Annual Report & Financial Statements 2008

Smaller Companies Value Trust plc

Annual report and financial statements for the year ended 30 April 2008

Contents

Objectives

Financial Highlights

Directors, Investment Manager and Others

Chairman’s Statement

Investment Manager’s Review

Fifty Largest Holdings

Sector Distribution

Directors’ Report

Statement of Directors’ responsibilities in

relation to the Company financial statements

Corporate Governance

Directors’ Remuneration Report

Independent Auditors’ Report

Income Statement

Balance Sheet

Reconciliation of Movements in Shareholders’ Funds

Cash Flow Statement

Notes to the Financial Statements

Notice of Meeting

Form of Proxy

Financial Calendar

Investment Manager Information

Trust Information

Smaller Companies Value Trust plc is registered in England and Wales no. 4388908 and is an investment company within the meaning of Part 23 of the Companies Act 2006.

Registered office:
10 Fleet Place
London EC4M 7RH

This document is important and requires your immediate attention.

If you are in any doubt about the action to be taken you should consult an independent financial adviser immediately. If you have sold or otherwise transferred all of your shares in Smaller Companies Value Trust plc, this document should be passed to the purchaser or transferee or to the person through whom the transfer was effected for transmission to the purchaser or transferee.

Objectives – Smaller Companies Value Trust plc

The Company invests in a diversified portfolio of quoted UK smaller companies with the objective of providing income shareholders with a dividend yield, together with the potential for dividend growth and capital shareholders with the benefit of geared capital growth.

The Board seeks to balance the interests of the holders of the income shares and capital shares at all times and the investment policy is such that the Company will be a qualifying investment trust under the Income and Corporation Taxes Act 1988 (as amended).

Information about the duration of the Company may be found in the Directors’ Report on page 8.

Financial Highlights

		Year ended		Year ended
		30-Apr		30-Apr
		2008		2007
Net asset value per package unit (Articles basis)*		189.49p		274.53p
Share price per package unit**		176.50p		248.25p
Discount per package unit		6.86%		9.57%
Net asset value per capital share (Articles basis)		132.00p		218.57p
Share price per capital share**		109.50p		183.50p
Discount per capital share		17.05%		16.05%
Net asset value per income share (Articles basis)		57.49p		55.96p
Share price per income share**		61.00p		64.75p
Premium per income share		6.11%		15.70%
Hoare Govett Smaller Companies Index
(excluding investment companies)***		7,589.10		9,401.67
Total (loss)/return on ordinary activities
before and after taxation (£’000)		-16,716		8,066
Dividend per income share		6.75p		5.47p
Net asset total (loss)/return per package unit		(74.77p)		45.17p

* A package unit comprises one capital share and one income share

** Source: Bloomberg

*** Source: Datastream

In the report and accounts, the net asset value has been calculated on both an Articles basis and Accounts basis (see Note 13).

Comparison of the total return of Smaller Companies Value Trust plc with the Hoare Govett Smaller Companies Index (excluding investment companies)

(Graphic Omitted)

Directors

Anthony Bushell

Anthony Bushell, aged 75, the chairman, joined the Bank of England in 1956 and was its chief investment manager from 1978 until 1992. He is Chairman of Eclectic Investment Trust plc. Until 2002 he was chairman of GT Japan Investment Trust plc and a director of Aberdeen Asset Management plc and, until March 2005, was a member of the advisory committee of the Pan European Smaller Companies Fund of the Scottish Widows Investment Partnership Investment Funds ICVC.

Bernard Clark

Bernard Clark, aged 66, is currently non-executive chairman of Litho Supplies plc, a non-executive director of TR European Growth Trust plc and a director of Edwina Investments Limited. Previously, he was a director of Lloyds Merchant Bank Limited and Lloyds Investment Managers Limited.

Nigel Pearson

Nigel Pearson, aged 64, qualified as a solicitor in Scotland and, until 2002, was general counsel for Rabobank International, London. He held various positions within Deutsche Bank Group between 1986 and 1998 including head of the legal and compliance departments of Deutsche Bank AG, London. He was chief legal adviser and company secretary of European Arab Bank Limited, London and then group legal counsel between 1979 and 1986. He has also occupied the position of company secretary and legal adviser to Arab Swiss Consultants Limited and Bank of America International Limited, London.

