Dunedin Smaller Cos. Investment Trust PLC Regulatory News (DNDL)

DUNEDIN SMALLER COMPANIES INVESTMENT TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 OCTOBER 2015

COMPANY OVERVIEW

The Company

Dunedin Smaller Companies Investment Trust PLC ("the Company") is an investment company with its Ordinary shares listed on the premium segment of the London Stock Exchange. The Company is an approved investment trust and aims to attract long term private and institutional investors wanting to benefit from the growth prospects of UK smaller companies by investment in a relatively risk averse investment trust.

Investment Objective

The Company's investment objective is to achieve long term growth from a portfolio of smaller companies in the United Kingdom.

Benchmark

The Company's benchmark index is the FTSE SmallCap Index (excluding Investment Companies).

Management

Aberdeen Fund Managers Limited ("AFML", "the AIFM" or "the Manager")

Aberdeen Asset Managers Limited ("AAML" or "the Investment Manager")

Website

Up-to-date information can be found on the Company's website: www.dunedinsmaller.co.uk

COMPANY OVERVIEW - FINANCIAL HIGHLIGHTS

COMPANY OVERVIEW - CHAIRMAN'S STATEMENT

This is my first year as Chairman of Dunedin Smaller Companies Investment Trust, an investment trust that dates back to 1927. I am delighted to write to shareholders (or potential shareholders) in my first Annual Report as Chairman.

Results

Markets have continued to be volatile during the year under review. Notwithstanding the volatility, I am pleased to report that the Company saw a return to growth in its net asset value ("NAV") per share in total return terms for the year ended 31 October 2015 of 10.7% despite a small underperformance of the FTSE SmallCap Index (excluding Investment Companies) total return.

Much of the recent underperformance of the NAV relative to the benchmark index was due to the portfolio's overweight position in the industrial sector (a very broad sector comprising companies with a wide range of end markets). Some of the companies in the portfolio have had a disappointing year which has impacted overall performance relative to the benchmark. Notwithstanding that, we continue to believe that the long term outlook for the companies in the portfolio is positive and are pleased to see a return to growth. 

Overview

The Company's portfolio is constructed to deliver both capital and income growth and the Investment Manager remains focused on identifying good quality companies run by strong management teams, particularly where an above-average dividend yield is available. The benefits of this approach are reflected in the Company's returns over longer time periods.

While the financial year started well with a continuation of the recoveries in the UK and the US, the good start was hampered by a number of global as well as local headwinds. In the UK, the Chancellor's 2014 Autumn Statement indicated that there would be no quick end to austerity. Despite the delivery of a Conservative win in May, broadly seen as a market friendly result, June was the worst month for equities for three years. Similarly, the uncertainty caused by the slowdown in the Chinese economy, and, in particular, the steep decline in equity values in China's stock market coupled with the interventions of the Chinese government, continued through the period. The steep decline in the oil price only added to the uncertainties.

As we have reported in the past, one of the attractions of investing in smaller companies is that, over the last decade or more, they have become increasingly internationalised. We estimate that over half of the revenues of the holdings in the portfolio emanate from outside the UK. As a consequence, foreign exchange movements have an impact on your portfolio. Over the past year, the strengthening dollar and weakening euro has meant that, whilst individual companies were achieving market expectations and producing organic sales growth, when measured at constant rates of exchange, actual sales were often declining. Over the longer term, we continue to believe the international dimension will add resilience to our investment model but, in the short term, the relative strength of sterling has impacted the profitability of the portfolio.

Dividend

I am pleased to report that the Company's revenue earnings per share have increased over the year, from 5.34p to 6.17p, following a year of good dividend growth and a number of special dividends (which totalled 0.6p per share). 11 holdings in the portfolio (out of 43 holdings at the year end) increased their dividends by 10% or more and only one holding cut their dividend. Accordingly, your Board is pleased to propose an increase in the final dividend of 22% to 3.85p per share (2014 - 3.15p) which, subject to approval from shareholders at the Annual General Meeting, will be paid on 12 February 2016 to shareholders on the register on 15 January 2016. When combined with the interim dividend of 2.15p, the total dividend for the year will amount to 6.0p (2014 - 5.25p), an increase of 14.3%. At the current share price (£2.03 at the time of writing) this gives a yield of 3.0%. Following the payment of the final dividend, revenue reserves per share will amount to 6.25p (2014 - 6.07p).

Whilst your Company's objective is to achieve long term growth, your Board recognises the importance of income to shareholders. In order to maintain or grow the dividend in future years, the Board intends, if necessary, to use the Company's substantial revenue reserves to support any portion of the dividend not covered by the year's earnings. In addition, as part of the business of the Annual General Meeting, your Board is proposing an amendment to the Company's Articles of Association to take advantage of recent legislative changes to permit the Company to pay dividends using its capital profits. This would ensure that, if, in the longer term, revenue reserves are exhausted, the Board will still be able to continue to maintain or grow the dividend by the use of its distributable capital reserves. However, given the size of the Company's revenue reserves, the Board has no current plans to fund dividends using distributable capital reserves. 

Share Capital Management

The Company did not repurchase any Ordinary shares during the period. The Directors will continue to monitor the Company's discount as compared to that of its peer group and will use the Company's share buyback powers, subject to market conditions, when it feels this to be appropriate. Pleasingly, the discount tightened marginally during the year, from 16.9% to 15.0% following the trend within the smaller companies sector. At the time of writing, the discount is standing at 14.5%.

Gearing

The Company was ungeared at the year end. It has a £5 million revolving facility agreement as well as a three year term loan facility of £5 million with Scotiabank Europe which expire on 24 November 2017. £5 million is currently drawn down under the term loan facility at a fixed interest rate of 2.171% until that date but at the end of the year was offset by cash balances held. 

Annual General Meeting

The Annual General Meeting will be held at the offices of Aberdeen Asset Managers Limited, 40 Princes Street, Edinburgh on 3 February 2016, at 12 noon. In addition to the formal business of the meeting, our portfolio manager, Ed Beal, will provide an update on the outlook for smaller companies and there will also be an opportunity for shareholders to meet informally with the Directors at the conclusion of the meeting. Whilst the Board welcomes general questions on the Annual Report and financial statements at the meeting, we would request that questions of a technical nature should be addressed in writing to the Company Secretary in advance. The Board likes to meet all its shareholders (both large and small) regularly.

It is always useful to receive feedback from shareholders and the Board likes to hear shareholder views on a range of key issues.

