STANDARD LIFE UK SMALLER COMPANIES TRUST PLC

HALF YEARLY REPORT FOR THE SIX MONTHS ENDED 31 DECEMBER 2020

Legal Entity Identifier (LEI):  213800UUKA68SHSJBE37

INVESTMENT OBJECTIVE

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

Reference Index

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

PERFORMANCE HIGHLIGHTS

FINANCIAL HIGHLIGHTS

PERFORMANCE (TOTAL RETURNS)

For further information, please contact:

Scott Anderson

Evan Bruce-Gardyne

Aberdeen Standard Investments

0131 372 2200

CHAIRMAN'S STATEMENT

Performance

The Company's net asset value ("NAV") total return was 22.1% for the six months to 31 December 2020, while the share price total return was 32.4%. This compares with a total return of 30.8% for the Company's reference index, the Numis Smaller Companies plus AIM (ex investment companies) Index (the "Reference Index").

I will not be the first or last Chairman to state that 2020 was an extraordinary year for their Company. In "normal" markets a return of over 20% in six months would be exceptional, but in the context of the impact of Covid-19 on equity markets in the first quarter of 2020, the performance is typical of a recovery from a market shock and the NAV per share ended the year a modest 1.9% higher than it was 12 months previously.

Despite the strong performance in the six month period in absolute terms, we need to recognise that the NAV has not performed as well as the Reference Index. The Portfolio Managers have been consistent in explaining that, while the investment process has a proven track record of outperformance relative to the Reference Index over the long term, the process typically struggles to keep pace with the index during a recovery phase. It was the relative performance in November and December that led to the NAV lagging the return on the index over the past six months. The Portfolio Managers are confident that this phase will pass and the benefits of the investment process will prevail. The Board agrees with this conclusion.

The Investment Manager's Review provides further information on stock performance and portfolio activity during the period, as well as their outlook for smaller companies.

Earnings and Dividends

The revenue return per share for the six months to 31 December 2020 decreased by 26.2% to 3.41p (2019 - 4.62p), with underlying dividends per share from investee companies falling by 20.5% compared to the same period last year. The decline in the revenue return is again a consequence of the impact that Covid-19 has had on the profitability of UK companies.

The decline in the Company's earnings has a potential impact on the dividend paid to shareholders. Although some companies have reinstated dividends, the long-term effects of the pandemic on the ability of companies to pay dividends remains to be seen.  The Board is conscious that the Company paid a partly uncovered dividend during the financial year ended 30 June 2020, but it is also conscious of the level of revenue reserves which are available to smooth dividends when the need arises. The Board has concluded that, while the Company is not seen by the market as an income trust, many shareholders appreciate the dividend that the Company has delivered. As a consequence the Board is declaring an interim dividend of 2.70p per share (2019: 2.70p per share) and this will be paid on 9 April 2021 to shareholders on the register on 12 March 2021 with an associated ex-dividend date of 11 March 2021. The Board will continue to monitor the pace of the recovery of the revenue account from the impact of Covid and will take that into consideration when it comes to determining the level of the final dividend.

Gearing

The Board has given the Portfolio Managers discretion to vary the level of gearing between a net cash position of 5% and net gearing of 25% of net assets. During the period, the Company had drawn down borrowings of £25 million in the form of its 2.349% fixed rate loan. Net of cash, gearing at the end of the period was 3.4% (30 June 2020: net cash 0.3%). Since the end of the period, the Company has drawn its £20 million revolving credit facility as the Portfolio Managers' outlook became more positive due to the nature of the trade deal agreed with the EU and the prospect that vaccines would help to deliver a route out of the pandemic.

Discount Control and Share Buy Backs

At 31 December 2020 the Company's shares were trading at a discount of 1.0% to its NAV per share. This was similar to the position at the end of 2019 and considerably narrower than the level at which the shares traded during most of 2020. The Company continues to operate a discount control mechanism which targets a maximum discount of the share price to the cum-income NAV of 8% under normal market conditions. At times during the period the Board felt that the discount did not fairly reflect the long term performance of the Company when compared with close peers and so authorised the buy-back of shares at a lower discount than has historically been the case.

During the period, the Company bought back 697,476 shares (0.70% of the issued share capital) for a cost of £3.9 million and at a weighted average price of 554.04p, which equated to an average discount of 6.1%.

Management Changes

The Board was pleased at the recent announcement that Abby Glennie has been appointed Co-Manager of the Company's portfolio, alongside Harry Nimmo. Abby has been supporting Harry in the management of the portfolio for some time and the Board welcomes this step up to fully recognise her role. The Board considers it very helpful to have a robust succession plan clearly in place.

Management Fees

In addition to the investment management fee, full details of which are included in the Company's Annual Report, the Manager also receives a secretarial and administration fee which was previously capped at £150,000 per annum. During the period, the Board and Manager agreed to reduce the secretarial and administration fee to a fixed amount of £75,000 per annum with effect from 1 January 2021. The lower cost will have a small impact on the Company's level of ongoing charges, but the cost savings are particularly welcome at this time.

Outlook

The last six months has seen progress on a number of the "known unknowns" that were weighing on the minds of investors when we published the annual results. Joe Biden has succeeded Donald Trump as President of the United States, the Brexit agreement has been signed and has started to be implemented and a range of vaccines are starting the mammoth task of tackling the Covid-19 virus.

Collectively these must be seen as a cause for optimism but it would be rash to suggest that we are out of the woods. While we can hope that Mr Biden will be more international in his decision making than his predecessor, adjusting to Brexit and establishing a different working relationship with Europe is going to remain an ongoing challenge. On top of this one has to presume that the path out of lockdown will not be completely smooth and the challenge of rebuilding the economies of the world is not to be underestimated.

Having said that, the Manager's "Quality, Growth and Momentum" investment process is focused on stock picking and we are in an environment that is favourable to a stock picking approach.  Our Portfolio Managers are looking to identify and invest in those companies and their management teams which have market-leading positions and products that are best positioned to navigate these choppy waters and which should deliver superior returns over the long term. Following this approach does mean that there will be times, such as recently, when the portfolio does not perform as well as the Reference Index, but the Board is comfortable that this does not indicate that the process is flawed. One of the benefits of having a track record of over 15 years is that we can look back at how the process has performed across the cycle. Past performance, while being no guide to the future, does suggest that the investment process is better suited to "normal market conditions" and specifically does not perform well during the early stages of a market recovery. The Board considers that this is where we are at present and when this phase of the market cycle passes we can hope to see both strong absolute and relative performance. It is an appropriate time to remind shareholders of  the need to see an investment in the Company as a long-term decision.

Liz Airey,

Chairman

25 February 2021

OTHER MATTERS

Directors' Responsibility Statement

The Directors are responsible for preparing the Half Yearly Financial Report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge:

-        The condensed set of financial statements has been prepared in accordance with Financial Reporting Standard 104 'Interim Financial Reporting';

-        The Interim Board Report (constituting the interim management report) includes a fair review of the information required by DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the year; and

-        The financial statements include a fair review of the information required by DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the financial year and that have materially affected the financial position or performance of the Company during that period, and any changes in the related party transactions described in the last Annual Report that could do so.

The Half Yearly Financial Report for the six months ended 31 December 2020 comprises an Interim Management Report, in the form of the Chairman's Statement and Other Matters, the Investment Manager's Review, Portfolio Information and a condensed set of Financial Statements which has not been reviewed or audited by the Company's auditor.

Principal Risks and Uncertainties

The Board regularly reviews the principal risks and uncertainties faced by the Company together with the mitigating actions it has established to manage the risks. These are set out within the Strategic Report contained within the Annual Report for the year ended 30 June 2020 and comprise the following risk categories:

-        Strategy

-        Investment performance

-        Key person risk

-        Share price

-        Financial instruments

-        Financial obligations

-        Regulatory

-        Operational

-        Exogenous risks such as health, social, financial, economic and geopolitical

The Company's principal risks and uncertainties have not changed materially since the date of the Annual Report and no material change is foreseen in the principal risks over the remainder of the financial year.

Going Concern

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

As at 31 December 2020, the Company had a £45 million unsecured loan facility agreement with The Royal Bank of Scotland International Limited which matures on 31 October 2022. This consists of a five year, fixed-rate term loan facility of £25 million and a five year revolving credit facility of £20 million.

The Directors are mindful of the Principal Risks and Uncertainties summarised above and they believe that the Company has adequate financial resources to continue in operational existence for a period of not less than 12 months from the date of approval of this Report. They have arrived at this conclusion having confirmed that the Company's diversified portfolio of realisable securities is sufficiently liquid and could be used to meet short-term funding requirements were they to arise, including in current market conditions caused by the Covid-19 pandemic. The Directors have also reviewed the revenue and ongoing expenses forecasts for the coming year. Accordingly, the Directors believe that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.

On behalf of the Board

Liz Airey,

Chairman

25 February 2021

INVESTMENT MANAGER'S REVIEW

The net asset value total return for the Company for the six month period to 31 December 2020 was 22.1%, while the share price total return was 32.4%. By comparison, the UK smaller companies sector as represented by the Numis Smaller Companies Index plus AIM (excluding investment companies) Index rose by 30.8% on a total return basis. Over the same period, the FTSE 100 Index of the largest UK listed companies delivered a total return of 4.6%. Since we took over the management of the Company on 1 September 2003, the share price total return is 1,620% from then to the current period end compared with the Reference Index's total return of 486%. The FTSE 100 Index's total return was 194% over the same period.

Equity Markets

Market performance during the period in question can be divided into two parts, that of pre and post the announcement of Covid vaccines. Small and midcap indices moved sideways during the summer and autumn but, following the first vaccine announcement on 9 November 2020, accelerated upwards. The growth and technology-heavy AIM index however moved up throughout. Continued ultra-low interest rates across the world combined with monetary stimulus have pushed markets ahead. 

UK markets in general have performed less well than many other markets including the technology-heavy Nasdaq index in the USA and Far East markets, where Covid was tackled in a more robust fashion and economies came out the other side more quickly. European markets faired only slightly better with only Spain being behind the UK. Brexit and the fear of a negative out-turn was also unhelpful during most of the period in question. 

In the first period, Covid winners led the way with really spectacular stock performances from some of our largest holdings. A second bout of lock-down encouraged this trend. However, since the announcement on 9 November we have witnessed a complete reversal with a dramatic recovery for those worst effected and with most to gain from the potential return of normal conditions in the not too distant future. It has been a classic recovery rally, not unlike the second quarter of 2009 after the trough of the Banking Crisis.

Sector performance was led by the availability of quality growth or where there were actual Covid beneficiaries. These included media, software, pharmaceuticals, IT hardware and leisure goods. Alternative energy through AIM-listed ITM and Ceres Power had spectacular runs.  The weaker sectors included oil & gas, travel & leisure, restaurants and traditional retailers. Since 9 November a complete sector rotation caused the exact opposite in terms of market leadership.

Bid activity started to pick up markedly, particularly in the final three months of 2020 with bids for William Hill, Countrywide, IMImobile, McCarthy & Stone, G4S and the AA among others, mainly from private equity funds and opportunist value buyers.

The oil price rose 22% by the end of the year to $52 per barrel while copper was up 30%. Gold peaked in August before drifting towards the year end, leaving it up 7% during the period.

Performance

The investment portfolio rose in value by almost £129 million during the period and much of the increase came in the months before the first vaccines were announced. In normal times, a return of over 20% in six months would be cause for celebration, but we need to put the return in the context of the events prior to the start of the period and the performance of the Reference Index.

We have always been very clear that the portfolio is positioned to deliver outperformance over the cycle and that there will be periods when it will underperform. Over the more than 20 years that we have deployed the investment strategy that we use for the Company, we have seen that, during periods of sharp recovery that typically follow a crisis in the market, the portfolio underperforms for a time as investors focus on companies that have been particularly hard hit during the crisis. These stocks do not normally meet our investment criteria. A recovery rally is one of the worst things for the relative performance of our investment process. Thankfully they occur only rarely and during rising markets of extreme small cap popularity. We are long-term investors and are not timing experts and do not consider it appropriate to attempt to switch into such stocks for a short period. We last saw this in the spring of 2009, following the trough of the financial crisis.

The recovery that we have seen across the world since the first announcement of a vaccine on 9 November looks to be typical of this sort of market behaviour. Prior to the announcement, the portfolio was outperforming the Reference Index but, although it continued to increase in value since the start of November, it has not kept pace with the index.

Relative performance "pre-vaccine" was good and was driven by some really quite spectacular trading statements, from the likes of Kainos, Games Workshop, Ergomed, Impax Asset Management, Team17, Gear4Music and Focusrite. However post vaccine, the performance appears 'pedestrian' when compared to the index. This impact was particularly fierce in the week after the announcement of the first vaccine. 

Our five leading performers in the period were as follows:-

Kainos (closing weight 4.5%) +0.8% announced that results would be materially ahead of expectations and reinstated the dividend. Government digitalisation of processes continues apace as does Workday installations.

Jet2 (closing weight 2.8%) +0.5%. It is seen as a likely winner in the holiday market when things get back to normal. This extremely well run and well capitalised airline has been ranked Europe's favourite by TripAdvisor.

Ergomed (closing weight 1.6%) +0.5% is a contract research organisation to the pharmaceutical industry that has benefited from Covid business.

Games Workshop (closing weight 4.0%) +0.4% demonstrated that demand has remained robust when it re-opened for business after six weeks of lock down.

Gear4Music (closing weight 1.0%) +0.3% has been helped by Covid. It sells musical instruments on line. It has also recovered from operational setbacks in 2019.

Our five worst performers in the period were as follows:-

Hilton Food Group (closing weight 2.9%) -1.1%. Although this innovative international beef and fish packer has performed well there is the feeling abroad that it will suffer post-Covid when the restaurants are open again.

RWS (closing weight 2.2%) -0.9% has weakened following the share acquisition of SDL. This language translation company was seen as low grade by investors.

Boohoo (position sold during period) -0.9% came unstuck as the press latched on to reports that contractors were running sweatshops and avoiding taxes.

Cranswick (closing weight 2.6%) -0.8%. Like Hilton, this pork products company was seen as exposed to weakness when all the restaurants are open again.

James Fisher (closing weight 0.9%) -0.6%. This marine engineer has seen significant order delay in some of its offshore markets related to wind farms.

Dealing and Activity

As ever, our investment process has driven stock selection with new purchases having high Matrix scores and sales either having lower Matrix scores or are stocks which are too big to be described as smaller companies. Significant additions were made to Sumo in video games, Liontrust, the fund manager, Sirius Real Estate, the German real estate manager, AJ Bell, the investment platform, Ergomed in drug research, Focusrite in techno-music and Jet2, the budget airline.  Three new holdings were added; those of Impax Asset Management, the specialist ESG orientated fund manager, AO World, the on-line white goods retailer and Bytes Technology Group, the supplier of IT and communications software and hardware.

Significant sales took place in Greggs, Paypoint, Paragon, Midwich, 4imprint and Workspace over concerns on trading during an extended lock down. Matrix scores were weak here. Gamma Communications, Games Workshop, Kainos and Future were sold down as the holdings grew towards 5% of the portfolio. JD Sports was sold because it has now grown so far that it has become a constituent of the FTSE 100 Index and cannot be considered to be a "small cap" stock. Boohoo was sold completely on concerns that the management were not taking seriously enough the work practices of their suppliers.

The biggest purchases were:-

Bytes Technology Group.  A supplier of IT and communications software and hardware across the UK, not dissimilar to Computacenter. Its track record is strong. It is a new issue.

Impax Asset Management. A specialist ESG manager for 25 years delivering good performance as it strives for a more sustainable global economy. This has led to strong net flows.

AO World was purchased as its Matrix score moved up. The company is trading well and gaining headwind in Germany. It is now being actively courted by suppliers, leading to better pricing terms.

Ergomed. Significant follow-on purchases were made in this manager of drug trials. Indeed the company has announced strong trading and significant earnings upgrades.