John Poulter

John Poulter, aged 65, was chairman of Spectris plc until May 2008. He was chief executive of Spectris plc from 1991 to 2001. He is also the non-executive chairman of Filtronic plc and a director of a number of private companies. His previous directorships include Kidde plc, RAC plc and the London Metal Exchange Limited. Previously he was responsible for a group of UK and US manufacturing businesses within BTR plc.

All of the Directors are members of the Nominations Committee and the Audit and Management Engagement Committee.

Investment Manager and Others

Company Secretary and registered office
Scottish Widows Investment Partnership Limited
10 Fleet Place
London EC4M 7RH
020 7203 3000

Auditors
Ernst & Young LLP
10 George Street
Edinburgh EH2 2DZ

Registrar
Equiniti Limited
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA

Broker
Landsbanki Securities (UK) Limited
Beaufort House
15 St Botolph Street
London EC3A 7QR

Banker
Lloyds TSB Scotland plc
120 George Street
Edinburgh EH2 4TS

Investment Manager
Scottish Widows Investment Partnership Limited
Edinburgh One
Morrison Street
Edinburgh EH3 8BE

Chairman’s Statement

Review

This has been a challenging period for UK equities, and particularly for those investing in smaller companies. While the total return for the FTSE 100 index fell by just over 2% during the period under review, the comparable figure for the smaller companies market, as measured by the Hoare Govett Smaller Companies Index (excluding investment companies) fell by 19.3%. During this time, the total return of the Smaller Companies Value Trust’s capital shares fell 22.9%. The leverage through the fixed bank loan inevitably had a detrimental effect on the capital shares.

Volatility has been a key feature of the market. Investors have been particularly concerned that difficulties associated with US subprime lending would affect global growth prospects. As a result, risk-adverse investors took shelter in the perceived safety of large-capitalisation stocks, and smaller companies were neglected. Deteriorating economic conditions also affected performance, since smaller companies tend to rely more heavily than their larger counterparts on a favourable domestic economic environment.

The other major impediment, of course, has been the credit crisis and its impact on the banking sector. Inevitably, sentiment has been driven by events in the US, with concerns over the financial health of Bear Stearns precipitating a share price collapse in March. Though the mood recovered somewhat in the wake of a large cut in US interest rates and encouraging news elsewhere within the sector, investors have retained a cautious outlook.

The market’s preference for large-capitalisation stocks has left many smaller companies at their most attractive valuations in years. While the Trust’s performance lagged its benchmark during this difficult period, I remain confident of the manager’s ability to identify these opportunities.

Dividend

A second interim dividend for the year ended 30 April 2008 was paid on 14 May 2008, making a total for the year of 6.75p per income share. As the balance of undistributed income for the year is small, the Board decided, as intimated in the announcement made on 24 April 2008, not to pay a final dividend.

Future of the Company

The attention of Shareholders is drawn to the paragraph on page 8 on the options available to the Board with the approach of 30 April 2009, by which date the future of the Company must be determined.

Outlook

In spite of the turmoil on the financial markets, the UK economy has held up remarkably well, but it is now slowing. In the short term, equities are likely to remain volatile amid the continued uncertainty over the impact of the credit crunch in financial markets. Investors will also be keen to see if the strength of the emerging economies is sustained. Rampant growth in the world’s developing nations will continue to affect both the UK economy and the general direction of equity markets in the months to come.

The performance of smaller companies relative to their larger counterparts depends to a considerable extent on how much further the credit crisis has to run. The key for many firms is not only if the Bank of England’s monetary policy committee is prepared to reduce interest rates again, but the extent to which financial institutions are prepared to pass such cuts on to the corporate sector and to consumers or even at a later stage should the Bank of England decide to lift rates.

Anthony Bushell
Chairman
27 June 2008

Investment Manager’s Review

Global and market background

The UK equity market traced a downward path over the twelve months. For much of the review period two concerns dominated investor sentiment: the economic outlook for the US and the knock-on effects of the credit crisis. Investors in the UK and elsewhere have been gripped by fears that the slowing American economy will tip into recession, and that the effects of the fallout from US subprime lending would begin to affect the wider economy. With this in mind, it is hardly surprising that the financial stresses affecting US activity have worked through to other major developed countries.

At the same time, though, the performance of the global economy has remained relatively robust. Industrial production has been holding up, and the developing world, headed by China and India, is still performing relatively well. Indeed, the big winners in the market over the review period proved to be mining stocks, propelled not only by the sustained growth in demand from emerging markets but by merger activity as well. The oil & gas sector, boosted by record prices for crude oil, was another strong performer. In contrast, many sectors of the market in which smaller companies play a prominent role, such as support services, struggled.