Outlook

The outlook for the global economy is uncertain and markets are likely to remain volatile. Central banks are dominating investor thinking currently. In the US, the Federal Bank has delayed an anticipated increase in interest rates which has unsettled markets. An increase in rates in the UK has been deferred, but the expectation is that they will rise in early 2016. In Europe, the Central Bank look to be taking a different approach with the possibility of increasing the size or duration of their quantitative easing programme. Chinese growth continues to slow with further devalutions in the Renminbi possible.

Notwithstanding these factors, the Investment Manager believes there are some reasons for cautious optimism, not least because the UK and US are delivering acceptable levels of economic growth. Therefore, sceptical of analysts' forecasts, they do anticipate growth in profits for small companies next year. Importantly, they continue to believe that the companies in the portfolio have business models and balance sheets that will allow them to prosper over the long term even if the shorter term outlook is more difficult to predict.

Your Board therefore continues to believe the companies in the portfolio will prosper over the long term and will continue to seek fundamentally high quality businesses that can deliver attractive returns over the long term.

N M Yarrow

Chairman

14 December 2015

STRATEGIC REPORT - OVERVIEW OF STRATEGY

Business Model

The business of the Company is that of an investment company which seeks to qualify as an investment trust for UK capital gains tax purposes.

The Company aims to attract long term private and institutional investors wanting to benefit from the growth prospects of UK smaller companies by investment in a relatively risk averse investment trust, by following the investment policy described below. The Directors do not envisage any change in this activity in the foreseeable future.

Investment Objective

The Company's investment objective is to achieve long term growth from a portfolio of smaller companies in the United Kingdom.

Investment Policy

The Company invests primarily in the equity securities of UK smaller companies, with an emphasis on investing in quality companies with good management, strong cash flow, a sound balance sheet and the prospect of dividend growth.

The Company does not typically acquire securities that are unquoted or unlisted at the time of investment (with the exception of securities which are about to be listed or traded on a stock exchange). However, the Company may continue to hold securities that cease to be quoted or listed if the Investment Manager considers this to be appropriate.

The Directors measure the performance of the portfolio relative to the FTSE SmallCap Index (ex Investment Companies) but the Company is unconstrained as to the market sectors in which it may invest. As a result the portfolio is likely to diverge, sometimes significantly, from the benchmark.

Risk Diversification

The Company maintains a diversified portfolio of investments, typically comprising in the region of 40 to 75 holdings (but without restricting the Company from holding a more or less concentrated portfolio from time to time). It is the policy of the Company to invest no more than 15% of its gross assets in any one company and no more than 15% of its gross assets in other listed investment companies (including listed investment trusts).

Gearing

The Directors are responsible for determining the gearing strategy of the Company. Gearing is used with the intention of enhancing long-term returns and is subject to a maximum level of 20% of gross assets at the time the gearing is incurred. Any borrowing, except for short-term liquidity purposes, is used for investment purposes.

Delivering the Investment Policy

The Directors are responsible for determining the investment policy and the investment objective of the Company. Day-to-day management of the Company's assets has been delegated, via the AIFM, to the Investment Manager, Aberdeen Asset Managers Limited ("AAML").

The Investment Manager believes that, over the long term, share prices reflect underlying business fundamentals. A bottom-up investment process is followed, which is based on a disciplined evaluation of companies that includes visits by its fund managers. Company selection is the major source of added value. New investments are not made without the fund managers having first met management of the investee company, undertaken further analysis and written detailed notes to outline the underlying investment merits. A company's value is estimated in two stages: quality then price. Quality is defined with reference to management, business focus, balance sheet and corporate governance. Price is calculated relative to key financial ratios and business prospects.

The Investment Manager's portfolio construction relies upon diversification rather than formal controls guiding stock and sector weightings. The Investment Manager's portfolios are generally run conservatively, with an emphasis on traditional buy-and-hold, top-slicing/topping up being preferred to outright trading and this approach results in low turnover within portfolios. Typically, investee companies have a higher return on equity/assets and lower debt to equity than the market averages.

At the year end the Company's portfolio consisted of 43 holdings.

Benchmark

The Company's benchmark is the FTSE SmallCap Index (excluding Investment Companies).

Key Performance Indicators ("KPIs")

The Board uses a number of financial performance measures to assess the Company's success in achieving its objective and determining the progress of the Company in pursuing its investment policy. The main KPIs identified by the Board in relation to the Company which are considered at each Board meeting are as follows:

Principal Risks and Uncertainties

There are a number of risks which, if realised, could have a material adverse effect on the Company and its financial condition, performance and prospects. The Board has identified the principal risks and uncertainties facing the Company at the current time in the table below together with a description of the mitigating actions its has taken. The Board has carried out a robust assessment of these risks, which include those that would threaten its business model, future performance, solvency or liquidity. The principal risks associated with an investment in the Company's shares are published monthly on the Company's factsheet or they can be found in the pre-investment disclosure document ("PIDD") published by the Manager, both of which are on the Company's website. The risks and uncertainties faced by the Company are reviewed annually by the Audit Committee in the form of a risk matrix and heat map and a summary of the principal risks is set out below.

Promoting the Company

The Board recognises the importance of promoting the Company to prospective investors both for improving liquidity and enhancing the value and rating of the Company's shares. The Board believes an effective way to achieve this is through subscription to and participation in the promotional programme run by the Aberdeen Group on behalf of a number of investment trusts under its management. The Company's financial contribution to the programme is matched by the Aberdeen Group. The Aberdeen Group Head of Brand reports quarterly to the Board giving analysis of the promotional activities as well as updates on the shareholder register and any changes in the make up of that register.

The purpose of the programme is both to communicate effectively with existing shareholders and to gain new shareholders with the aim of improving liquidity and enhancing the value and rating of the Company's shares. Communicating the long-term attractions of the Company is key and therefore the Company also supports the Aberdeen Group's investor relations programme which involves regional roadshows, promotional and public relations campaigns.

Board Diversity

The Board recognises the importance of having a range of skilled, experienced individuals with the right knowledge represented on the Board in order to allow the Board to fulfill its obligations. The Board also recognises the benefits, and is supportive, of the principle of diversity in its recruitment of new board members.

At 31 October 2015, there were three male Directors and one female Director on the Board.

Environmental, Social and Human Rights Issues

The Company has no employees as the Board has delegated day to day management and administrative functions to Aberdeen Fund Managers Limited. There are therefore no disclosures to be made in respect of employees. The Company's socially responsible investment policy is outlined below.

