Half-yearly Report

BlackRock Income Strategies Trust plc Half Yearly Financial Report 31 March 2015 Financial Highlights Assets 31 March 30 September Change 2015 2014 % Net assets (£'000)* 426,721 426,865 -0.03 Net asset value per share (debt at market value) 142.08p 143.30p +0.5** Ordinary share price 131.25p 134.00p +0.5** Discount to net asset value 7.62% 6.49% ======== ======== ======== * Before provision for the first interim dividend of 1.5p per share, paid on 10 April 2015 ** With income reinvested Revenue Six months Six months ended ended 31 March 31 March Change 2015 2014 % Net revenue return after taxation (£'000) 7,883 9,296 -15.2 Revenue return per share 2.73p 3.21p -15.0 Dividends: 1st interim dividend 1.50p 1.485p +1.0 2nd interim dividend 1.67p 1.53p +9.2 ======== ======== ======== Chairman's statement HIGHLIGHTS: - Adopted new multi-asset investment approach - Appointed BlackRock Fund Managers Ltd - Successfully migrated shareholders invested through F&C Savings Schemes - Announced Q2 2015 Dividend of 1.67p I am pleased to present my first report as Chairman of your Company. The last few months have been among the most significant in our 117 year history with a number of important developments: New multi-asset investment approach adopted: On 26 February this year, shareholders voted overwhelmingly to adopt a new multi-asset investment objective and policy. This will, we believe, provide shareholders with a more stable long term return, one which seeks to deliver greater capital stability than an equity only portfolio, with an objective of achieving a total portfolio return of UK Consumer Price Index ("CPI") + 4 per cent. per annum (before ongoing charges) over the medium term (five to seven years). In adopting this new objective, your Board has committed itself to delivering long term real dividend growth and capital preservation for shareholders. Change of name: As announced on 26 February 2015, and to reflect the new investment policy and objective outlined above, the Company's name was changed to BlackRock Income Strategies Trust plc. BlackRock Fund Managers Ltd appointed: With effect from 27 February 2015, BlackRock Fund Managers Limited has been appointed as the Company's Alternative Investment Fund Manager in place of F&C Investment Business Limited. BlackRock Investment Management (UK) Limited has been appointed as Company Secretary in place of F&C Investment Business Limited. Following the appointment of BlackRock, the Company's assets have now been aligned in accordance with the Company's new investment objective. Migration from F&C Savings Schemes: Shares in the Company ceased to be available through the F&C Savings Schemes with effect from 30 April 2015. There were circa 73 million shares held in these plans as at 31 January 2015, which have now been sold, transferred to other savings scheme and ISA providers, including BlackRock, or transferred to the Company's main register. I am pleased to report that the shares which were sold were successfully placed with other shareholders, thereby avoiding the necessity for the Company to make on-market share buy backs. Positioned for growth: Following the introduction of freedoms in the retirement savings market, your Board believes that the new investment policy of your Company will prove attractive for those seeking long term stable income. We intend that this, combined with BlackRock's investment management and marketing activities, will result in higher demand for the shares which will, in turn, lead to a re-rating of the shares by narrowing the current discount to Net Asset Value towards zero. We believe that it is in the best interests of all of our shareholders that the shares trade at a price as close as possible to their underlying cum income Net Asset Value per share (including debt at market value) ('NAV'). Your Board will continue to monitor the level of the discount to NAV at which the Company's shares trade and may, at its discretion, utilise the authority granted by shareholders in February to implement a tender offer by 31 August 2015 for up to 20 per cent. of shares in issue at that time (excluding any shares held in treasury) at a two per cent. discount to the cum income Net Asset Value per share (debt at market value) less costs and expenses. In exercising its discretion to implement this tender offer, your Board will be mindful of the best interests of shareholders as a whole as well as market conditions prevailing at that time. Board changes: After serving 5 years as Chairman, Lynn Ruddick stepped down at the conclusion of the recent AGM. This was a requirement of the UK Listing Authority, since she is a director of another BlackRock managed investment trust. I am delighted that she agreed, however, to continue to serve as a Director, and was so elected at the AGM. I would like to take this opportunity on behalf of your Board to thank Lynn for leading the Company so steadily and successfully through such an exciting period of change. PERFORMANCE Markets were broadly positive in the 6 months ending 31 March 2015, with the FTSE All-Share Index returning +5.3% and the FTSE World ex UK Index +13.1%, reflecting the continued support to equities from accommodative central bank policies. The moderation of interest rate expectations has impacted bond yields, which remain at very depressed levels historically. Against this backdrop of low interest rates, inflation remains at very low levels in the UK, with the CPI remaining static in both March and April 2015. Towards the end of the period under review concerns began to emerge about the sustainability of global growth, particularly in China, given a strong US dollar, and geo-political fears in central Europe and the Middle East. The result was increased volatility and, notwithstanding the market reaching new highs, a more cautious outlook. Over the 6 months to 31 March 2015 both the NAV and share price returned 0.5%. As the portfolio was managed by both F&C and BlackRock during the period, the table below analyses the Company's NAV and share price performance for the six months to 31 March 2015 to show the respective contribution from each of the Managers over this period against their respective benchmark or target index. You will find separate Investment Manager reports by both F&C and Blackrock, covering their respective periods of responsibility, set out below. Performance since BlackRock was appointed on 27 February 2015 reflects the impact of realigning the portfolio at a time when the market was notably volatile and our sensitivity to equities was reduced towards the end of the month following legacy portfolio disposals. In effect we tracked the market lower by approximately -1.7% whilst, at the same time, the market value of the Company's liability to its bond holders increased as interest rate expectations moderated, further impacting performance by -0.3%. NAV Share Target Index Period Manager performance* price Name % 1 October 2014 to Composite 26 February 2015 F&C 2.6% 2.5% Benchmark** 7.6% 27 February 2015 to 31 March 2015 BlackRock -2.1% -2.0% CPI plus 4% 0.5% ------- ------- ----------- ------ 6 months to 31 March 2015 0.5% 0.5% N/A ======= ======= =========== ====== * Based on cum-income NAV with debt at market value and with income reinvested ** Composite index of 80% FTSE All-Share Index and 20% FTSE World (ex UK) Index In the period since 31 March and up to close of business on 20 May 2015 the NAV has increased by 1.8% and the share price has increased by 4.0%. GEARING Gross gearing in the portfolio as at 31 March 2015 was approximately 14% via the Company's 6.25% Bonds 2031. The portfolio is not currently geared through the use of derivatives but the Manager will consider increasing exposure when suitable opportunities arise. EARNINGS AND DIVIDENDS The Company's revenue earnings for the period were 2.73p per share (2014: 3.21p). The decrease in earnings reflects the fact that the portfolio was managed throughout most of the period with a view to the likelihood of substantial further changes given the forthcoming change in Manager, including a reduction in gearing with the repayment of the Company's revolving credit facility of approximately £20 million. In addition, a convertible bond holding in the mining sector had to be written off and this contributed to a decline in fixed interest income for the period. Following the successful transition to BlackRock as Manager, your Board expects that the new investment policy will continue to offer an attractive level of income via multiple sources. We expect to continue to pay dividends at least at the current level and to grow the dividend in line with inflation. A first quarterly interim dividend of 1.5p per share was paid on 10 April 2015 (2013: 1.485p) and your Board has