Annual Financial Report
The Edinburgh Investment Trust plc
Annual Financial Report Announcement
for the Year Ended 31 March 2012
FINANCIAL INFORMATION AND PERFORMANCE STATISTICS
(1)Source: Thomson Reuters Datastream
At At
31 31 %
March March
2012 2011 Change
Capital Return
Net asset value (`NAV') per
share:
  - debt at par 502.03p 456.66p +9.9
  - debt at market value 478.30p 434.02p +10.2
FTSE All-Share Index(1) 3002.78 3067.73 -2.1
Share price(1) 497.6p 444.0p +12.1
Discount/(premium):
  - debt at par 0.9% 2.8%
  - debt at market value (4.0)% (2.3)%
Gearing†(at par):
  -gross gearing 20.4% 22.4%
  -net gearing 20.3% 22.4%
. %
FOR THE YEAR TO 31 MARCH 2012 2011 Change
Revenue Return
Revenue return per share:
  -excluding VAT recovered on
management fees
and interest 22.1p 20.8p +6.3
  -VAT and interest recovered on - 2.2p
management fees
  -basic return 22.1p 23.0p -3.9
Dividends:
  -first interim 5.0p 4.75p
  -second interim 5.0p 4.75p
  -third interim 5.0p 4.75p
  -final proposed 7.0p 6.55p
22.0p 20.80p +5.8%
  -first special - 0.93p
  -second special - 1.26p
  -total dividends 22.0p 22.99p
Retail Price Index(1) 3.6% 5.3%
The special dividends arose from refunds of VAT on management fees and related
interest.
FOR THE YEAR TO 31 MARCH 2012 2011
% %
Change Change
Total Return (capital growth with
income reinvested)
NAV per share:
  -debt at par +15.2 +12.3
  -debt at market value +15.8 +13.3
FTSE All-Share Index(1) +1.4 +8.7
Share price(1) +17.6 +16.5
Ongoing Charges Ratio:
  Excluding performance fee 0.72% 0.71%
  Performance fee 0.41% -
CHAIRMAN'S STATEMENT
Economic and market conditions have remained challenging throughout the past 12
months. However, against this backdrop, the Company's defensively positioned
investment portfolio delivered substantial out-performance against the broader
market for the year ended 31 March 2012. More detail on the performance is set
out below.
The income generation of the portfolio has continued in good shape and the
Board is proposing, subject to shareholder approval, a final dividend of 7
pence per share for the 3 months to 31 March 2012 to make full year dividends
of 22 pence per share, an increase of 5.8% over the prior year.
UK Equity Market
During the year concerns over austerity measures and the lack of economic
growth stimuli in many western economies, oil price worries from political
instability in the Middle East, and the ongoing eurozone debt and banking
crisis have challenged the UK equity market and financial markets in general.
This has resulted both in periods of high volatility during the year and a FTSE
All-Share Index which ended slightly lower in the 12 month period.
A more detailed discussion on the UK equity market and the Company's portfolio
is contained in the Manager's Report.
Investment Strategy
Since the 2008 financial crisis, Neil Woodford and his colleagues have been
consistent in their view that the recovery of the global economy was likely to
be slower than the markets had anticipated, with a lengthy period of lower
growth in the developed world being a distinct possibility. Accordingly, a
defensive portfolio was constructed by the Manager and this investment
approach, supported by the Board, has remained in place during the last four
years, and continues today.
The central theme behind the construction of our portfolio is the selection of
individual stocks based upon fundamental value. This approach is designed to be
resilient in the continuing difficult economic environment, whilst at the same
time providing opportunity to participate in long term growth through rising
earnings and dividends.
Performance
Capital: The Company's Net Asset Value (`NAV') increased by 9.9% (valuing debt
at par) and 10.2% (with debt at market value) which represents a substantial
out-performance against the Company's benchmark (the FTSE All-Share Index (`the
Index')) which fell by 2.1%. Our portfolio is concentrated in a relatively
small number of sectors and its overweight positions in the pharmaceutical and
tobacco sectors and the underweight positions in the financials and mining
sectors were the main drivers in the Company's investment out-performance in
the year.
Total Return: The Company's NAV on a total return basis (capital growth with
income reinvested) increased by 15.2% (debt at par) and 15.8% (debt at market
value) compared to the Index which increased by 1.4%.
Shareholders' Return: The Company's share price (including income reinvested)
increased over the 12 months to 31 March 2012 by 17.6% and this compares very
favourably to the 1.4% increase in Index over the same period. The discount of
the share price to NAV (debt at par) reduced from 2.8% at 31 March 2011 to 0.9%
at 31 March 2012; valuing debt at market the shares traded at a premium of
4.0%, an increase from 2.3% at 31 March 2011.