Socially Responsible Investment Policy

The Board acknowledges that there are risks associated with investment in companies which fail to conduct business in a socially responsible manner and has noted the Aberdeen Group's policy on social responsibility. The Investment Manager considers social, environmental and ethical factors which may affect the performance or value of the Company's investments as part of its investment process. In particular, the Investment Manager encourages companies in which investments are made to adhere to best practice in the area of corporate governance. It believes that this can best be achieved by entering into a dialogue with company management to encourage them, where necessary, to improve their policies in this area. The Company's ultimate objective, however, is to deliver long term growth on its investments for its shareholders. Accordingly, whilst the Investment Manager will seek to favour companies which pursue best practice in the above areas, this must not be to the detriment of the return on the investment portfolio.

Global Greenhouse Gas Emissions

The Company has no greenhouse gas emissions to report from the operations of its business, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013.

Viability Statement

The Company does not have a formal fixed period strategic plan but the Board does formally consider risks and strategy on at least an annual basis. The Board considers the Company, with no fixed life, to be a long term investment vehicle, but for the purposes of this viability statement has decided that a period of three years is an appropriate period over which to report. The Board considers that this period reflects a balance between looking out over a long term horizon and the inherent uncertainties of looking out further than three years.

Accordingly, taking into account the Company's current position and the potential impact of its principal risks and uncertainties, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due for a period of three years from the date of this Report. In making this assessment, the Board has considered that matters such as significant economic or stock market volatility, a substantial reduction in the liquidity of the portfolio, or changes in investor sentiment could have an impact on its assessment of the Company's prospects and viability in the future. The Directors have also considered the maturity of the Company's £10 million loan facility in November 2017.

Future

Many of the non-performance related trends likely to affect the Company in the future are common across all closed ended investment companies, such as the attractiveness of investment companies as investment vehicles, the impact of regulatory changes (including MiFID II and the Packaged Retail Investment and Insurance Products regulations) and the recent changes to the pensions and savings market in the UK. These factors need to be viewed alongside the outlook for the Company, both generally and specifically, in relation to the portfolio. The Board's view on the general outlook for the Company can be found in the Chairman's Statement whilst the Investment Manager's views on the outlook for the portfolio are contained in its statement.

N M Yarrow

Chairman

14 December 2015

STRATEGIC REPORT - FINANCIAL HIGHLIGHTS

STRATEGIC REPORT - PERFORMANCE

Dividends

Ten Year Financial Record

STRATEGIC REPORT - INVESTMENT MANAGER'S REVIEW

Markets made a good start to the year under review buoyed by continuing recoveries in the UK and US. The Chancellor's autumn statement indicated that there would be no quick end to austerity, though it was still believed that the deficit could be eliminated by 2019. Positively there were upgrades to expectations for growth over 2015. A slowdown in the Chinese economy was a concern that had been emerging for some months as it looked increasingly unlikely that the economy would achieve the targeted level of 7.5% growth. This was tacitly recognised by the authorities when they reduced interest rates. This would be the first of several cuts, indeed by the end of the financial year they would have reduced rates on six occasions in less than twelve months.

The price of oil was falling precipitously. The declines were exacerbated by the actions of Saudi Arabia who made it clear that they were more minded to protect their market share than to cut production in an attempt to support the price. This decline was expected to have a beneficial impact on energy consumers. It was also likely to cause additional deflationary pressure in Europe, therefore making the commencement of Quantitative Easing, ("QE") in the region more likely. Unsurprisingly it was having a significant impact on the share prices of oil producers. The portfolio had a relatively low exposure to such companies. By the year end we were beginning to see the second order effects of the lower oil price. As producers slashed budgets for capital and operational expenditure so those companies that sell services and goods to them began to feel the pressure. The portfolio does have a level of exposure to these businesses and the declines in their share prices had a more marked impact on net assets. In general we believe that these companies are well placed to benefit from any recovery in demand that arises as a result of a stabilisation and eventual pick up in the oil price. They remain good quality companies albeit ones that are experiencing cyclical pressure. Where opportunities have arisen we have judiciously topped them up.

The New Year witnessed a good performance from markets, indeed February saw the FTSE 100 Index achieve an all-time high, surpassing the previous peak set in 1999. Some caution was warranted though because the progress being registered by markets was not being driven by growth in corporate profits. Valuations, especially of quality companies, were being pushed higher by the impact of quantitative easing and the absence of more appealing options in other asset classes.

As the domestic economy was strengthening, expectations for 2016 growth were lifted and unemployment was declining at a time when wages were rising. This indicated that the painful squeeze that had been endured by the consumer was beginning to ease. In Europe the European Central Bank, ("ECB") announced that QE would commence in March and would amount to €60 billion per month running well into 2016. The scale and uncapped nature of the commitment boosted markets. Meanwhile in Greece the election was won by the anti-austerity party Syriza. Their desire to renegotiate the bail-out programme in an effort to reduce the country's debt burden, served to re-ignite worries about sovereign indebtedness and the possibility of a Greek exit from the Euro.

The declines in oil and commodity prices were having a deflationary impact particularly in the UK and Europe. This was serving to delay interest rate rises and whereas most investors had been expecting a rise in the UK during 2015, it quickly became apparent that this would not now occur until 2016. This was despite the fact that unemployment was approaching the 5.5% level that Mark Carney had previously indicated was the level required to support an increase in rates. Indeed, around the World, countries were reducing their interest rates. There was now an increasing risk that the potential benefits of European QE would be diluted as other nations sought to devalue their currencies. The Federal Reserve was taking a different tack suggesting that an increase in US rates during 2015 remained very much on the cards.

By the spring the economy in Europe was showing signs of life. The impact of the initial stages of QE, the benefits of lower energy prices, euro weakness and some easing of austerity were all helping. The reporting season was largely uneventful as most small companies reported results that were in line with expectations. It is though worth remembering that these expectations had in general, been gradually reduced over the course of the prior year.

May's General Election delivered a surprising result. A Conservative majority was widely interpreted as a business and market friendly result.

June was the worst month for UK equities for three years. Nonetheless, there were reasons to be positive as the recoveries continued in the UK and US. Additionally there were reasons to believe that the deflation that was present in various economies was supply rather than demand led. As the impact of the fall in oil prices was expected to annualise later in the year so inflation might be expected to return to the system. However, it was Greece that was weighing on sentiment. The country missed a payment due to the IMF at the end of June and Prime Minister Tsipras caused further uncertainty by calling a surprise referendum on the restructuring proposals. Sovereign debt was back at the forefront of investors' concerns as they worried about the implications of a potential Greek exit from the Euro. Although currency markets were suggesting that the risk of economic contagion from an exit was containable, it was much less clear that the political impact would be so benign. How would other highly indebted members of the EU behave were this rubicon to be crossed? Although a third bailout package was eventually agreed and the nation's banks were able to re-open, much uncertainty remained. Without some form of debt forgiveness it seemed likely that the problem had been deferred rather than resolved.

For much of the year China's stock market had been out of step with a reduced rate of growth in its economy, posting some remarkable gains and causing many observers to talk of a bubble in equity prices. This halted abruptly in the middle of the year with a very rapid 30% decline in value. The authorities were forced to implement some highly unusual measures to prevent further declines. The weakening in the Chinese economy placed further pressure on oil and commodity prices.

As we moved through the middle of the year the first half reporting season passed without drama. Two themes emerged. Firstly, companies were achieving the market's expectations, but as was the case at the spring reporting season these expectations had previously been reduced. Secondly, foreign exchange was having an increasing impact on results. The dollar had been strengthening and the euro weakening. Although many companies were producing organic sales growth, when measured at constant rates of exchange, their actual sales were often declining.

August was a turbulent month as the FTSE 100 Index recorded its largest single day decline since the dark days of 2009. Although small company performance often diverges from that of their larger brethren the difference on this occasion was marked, as the FTSE SmallCap Index (excluding Investment Companies) outperformed the main index by over 5% in one month alone. There were a number of reasons for this. The market weakness was primarily a function of rising concerns that Chinese growth was slowing even more than anticipated. This placed further pressure on the commodity producers. Small companies have less exposure than their larger counterparts to emerging markets in general and to commodity producers. They have proportionately more exposure to the consumer and the domestic economy and these were actually doing reasonably well.

The genesis for these moves was the surprise decision by the Peoples' Bank of China to allow the Yuan to devalue against the dollar. This was initially interpreted as the authorities making the adjustments necessary to allow their currency to gain reserve status. However, sentiment turned rapidly as investors became concerned that it was actually a sign that Chinese growth was weaker than markets had believed and that this weakness would necessarily impact upon global growth. However, it needed to be remembered that the subsequent reduction in Chinese interest rates demonstrated that they retained some monetary flexibility to try and provide support for their economy. The general antipathy towards emerging markets was being felt in the share prices of companies with sizable exposures to these regions. What was until recently a positive had become regarded as undesirable. Where that presented opportunities we sought to capitalise on them.

As we approached the end of the financial year it was central bankers who had moved front and centre in investors' thoughts. The Federal Reserve had been widely expected to raise US interest rates at their September meeting. The fact that they didn't unsettled investors causing them to conclude that the Committee must be more concerned about the impact that slowing emerging economies and China in particular would have on global growth. The timing of interest rate increases in the UK was similarly pushed outwards. Meanwhile, Mario Draghi and the European Central Bank were taking a different approach. Despite the signs of improvement in the Eurozone economy they pointed to the possibility of an increase in the size and or duration of their Quantitative Easing programme.

Portfolio Activity

Merger and acquisition activity was a theme across markets throughout the year. Many companies have cash rich balance sheets and in the absence of significant levels of organic growth, some have chosen to deploy the proceeds in inorganic growth. The bulk of the headlines have been occupied by the very large scale deals, such as AmBev's bid for SAB Miller, Royal Dutch Shell acquiring BG Group and although it eventually came to nought, Vodafone and Liberty International's potential tie up. Deals further down the market capitalisation spectrum have been less eye catching. Nonetheless there has been activity within the portfolio. Our holding in Domino Printing was acquired by Brother Industries. A business we had held for many years was Anite the supplier of mobile telecoms testing hardware and software. Having tidied up their portfolio of operations with an exit from public sector consulting and the sale of their Travel division the business was benefiting from the acceleration of the penetration of 4G technology and smart phones. The company received a recommended bid from Keysight Technologies. We also have an investment in AVEVA Group, the provider of 3D design software for highly complex infrastructure projects. Schneider Electric are to take a majority stake in the company. We will be able to continue as investors and should benefit from the new opportunity for the company to access Schneider's rather more extensive customer base.

The flow of capital wasn't only one way. Although our conservative approach leads us to view acquisitive growth with a healthy degree of scepticism we are pleased to support our investments where they are pursuing attractive opportunities. Therefore we participated in a placing by Chesnara who raised money to purchase a Dutch closed life insurance book from DSB Beheer. The price they paid was attractive and the deal fits neatly with their existing strategy and will potentially provide a platform for them to pursue further consolidation in the fragmented Dutch market. Hansteen, an operator of industrial real estate assets primarily in the UK and Germany raised funds to finance their acquisition of a further tranche of the Ashtenne Fund. The management team are highly experienced and have in depth knowledge of the assets they have acquired as they used to run Ashtenne. Lastly, BBA Aviation conducted a rights issue towards the end of the financial year. The proceeds are to be used to purchase a business called Landmark which owns a portfolio of fixed base operations at airports in the US. These are the facilities used by owners and operators of private jets. The deal will further extend BBA's position as the market leading operator and importantly fills some of the geographic gaps in their portfolio. The additional network density makes their offering more attractive for customers. Landmark is a company BBA have considered buying previously and we had anticipated that at some point they would succeed in doing so.

We introduced four new holdings to the portfolio. Xaar is a leading designer and manufacturer of digital print heads. The business possesses a significant amount of intellectual property and benefits from high barriers to entry. Demand for their products is undergoing structural growth driven by a number of end markets. The timing of the development of these markets is unpredictable leading to lumpiness in profits, but there is a reasonable expectation of growth over the long term. They have two developing technologies both of which could be very significant to the fortunes of the company. Direct to shape printing will allow FMCG brand owners to have much more personalised and rapidly variable packaging. Thin film technology will reduce the costs of digital printing opening a range of new markets to its benefits. The lumpiness of adoption can cause fluctuations in the share price and it was such an event that created the opportunity for us to build an initial position in a company we have followed for some time.

Exova is a testing and inspection business. They provide laboratory based destructive testing into the Aerospace, Oil & Gas, Industrial, Health Sciences, Fire, Transport and Calibration markets. These markets are growing, in large part due to increasing regulation. The end products typically have a high cost of failure, so it is vital that the testing is conducted accurately by a reputable third party. This confers reputational barriers and some pricing power. Their markets are growing as volumes increase and regulation means more items have to be tested. Testing is still a fragmented industry hence the company has opportunities to take share through consolidation.