declared a second interim dividend of 1.67p per share (2014: 1.53p) which will be paid on 10 July 2015 to shareholders on the register on 12 June 2015. Your Board intends to spread the Company's distributions to shareholders as smoothly as possible across the year. For the year to 30 September 2015, we aim to do this by setting a second quarter dividend rate that will be constant for each remaining quarter of the year, with any adjustments that may be required to the total dividends paid for the year to be made to the fourth quarter dividend. Going forward, from 1 October 2015, it is your Board's intention to set a quarterly dividend rate in the first quarter that will be paid across the first three quarters of the year, with any adjustments that may be required to the total dividends paid for the year to be made to the fourth quarter dividend. OUTLOOK Following the successful migration or placing of the Company's shares held in the F&C Savings Schemes, your Board is excited about the next phase in our strategy - to capture the opportunities presented by the radical changes in the pensions market. The end of compulsory annuitisation means that thousands of investors will now have flexible access to their savings via drawdown. We believe that your Company's focus on dividend growth and capital preservation should appeal to those seeking long term stability, and we look forwards to the future with confidence. James M Long Chairman 22 May 2015 Interim management report and responsibility statement The Chairman's Statement and the Investment Managers' Report give details of the important events which have occurred during the period and their impact on the financial statements. Principal risks and uncertainties The principal risks faced by the Company can be divided into various areas as follows: - Market; - Investment and strategic; - Regulatory; - Operational; and - Financial. The Board reported on the principal risks and uncertainties faced by the Company in the Annual Report and Financial Statements for the year ended 30 September 2014. A detailed explanation can be found in the Strategic Report on page 11 and in note 18 on pages 46 to 51 of the Annual Report and Financial Statements which are available on the website maintained by BlackRock at blackrock.co.uk/bist. Notwithstanding the changes in the Company's investment objective and strategy, in the view of the Board, there have not been any changes to the fundamental nature of these risks since the previous report and these principal risks and uncertainties are equally applicable to the remaining six months of the financial year as they were to the six months under review. Going concern The Directors, having considered the nature and liquidity of the portfolio, the Company's new investment objective and the Company's projected income and expenditure, are satisfied that the Company has adequate resources to continue in operational existence for the foreseeable future and is financially sound. For this reason, they continue to adopt the going concern basis in preparing the financial statements. The Company has a portfolio of investments which are considered to be mostly readily realisable and is able to meet all of its liabilities from its assets and income generated from these assets. Ongoing charges (excluding interest costs and taxation) are approximately 0.65% of net assets. Related party disclosure and transactions with the AIFM and Investment Manager F&C Investment Business Limited ('F&C') provided investment management and other services to the Company for the period up until 27 February 2015 and was appointed as the Company's AIFM on 22 July 2014. BlackRock Fund Managers Limited (BFM) was appointed as the Company's AIFM in place of F&C with effect from 27 February 2015. BFM has (with the Company's consent) delegated certain portfolio and risk management services, and other ancillary services to BlackRock Investment Management (UK) Limited (BIM (UK)). F&C, BFM and BIM (UK) are regarded as related parties under the Listing Rules. Details of the fees payable are set out in notes 3 and 4 and note 12. The related party transactions with the Directors are set out in note 13. Directors' responsibility statement The Disclosure and Transparency Rules (DTR) of the UK Listing Authority require the Directors to confirm their responsibilities in relation to the preparation and publication of the Interim Management Report and Financial Statements. The Directors confirm to the best of their knowledge that: - the condensed set of financial statements contained within the half yearly financial report has been prepared in accordance with applicable UK Accounting Standards and the Accounting Standards Board's Statement `Half Yearly Financial Reports'; and - the Interim Management Report, together with the Chairman's Statement and Investment Manager's Report, include a fair review of the information required by 4.2.7R and 4.2.8R of the FCA's Disclosure and Transparency Rules. This half yearly financial report has been reviewed by the Company's auditor. The half yearly financial report was approved by the Board on 22 May 2015 and the above responsibility statement was signed on its behalf by the Chairman. James M Long For and on behalf of the Board 22 May 2015 Investment managers' report PORTFOLIO STRATEGY The following comments come from Adam Ryan of BlackRock, the Company's new investment manager. It is with great excitement that I take over as the investment manager of the Company some 117 years after its inception, although this is tinged with acute awareness of the responsibility my team and I bear to our new clients - the shareholders of the Company. The Company, along with many of the early investment trusts, was set up to allow small and medium-sized investors access to opportunities which larger investors took for granted - indeed the list of British Asset's (the previous name for the Company) 46 founding shareholders were categorised into manufacturing, trade, farming, and mining, as well as 'professionals'. Whilst many things have changed over the intervening period, not least in the investment world, I think this objective is just as appropriate now as it was at the end of the 19th century: to provide investors large and small with a well-diversified portfolio of assets managed with robust control of risk. I therefore look forward to serving all of the Company's shareholders, large or small over the coming years. As you will have no doubt read, as well as appointing a new Manager, the Company has also undergone a significant change in strategy. What hasn't changed, however, is the long-term aim of the Company: to deliver an attractive dividend yield and to preserve the value of shareholders' capital in real terms, i.e. after discounting inflationary effects. The change is in how we intend to try and deliver this. The first step has been to look beyond a strategy of just owning shares. Instead, by allowing the portfolio to own a much wider variety of asset classes, including bonds, and 'alternative' assets like property, commodities and infrastructure, we can build a portfolio which achieves much greater diversification, and therefore will typically have a lower level of risk. The second step has been to remove the equity 'benchmark' as a performance comparator and instead focus on an overall return objective. In part this is because, by its very nature, a multi-asset portfolio such as the Company now has is more difficult to compare to a simple benchmark or market index, but perhaps more importantly shareholders ultimately care most of all about their income and how secure their capital is. No-one's income needs to track FTSE returns, but they often want to track inflation. We have therefore taken as our return target one which closely matches the aims noted above, namely to continue paying dividends at least at the current level and to grow the dividend in line with inflation through time, and to combine this with seeking to preserve the real value of capital after accounting for inflation (which we've defined as the CPI). This gives a medium-term total return target of CPI +4%. I take over the management of the Company at an interesting time and one with not insignificant challenges, particularly for an investor seeking attractive levels of income. Ever since the global financial crisis, central banks have been cutting interest rates and employing techniques designed to reduce the longer-term cost of borrowing (i.e. Quantitative Easing, or QE). The result of this has been to push not only interest rates to zero but also push long-term bond yields to very low levels too. We only need to look as far as Germany to witness the extreme impact of QE. Short-dated German government bonds have negative interest rates, and