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Small Companies Dividend Trust provides a year of strong outperformance

Small Companies Dividend Trust has announced its annual results for the year ended 30 April 2016. During the year, the Trust’s NAV per ordinary share increased by 8.44% whilst its ordinary share price increased by 17.41%. Total dividends for the year are 9.1p per ordinary share including a special dividend of 1.6p. During the same period the MSCI Total Return Index decreased by 7.42% and the MSCI Small Cap Index increased by 1.72%. The trust says that its current underlying portfolio dividend growth has been positive with a prospective portfolio yield of 4.7%.

With effect from 1 August 2016 there will be some name changes. The names of Small Companies Dividend Trust PLC and Small Companies ZDP PLC will be changed to Chelverton Small Companies Dividend Trust PLC and Chelverton Small Companies ZDP PLC respectively. The board say that this follows from Chelverton Asset Management recognition and strong investment performance in the Mid and Small cap arena. They say that Chelverton manage in excess of £500m in this specialised area with four open and closed mandates for income and growth.

The announcement has limited information in terms of performance attribution, so it is difficult to comment on this here. However, in terms of portfolio activity, the year saw two takeovers: Amlin and Phoenix IT Group and, after the year end, a recommended offer was received for Premier Farnell. The managers say that they continue to expect to see a number of takeovers from the company’s portfolio once future prospects become clearer. The managers say that twelve holdings were sold in their entirety, Amlin, Flying Brands, Ladbrokes, Majestic Wine, Marshalls, Menzies (John), Phoenix IT Group, Portmeirion Group, Sanne Group, Stadium Group, Trifast and William Sinclair Holdings. The managers say that, apart from William Sinclair Holdings, Flying Brands and Ladbrokes, the companies sold have all made a significant contribution to both the income and the capital performance of the fund. No other specific details are provided but the managers says that companies are generally sold when the dividend yield has declined to a point where the income contribution has fallen below the level acceptable to them to retain the stocks in an income fund. The managers say that positions in 13 companies were reduced: Acal, Alumasc Group, Bioventix, Clarke (T), Curtis Banks Group, Dairy Crest Group, Epwin Group, Go-Ahead Group, Intermediate Capital Group, Kcom Group, Macfarlane Group, Novae Group, NWF Group, Personal Group Holdings, Sanderson Group, Town Centre Securities, St Ives and Wilmington Group after strong share price performances.

The managers say that nine new shareholdings were added to the Trust’s portfolio in the year: Ashmore Group – a specialist emerging markets investment manager, Fenner – a manufacturer of industrial polymer products, Galliford Try – a house building and construction group, Martin McColl Retail Group – convenience store and newsagent group, Regional REIT – a property company, RPS Group – international consultancy, RWS Holdings – a patent translation and patent research company, StatPro Group – software solutions for asset managers, XP Power – power supply provider. In addition to this, holdings were increased in thirty companies, being almost half the portfolio.

In terms of outlook, the managers say that the result in the Referendum has taken many people by surprise and highlights the stark divisions in the country. However, tey believe that, as time passes and the country moves on, people and companies will begin to become more objective about the situation. The manager say that they have little doubt that companies will use the opportunity of blaming “Brexit” for any problems that emerge over the next two years. The managers say that, despite being very vociferous opponents of the Leave proposal, The Governor of the Bank of England and the Chancellor have put in place a whole range of facilities to protect the economy from the shocks from the Brexit process. However, they say that the need is increasingly recognised by all to work towards a sensible solution that is beneficial and acceptable to all.

The managers say that the portfolio’s performance over the past month has been poor and reflects the uncertainty created by the Referendum result. Looking at the portfolio and the strength and trading of the individual companies the managers say that they believe this has been an overreaction, albeit understandable in the circumstances. However, they also say that, as people become more used to the concept of Brexit, once the “new” Conservative government is installed and members of the European Union, who undoubtedly have their own political and economic issues, start working towards an amicable solution for all parties then a more balanced view will emerge.

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