Genus is a world leader in the provision of genetic material for pig and cattle breeders. The company benefits from high barriers to entry because it is a difficult and lengthy process for a competitor to seek to replicate their germplasm. This is where much of their intellectual property resides. The business benefits from structural growth drivers as agriculture becomes increasingly industrialised in both developed and emerging markets in response to rising consumption. Genetics are the most efficient and predictable method for farmers to increase their yields. The company has a strong balance sheet and in addition to its existing businesses it has technology that facilities the production of sexed semen and in vitro fertilisation in cattle. Each of these could be sizable opportunities for them.

Stock Spirits are the market leader in high quality branded vodka in Poland and the Czech Republic. Although total vodka consumption is declining, the market is growing as consumers are drinking more premium products. They have an experienced management team, low cost manufacturing with significant additional capacity and leading capabilities in distribution. The business generates high teens margins and has a solid balance sheet, which gives them the ability to participate in consolidation opportunities across Central and Eastern Europe.

Two holdings were exited. Greggs has been held in the portfolio for many years. It has delivered very attractive returns over the long term. The business has been engaged in a restructuring recently and that has progressed well. This has been increasingly recognised by the market and the share price has reacted very strongly over the last couple of years. Our decision to exit is a function of the marked increase in the valuation. McBride is a producer of own label personal care and household goods for the supermarkets. The business had been experiencing difficult trading for a prolonged period of time. Although intuitively one might have expected cheaper own label products to take share during an economic downturn, this thesis was not in fact materialising. The brand owners were behaving very aggressively on price so undermining a core part of the company's competitive advantage. Simultaneously their customers, the supermarkets, were experiencing structural change across their industry causing them to be even more demanding on price. Lastly the weakness of the euro meant that goods produced in Europe were now competitive in the UK, eroding the company's previously strong domestic position. We took the decision to exit and to redeploy the proceeds elsewhere.

This has been another year of good dividend growth for a number of the investments in the portfolio. We continue to believe that dividends are a very important component of the total return received by investors. They are also the only tangible return they receive until they sell their investment. Lastly, although we seek companies where the management teams have the ability to reinvest the surplus returns that they generate in assets that earn returns above their costs of capital, we are of the opinion that it is a good discipline for them to return a portion of the capital they generate to investors. Eleven holdings increased the dividends received by the Company during the year by 10% or more. A special mention should go to the house builder Bellway who increased their distribution by almost 65%. It is becoming a repetitive but welcome task to draw shareholders' attention to this company, this being the fourth consecutive year that we have noted the fact that they have increased their dividend by more than 50% in each of those years. Other companies that delivered significant increases include AVEVA and Elementis. Although these are very different businesses, one being a software company and one a speciality chemicals business they share two characteristics. The first is that they both have sizable portions of their business that serve the Oil & Gas industry and consequently both would be good examples of the kind of company we were discussing earlier in this report when we referenced businesses that suffered from the second and third order impacts of the weak oil price. Positively though, both companies retain net cash balance sheets. This is important because it gives us as investors the confidence that companies that we regard as being of good quality will be able to withstand the vagaries that their markets may throw at them. It also gives the management teams the ability to signal their confidence in their long term prospects by raising their distribution materially ahead of inflation. XP Power, the Singapore based designer and manufacturer of power convertors for specialist end markets, produced a 10% increase in their dividend, taking their five year growth profile to almost 17%. Robert Walters, the recruitment agency, and Savills, the property consultancy, are both good examples of smaller companies in the UK with strong and growing Asian franchises. Clearly they operate in cyclical industries but investors are being rewarded with dividends that have again risen strongly as both companies raised their payouts by well in excess of 10%.

It is pleasing to report that, of our recent introductions this year and last, Manx Telecom, Exova and Stock Spirits have all moved onto the dividend paying list. Xaar and Genus were more established payers though Genus produced a double digit increase as well.

Special dividends were also a feature during the year with Greggs, Hansteen and Victrex all making such distributions.

One company cut its dividend. Huntsworth is a PR agency which has suffered from difficult trading and excess costs. A new Chairman, CEO and Finance Director have been appointed and they have outlined their restructuring plan. In the meantime the company was paying out more than it was earning and it makes sense for them to reduce their distribution whilst they steady the ship.

As would be expected there are holdings in the portfolio that have had a tougher time during 2015. It is disappointing to report that Oxford Instruments has continued to experience the difficulties that we first reported on in last year's review. The business is a market leader in the provision of high technology instrumentation for the characterisation and analysis of matter at the nano scale. There has been some general weakness in a number of their markets and some specific events that lie outwith their control. Amongst these has been the onset of sanctions against Russia which have impacted their earnings this year. We continue to believe that nanotechnology in its many forms will be an important area of research and development expenditure for a broad range of industries for many years into the future. Oxford allows us to access this growing market without having to back a specific technology and therefore should provide a less volatile route to gain exposure to this growth. Fenner is a market leader in the provision of conveyor belting for miners particularly in the US and Australia. They have been hit by a combination of falling demand in the US and price pressure in Australia as the miners have sought to reduce their costs. This is a business with significant levels of fixed cost. Management have announced a restructuring of their US operations, though in the short and even medium term it is very difficult for them to cut costs faster than the market is declining. Consequently, although the business remains profitable, their earnings have fallen materially. Once some stability returns to their markets it is reasonable to expect that they can right size their company and whilst a return to historic levels of profits is perhaps unlikely we anticipate that the share price will recover to an extent that reflects a core level of earnings.

Outlook

Central banks are dominating investor thinking currently. The US Federal Reserve has delayed an anticipated increase in interest rates, in part due to their concerns about the impact that slowing emerging market economies will have on global growth. This has unsettled markets which dislike the uncertainty and worry that the Fed must believe that the risks are greater than the market thinks. Any increase in interest rates in the UK has also been deferred though it does seem reasonable to anticipate that inflation will pick up towards the end of the year and expectations remain that rates will rise in early 2016. Mario Draghi and the European Central Bank are taking a different approach. Recent commentary from them has referred to the possibility of an increase in the size and or duration of their Quantitative Easing programme.

Whilst a further devaluation of the Chinese Renminbi is possible in response to growth that may slip below 6% in 2016, we believe that a hard landing will be avoided and that global growth can increase during 2016 and 2017.

Markets are likely to remain volatile in the face of so much uncertainty.

We noted last year that the market's expectations for profits growth from small companies over 2015 looked more realistic than had been the case for several years. As we stand today, it looks like we shall be proven wrong with aggregate earnings set to decline rather than deliver the modest expansion we had anticipated. Looking into 2016 we see reasons for cautious optimism. The UK and US are delivering acceptable levels of economic growth. The annualisation of the impact of 2014's collapse in oil prices combined with some upward wage pressure in these two economies should allow a modest level of inflation to enter the system. That in turn will allow the authorities to begin to increase interest rates, albeit at what is likely to be a very gentle pace relative to history. Europe is also growing and the ECB have made clear that they will provide further stimulus should this falter. Meanwhile although China is slowing it is delivering growth and the authorities still have conventional monetary policy options available to them if necessary. Therefore, although we are sceptical of analysts' forecasts that suggest 10% growth in profits for small companies next year, we do anticipate growth. Market level aggregate valuations need to be treated with caution given the broad range of multiples across the market. However, acknowledging that good quality business are typically trading at above market average earnings multiples we believe that the companies in the portfolio have business models and balance sheets that will allow them to prosper over the long term, though as alluded to above, the shorter term outlook is more difficult to predict.

Ed Beal

Aberdeen Asset Managers Limited

14 December 2015

GOVERNANCE - DIRECTORS' REPORT

Results and Dividends

The Directors present their report and the audited financial statements for the year ended 31 October 2015.

An interim dividend of 2.15p (2014 - 2.10p) per share was paid on 24 July 2015. The Directors recommend that a final dividend of 3.85p (2014 - 3.15p) per share is paid on 12 February 2016 to shareholders on the register on 15 January 2016. The ex-dividend date is 14 January 2016.

Investment Trust Status

The Company is registered as a public limited company (registered in Scotland No. SC014692) and has been accepted by HM Revenue & Customs as an investment trust subject to the Company continuing to meet the relevant eligibility conditions of Section 1158 of the Corporation Tax Act 2010 and the ongoing requirements of Part 2 Chapter 3 Statutory Instrument 2011/2999 for all financial years commencing on or after 1 November 2012. The Directors are of the opinion that the Company has conducted its affairs for the year ended 31 October 2015 so as to enable it to comply with the ongoing requirements for investment trust status.

Individual Savings Accounts

The Company has conducted its affairs so as to satisfy the requirements as a qualifying security for Individual Savings Accounts. The Directors intend that the Company will continue to conduct its affairs in this manner in the future.

Capital Structure

At 31 October 2015, the Company had 47,857,317 fully paid Ordinary shares of 5p each (2014 - 47,857,317 Ordinary shares). There have been no changes in the Company's issued share capital subsequent to the year end and up to the date of this Report. 

Voting Rights

Each Ordinary share holds one voting right and shareholders are entitled to vote on all resolutions which are proposed at general meetings of the Company. The Ordinary shares, excluding treasury shares, carry a right to receive dividends. On a winding up or other return of capital, after meeting the liabilities of the Company, the surplus assets will be paid to Ordinary shareholders in proportion to their shareholdings.

There are no restrictions on the transfer of Ordinary shares in the Company other than certain restrictions which may be applied from time to time by law.

Management Agreement

The Company has appointed Aberdeen Fund Managers Limited ("AFML" or "the Manager"), a wholly owned subsidiary of Aberdeen Asset Management PLC, as its alternative investment fund manager ("AIFM"). AFML has been appointed to provide investment management, risk management, administration and company secretarial services as well as promotional activities. The Company's portfolio is managed by Aberdeen Asset Managers Limited ("AAML" or "the Investment Manager") by way of a group delegation agreement in place between AFML and AAML. In addition, AFML has sub-delegated promotional activities to AAML and administrative and secretarial services to Aberdeen Asset Management PLC, and fees payable for these services are shown in note 3 to the financial statements.

The basic management fee, details of which are shown in note 3 to the financial statements, is 0.4% per annum of adjusted gross assets. There is also a quarterly performance-related fee calculated at a rate of 0.1% per annum (up to a maximum of 0.5% per annum) of the adjusted gross assets for every 1% by which the Company's net asset value performance outperforms the capital performance of the benchmark index over the previous rolling 12 month period.

The management agreement may be terminated by either party on three months' written notice. On termination, the Manager would be entitled to receive fees which would otherwise have been due to that date.

Substantial Interests

As at 31 October 2015, the following interests over 3% in the issued Ordinary share capital of the Company had been disclosed in accordance with the requirements of the FCA's Disclosure and Transparency Rules:

A Non-beneficial interests

As at the date of approval of this Report, no changes to the above interests had been notified to the Company.

Directors

The Board currently consists of four non-executive Directors.

All Directors are considered by the Board to be independent of the Company and the Manager and free of any material relationship with the Manager. Each Director has the requisite high level and range of business and financial experience which enables the Board to provide clear and effective leadership and proper stewardship of the Company.

The Directors attended Board and Committee meetings during the year ended 31 October 2015 as follows (with their eligibility to attend the relevant meeting in brackets):

A Retired 5 February 2015

B Appointed 1 January 2015

Mr T J K Barnes and Mr N M Yarrow retire at the Annual General Meeting and, being eligible, offer themselves for re-election.

The Board (excluding the individual Directors) believes that these Directors remain independent of the Manager and free of any relationship which could materially interfere with the exercise of their independent judgement on issues of strategy, performance, resources and standards of conduct and confirms that, following formal performance evaluations, the individuals' performance continues to be effective and demonstrates commitment to the role. The Board therefore has no hesitation in recommending the re-election of Messrs Barnes and Yarrow for re-election at the Annual General Meeting.

Directors' & Officers' Liability Insurance

The Company maintains insurance in respect of Directors' & Officers' liabilities in relation to their acts on behalf of the Company. Furthermore, each Director of the Company is entitled to be indemnified out of the assets of the Company to the extent permitted by law against all costs, charges, losses, expenses and liabilities incurred by them in the actual or purported execution and/or discharge of their duties and/or the exercise or purported exercise of their powers and/or otherwise in relation to or in connection with their duties, powers or office. These rights are included in the Articles of Association of the Company and the Company has granted indemnities to the Directors on this basis.

Management of Conflicts of Interest

The Board has a procedure in place to deal with a situation where a Director has a conflict of interest. As part of this process, the Directors prepare a list of other positions held and all other conflict situations that may need to be authorised either in relation to the Director concerned or his or her connected persons. The Board considers each Director's situation and decides whether to approve any conflict, taking into consideration what is in the best interests of the Company and whether the Director's ability to act in accordance with his or her wider duties is affected. Each Director is required to notify the Company Secretary of any potential, or actual, conflict situations that will need authorising by the Board. Authorisations given by the Board are reviewed at each Board meeting.

No Director has a service contract with the Company although Directors are issued with letters of appointment upon appointment. There were no contracts during, or at the end of the year, in which any Director was interested.

The Board takes a zero tolerance approach to bribery and has adopted appropriate procedures designed to prevent bribery. The Manager also takes a zero tolerance approach and has its own detailed policy and procedures in place to prevent bribery and corruption.

Going Concern

The Company's assets consist substantially of equity shares in companies traded on the London Stock Exchange which are, in most circumstances, realisable within a short timescale. The Board has set limits for borrowing and regularly reviews actual exposures, cash flow projections and compliance with banking covenants. Borrowings of £10 million are committed to the Company until 24 November 2017. As such, the Directors believe that the Company has adequate financial resources to continue its operational existence for the foreseeable future and at least 12 months from the date of this Annual Report. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Accountability and Audit

Each Director confirms that, so far as they are aware, there is no relevant audit information of which the Company's auditor is unaware, and they have taken all the steps that they could reasonably be expected to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company's auditor is aware of that information.

Additionally there have been no important events since the year end.

The Directors have reviewed the level of non-audit services provided by the auditor during the year, together with the auditor's procedures in connection with the provision of such services, and remain satisfied that the auditor's objectivity and independence is being safeguarded.

Independent Auditor

The Company's auditor, KPMG LLP, has indicated its willingness to remain in office. The Directors will place a resolution before the Annual General Meeting to re-appoint KPMG LLP as auditor for the ensuing year, and to authorise the Directors to determine its remuneration.

Internal Control

The Board is ultimately responsible for the Company's system of internal control and risk management and for reviewing its effectiveness. The Board confirms that as at 31 October 2015 there is an ongoing process for identifying, evaluating and managing the Company's significant business and operational risks, that it has been in place for the year ended 31 October 2015 and up to the date of approval of the Annual Report, that it is regularly reviewed by the Board and accords with the internal control guidance for directors in the UK Code.

The design, implementation and maintenance of controls and procedures to safeguard the assets of the Company and to manage its affairs properly extends to operational and compliance controls and risk management.

The Directors have delegated the investment management of the Company's assets to the Manager within overall guidelines, and this embraces implementation of the system of internal control, including financial, operational and compliance controls and risk management. Internal control systems are monitored and supported by the Manager's internal audit function which undertakes periodic examination of business processes, including compliance with the terms of the management agreement, and ensures that recommendations to improve controls are implemented.

Risks are identified and documented through a risk management framework by each function within the Manager's activities. Risk is considered in the context of the FRC and the UK Code guidance, and includes financial, regulatory, market, operational and reputational risk. This helps the Manager's internal audit risk assessment model identify those functions for review. Any weaknesses identified are reported to the Board, and timetables are agreed for implementing improvements to systems. The implementation of any remedial action required is monitored and feedback provided to the Board.

The key components designed to provide effective internal control are outlined below:

- the Board and Manager have agreed clearly defined investment criteria, specified levels of authority and exposure limits. Reports on these issues, including performance statistics and investment valuations, are regularly submitted to the Board;

- the Manager prepares forecasts and management accounts which allow the Board to assess the Company's activities and review its performance;

- as a matter of course, the Manager's compliance department continually reviews the Manager's operations; and

- written agreements are in place which specifically define the roles and responsibilities of the Manager and other third party service providers.

The Board has considered the need for an internal audit function but, because of the compliance and internal control systems in place at the Manager, has decided to place reliance on the Manager's systems and internal audit procedures. At its meeting in December 2015, the Audit Committee carried out an annual assessment of internal controls for the year ended 31 October 2015 by considering documentation from the Manager, including the internal audit and compliance functions and taking account of events since 31 October 2015. The results of the assessment were then reported to the Board at the next Board meeting.

The system of internal control and risk management is designed to meet the Company's particular needs and the risks to which it is exposed. Accordingly, the system of internal control and risk is designed to manage rather than eliminate the risk of failure to achieve business objectives and by their nature can only provide reasonable and not absolute assurance against misstatement and loss.

The UK Stewardship Code and Proxy Voting

The purpose of the UK Stewardship Code is to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and assist institutional investors with the efficient exercise of their governance responsibilities.

The Company's investments are held in nominee names. The Board has delegated responsibility for actively monitoring the activities of portfolio companies, including the exercise of voting powers on its behalf, to the Manager who has in turn delegated this responsibility to the Investment Manager.

The Investment Manager is responsible for reviewing, on a regular basis, the annual reports, circulars and other publications produced by the portfolio company and for attending company meetings. The Investment Manager, in the absence of explicit instruction from the Board, is empowered to use discretion in the exercise of the Company's voting rights.

In exercising the Company's voting rights, the Aberdeen Group follows a number of principles which set out the framework on corporate governance, proxy voting and shareholder engagement in relation to the companies in which the Aberdeen Group has invested or is considering investing. The Board has reviewed these principles together with the Aberdeen Group's Disclosure Response to the UK Stewardship Code, and is satisfied that the exercise of delegated voting powers by the Investment Manager is being properly executed. The Aberdeen Group's Corporate Governance Principles together with the Aberdeen Group's Disclosure Response to the UK Stewardship Code may be found on the Aberdeen Group's website, at aberdeen-asset.com/aam.nsf/AboutUs/governancestewardship

The Board recognises and supports the Aberdeen Group's policy of active engagement with investee companies and the voting of all of the shares held by the Company. The Board receives regular reports on the exercise of the Company's voting rights and discusses any issues arising with the Investment Manager. It is the Board's view that having an active voting policy and a process for monitoring the Investment Manager's exercise of those votes, especially in relation to controversial issues, aids the efficient exercise of the Company's governance responsibilities.

Relations with Shareholders

The Directors place a great deal of importance on communication with shareholders. The Annual Report is widely distributed to other parties who have an interest in the Company's performance. Shareholders and investors may obtain up to date information on the Company through its website, dunedinsmaller.co.uk and the Investment Manager's freephone information service. The Company responds to letters from shareholders on a wide range of issues.

The Board's policy is to communicate directly with shareholders and their representative bodies without the involvement of the management group (either the Company Secretary or the Manager) in situations where direct communication is required and representatives from the Board meet with major shareholders on an annual basis in order to gauge their views.