since taking on the Company we have seen yields on 10-year German government bonds fall to just 0.05%. This has spread to other segments of the market, reducing the yield on corporate bonds - often the asset class of choice for investors seeking income - to historically low levels. As Bob Dylan wrote in 1964 though, "The Times They Are A-Changin", because at some point this year at least one of the main central banks will raise interest rates. This is most likely in the US, given that the unemployment rate has dropped sharply to just 5.4%, but is an outside possibility here in the UK too, as our jobless rate is only slightly higher at 5.5%. "So what?" you may ask, "isn't this good news for people seeking higher income yields?" In some ways yes, particularly if we are in a world in which economies are strong enough to allow us to revert to more normal levels of interest rates. The flip-side, however, is the degree of uncertainty this brings. When yields rise bond prices fall, creating unwanted volatility for investors. When Dylan was penning his lyrics some 50 years ago, US interest rates were also at very low levels and already heading higher. This was a precursor to a prolonged bear market in bonds which saw yields peak at around 14% in the mid-1980's and the US stock market going sideways for 20 years, as inflation took hold, driven by the oil crises of the 1970's. Some argue that the amount of money that has been pumped into the global economy over the last 6 years by central banks will also lead to inflation and a bear market for bonds, but I'm not convinced this is the case. For a start, it's difficult to believe that oil prices will return to anywhere near their previous highs given plentiful supply, and technological advances in areas such as robotics mean that labour market dynamics should exert much less pressure on inflation now than in the past. Further, many investors are forced buyers of bonds due to regulatory changes, meaning there is steady demand in a world in which supply of very high quality debt has shrunk significantly. What is true, however, is that for a market that has become used to interest rates only moving one way, the change in direction is bound to create a degree of nervousness, and this could well make itself felt in more frequent periods of volatility within markets. This greater uncertainty in markets brings us back to the changes made to the Company: a portfolio diversified across different asset classes and different geographies, that takes the state of the global economy as its starting point for allocating capital, and which has the flexibility tactically to alter the shape of the portfolio when circumstances change should be better placed to withstand market gyrations whilst still delivering the long-term returns shareholders need. With that in mind, I have outlined below the changes my team and I have made to the Company's portfolio, and our views of the world going forward. Portfolio analysis as a % of sharesholders funds 6.25% Bond 2031 -14.1% UK Equity Income 43.3% Legacy Equities 1.3% Tactical Allocation Equities 15.5% Listed Alternatives 2.6% Fixed Income 13.5% Net Current Assets 5.4% Cash and Cash Equivalents 17.6% Cash held to back Derivatives 14.9% Source: BlackRock (1) Further definitions in relation to financial terminology used in the above graph and elsewhere in this report are given in the glossary on pages 45 to 49 of the Half Yearly Financial Report. (2) In total, Cash and Cash Equivalents and Cash held to back Derivatives in the above chart equate to 32.5% of the Company's portfolio. In the investment listing, these amounts are held in the Cash and Cash Equivalents total of 23.1% and the holding in BlackRock's Institutional Cash fund of 9.4%. The level of cash held is linked to the multi-asset nature of the Company's portfolio which means that the Company has the ability to obtain exposure to a range of investment strategies through derivative instruments. To the extent the Investment Manager has elected not to be geared through the use of such instruments, the Company will always hold a level of cash (or equivalent holding in an Institutional Cash Fund) on its balance sheet representative of the difference between the market value of the underlying shares to which the portfolio is exposed via the relevant derivative contract and the lower cost of using a derivative contract to gain exposure to these holdings. The Company is limited to any gearing through the use of derivative instruments such that net economic equity exposure will not exceed 120% of the Company's net assets. UK EQUITIES (INCOME & GROWTH) Approximately 40% of the overall portfolio has been allocated to UK equities which is actively managed by Mark Wharrier and the BlackRock UK Equity Income Team. The UK equity portfolio is designed to generate a premium dividend yield to the UK market, dividend growth in excess of inflation over time and a total return exceeding that of the FTSE All Share Index. This is achieved by allocating circa 70% of the portfolio to dividend yield companies with attractive free cashflow characteristics, circa 20% to companies with strong growth characteristics and circa 10% to turnaround companies where there is significant recovery potential. To complement this allocation, another 12.5% has been allocated to international equities with a focus on dividend stocks. Regional tilts to Asia have been added to enhance the long-term growth potential. To enhance yield and to provide some protection we have deployed options strategies across liquid, developed markets. EQUITIES (TACTICAL ALLOCATION) Whilst Greece and the consequences of the UK elections have been dominating the headlines, the European economy is showing some improvement. We have implemented tactical exposures to stocks that generate their revenues from the Eurozone. In addition, with downward pressure on oil prices providing opportunities at the regional and sector level, we have allocated some exposure to India, and a basket of 'oil beneficiaries', screened for their improved prospects in a world where oil prices are set to remain relatively low. FIXED INCOME With yields at low levels across developed markets and little reward for taking large amounts of credit risk, the portfolio has only a small allocation to fixed income with a bias towards global corporate bonds. Whilst we appreciate the long-term diversification benefits of fixed income, we believe that there are downside risks in a year that could see the Federal Reserve in the US increase interest rates. To enhance yield the portfolio has a small exposure to Brazilian bonds. ALTERNATIVES The Company's 'alternative assets' exposure, which is currently less than 10% of the portfolio, includes listed closed-end investment companies with a bias towards those paying a strong income yield. The portfolio also holds volatility-based strategies that seek to exploit inefficiencies across derivatives markets. GEARING AND CASH Gross gearing in the portfolio is 14.1%, implemented through the 6.25% Bonds maturing in 2031 which the Company issued fourteen years ago. Total physical borrowings (including the Bonds) would not normally be expected to exceed 20% of shareholders' funds. The portfolio is not currently geared through the use of derivatives but the team will consider increasing exposure when suitable opportunities arise. Total gearing, including net derivative exposure, would not normally be expected to result in a net economic equity exposure in excess of 120%. Approximately 32% of the Company's current net assets are represented by cash or cash equivalents. Of this total, just under half relates to cash held to offset exposures on derivative positions (approximately 15% of net current assets). The allocation to cash beyond that held to cover derivative exposures reflects the cautious approach adopted since BlackRock took over as investment manager. The recent episode of volatility should present growth and income opportunities going forward and the portfolio is well positioned to deploy capital when these opportunities arise. OUTLOOK So how are times changing? Whilst our outlook is less dramatic than the lyrics of Dylan's '60s anthem, we do see some greater episodes of market volatility on the horizon. Interest rate rises, elections, the strong dollar and oil market price falls will have an impact on the corporate sector and we are monitoring these developments carefully. Periods of volatility can lead to changes in the way asset classes behave in relation to each other, and therefore require a careful understanding and monitoring of the risks we take to generate profits. In order to manage this up-tick in volatility, since taking over the management of the Company we have focussed on increasing the breadth of asset classes held within the portfolio. We are aware that 'crowding' around some popular investment themes has become extreme, which has the potential to cause volatility when investors collectively rush to the exits. In such periods, the fundamentals backing an investment can remain strong, but we can experience some pain as 'hot money' becomes the dominant driver of asset prices. Recently, we have seen this in the Eurozone as government bond markets sold-off aggressively. We believe that our positions are backed by sound fundamentals, but this recent turbulence does re-affirm the benefit of a dynamic and risk controlled approach to allocating capital. Whilst we retain a keen eye on the overall equity sensitivity of the portfolio, we are also taking measures to ensure the sensitivity to global interest rates is at low levels. At the time of writing, the UK election has just been decided with David Cameron securing a slim majority. Every pre-election poll and prediction has been wrong, with the Conservative Party victory totally unexpected. The immediate reaction has been positive for UK risk assets but the medium term outlook will be more challenging and we have elected to take small profits on some of our more cyclical UK positions. We look forward to reporting to shareholders in the future. Thank you for your support. Adam Ryan 22 May 2015 BRITISH ASSETS TRUST: F&C PERFORMANCE REVIEW FOR THE PERIOD FROM 1 OCTOBER 2014 TO 26 FEBRUARY 2015 The portfolio was managed throughout most of the period with a view to the likelihood of substantial further changes given the forthcoming change in manager. In addition, to ease the transition and provide liquidity in the event of any share buyback requirements, gearing was substantially reduced - the short term borrowing facility was repaid in full in January - and many of the less liquid smaller holdings were realised. Given the circumstances above, no new holdings were initiated. Total equity purchases amounted to £15.8m - the major individual additional shares bought were in Royal Dutch Shell, CRH, UBS, Intermediate Capital and Ashmore (all over £1.5m). No new shares were purchased after the end of December. Equity sales totalled £52.1m, the most significant of which were holdings in Microsoft, ICICI Bank, WPP, BP, Las Vegas Sands, Lancashire Holdings and Doric Nimrod Air 2 (all over £3m). The equity holdings within the portfolio generated a return of around 5% compared to a composite benchmark return of c.7.7% (Source: F&C Factset). The portfolio benefitted from strong stock picking in the bank (Industrial & Commercial Bank of China, ICICI Bank and Barclays) and media sectors alongside individual stocks such as CRH and Inmarsat. However, in aggregate, relative returns were disappointing. Unsurprisingly, given the fall in the oil price in the fourth quarter of 2014, holdings in the oil sector (Hunting, Total and Occidental) were particularly detrimental to performance. Elsewhere, stock specific issues at Sanofi, Premier Farnell and Digital Barriers, which each issued profit warnings, and a stock overhang at Greenko were also notable negatives. Exposure to the mining sector was also a negative factor with a convertible bond holding losing its entire value and the impact of a fall in Freeport-Mcmoran more than offsetting generally positive stock picking elsewhere. The return of the separate bond portfolio (excluding the convertible bond holding referred to above) was in line with that delivered by the equities over the period, but again behind the composite benchmark. F&C Investment Business Limited 22 May 2015 Portfolio analysis as at 31 March 2015 Anaysis of portfolio assets (including net current assets) UK Equities (Income & Growth) 38.0% Equities (Tactical Allocation) 13.6% Fixed Income 11.9% Listed Alternatives 2.3% Legacy Equities 1.1% Cash and Cash Equivalents 15.4% Cash held to back Derivatives 13.1% Net Current Assets 4.6% Fixed income portfolio Brazil 16.5% Europe 4.5% France 0.3% Germany 1.9% Global-BGF Corporate Bond Fund 42.3% Luxembourg 3.3% Mexico 0.7% Netherlands 2.5% United Kingdom 22.0% United States 6.0% Equities (Tactical Allocation) portfolio BGF ASEAN Leaders Fund 15.2% BGF Asian Dragon Fund 7.5% BGF Emerging Markets Equity Income Fund 22.5% BGF Global Equity Income Fund 36.6% Lyxor ETF MSCI India 15.1% Scottish Mortgage Investment Trust 3.1% UK equities (Income & Growth) portfolio Basic Materials 3.2% Consumer Goods 17.7% Consumer Services 19.2% Financials 24.6% Health Care 10.4% Industrials 15.7% Oil & Gas 6.6% Telecommunications 2.6% Ten largest equity investments 31 March 2015 BGF Global Equity Income Fund: 5.7% (2014: nil) invests in a global portfolio, with at least 70% of its total assets in the equity securities of companies domiciled in, or exercising the predominant part of their economic activity in, developed markets. BGF Emerging Markets Equity Income Fund: 3.5% (2014: nil) is a diversified portfolio of predominantly emerging market equities selected for their ability to generate income from dividends. The fund can also hold developed market securities that have significant business operations in emerging markets. BGF ASEAN Leaders Fund: 2.4% (2014: nil) ) seeks to maximise total return, through a diversified portfolio of securities of companies domiciled in, or exercising the predominant part of their economic activity in, current or past member countries of the ASEAN economic organisation. By 'Leaders', we mean those companies which, in the opinion of the fund managers, have attained or exhibited potential to attain above average market share in the geography they operate in, or in one or more products or services within its principal sector; or profitability or sales growth; or superior returns for investors. Lyxor ETF MSCI India: 2.4% (2014: nil) is an Exchange-traded fund established in France. The fund's investment objective is to track the performance of the MSCI India index, allowing the portfolio to gain direct exposure to the domestic stock market. AstraZeneca: 2.3% (2014: 1.0%) is a global pharmaceutical company, operating in the research, development, manufacture and marketing of pharmaceutical products. British American Tobacco 2.3% (2014: 1.5%) is one of the world's leading tobacco groups, with more than 200 brands in the portfolio selling in approximately 180 markets worldwide. HSBC Holdings 2.1% (2014: 5.2%) is a global banking and financial services organisation. Reed Elsevier 1.8% (2014: nil) is a global provider of professional information solutions (including publication of scientific, medical, technical and legal journals). Lloyds Banking Group 1.8% (2014: 1.6%) is a UK-based financial services company, providing a range of banking and financial services to individual and business customers. Friends Life 1.6% (2014: nil) is a global life insurance company providing a range of pension, investment and insurance products and services. All percentages reflect the value of the holding as a percentage of total investments. Percentages in brackets represent the value of the holding as at 30 September 2014. Together, the ten largest investments represent 25.9% of the Company's portfolio (ten largest investments at 30 September 2014: 31.6%). Portfolio valuation as at 31 March 2015 Market Gross value Country market Market as a % Company of exposure* value of net Equities (Tactical Allocation) risk £'000 £'000 assets Collective Investment Vehicles BGF ASEAN Leaders Fund Global 10,081 2.4 BGF Asian Dragon Fund Global 4,996 1.2 BGF Emerging Markets Equity Income Fund Global 14,941 3.5 BGF Global Equity Income Fund Global 24,249 5.7 Lyxor ETF MSCI India India 10,032 2.4 Scottish Mortgage Investment Trust United Kingdom 2,042 0.5 ------ --- Options Euro Stoxx 50 Call Option 18/12/15 3000 Germany 4,179 332 0.1 Euro Stoxx 50 Put Option 18/12/15 2650 Germany (2,794) (389) (0.1) Euro Stoxx 50 Put Option 19/06/15 3350 Germany (4,115) (266) (0.1) Euro Stoxx 50 Put Option 19/06/15 3550 Germany 3,772 268 0.1 FTSE 100 Call Option 15/05/15 7000 United Kingdom (5,073) (133) (0.0) FTSE 100 Call Option 17/04/15 7050 United Kingdom (2,155) (21) 0.0 FTSE 100 Put Option 15/05/15 6400 United Kingdom (4,755) (191) (0.1) FTSE 100 Put Option 15/05/15 6800 United Kingdom 13,228 600 0.1 iShares Put Option 17/04/15 28 United States (396) (16) 0.0 S&P 500 Put Option 17/04/15 1975 United States (1,138) (22) (0.0) S&P 500 Put Option 18/12/15 2320 United States 93 105 0.0 TOPIX Put Option 10/04/15 1550 Japan (7,896) (230) (0.1) ------ -------- ------- Total Return Swaps Total Return Swap City Dynavol Index United States 9,843 8 0.0 Total Return Swap City Dynavol EM Index United States 4,919 2 0.0 Total Return Swap Gold Miners Index United States 9,909 (192) (0.1) Total Return Swap EU Recovery Basket 2 Index Europe 7,519 122 0.0 Total Return Swap Oil Beneficiaries Basket Index United States 9,597 (188) (0.0) Total Return Swap EU Recovery Basket 1 Index Europe 9,928 131 0.0 Total Return Swap UK Recovery Basket Index United Kingdom 9,720 (35) (0.0) Total Return Swap Commodity Vol Basket Index United States 4,889 20 0.0 -------- ------- Total 66,246 15.5 -------- ------- Forward Currency Contracts Nominal currency Euro vs UK Sterling €17,000,000 12,315 (80) (0.0) Swiss Franc vs UK Sterling CHF10,905,000 7,210 (376) (0.1) Euro vs UK Sterling €46,080,000 32,406 (974) (0.2) Japanese Yen vs UK Sterling JPY3,030,500,000 16,588 (457) (0.1) Japanese Yen vs UK Sterling JPY1,164,866,022 6,552 (16) 0.0 US Dollar vs UK Sterling US$16,000,000 10,783 54 0.0 US Dollar vs Brazilian Real US$2,913,313 1,963 15 0.0 --------- -------- Total (1,834) (0.4) --------- -------- * Gross market exposure is the market value of the underlying shares to which the portfolio is exposed via the contract. Market value Country Market as a % of value of net Company risk £'000 assets Fixed Income AA Bond 3.781% 31 Jul 2019 United Kingdom 120 0.0 AA Bond 4.2487% 31 Jul 2020 United Kingdom 526 0.1 AA Bond 4.7201% 02 Jul 2043 United Kingdom 508 0.1 America Movil 5.125% 06 Sep 2073 Mexico 177 0.0 America Movil 5.75% 28 Jun 2030 Mexico 65 0.0 America Movil 6.375% 06 Sep 2073 Mexico 206 0.1 America Movil 6.375% 06 Sep 2073 Mexico 223 0.1 Aviva 6.125% Perpetual United Kingdom 814 0.2 Aviva 6.125% Var 14 Nov 2036 United Kingdom 129 0.0 Axa 5.625% 16 Jan 2054 United Kingdom 205 0.1 Axa 6.6862% FRN Perpetual United Kingdom 655 0.2 BAA 7.125% 01 Mar 2017 United Kingdom 134 0.0 BGF Global Corporate Bond Fund Global 24,404 5.7 Bharti Airtel 4% 10 Dec 2018 India 695 0.2 Bharti Airtel 5.35% 20 May 2024 India 184 0.0 BL Superstores Finance FRN 04 Oct 2030 United Kingdom 6 0.0 Blackstone GSO Loan Financing Europe 2,597 0.6 Brakes Capital 7.125% 15 Dec 2018 United Kingdom 549 0.1 Brazil 6% PIDI Notes 15 Aug 2022 Brazil 9,526 2.2 Citigroup 5.5% 13 Sep 2025 United States 683 0.2 CNH Industrial Finance Europe 2.75% 18 Mar 2019 Luxembourg 366 0.1 Deutsche Annington Finance 4.625% 08 Apr 2074 Netherlands 700 0.2 Dufry Finance 4.5% 15 Jul 2022 Luxembourg 577 0.1 EDF 5% Var Perpetual France 166 0.0 EDF 5.5% 17 Oct 2041 France 130 0.0 EDF 6% 23 Jan 2114 France 846 0.2 EDF 6.125% 02 Jun 2034 France 135 0.0 Elm 6.3024% FRN Perpetual United Kingdom 442 0.1 Empark Funding 6.75% 15 Dec 2019 Luxembourg 992 0.2 Enterprise Inns 6% 06 Oct 2023 United Kingdom 395 0.1 Fiat Finance 5.625% 12 Jun 2017 United States 26 0.0 Fidelity 7.125% 13 Feb 2024 United Kingdom 136 0.0 General Motors Financial 4.25% 15 May 2023 United States 1,396 0.3 Investec Bank 9.625% 17 Feb 2022 United Kingdom 207 0.1 Lloyds TSB Bank 10.75% Var 16 Dec 2021 United Kingdom 46 0.0 Lloyds TSB Bank 6.5% 17 Sep 2040 United Kingdom 188 0.1 Lloyds TSB Bank 6.75% 24 Oct 2018 United Kingdom 73 0.0 Lloyds TSB Bank 6.9625% FRN 29 May 2020 United Kingdom 101 0.0 Lloyds TSB Bank 7.625% 22 Apr 2025 United Kingdom 120 0.0 London Mining 12% Cnv 30 Apr 2019 United Kingdom - 0.0 Macquarie Bank 3.5% 18 Dec 2020 Australia 1,046 0.3 Matalan Finance 6.875% 01 Jun 2019 United Kingdom 435 0.1 Mitchells & Butlers Finance FRN 15 Dec 2028 United Kingdom 159 0.0 Orange 5.75% Var Perpetual United Kingdom 797 0.2 Paragon Group of Companies 3.729% 20 Apr 2017 United Kingdom 722 0.2 Petrobras 5.875% 07 Mar 2022 Brazil 71 0.0 Petrobras 6.625% 16 Jan 2034 Brazil 245 0.1 Société Générale 5% PIDI Notes 17 Jan 2024 United States 444 0.1 Standard Chartered 5.125% 06 Jun 2034 United Kingdom 742 0.2 Stonegate Public Co Financing 5.75% 15 Apr 2019 United Kingdom 1,154 0.3 Unique Public Financing 6.542% 30 Mar 2021 United Kingdom 93 0.0 Unique Public Financing 7.395% 28 Mar 2024 United Kingdom 51 0.0 UnityMedia Hessen 5.125% 21 Jan 2023 Germany 296 0.1 UnityMedia Hessen 6.25% 15 Jan 2029 Germany 816 0.2 Verizon Communications 4.862% 21 Aug 2046 United States 342 0.1 Verizon Communications 6.4% 15 Sep 2033 United States 393 0.1 Washington Mutual Bank 5.5% 10 Jun 2019 United States - 0.0 William Hill 4.25% 05 Jun 2020 United Kingdom 504 0.1 -------- ------- Total 57,759 13.5 -------- ------- Listed Alternatives BlueCrest BlueTrend United Kingdom 5,198 1.2 Foresight Solar Fund United Kingdom 4,928 1.2 NB Distressed Debt Investment Fund United States 1,030 0.2 -------- ------- Total 11,156 2.6 -------- ------- Market value Country Market as a % of value of net Company risk Sector £'000 assets UK Equities (Income & Growth) 3i Group United Kingdom Financials 1,939 0.5 Admiral Group United Kingdom Financials 978 0.2 Ashmore Group United Kingdom Financials 2,578 0.6 AstraZeneca United Kingdom Health Care 9,899 2.3 Berkeley Group Holdings United Kingdom Consumer Goods 2,955 0.7 Bodycote United Kingdom Industrials 1,551 0.4 BP Group United Kingdom Oil & Gas 6,207 1.5 British American Tobacco United Kingdom Consumer Goods 9,821 2.3 BT Group United Kingdom Telecommunications 4,727 1.1 Carnival United States Consumer Services 5,702 1.3 Cineworld Group United Kingdom Consumer Services 3,381 0.8 Compass Group United Kingdom Consumer Services 5,204 1.2 Deutsche Post Germany Industrials 1,874 0.4 Diageo United Kingdom Consumer Goods 4,946 1.2 Direct Line Insurance United Kingdom Financials 4,217 1.0 Dixons Carphone United Kingdom Consumer Services 1,411 0.3 Domino Printing United Kingdom Industrials 1,597 0.4 Energizer Holdings United States Consumer Goods 2,604 0.6 Friends Life United Kingdom Financials 6,965 1.6 GlaxoSmithKline United Kingdom Health Care 6,464 1.5 Hays United Kingdom Industrials 4,273 1.0 Howden Joinery United Kingdom Industrials 3,348 0.8 HSBC Holdings United Kingdom Financials 9,127 2.1 Imperial Tobacco Group United Kingdom Consumer Goods 6,919 1.6 Informa United Kingdom Consumer Services 2,416 0.6 Legal & General Group United Kingdom Financials 5,194 1.2 Lloyds Banking Group United Kingdom Financials 7,625 1.8 Next United Kingdom Consumer Services 6,463 1.5 Prudential United Kingdom Financials 6,839 1.6 Reed Elsevier United Kingdom Consumer Services 7,823 1.8 Rentokil Initial United Kingdom Industrials 4,598 1.1 Rio Tinto United Kingdom Basic Materials 6,007 1.4 Roche Switzerland Health Care 2,789 0.7 Royal Dutch Shell 'B' Netherlands Oil & Gas 5,961 1.4 Smith (DS) United Kingdom Industrials 3,409 0.8 Spectris United Kingdom Industrials 2,440 0.6 Stagecoach Group United Kingdom Consumer Services 3,160 0.7 Unilever United Kingdom Consumer Goods 5,515 1.3 Wolseley United Kingdom Industrials 5,840 1.4 -------- -------- Total 184,766 43.3 -------- -------- Individual Equities (legacy) Caithness Petroleum United States - 0.0 Digital Barriers United Kingdom 700 0.2 Great Eastern Energy India 1,020 0.2 Greenko Group India 2,844 0.7 Ienergizer United Kingdom 927 0.2 -------- -------- Total 5,491 1.3 -------- -------- BlackRock's Institutional Sterling Liquidity Fund 40,000 9.4 -------- -------- Total investments 363,584 85.2 -------- -------- Cash and cash equivalents 98,627 23.1 Net liabilities (35,490) (8.3) -------- -------- Net assets 426,721 100.0 -------- -------- Income statement for the six months ended 31 March 2015 Revenue £'000 Capital £'000 Total £'000 Six months Year Six months Year Six months Year ended ended ended ended ended ended 31.03.15 31.03.14 30.09.14 31.03.15 31.03.14 30.09.14 31.03.15 31.03.14 30.09.14 Notes (unaudited) (unaudited) (audited) (unaudited) (unaudited) (audited) (unaudited) (unaudited) (audited) Gains on investments held at fair value through profit or loss 2 - - - 6,524 9,940 9,596 6,524 9,940 9,596 Exchange (losses)/ gains - - - (1,438) 407 969 (1,438) 407 969 Income from investments held at fair value through profit or loss 2 9,315 10,816 23,549 - - - 9,315 10,816 23,549 Other income 2 72 31 59 - - - 72 31 59 Investment management fee 3 (343) (353) (700) (639) (655) (1,301) (982) (1,008) (2,001) Other operating expenses 4 (478) (292) (711) (2) - - (480) (292) (711) -------- -------- -------- -------- -------- -------- -------- -------- -------- Net return before finance costs and taxation 8,566 10,202 22,197 4,445 9,692 9,264 13,011 19,894 31,461 Finance costs (732) (733) (1,460) (1,342) (1,361) (2,711) (2,074) (2,094) (4,171) ------- -------- -------- -------- -------- -------- -------- -------- -------- Net return on ordinary activities before taxation 7,834 9,469 20,737 3,103 8,331 6,553 10,937 17,800 27,290 Taxation on ordinary activities 49 (173) (439) - - - 49 (173) (439) ------- -------- -------- -------- -------- -------- -------- -------- -------- Net return on ordinary activities after taxation 7,883 9,296 20,298 3,103 8,331 6,553 10,986 17,627 26,851 ------- -------- -------- -------- -------- -------- -------- -------- -------- Return per ordinary share 6 2.73p 3.21p 7.01p 1.08p 2.88p 2.26p 3.81p 6.09p 9.27p ======= ======== ======== ======== ======== ======== ======== ======== ======== The total column of this statement represents the Profit and Loss Account of the Company. The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies ('AIC'). The Company had no recognised gains or losses other than those disclosed in the Income Statement and the Reconciliation of Movements in Shareholders' Funds. All items in the above statement derive from continuing operations. All income is attributable to the equity holders of BlackRock Income Strategies Trust plc. There is no material difference between the profit on ordinary activities before taxation and the profit for the financial year stated above and their historical cost equivalents. Reconciliation of movements in shareholders' funds for the six months ended 31 March 2015 and comparative periods Called up Capital share redemption Capital Revenue capital reserve reserves reserve Total £'000 £'000 £'000 £'000 £'000 For the six months ended 31 March 2015 (unaudited) At 30 September 2014 72,778 15,563 302,990 35,534 426,865 Net return for the period - - 3,103 7,883 10,986 Shares purchased to be held in treasury - - (1,237) - (1,237) Dividends paid(a) - - - (9,893) (9,893) -------- -------- -------- -------- -------- At 31 March 2015 72,778 15,563 304,856 33,524 426,721 -------- -------- -------- -------- -------- For the six months ended 31 March 2014 (unaudited) At 30 September 2013 72,778 15,563 296,437 33,567 418,345 Net return for the period - - 8,331 9,296 17,627 Dividends paid(b) - - - (9,623) (9,623) -------- -------- -------- -------- -------- At 31 March 2014 72,778 15,563 304,768 33,240 426,349 -------- -------- -------- -------- -------- For the year ended 30 September 2014 (audited) At 30 September 2013 72,778 15,563 296,437 33,567 418,345 Net return for the period - - 6,553 20,298 26,851 Dividends paid(c) - - - (18,331) (18,331) -------- -------- -------- -------- -------- At 30 September 2014 72,778 15,563 302,990 35,534 426,865 ======== ======== ======== ======== ======== (a) Third quarterly interim dividend of 1.53p per share for the year ended 30 September 2014, paid on 10 October 2014. Fourth quarterly interim dividend of 1.895p per share for the year ended 30 September 2014, paid on 30 January 2015. (b) Third quarterly interim dividend of 1.4853p per share for the year ended 30 September 2013, paid on 11 October 2013. Final dividend of 1.8396p per share for the year ended 30 September 2013, paid on 31 January 2014. (c) Third quarterly interim dividend of 1.4853p per share for the year ended 30 September 2013, paid on 11 October 2013. Final dividend of 1.8396p per share for the year ended 30 September 2013, paid on 31 January 2014. First quarterly interim dividend of 1.485p per share for the year ended 30 September 2014, paid on 11 April 2014. Second quarterly interim dividend of 1.53p per share for the year ended 30 September 2014, paid on 11 July 2014. Balance sheet as at 31 March 2015 Notes 31 March 31 March 30 September 2015 2014 2014 £'000 £'000 £'000 (unaudited) (unaudited) (audited) Fixed assets Investments held at fair value through profit or loss 365,513 484,151 490,690 -------- -------- -------- Current assets Debtors 7 25,462 8,808 5,420 Derivative financial instruments 1,588 48 - Cash 11 98,627 14,200 14,790 -------- -------- -------- 125,677 23,056 20,210 Creditors - amounts falling due within one year Derivative financial instruments (3,517) - (32) Other creditors 8 (1,386) (21,318) (24,450) -------- -------- -------- (4,903) (21,318) (24,482) -------- -------- -------- Net current assets/(liabilities) 120,774 1,738 (4,272) -------- -------- -------- Total assets less current liabilities 486,287 485,889 486,418 -------- -------- -------- Creditors - amounts falling due after more than one year 9 (59,566) (59,540) (59,553) Net assets 426,721 426,349 426,865 -------- -------- -------- Capital and reserves Called up share capital 10 72,778 72,778 72,778 Capital redemption reserve 15,563 15,563 15,563 Capital reserves 304,856 304,768 302,990 Revenue reserve 33,524 33,240 35,534 -------- -------- -------- Total equity shareholders' funds 6 426,721 426,349 426,865 -------- -------- -------- Net asset value per ordinary share (debenture at par value) 6 147.96p 147.32p 147.49p -------- -------- -------- Net asset value per ordinary share (debenture at market value) 6 142.08p 144.30p 143.30p ======== ======== ======== Cash flow statement for the six months ended 31 March 2015 Six months Six months Year ended ended ended 31 March 31 March 30 September 2015 2014 2014 £'000 £'000 £'000 Notes (unaudited) (unaudited) (audited) Net cash inflow from operating activities 8,194 8,560 21,217 Servicing of finance (2,034) (2,080) (4,152) Capital expenditure and financial investment Purchase of investments (335,692) (210,654) (351,175) Proceeds from sale of investments 445,899 223,545 356,482 -------- -------- -------- Net cash inflow from capital expenditure and financial investment 110,207 12,891 5,307 -------- -------- -------- Equity dividends paid (9,893) (9,623) (18,331) -------- -------- -------- Net cash inflow before financing 106,474 9,748 4,041 -------- -------- -------- Financing Shares purchased to be held in treasury (1,237) - - Revolving advance facility (repaid)/drawndown (19,962) (10,142) (5,023) -------- -------- -------- Net cash outflow from financing (21,199) (10,142) (5,023) -------- -------- -------- Increase/(decrease) in cash in the period 11 85,275 (394) (982) ======== ======== ======== Reconciliation of net return before finance costs and taxation to net cash flow from operating activities for the six months ended 31 March 2015 Six months Six months Year ended ended ended 31 March 31 March 30 September 2015 2014 2014 £'000 £'000 £'000 (unaudited) (unaudited) (audited) Total return before finance costs and taxation 13,011 19,894 31,461 -------- -------- -------- Less: capital return before finance costs (4,445) (9,692) (9,264) -------- -------- -------- Net revenue return before finance costs and taxation 8,566 10,202 22,197 Expenses charged to capital (641) (655) (1,301) Tax on investment income 49 (248) (528) (Increase)/decrease in accrued income (1,815) (574) 853 Increase/(decrease) in creditors 2,035 (165) (4) -------- -------- -------- Net cash inflow from operating activities 8,194 8,560 21,217 -------- -------- -------- Notes to the financial statements for the six months ended 31 March 2015 1. Principal activity and basis of preparation The principal activity of the Company is that of an investment trust company within the meaning of section 1158 of the Corporation Tax Act 2010. The taxation charge has been calculated by applying an estimate of the annual effective tax rate to any profit for the period. The half yearly financial statements have been prepared using the same accounting policies set out in the Company's financial statements for the year ended 30 September 2014, except as otherwise disclosed below. Following the change to the Company's investment objective and policy with effect from 27 February 2015, the Company invests in a range of derivative products. Where appropriate, certain permitted financial instruments such as derivatives, including forward currency contracts, are used for revenue enhancement or efficient portfolio management. Where such financial instruments are used to protect or enhance revenue, the revenue and expenses derived therefrom are included in the revenue column of the Income Statement. Where such financial instruments are used to protect or enhance capital, the gains and losses derived therefrom are taken to the capital column of the Income Statement. In some circumstances, gains or losses may have to be apportioned between capital and revenue to reflect the nature of the transaction. The accounting policies for these instruments are set out below in more detail. Over the counter derivatives For over the counter derivatives (e.g. credit default swaps, interest rate swaps, swaptions, total return swaps and currency options), market value is determined based on valuation pricing models which take into account relevant market inputs as well as the time values, liquidity and volatility factors underlying the positions. Where an income stream can be determined on total return instruments the gain or loss will be included in the revenue column of the Income Statement. Collective Investment Schemes Investments in dual priced Collective Investment Schemes have been valued at fair value, which is usually bid value at the closing valuation point of the underlying fund on the last business day of the accounting period. Investments in single priced Collective Investment Schemes have been valued at market values, defined