Other developments, such as the increasingly gloomy outlook for UK consumer spending and the slowing UK economy, had a detrimental effect on the share price of many smaller companies. Those with earnings linked to the public sector were adversely affected by an anticipated downturn in government spending. March’s budget statement, in which the chancellor of the exchequer was forced to admit that the UK economy was likely to grow more slowly than previously expected, heralded a reduction in government revenue and an increase in borrowing.

The other source of concern continues to be the credit crisis, which among other things prompted central banks around the world to arrange fresh injections of cash in an effort to keep the wheels of the financial system turning. While markets generally responded favourably to such intervention, banks remain wary of lending to each other, and it is likely to be some time before their confidence is fully restored.

Toward the end of 2007, a slowdown in the UK economy became apparent, prompting a change in the outlook for interest rates. On three occasions (December 2007, February 2008 and April 2008), the Bank of England’s monetary policy committee lowered the base figure by 0.25 percentage points, largely in response to slowing growth prospects and tighter credit conditions. At the same time, though, consumers have been faced with escalating utility bills, mortgage payments and food prices. The bank has thus been faced with the difficult task of balancing the risk to growth with that of domestic inflation, which threatens to rise above its targeted level. On the whole, though, the UK economy has held up remarkably well, with little downturn in business activity and companies still spending fairly healthily.

Portfolio activity

In a difficult environment for smaller companies, the Trust’s performance was disappointing. The issues surrounding Carter & Carter and Erinaceous Group, both now in administration, left their mark on performance and prompted us to dispose of our holding in each. We also disposed of Mapeley, a commercial property company, and Paragon, a provider of buy-to-let mortgages, amid the gloomy outlook for the property sector. Retailers also struggled against waning consumer confidence, and this was reflected in our holdings in Topps Tiles and Land of Leather.

The price of oil, which reached record levels during the period, was another negative factor affecting performance. Investors’ enthusiasm for this sector meant that the Trust’s underweight position relative to its benchmark detracted from performance. There is, however, considerable geopolitical risk associated with this area of the market, which we felt was not appropriate for the Trust to take.

The best performing stock during the period was Hilton Food Group, a specialist meat-packaging operator. Since its flotation, the highly cash-generative company has performed consistently well and numbers Tesco among its key customers. Other positive contributions came from Babcock International and VT Group, both of whom won a substantial number of defence contracts, and seem well-placed to do so in future. Fenner, an engineering company which purchased Prodesco, a US competitor, during the period, also performed well.

There were no significant shifts in the focus of the portfolio during the period. Transactions reflected our favourable view of healthcare and other defensive areas of the market where profits will be less affected by slowing economic growth. We participated in the float of CVS Group, a veterinary services provider, which proved one of the strongest performers in the portfolio, and established a holding in Southern Cross Healthcare, the UK’s largest provider of care homes. We also favour companies with strong links to emerging market infrastructure, such as Morgan Crucible which was another of the Trust’s strongest performers. Disposals, such as Pendragon, the UK’s largest car dealer, and Workspace Group, a commercial property provider, were indicative of our cautious economic outlook.

Outlook

Growth in the UK now looks likely to slow quite sharply this year as residential investment falls, consumers turn more cautious and business investment stops growing.

The more competitive level of sterling may give some boost to exports, but growth in GDP is likely to slow substantially.

From a global perspective, the reluctance of financial institutions to lend both to each other and to consumers will inevitably lead to slowing growth. In the short term, financial markets are likely to remain volatile amid concerns over the economic outlook for the US and the difficulties in the credit markets. Recent comments from the Bank of England and elsewhere suggesting the worst of the credit crisis may be over need to be taken with caution. Our outlook for consumer-related sectors remains guarded, something which is reflected in the position of the portfolio.

While the short-term economic outlook in the UK is far from favourable, many small and medium-sized firms are trading at their most attractive valuations in several years. Their share prices, though, may be susceptible to ongoing economic concerns.

