 8.10p per share paid last year. This still permits a proportion of earnings to be transferred to revenue reserves which will help your Company to withstand any future downturn such as we witnessed in 2020/21 or, indeed, simply manage any reduction in dividend receipts in future as income receipts from smaller companies are generally more variable than those of larger companies.

“The Board is pleased to declare a final dividend of 8.00p per share, which will mean that the total distribution for the financial year will be 11.00p per share, representing a 35.8% increase on the 8.10p per share paid last year. “

Following the payment of the final dividend, an amount of approximately 2.0p per share will be transferred to revenue reserves. Subject to approval by shareholders at the Annual General Meeting (“AGM”), the final dividend will be paid on 30 November 2023 to shareholders on the register on 3 November 2023, with an associated ex-dividend date of 2 November 2023. 

Management Fee and Company Secretarial Fee 

The Board continually reviews the management fee structure and, during the year, considered that the existing structure of fees paid to the Manager made the Company insufficiently competitive relative to its closest peers. Accordingly, the Board has negotiated a lower fee structure with the Manager. With effect from 1 July 2023 fees will be 0.75% per annum (previously 0.85%) on the first £175 million (previously £250 million) of net assets, 0.65% per annum (unchanged) on net assets between this amount and £550 million (unchanged), and 0.55% per annum (unchanged) on net assets above £550 million (unchanged). In addition, from 1 January 2024 the Manager will no longer charge for the provision of company secretarial services, saving the Company a further £75,000 (+ VAT) per annum.

On a pro-forma basis, based on the NAV at 30 June 2023, the change would represent a saving in a full year of around £415,000, or approximately 12% of management fee costs. The Board considers that this makes the fee structure more competitive when compared to the other similar investment trusts in the sector.

Ongoing Charges

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

Discount Control and Share Buy Backs 

At the year end the discount of the share price to the cum income NAV was 14.3% (2022: 14.6%). Over the year, the Company bought back almost 5.7 million shares, equating to 6.0% of its issued share capital, at a total cost of £25.8 million and a weighted average price of 449.7p per share. The weighted average discount at which the shares were repurchased was 12.8%. The Board calculates that this has added 4.0p per share to the NAV for remaining shareholders. The Company has been more active in buying back shares in the last 12 months than in any previous year since it last undertook a tender offer in 2015, buying back shares on over 180 days last year. The increased activity has been caused by the level of the discount, which has been wider than the 8% target that the Board is committed to in the long term in normal market conditions. Given the backdrop has continued to be unfavourable for the UK smaller companies sector as a whole, evidenced by outflows in the open ended sector, it is to be expected that we would see the discount widen as it has across most of our peer group. Whilst the Board takes sector levels into account when implementing its discount control mechanism, it remains committed to its long term target of 8% and will continue to be active in the market when it believes it to be in the best interests of shareholders. Full details of the Board’s discount control policy can be found on page 18 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 25. 

The Board Discount Control and Share Buy Backs

At the year end the discount of the share price to the cum income NAV was 14.3% (2022: 14.6%). Over the year, the Company bought back almost 5.7 million shares, equating to 6.0% of its issued share capital, at a total cost of £25.8 million and a weighted average price of 449.7p per share. The weighted average discount at which the shares were repurchased was 12.8%. The Board calculates that this has added 4.0p per share to the NAV for remaining shareholders. The Company has been more active in buying back shares in the last 12 months than in any previous year since it last undertook a tender offer in 2015, buying back shares on over 180 days last year. The increased activity has been caused by the level of the discount, which has been wider than the 8% target that the Board is committed to in the long term in normal market conditions. Given the backdrop has continued to be unfavourable for the UK smaller companies sector as a whole, evidenced by outflows in the open ended sector, it is to be expected that we would see the discount widen as it has across most of our peer group. Whilst the Board takes sector levels into account when implementing its discount control mechanism, it remains committed to its long term target of 8% and will continue to be active in the market when it believes it to be in the best interests of shareholders. Full details of the Board’s discount control policy can be found on page 18 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 25. 

Annual General Meeting

The Company’s AGM will be held at 12 noon on Thursday 23 November 2023 at Wallacespace Spitalfields, 15 Artillery Lane, London E1 7HA. The meeting will include a presentation from the Investment Manager and will be followed by a buffet lunch. This is a good opportunity for shareholders to meet the Board and Manager and we would encourage you to attend. The Notice of the Meeting is contained on pages 116 to 121.

“The Company’s AGM will be held at 12 noon on Thursday 23 November 2023 at Wallacespace Spitalfields, 15 Artillery Lane, London E1 7HA.”

Shareholders will be able to submit questions in advance of the AGM at the following email address: abrdnuksmallercompaniesgrowthtrust@abrdn.com. Should you be unable to attend the AGM, the Investment Manager’s presentation will be made available on the Company’s website shortly after the meeting. The results of the AGM will also be published on the website. In the meantime, the Board strongly encourages all shareholders to exercise their votes in respect of the AGM in advance of the meeting, and to appoint the Chairman of the meeting as their proxy, by completing the enclosed form of proxy form, or letter of direction for those who hold shares through the abrdn Investment Trust savings plans. This will ensure that your votes are registered. 

Outlook

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

“The Investment Manager has seen positive signs across the portfolio, with a strong reporting season and earnings upgrades for some of our core positions, even though significant economic challenges remain.” 

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 24 - albeit interspersed with periods of underperformance at times of market turbulence such as this. Predicting when these challenging market conditions will change is very difficult and we must acknowledge the possibility that they may continue for longer than they have in the past two decades. We must accept that much of this period was characterised by unprecedented low interest rates and loose monetary conditions which is no longer the case. Notwithstanding this uncertainty, company quality and growth factors should ultimately prove themselves in such an environment, through resilience and earnings delivery. Share price valuations of companies with these characteristics remain very attractive in historic terms, and the Investment Manager believes that this presents a significant opportunity to investors.

The Investment Manager has seen positive signs across the portfolio, with a strong reporting season and earnings upgrades for some of our core positions, even though significant economic challenges remain. If continued, over time this should lead to an improvement in investor sentiment to UK equities and the small and mid-cap sector in particular. In summary, the Board continues to believe that there are opportunities for your Company to achieve superior returns over the economic cycle. 

Important information

Risk factors you should consider prior to investing: