Invesco Perpetual UK Smaller Companies Investment Trust plc Annual Financial Report Year Ended 31 January 2014 Investment Objective Invesco Perpetual UK Smaller Companies Investment Trust plc is an investment trust whose investment objective is to achieve long-term total return for shareholders primarily by investment in a broad cross-section of small to medium sized UK quoted companies. The pursuit of income is of secondary importance. Benchmark The Company aims to achieve long-term total returns which are in excess of its benchmark, the Numis Smaller Companies Index (excluding Investment Companies). Nature of the Company The Company is a public listed Investment Company whose shares are traded on the London Stock Exchange. The business of the Company consists of investing its funds according to the investment objective with the aim of spreading investment risk and generating a return for shareholders. The Company may use bank borrowings, the proceeds from which can also be invested with the aim of enhancing returns to shareholders. Such additional investment would increase the potential risk to shareholders should the value of the investments fall. The Company has contracted with an external investment manager, Invesco Asset Management Limited (the ‘Manager’), to manage its investments and for the Company’s general administration. Other administrative functions are contracted to external service providers. The Company has a Board of non-executive directors who oversee and monitor the activities of the Manager and other service providers on behalf of shareholders and ensure that the investment objective and policy is adhered to. The Company has no employees. The Company’s Investment Style The Company’s investment style is: – to seek to identify well managed, financially strong companies which have unique propositions or clear competitive advantages, and whose share prices are reasonable in relation to their quality and growth; – to moderate risk by investing in a wide range of stocks; and – to take advantage of anticipated market strength or special situations by the careful use of borrowings. The Company’s shares qualify to be considered as a mainstream investment product suitable for promotion to retail investors and are eligible for investment in an ISA. If you have any queries about Invesco Perpetual UK Smaller Companies Investment Trust plc, or any of the other Investment Companies managed by Invesco Perpetual please contact our Investor Services Team on ☎ 0800 085 8677 Website:- www.invescoperpetual.co.uk/investmenttrusts Front cover: abstract granite, Cornwall Contents Overview 2-4 2 Financial Highlights Strategic Report 5-13 5 Chairman's Statement 7 Business Review 11 Portfolio Managers’ Report Investments 14-15 14 Investments in Order of Valuation Governance 16-33 16 Directors 17 The Company’s Governance Framework 18 Corporate Governance Statement 19 Audit Committee Chairman’s Letter 22 Directors’ Report 30 Directors’ Remuneration Report 33 Statement of Directors’ Responsibilities Financial Statements 34-50 34 Independent Auditor's Report 37 Statement of Comprehensive Income 37 Statement of Changes in Equity 38 Balance Sheet 39 Statement of Cash Flows 40 Notes to the Financial Statements Other 51-57 51 Notice of the Annual General Meeting 55 Shareholder Information 56 Advisers and Principal External Service Providers 57 Glossary of Terms The Company is a member of 01 02 FINANCIAL HIGHLIGHTS The Benchmark Index of the Company is the Numis Smaller Companies Index (excluding Investment Companies) with income reinvested AT 31 JANUARY 2014 Net asset value per ordinary share(1): – balance sheet – after charging proposed dividends (capital NAV) Shareholders’ funds (£’000)(1) Mid-market price per ordinary share Discount(1) per ordinary share based on balance sheet NAV AT 31 JANUARY 2013 % CHANGE 367.9p 285.7p +28.8% 363.0p 195,749 316.8p 13.9% 281.3p 152,034 246.5p 13.7% +29.0% +28.8% +28.5% Total return (with income reinvested): Net asset value(1)(2)(3) Benchmark Index(2)(3) FTSE All-Share Index(3) +31.4% +31.8% +10.1% Capital return: Net asset value(1)(2) Benchmark Index, excluding income reinvested(2)(3) FTSE All-Share Index(3) +29.0% +28.2% +6.4% Gearing: – gross gearing(2) – net gearing(2) – net cash(2) Maximum permissible gearing(2) Return and dividend per ordinary share: Revenue return Capital return Total return Interim dividend Final dividend Total dividends Ongoing charges(2) – excluding performance fee – performance fee Note: (1) Includes enhancements from share repurchases. (2) The term is defined in the Glossary on page 57. (3) Source: Thomson Reuters Datastream. 1.2% nil 1.2% 10.2% nil nil 5.1% 13.2% 6.9p 81.2p 88.1p 6.3p 46.7p 53.0p 1.6p 4.9p 6.5p 1.6p 4.4p 6.0p 0.83% nil 0.87% nil +8.3% INVESCO PERPETUAL UK SMALLER COMPANIES INVESTMENT TRUST PLC 03 Net Asset Value and Benchmark Total Return Performance For the Ten Years to 31 January 2014 2005 2006 2007 +24.3 +31.0 +24.7 +18.9 +28.0 +22.9 +5.4 +3.0 +1.8 Net Asset Value % Benchmark % Variance % 2008 -8.3 -15.6 +7.3 2009 2010 2011 -29.2 +40.1 +28.6 -36.7 +62.8 +28.7 +7.5 -22.7 -0.1 2012 2013 2014 3yr 5yr -0.8 +22.4 +31.4 +59.8 +187.8 -1.8 +25.6 +31.8 +62.7 +240.9 +1.0 -3.2 -0.4 -2.9 -53.1 10yr +279.2 +240.9 +38.3 Source: Thomson Reuters Datastream. Cumulative Ten Year Share Price and NAV Performance vs Benchmark (Total Return) From 31 January 2004 to 31 January 2014 (Figures have been rebased to 100 at 31 January 2004) 400 Net Asset Value Share Price Benchmark Index 350 300 250 200 150 100 50 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Five Year Discount Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Five Year Annual NAV Performance vs Benchmark (Total Return) 26% Net Asset Value Benchmark 24% 70% 22% 60% 20% 50% 18% 40% 16% 30% 14% 20% 12% 10% 10% 0% 8% Jan 09 -10% Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 2010 2011 2012 2013 2014 04 Five Year Historical Record GROSS INCOME £’000 NET REVENUE RETURN AVAILABLE FOR SHAREHOLDERS £’000 2010 2,909 2,477 2,472 4.30 111,281 193.7 150.5 0.86 – 2011 2,985 2,312 2,399 4.30 133,999 242.9 195.0 0.86 – 2012 3,590 2,852 2,676 5.00 126,771 237.6 187.5 0.89 0.31 2013 4,123 3,370 3,193 6.00 152,034 285.7 246.5 0.87 – 2014 4,555 3,673 3,459 6.50 195,749 367.9 316.8 0.83 – TO 31 JANUARY (1) DIVIDENDS ON SHARES(1) COST RATE £’000 p TOTAL SHAREHOLDERS FUNDS £’000 NET ASSET VALUE PER SHARE p MIDMARKET PRICE PER SHARE p ONGOING CHARGES % PERFORMANCE FEE % The dividends shown above are those proposed in respect of each year. Five Year Dividend History: Yield Pence per Share 7p 3% 6.5p 2.9% 2.7% 6.0p 6p 2.4% 2.2% 5.0p 5p 4.3p 2.1% 2% 4.3p 4p 3p 1% 2p 1p 0p 0% 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 The dividends shown above are those proposed in respect of each year. Sector Allocation of Portfolio vs Benchmark As at 31 January 2014 40% Portfolio Benchmark 30% 20% 10% 0% Oil & Gas Basic Materials Industrials Consumer Goods Health Care Consumer Services Telecommunications Utilities Financials Technology INVESCO PERPETUAL UK SMALLER COMPANIES INVESTMENT TRUST PLC STRATEGIC REPORT CHAIRMAN’S STATEMENT I am pleased to report substantial growth in the net asset value (NAV) of your Company, which rose by 31.4% on a total return basis during the financial year to 31 January 2014. This return was broadly in line with the Numis Smaller Companies Index (excluding Investment Companies), the Company’s benchmark index, which returned 31.8%. In absolute terms, this was an excellent result. By comparison, your Company and the UK Smaller Companies sector as a whole significantly out-performed the wider UK stock market, as measured by the FTSE All-Share Index, which rose by 10.1%. This demonstrates the ability of Smaller Companies to outperform their larger counterparts under certain economic conditions and this was particularly evident during the 12 months to 31 January 2014. Over the same period, the mid-market price of the Company’s shares increased by 28.5%, from 246.5p to 316.8p per share. Having narrowed during the year, the discount to NAV at which the Company’s shares trade ended the year marginally wider at 13.9% compared with 13.7% at the end of the previous financial year. Dividend For the year ended 31 January 2014, an interim dividend of 1.6 pence per share was paid on 24 October 2013 to those shareholders who were on the register on 27 September 2013. The Board is proposing a final dividend of 4.9 pence per share payable on 6 June 2014 to shareholders who are on the register on 25 April 2014. Total dividends for the year to 31 January 2014 will therefore amount to 6.5 pence per share, a 8.3% increase on the previous year. The income of the Company includes £0.6m or 1.1 pence per share (2013: £0.3m or 0.6 pence) of special dividends. By their nature, special dividends are non-recurring and future dividends, will, as always, depend on market conditions and investment performance. The Future of the Company As previously announced, on or around the date of its AGM in 2017, the Board will make available a number of options for shareholders to consider. These may include one or more of a continuation of the existing Company, a rollover into a similar or other investment vehicle and/or the provision of a cash exit at a price close to NAV. One of the benefits the Board hopes to achieve by this initiative is a narrowing of the discount to NAV at which the shares trade. The Board expects this benefit to become more apparent over time. The Board On 17 December 2013, the Board appointed Jane Lewis as a new director of the Company and in accordance with the Company’s