as fair value, which is usually the quoted price on the last business day of the accounting period. Options Options may be written over securities held in the portfolio for generating or protecting capital returns, or for generating or maintaining revenue returns. Where the purpose of the option is the generation of income, the premium is treated as a revenue item. Where the purpose of the option is the maintenance of capital, the premium is treated as a capital item. The value of the option is subsequently marked to market to reflect the fair value of the option based on traded prices. Option premium income is recognised as revenue evenly over the life of the option contract and included in the revenue column of the Income Statement unless the option has been written for the maintenance and enhancement of the Company's investment portfolio and represents an incidental part of a larger capital transaction, in which case any premia arising are allocated to the capital column of the Income Statement. Where the premium is taken to revenue, an appropriate amount is shown as capital return such that the total return reflects the overall change in the fair value of the option. When an option is closed out or exercised the gain or loss is accounted for as capital. The Company's financial statements have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (UK GAAP) and the Statement of Recommended Practice 'Financial Statement of Investment Companies' ('SORP') revised in January 2009, except for the allocation of the marginal tax relief as disclosed in the Company's financial statements for the year ending 30 September 2014. 2. Income Six months Six months Year ended ended ended 31 March 31 March 30 September 2015 2014 2014 £'000 £'000 £'000 (unaudited) (unaudited) (audited) Investment Income: UK listed dividends 6,549 7,811 15,869 Overseas listed dividends 1,355 1,322 4,402 Fixed interest income 1,043 1,612 3,164 Derivative income 368 71 114 -------- -------- -------- 9,315 10,816 23,549 -------- -------- -------- Other income: Interest 53 16 32 Underwriting commission 19 15 27 -------- -------- -------- Total 72 31 59 ======== ======== ======== 9,387 10,847 23,608 ======== ======== ======== Gains on investments held at fair value through profit or loss: Realised gains on sales 39,101 19,133 23,398 ======== ======== ======== Movement in investment holding losses (32,577) (9,193) (13,802) ======== ======== ======== Total 6,524 9,940 9,596 ======== ======== ======== 3. Investment management fee Six months Six months Year ended ended ended 31 March 31 March 30 September 2015 2014 2014 (unaudited) (unaudited) (audited) Revenue Capital Total Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 Investment management fee - F&C 287 523 810 353 655 1,008 700 1,301 2,001 Investment management fee - BlackRock 56 116 172 - - - - - - -------- -------- -------- -------- -------- -------- -------- -------- -------- Total 343 639 982 353 655 1,008 700 1,301 2,001 ======== ======== ======== ======== ======== ======== ======== ======== ======== With effect from 27 February 2015, BlackRock Fund Managers Limited has been appointed as the Company's Alternative Investment Funds Manager in place of F&C Investment Business Limited. There has been no change to the investment management fee, which continues to be levied at a rate of 0.4% per annum of the Company's total assets less current liabilities (excluding loans) and is allocated 35% to the revenue column and 65% to the capital column of the Income Statement. BlackRock have agreed to waive the management fees payable to the Company up to the level of transition and restructuring costs, which are estimated to be in the region of £744,000 (additional details are given in note 4). The fees in the above table that are shown as accrued to BlackRock have been credited to a payables account on the Company's balance sheet, and this balance has been offset by a corresponding debit representing the fee waiver benefit due from BlackRock in respect of the termination costs, such that no management fees will actually be paid to BlackRock until the level of fees earned exceeds the transition costs paid and accrued. The Company also receives rebates on the management fees levied on its underlying investments in other BlackRock managed funds in the normal course of business to ensure that no double charging occurs. These are recognised on an accruals basis and are treated as reduction in management fee expense and allocated between revenue and capital in accordance with the Company's policy for allocation of management fees. Additional information is given in note 12. 4. Operating costs and transition costs Other operating expenses charged to revenue of £478,000 (six months to March 2014: £292,000) relate to the ongoing operational costs of the Company and include custody and depositary fees, marketing costs, Directors' and auditors fees and registrar's fees. They do not include any of the costs associated with the Company's transition of Manager, which amounted to £744,000. This is because BlackRock has agreed to meet these costs in full by waiving the collection of its management fee until such time as these costs have been met in full. In the period to 31 March 2015, an amount of £172,000 has been waived; a further amount of approximately £572,000 is due under the fee waiver. The fee waiver benefit has been recognised in full during the period and credited against the corresponding charge for transition costs in the Company's Income Statement such that the transition costs have been fully offset and there is no impact to the Company's NAV. 5. Dividend The Board has declared a first interim dividend of 1.5p per share (2014: 1.485p per share), which was paid on 10 April 2015 to shareholders on the register as at 13 March 2015; the ex-dividend date was 12 March 2015. The total cost of this dividend, based on 288,412,282 shares in issue was £4,326,000 (2014: £4,298,000). As this is an interim dividend and has not been approved by shareholders, in accordance with FRS 21 it will be recognised in the Financial Statements only once it has been paid, and is therefore not accrued in these half yearly accounts. The Board has declared a second interim dividend of 1.67p per share (2014: 1.53p per share), which will be paid on 10 July 2015 to shareholders on the register as at 12 June 2015; the ex-dividend date will be 11 June 2015. The total cost of this dividend, based on 288,412,282 shares in issue is £4,816,000 (2014: £4,428,000). 6. Return and net asset value per ordinary share Revenue and capital return per share are shown below and have been calculated using the following: Six months Six months Year ended ended ended 31 March 31 March 30 September 2015 2014 2014 (unaudited) (unaudited) (audited) Net revenue return attributable to ordinary shareholders (£'000) 7,883 9,296 20,298 -------- -------- -------- Net capital return attributable to ordinary shareholders (£'000) 3,103 8,331 6,553 -------- -------- -------- Total return attributable to ordinary shareholders (£'000) 10,986 17,627 26,851 -------- -------- -------- Total shareholders' funds (£'000) 426,721 426,349 426,865 -------- -------- -------- The weighted average number of ordinary shares in issue during each period, on which the return per ordinary share was calculated, was: 288,566,128 289,412,282 289,412,282 -------- -------- -------- The actual number of ordinary shares in issue at the end of the period, on which the net asset value was calculated, was: 288,412,282 289,412,282 289,412,282 -------- -------- -------- Revenue return per ordinary share 2.73 3.21 7.01 -------- -------- -------- Capital return per ordinary share 1.08 2.88 2.26 -------- -------- -------- Total return per ordinary share 3.81 6.09 9.27 -------- -------- -------- Net asset value per ordinary share (debt at par value) 147.96 147.32 147.49 -------- -------- -------- Net asset value per ordinary share (debt at market value) 142.08 144.30 143.30 -------- -------- -------- 7. Debtors Six months Six months Year ended ended ended 31 March 31 March 30 September 2015 2014 2014 £'000 £'000 £'000 (unaudited) (unaudited) (audited) Amounts due from brokers 21,685 5,410 3,458 Prepayments and accrued income 3,108 3,284 1,857 Due from BlackRock in respect of management fee waiver 572 - - Other debtors 97 114 105 -------- -------- -------- Total 25,462 8,808 5,420 ======== ======== ======== 8. Creditors - amounts falling due within one year Six months Six months Year ended ended ended 31 March 31 March 30 September 2015 2014 2014 £'000 £'000 £'000 (unaudited) (unaudited) (audited) Revolving advance facility - 14,865 19,976 Amounts due to brokers 680 6,148 4,042 Interest on 6.25 per cent Bonds 2031 214 230 207 Other creditors 492 75 225 -------- -------- -------- Total 1,386 21,318 24,450 ======== ======== ======== 9. Creditors - amounts falling due after more than one year Six months Six months Year ended ended ended 31 March 31 March 30 September 2015 2014 2014 £'000 £'000 £'000 (unaudited) (unaudited) (audited) 6.25% Bonds 2031 59,566 59,540 59,553 -------- -------- -------- The market value of the 6.25% Bonds using the last available quoted offer price from the London Stock Exchange as at 31 March 2015 was 127.51p per bond, a total of £76,506,000. 