At each Board meeting the Board receives full details of any communications from shareholders to which the Chairman responds personally as appropriate.

The notice of the Annual General Meeting included within the Annual Report is sent out at least 20 working days in advance of the meeting. All shareholders have the opportunity to put questions at the Company's Annual General Meeting. 

Annual General Meeting

The Annual General Meeting will be held at the offices of Aberdeen Asset Managers Limited, 40 Princes Street, Edinburgh EH2 2BY on 3 February 2016, at 12 noon.

Issue of New Shares and Treasury Shares

Under resolution 8, an ordinary resolution, it is proposed that, in line with common practice, the Directors be authorised to allot up to £789,645 in aggregate nominal value of shares and to grant relevant rights (as defined in that resolution) in relation to shares in the Company (equivalent to 15,792,915 Ordinary shares of 5p, representing approximately 33% of the Company's issued share capital) without further reference to the Company in general meeting for a period ending at the conclusion of the Annual General Meeting in 2017. The Directors have no current intention to utilise this authority.

Resolution 9, an ordinary resolution, seeks to renew the Directors' authority to sell or transfer Ordinary shares out of treasury for cash up to an aggregate nominal value of £119,643 (representing approximately 5% of the Company's issued share capital) after taking account of any shares issued pursuant to resolution 10. The Directors will be authorised to sell or transfer such shares at a price below the then prevailing net asset value of the shares provided always that the shares will only be sold or transferred out of treasury at prices (a) in excess of the average price at which the shares were bought into treasury; and (b) at a narrower discount to the net asset value than the average level of discount the shares were purchased at. Any dilution to the net asset value resulting from (b) above will be restricted to no more than 0.5% in any financial year. Resolution 9 is conditional on the passing of resolution 10.

The authority conferred by this resolution will give the Directors additional flexibility going forward, and the Directors consider that it is in the interests of the Company that such authority be available. Such authority will only be implemented when, in the view of the Directors, to do so will be for the benefit of all shareholders. This authority will lapse at the conclusion of the Annual General Meeting to be held in 2017.

Under Section 561 of the Companies Act 2006, where it is proposed to issue equity securities for cash, or to sell the shares out of treasury, they must first be offered to existing shareholders in proportion to their holdings. In some circumstances, it is beneficial to allot such securities for cash without first offering them in this way.

The Directors will therefore propose a special resolution (resolution 10) at the Annual General Meeting which, if passed, will allow them to allot shares (and securities convertible into shares) for cash up to an aggregate nominal value of £119,643 as if Section 561(1) did not apply. This authority will lapse (unless renewed) at the conclusion of the Annual General Meeting in 2017. New Ordinary shares would not be issued at a price that is less than the prevailing net asset value per share.

Share Repurchases

The Directors also propose a special resolution to seek renewed approval at the forthcoming Annual General Meeting of the Company's authority to purchase its own Ordinary shares in the market (resolution 11). The maximum aggregate number of Ordinary shares which may be purchased pursuant to the authority is 14.99% of the issued Ordinary share capital of the Company as at the date of the passing of the resolution. The minimum price which may be paid for an Ordinary share is 5p (being the nominal value). The maximum price (exclusive of expenses) which may be paid for the shares is the higher of: a) 5% above the average of the market values of the Ordinary shares (as derived from the Daily Official List of the London Stock Exchange) for the shares for the five business days immediately preceding the date of purchase; and b) the higher of the price of the last independent trade and the highest current independent bid on the main market for the Ordinary shares.

The authority to buy back Ordinary shares, if conferred, will only be exercised if to do so would result in an increase in net asset value per Ordinary share for the remaining shareholders and if it is in the best interests of shareholders generally. If the Directors exercise the authority conferred by resolution 11, the Company will have the option of either holding the shares in treasury or of cancelling the shares, and will decide at the time of purchase which option to pursue.

This authority will last until the conclusion of the Annual General Meeting of the Company to be held in 2017 (unless previously revoked, varied or renewed by the Company in general meeting).

Any use by the Company of the authority to purchase shares will be by way of either a single purchase or a series of purchases, when market conditions allow.

Amendment to Articles of Association

Resolution 12, which is a special resolution, will be proposed as special business at the Annual General Meeting to amend the articles of association ("the Amended Articles") of the Company to reflect a recent change to the UK regulation of investment companies.

The proposed change to the existing articles of association will be to Article 110 (Capital Reserve). The Companies Act 2006 (Amendment of Part 23) (Investment Companies) Regulations 2012 removed the requirement that the articles of association of an investment company must prohibit the distribution of capital profits by way of dividend. The Amended Articles reflect this change and no longer prohibit the distribution of capital profits by way of dividend. Although the Board has no current intention to distribute capital profits in this way, it considers that the proposed amendments to the articles of association provide useful flexibility and are to the benefit of the Company and its members as a whole.

Copies of the proposed Amended Articles detailing changes to the existing articles of association are available from the Company Secretary and will be on display during normal business hours on any business day (English public holidays excepted) at Bow Bells House, 1 Bread Street, London EC4M 9HH. They will also be available for inspection by any person attending the Annual General Meeting.

Recommendation

The Directors believe that the resolutions to be proposed at the Annual General Meeting are in the best interests of the Company and its shareholders as a whole, and recommend that shareholders vote in favour of the resolutions, as the Directors intend to do in respect of their own beneficial shareholdings totalling 67,825 Ordinary shares, representing 0.14% of the issued Ordinary share capital of the Company.

By order of the Board

Aberdeen Asset Management PLC

Company Secretary

40 Princes Street

Edinburgh EH2 2BY

14 December 2015

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with UK Accounting Standards. The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing these financial statements, the Directors are required to:

- select suitable accounting policies and then apply them consistently;

- make judgments and estimates that are reasonable and prudent;

- state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and

- prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

We confirm that to the best of our knowledge:

- the financial statements, prepared in accordance with the applicable accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

- that in the opinion of the Directors, the Annual Report taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Company's position and performance, business model and strategy; and

- the Strategic Report and Directors' Report include a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces.

For and on behalf of the Board of Dunedin Smaller Companies Investment Trust PLC

N M Yarrow

Director

14 December 2015

INCOME STATEMENT

BALANCE SHEET

The accompanying notes are an integral part of the financial statements. ​​​​​​​

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

CASHFLOW STATEMENT

NOTES TO FINANCIAL STATEMENTS