articles of association she will stand for election by shareholders at the forthcoming Annual General Meeting. Jane is an investment trust specialist who, until August of 2013, held the position of Director of Corporate Finance & Broking at Winterflood Investment Trusts. The Board believes that Jane’s broad investment trust experience will prove be to be a great asset to the Company. In addition, John Spooner has decided that he will not seek re-election at the Company’s Annual General Meeting and will therefore retire from the Board at its conclusion. The Board would like to take this opportunity to thank John for his long and substantial contribution to the success of the Company during his tenure and to wish him well in the future. Annual General Meeting The Directors have carefully considered all of the resolutions proposed in the Notice of the AGM and believe them to be in the best interests of shareholders and the Company as a whole. The Directors, accordingly, recommend that shareholders vote in favour of each resolution. 05 06 CHAIRMAN’S STATEMENT continued Retirement of Richard Smith Richard has managed your Company’s portfolio since 2002 and the Board is aware of, and is grateful for, the great contribution he has made, both to the delivery of investment performance and through his wise counsel to the Board over that period. Richard is retiring at the end of June 2014 and my fellow Directors and I wish him a long, happy and very well-deserved retirement. Jonathan Brown, Richard’s co-manager, has been appointed Head of Smaller Companies at Invesco Perpetual and was formally appointed lead manager of your Company’s portfolio on 30 December 2013, in anticipation of Richard’s retirement. He has considerable experience working with Richard and the Board is confident that he will continue to manage shareholders’ investments with great skill. Outlook As ever, your portfolio managers have given a very full account of the year’s performance in their report that follows. In terms of the year under review, the most surprising aspect may be the lacklustre performance of the emerging economies, just as it was thought that they were somehow immune from the effects of the banking crisis that started in 2008. Clearly, reduced demand from western economies as belts were tightened due to austerity measures has had more of an effect than first thought and any suggestion of a “de-coupling” from the west has now been dismissed. Whilst this region may seem disconnected from the fortunes of smaller companies in the UK, the effect of a “hard landing” for the Chinese economy and the ramifications worldwide should not be underestimated. However, as you will read, the portfolio managers continue to find plenty of good investment opportunities within the smaller companies sector. Given the likelihood of some level of domestic stimulus ahead of the 2015 General Election, they remain positive for future returns. Ian Barby Chairman 8 April 2014 INVESCO PERPETUAL UK SMALLER COMPANIES INVESTMENT TRUST PLC BUSINESS REVIEW FOR THE YEAR ENDED 31 JANUARY 2014 Invesco Perpetual UK Smaller Companies Investment Trust plc is an investment company and its investment objective is set out below. The strategy the Board follows to achieve that objective is to set investment policy and risk guidelines, together with investment limits, and to monitor how they are applied. These are also set out below and have been approved by shareholders. The Company has contracted the services of Invesco Asset Management Limited (the ‘Manager’) to manage the portfolio in accordance with the Board’s strategy and under its oversight. The portfolio managers responsible for the day to day management of the portfolio are Jonathan Brown and, until his planned retirement in June 2014, Richard Smith, at which date Jonathan becomes the sole named portfolio manager. Investment Objective The Company is an investment trust whose investment objective is to achieve long-term total return for shareholders primarily by investment in a broad cross-section of small to medium sized UK quoted companies. The pursuit of income is of secondary importance. Investment Policy The portfolio primarily comprises shares traded on the London Stock Exchange, though it will also usually include a smaller proportion traded on AIM. The portfolio managers can also invest in unquoted securities, though these are limited to a maximum of 5% of gross assets at the time of acquisition. The Manager seeks to outperform the benchmark index. As a result, the Manager’s approach can, and often does, result in significant overweight or underweight positions in individual stocks or sectors compared with the benchmark. Sector weightings are ultimately determined by stock selection decisions. Risk diversification is sought through a broad exposure