10. Called up share capital Total Ordinary Treasury shares Nominal shares shares in issue value (number) (number) (number) £'000 Allotted, called up and fully paid share capital comprised: Ordinary shares of 25p each At 30 September 2014 289,412,282 1,700,000 291,112,282 72,778 ----------- --------- ----------- -------- Shares bought back and held in treasury (1,000,000) 1,000,000 - - ---------- --------- ----------- -------- At 31 March 2015 288,412,282 2,700,000 291,112,282 72,778 ----------- --------- ----------- -------- 11. Movement in net debt Six months Six months Year ended ended ended 31 March 31 March 30 September 2015 2014 2014 £'000 £'000 £'000 (unaudited) (unaudited) (audited) Reconciliation of net cash flow to movement in net debt -------- -------- -------- Increase/(decrease) in cash in the period 85,275 (394) (982) -------- -------- -------- Repayment of revolving loan facility 19,962 10,142 5,023 -------- -------- -------- Exchange movement (1,424) (53) 1,132 -------- -------- -------- Amortised debenture stock issue expenses (13) (13) (26) -------- -------- -------- Change in net debt in the period 103,800 9,682 5,147 -------- -------- -------- Opening net debt (64,739) (69,886) (69,886) -------- -------- -------- Closing net cash/(debt) 39,061 (60,204) (64,739) -------- -------- -------- Net cash of £39,061,000 in the above table comprises cash of £98,627,000 less the liability in respect of the 6.25% Bond 2031 of £59,566,000. The level of cash held is linked to the multi-asset nature of the Company's portfolio which means that the Company has the ability to obtain exposure to a range of investment strategies through derivative instruments. To the extent the Investment Manager has elected not to be geared through the use of such instruments, the Company will always hold a level of cash (or equivalent holding in BlackRock's Institutional Cash Fund) on its balance sheet representative of the difference between the market value of the underlying shares to which the portfolio is exposed via the relevant derivative contract and the lower cost of using a derivative contract to gain exposure to these holdings. The Company is limited to any gearing through the use of derivative instruments such that net economic equity exposure will not exceed 120% of the Company's net assets. 12. Transaction with the AIFM and related parties F&C Business Limited was the Company's AIFM until the close of business on 26 February 2015 and received investment management fees of £820,000 until that date (six months ended 31 March 2014: £1,008,000; year ended 30 September 2014: £2,001,000). In addition, and in accordance with the termination provisions of the Investment management agreement with F&C, the Company paid investment management fees of £335,000 to F&C for the period up until 30 April 2015. This additional fee will be met by BlackRock by way of a fee waiver. In addition to the above services, F&C provided the Company with marketing services until 26 February 2015. The total fees paid or payable for these services for the period ended 26 February 2015 amounted to £26,000 including VAT (£22,000 for 31 March 2014 and £68,000 30 September 2014) of which £24,000 was outstanding at 31 March 2015. BlackRock Fund Managers Limited ('BFM') was appointed as the Company's AIFM with effect from 27 February 2015. BFM has (with the Company's consent) delegated certain portfolio and risk management services, and other ancillary services, to BIM (UK). Details of the management fee payable to BlackRock are set out in note 3. BlackRock has agreed to meet certain transition costs as set out in note 4 by way of a management fee waiver. In addition to the above services, BlackRock has provided the Company with marketing services from 27 February 2015. The total fees paid or payable for these services for the period ended 31 March 2015 amounted to £19,000 including VAT of which £19,000 was outstanding at 31 March 2015. The Company also has investments in several funds managed by BlackRock and details of the amounts invested as at 31 March 2015 are set out in the table below. As disclosed in note 3, management fees may be levied on some of these investments. To the extent that any such management fees have been charged in respect of these holdings, the Company is rebated these management fees on a regular basis to ensure that no double charging occurs. For the period from 27 February 2015 to 31 March 2015, fees of £11,000 were levied in respect of the BGF Global Equity Income Fund and the BGF Emerging Markets Equity Income Fund, and were rebated in full to the Company. Value at 31 March 2015 Fund £'000 BlackRock's Institutional Sterling Liquidity Fund 40,000 BGF Global Corporate Bond Fund 24,404 BGF Global Equity Income Fund 24,249 BGF Emerging Markets Equity Income Fund 14,941 BGF ASEAN Leaders Fund 10,081 BGF Asian Dragon Fund 4,996 -------- 13. Related party disclosure The Board consists of five non-executive Directors, all of whom, with the exception of Ms Ruddick, are considered to be independent by the Board. Ms Ruddick is also a director of another BlackRock managed investment trust and is therefore not considered to be independent. None of the Directors has a service contract with the Company. Ms Ruddick was Chairman until 26 February 2015 and was succeeded by Mr Long. Mr Russell succeeded Mr Long as Chairman of the Audit Committee on the same day. The Chairman receives an annual fee of £40,500, the Audit Committee Chairman receives £26,470, the Senior Independent Director receives £25,750 and each of the other Directors receives an annual fee of £23,750. In addition, and in accordance with the Company's Articles of Association, the Directors received the following fees in relation to their significant additional work in respect of the transition to BlackRock: James M Long £13,235 Lynn C Ruddick £20,250 Jim N D Grover £11,875 Ian S M Russell £11,875 Jimmy G West £12,875 At the period end the Directors held ordinary shares in the Company as set out below: Beneficial Non-beneficial holdings holdings Ordinary Ordinary shares shares 31 March 2015 31 March 2015 James M Long 25,058 - Lynn C Ruddick 82,682 6,067 Jim N D Grover 27,500 - Ian S M Russell 27,500 - Jimmy G West 63,400 - -------- -------- 14. Publication of non statutory accounts The financial information contained in this half yearly report does not constitute statutory accounts as defined in section 435 of the Companies Act 2006. The financial information for the six months ended 31 March 2015 and 31 March 2014 has not been audited. The information for the year ended 30 September 2014 has been extracted from the latest published audited financial statements, which have been filed with the Registrar of Companies. The report of the auditor on those accounts contained no qualification or statement under sections 498(2) or (3) of the Companies Act 2006. 15. Contingent assets/liabilities There were no contingent liabilities or assets at 31 March 2015, 31 March 2014 or 30 September 2014. 16. Annual results The Board expects to announce the annual results for the year ending 30 September 2015 in December 2015. Copies of the annual results announcement can be obtained from the Secretary on 0207 743 3000 and a copy of the Annual Report is available from the Company's website at blackrock.co.uk/bist. The Annual Report should be available by late December 2015 and it is expected that the Annual General Meeting will be held in February 2016. 12 Thrormorton Avenue London EC2N 2DL ENDS The Half Yearly Financial Report will also be available on the BlackRock website at www.blackrock.co.uk/bist. Neither the contents of the Manager's website nor the contents of any website accessible from hyperlinks on the Manager's website (or any other website) is incorporated into, or forms part of, this announcement. For further information, please contact: Mark Johnson, Managing Director, Investment Trusts, BlackRock Investment Management (UK) Limited Tel: 020 7743 2300 Adam Ryan, BlackRock Investment Management (UK) Limited Tel: 020 7743 2761 Emma Phillips, Media & Communications, BlackRock Investment Management (UK) Limited Tel: 020 7743 2922 22 May 2015 12 Throgmorton Avenue London EC2N 2DL

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