Gregor Macdonald
Scottish Widows Investment Partnership Limited
27 June 2008

Fifty Largest Holdings at 30 April 2008

		Investment		30 April 2008 valuation £000		30 April 2007 valuation £000		Percentage of total assets less net current liabilities %		Business activity
1		Interserve		1,551		1,741		5.97		Support Services
2		Babcock International Group		1,479		1,435		5.69		Support Services
3		Intermediate Capital		1,398		807		5.39		General Financial
4		Fenner		1,395		1,269		5.38		Industrial Engineering
5		Hilton Food Group		1,377		#		5.31		Food Producers
6		Senior		1,371		#		5.28		Industrial Engineering
7		Dignity		1,350		1,245		5.20		General Retailers
8		Axon Group		1,217		1,742		4.69		Software & Computer Services
9		Atkins WS		1,193		#		4.60		Support Services
10		Cranswick		1,184		1,436		4.56		Food Producers
		Top ten investments		13,515				52.07
11		VT Group		1,153				4.44		Aerospace & Defence
12		Morgan Crucible Co		1,108				4.27		Electronic & Electrical Equipment
13		Shaftesbury		1,101				4.24		Real Estate
14		ROK		1,075				4.14		Construction & Building Materials
15		CVS Group		1,073				4.14		General Retailers
16		Kier Group		1,051				4.05		Construction & Building Materials
17		Caretec Holdings		1,034				3.98		Health Care Equipment & Service
18		Beazley Group		1,029				3.97		Non Life Insurance
19		S I G		984				3.79		Support Services
20		Taylor Nelson Sofres		972				3.75		Media & Entertainment
21		Savills		870				3.35		Real Estate
22		Cineworld Group		867				3.34		Travel & Leisure
23		Highway Insurance Holdings		862				3.32		Non Life Insurance
24		Unite Group		858				3.31		Real Estate
25		BSS Group		856				3.30		Support Services
26		Aberdeen Asset Management		851				3.28		General Financial
27		Headlam Group		840				3.24		Household Goods & Textiles
28		Spectris		840				3.24		Electronic & Electrical Equipment
29		Michael Page International		837				3.23		Support Services
30		Mouchel Group		833				3.21		Support Services
31		Elementis		825				3.18		Chemicals
32		Mitie Group		806				3.11		Support Services
33		Bovis Homes Group		756				2.91		Household Goods & Textiles
34		Tullett Prebon		736				2.84		General Financial
35		Ricardo		707				2.72		Support Services
36		Venture Production		700				2.70		Oil & Gas Producers
37		Southern Cross Heathcare Group		695				2.68		Health Care Equipment & Service
38		Clarkson		682				2.63		Industrial Transportation
39		Croda International		670				2.58		Chemicals
40		Hansard Global		624				2.40		Life Insurance
41		Rathbone Brothers		610				2.35		General Financial
42		Regus Group		521				2.01		Support Services
43		Luminar Group Holdings		513				1.98		Travel & Leisure
44		Fidessa Group		510				1.97		Software & Computer Services
45		Genus		501				1.93		Pharmaceuticals & Biotechnology
46		Melrose		474				1.83		Industrial Engineering
47		Greene King		464				1.79		Travel & Leisure
48		Topps Tiles		432				1.66		General Retailers
49		Halfords Group		351				1.35		General Retailers
50		Imperial Energy Corporation		340				1.31		Oil & Gas Producers
				44,526				171.59
		Other Equities (3)		583				2.25
		Net Current Liabilities		(19,161)				(73.84)
		Total assets less net current liabilities		25,948				100.00

# Not held at 30 April 2007.

Sector Distribution

		United Kingdom
		Total		Total
		2008		2007
Sector classification		%		%
Resources		4.01		3.46
Oil & Gas Producers		4.01		3.46
Basic Industries		13.95		7.87
Construction & Building Materials		8.19		5.16
Chemicals		5.76		2.71
General Industrials		24.44		14.46
Engineering & Machinery		12.49		8.12
Electronic & Electrical Equipment		7.51		4.62
Aerospace & Defence		4.44		1.72
Cyclical Consumer Goods		6.15		3.37
Household Goods & Textiles		6.15		3.37
Non-Cyclical Consumer Goods		18.57		4.59
Food Producers & Processors		9.87		2.25
Health		6.66		2.34
Pharmaceuticals & Biotechnology		2.04		-
Cyclical Services		64.38		36.27
Support Services		37.63		20.24
Transport		2.63		1.46
Leisure & Hotels		8.02		4.63
General Retailers		12.35		6.09
Media & Entertainment		3.75		3.85
Financials		34.45		20.90
Real Estate		10.90		7.51
Insurance		7.29		3.36
Life Assurance		2.40		2.72
General Financial		13.86		7.31
Information Technology		7.89		7.80
Software & Computer Services		7.89		7.80
Net current (liabilities)/assets		(73.84)		1.28
Total assets less net
current liabilities/assets