to the market, where no single investment may exceed 5% of the Company’s gross assets at the time of acquisition. The Company may utilise index futures to hedge risk of no more than 10% and other derivatives (including warrants) of no more than 5%. In addition, the Company will not invest more than 10% in collective investment schemes or investment companies, nor more than 10% in non-UK domiciled companies. All these limits are referenced to gross assets at the time of acquisition. Borrowings may be used to raise market exposure up to the lower of 30% of net asset value and £25 million. Performance The Board reviews performance by reference to a number of Key Performance Indicators which include the following: T G;8 @BI8@8AG 4A7 IB?4G8G E4G GB 58 4FF8FF87 4A7 @4A4:87 4A7 – to challenge constructively and scrutinise performance of all outsourced activities. Management Engagement Committee Audit Committee Nominations Committee Remuneration Committee Function Chairman Ian Barby Chairman Richard Brooman Chairman Ian Barby All the directors Additional members: – Christopher Fletcher – Garth Milne Additional members: – Christopher Fletcher – Garth Milne The Board as a whole performs this function Key objectives: – to oversee the control environment and financial E8CBEG8 4A 89986GABJ?87:8 B9 G;8 Company acquired in the course of performing our audit; or T BG;8EJ8CG BE E8GHEAF 478DH4G8 9BE BHE 4H77/8>= =96. 9< F ?82/ .300/ 98 >29=/ 38@/=>7/8>= =>366 2/6. +> >2/ C/+< /8. Investments listed on a recognised stock exchange AIM quoted investments 2014 £’000 2013 £’000 158,213 35,248 125,738 20,600 193,461 146,338 ................................................................................................................. Opening valuation 146,338 135,045 &BI8@8AGF 8G I4?H8 G G;8 L84E 8A7 G; G;4G G;8 B@C4AL 9468F 4E8G E R G; is reviewed in detail below. Since the Company invests mainly in UK equities traded on the London Stock Exchange, liquidity risk and credit risk are not significant. Liquidity risk is minimised as the majority of the Company’s investments comprise a diversified portfolio of readily realisable securities which can be sold to meet funding commitments as necessary. In addition, an overdraft if used provides short-term funding flexibility. Credit risk encompasses the failure by counterparties to deliver securities which the Company has paid for, or to pay for securities which the Company has delivered, and cash balances. Counterparty risk is minimised by using only approved counterparties. The Company’s ability to operate in the short-term may be adversely affected if the Company’s custodian suffers insolvency or other financial difficulties. The Board reviews the custodian’s annual controls report and the Manager’s management of the relationship with the custodian. Cash balances are limited to a maximum of £2.5 million with any one depositary, with only approved depositories being used, and a maximum of £10 million for holdings in the Short-Term Investments Company (Global Series) plc (STIC), a triple-A rated money market fund. Market Risk The fair value or future cash flows of a financial instrument may fluctuate because of changes in @4E>8G CE<68F -;8G E 6B@CE 4A7 other price risk. Looking at the component parts of market risk, the currency risk component effect is minimal as the Company’s financial instruments are either all or mainly denominated in sterling. For the remaining two components of market risk, the Company’s Manager assesses the Company’s exposure when making each investment decision, and monitors the overall level of market risk on the whole of the investment portfolio on an ongoing basis. The Board meets at least quarterly to assess risk and review investment performance, as disclosed in the Board Responsibilities on page 22. The Company may utilise hedging instruments to manage market risk. Gearing is used to enhance returns, however, this will also increase the Company’s exposure to market risk and volatility. 1. Interest Rate Risk Interest rate movements will affect the level of income receivable on cash deposits and the interest payable on variable rate borrowings. When the Company has cash balances, they are held on variable rate bank accounts yielding rates of interest dependent on the base rate of the Custodian, Bank of New York Mellon. Additionally, holdings in STIC are subject to interest rate changes. INVESCO PERPETUAL UK SMALLER COMPANIES INVESTMENT TRUST PLC 49 1. Interest Rate Risk (continued) The Company has an uncommitted bank overdraft facility up to a maximum of 30% of the net asset value of the Company or £20 million, whichever is the lower; the interest rate is charged at 0.85% over LIBOR. The Company uses the facility when required at levels approved and monitored by the Board. G G;8 L84E 8A7 G;8 O @