Liontrust Asset Management. Adding to the position as the fund manager continues to see strong net inflows.

Sector Exposure

All investments are driven by stock selection and as a consequence sector exposure is a by-product of these decisions. Our leading sectors are software, leisure goods, support services, media, food manufacturers, real estate, telecoms and financials. Leisure goods, media and financials saw the biggest increases. Leisure goods has benefitted from activities that keep the youngsters amused at home such as computer and hobby games and techno-music through holdings such as Team17, Sumo, Games Workshop and Focusrite. This area is liable to see further growth as global franchises and technology continue to develop as lock downs ease.

The Company holds no materials, oil & gas, household goods and home construction and remains underweight in healthcare and retailers.

Gearing

At the end of the period gearing stood at 3.4%. Gearing was increased in the final quarter of the calendar year reflecting our positive view on smaller companies. Since the period end, the  £20 million revolving credit facility has been drawn down, increasing gearing still further. Gearing now stands at 4.6%.

Outlook

On past experience the recovery rally phase is typically short term. While the portfolio tends to underperform the Reference Index during such periods, we need to recognise that the absolute performance continues to be strong. We currently feel pretty positive about the short and long term outlook for smaller companies as we see the continuation of the new economic cycle which effectively started on 19 March 2020. The future looks increasingly brighter albeit from a low base. The improvements will come in fits and starts but commencing with the vaccine announcements last year. The unknowns of Brexit are now largely behind us. Ultra-low interest rates are likely to remain for some time making equity assets look attractive. Finally, a new President in the US brings a welcome level of sanity and predictability to that divided country. While geo-political issues are unlikely to go away it is helpful to see that a sense of rationality has returned.

In theory, the new lock down announced on 4 January 2021 should be good for our investment process, favouring "Quality, Growth and Momentum". However the announcement of vaccines (assuming they work with all variants of the Covid virus) is good for the economy, good for smaller companies, and good for higher risk cyclicals but bad for our process. Currently the vaccines are driving performance but with each news item both positive and negative, market leadership will wax and wane.

The AIM market was the star of 2020. As many as 80% of the top 100 AIM stocks are profitable. More than half pay a dividend. The sector spread is now very diverse with a wide range of growth sectors represented. It's a far cry from ten and twenty years ago. AIM is becoming somewhat of an engine for growth in the UK economy, creating wealth and employment.

Valuation has always been secondary when it comes to stock selection. Nevertheless, as we look down the list of names in the portfolio, we find four out of our top ten with price earnings ratios in the teens. We haven't seen the largest positions trading on such low multiples for a while which suggests to us that, after the recent market rotation, a significant number of our Quality, Growth and Momentum-led holdings are looking cheap.

A glance at the recent trading statements of our holdings shows them to be overwhelmingly positive, with many upgrades, reinstated dividends and the paying back of furlough grants, which is very encouraging.

Having said that, there are clearly still clouds on the horizon as new variants of the virus appear, returns to normality are delayed, vaccine issues continue and the impact of Brexit filter through. Unemployment is likely to rise dramatically in the next six months as furlough comes to an end. Bearing in mind that the market typically looks two years ahead, we are comfortable that we are past the worst, that we are in a new economic cycle and that the next couple of years will be a good time for smaller companies relative to large caps.

As we have stressed before, our process remains unchanged. Our emphasis on risk aversion, resilience, growth and momentum still feels right for the future. Caution should be the watch-word however.

Smaller company investing should be viewed as a long-term investment and we have no doubt that patient investors will be rewarded in the longer term. Our stable process has been seasoned by fully four economic cycles. We remain very optimistic about the future of the Company in the long term.

Harry Nimmo and Abby Glennie,

Aberdeen Standard Investments

25 February 2021

CONDENSED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

CONDENSED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

CONDENSED STATEMENT OF FINANCIAL POSITION (UNAUDITED)

CONDENSED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)

NOTES TO THE FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED 31 DECEMBER 2020

By order of the Board

Aberdeen Asset Management PLC

Company Secretary

25 February 2021

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