Against peer group: The Company's NAV (debt at par) performance relative to the
21 investment trusts in the UK Growth and Income sector was ranked 1st in the
year to 31 March 2012. Over a longer time horizon, the Company ranked 10th over
three years and 4th over five years.
Gearing
The Company continues to have long-term debt amounting to £200 million. This is
all deployed in the market for investment purposes and contributed 1% to
relative total return performance against the benchmark in the year. At 31
March 2012 the gross gearing level was 20.4% compared to 22.4% at 31 March
2011.
Dividend
Income from the portfolio for the year was £52.9 million (2011 £50 million,
excluding one-off VAT related income).
The Board is recommending a final dividend of 7 pence per share which if
approved at the AGM will be paid on 31 July 2012 to shareholders on the
Company's register on 15 June 2012. This would result in a total dividend for
the year to 31 March 2012 of 22 pence per share which compares to 20.8 pence
per share in the prior year (excluding two VAT-related special dividends). This
represents a 5.8% increase over prior year compared to a 3.6% increase in the
Retail Prices Index for the same period and demonstrates the Company's
commitment to meet its long term objective of providing income growth which
exceeds the rate of inflation.
Retail Distribution Review (`RDR')
RDR comes into effect on 31 December 2012 and will have significant
implications in respect of how financial advice is provided, retail fund
platforms operate and financial products are distributed. Many commentators
have suggested that the abolition of commission under RDR should result in more
retail demand for Investment Trusts. The likely beneficiaries of this demand
will be the larger Investment Trusts, such as Edinburgh Investment Trust plc,
which have good levels of liquidity in their own shares and can demonstrate a
strong investment track record, a clear investment strategy and a compelling
brand.
With some key aspects of the RDR yet to emerge, the Board is monitoring
developments on RDR closely as they evolve to ensure that the Company is
positioned appropriately to benefit in the new environment of 2013 and
thereafter.
Articles of Association
A review of the Company's Articles of Association has been undertaken in light
of the full implementation of the Companies Act 2006. As a result of this
review, approval for the updated Articles of Association will be sought from
shareholders at the Annual General Meeting in July 2012.
Board
During the year there have been a number of changes to the Board. At last
year's AGM in July 2011 our former Chairman Scott Dobbie retired from the
Board. Scott joined the Company as a non-executive director in 1998 and became
Chairman in 2003. We thank him for his enormous contribution as a director over
these years and his guidance and leadership as Chairman. We wish Scott all the
very best for the future.
Max Ward joined the Board on 8 August 2011. Max has extensive investment
management experience. He spent a major part of his career as a partner at
Baillie Gifford, and is currently Managing Director and portfolio manager of
the Independent Investment Trust plc.
Dick Barfield will retire from the Board at the AGM in July 2012. Dick has
played a major role in the development of the Company during his 10 years on
the Board, and I particularly want to thank him for his wise council as Senior
Independent Director in my first year as Chairman. We wish him well for the
future.
It is envisaged that over the next few years there will be further refreshing
of the Board and in this context we support the intention of the Lord Davies
Review `Women on Boards' to encourage diversity. When appointing a new
Director, the Board takes into account the diversity of the Board, balance of
skills, knowledge and experience on the Board as a whole, as well as the
ability of a new Director to devote sufficient time to the Company to carry out
his or her duties effectively.
Outlook
There appears to be no realistic end in sight to the ongoing difficult economic
and market environment. Recent news around concerns over the pace of growth in
the global economy, recapitalisation of Spanish banks, and increasing economic
and political turmoil in Greece reinforce this viewpoint. As has been the case
in recent years, the relatively concentrated nature of the portfolio may from
time to time result in material short term performance deviations from the
benchmark. However, the Board and the Manager continue to believe that in the
present difficult market environment the current defensive investment approach
provides resilience whilst still providing the opportunity for creating growth
in shareholder value over the long term. Against this background, we see no
reason to change the Company's current investment approach.
Jim Pettigrew
Chairman
31 May 2012
MANAGER'S REPORT
Market Review
A return of 1.4% by the FTSE All-Share index over the 12 months masks some
major swings in sentiment and high stock market volatility. The optimistic mood
in which markets had started 2011 soon waned as the year unfolded and global
events, particularly the eurozone sovereign debt and banking crisis, dominated
UK stock market sentiment. The third quarter of the calendar year witnessed the
worst performance - a negative return of 13.5% - by the index since 2002, as
forecasts for slower economic growth added to stock market concerns.
Mirroring the pattern of the previous year, the stock market saw a strong
recovery into the end of 2011, this time driven by a significant shift in
policy by the European Central Bank, which announced its long-term refinancing
operation (LTRO). This was seen as removing the near term risk of a major
banking crisis. The performance comparison with the previous year continued
into 2012, as the UK stock market rose on the back of improved economic news
coming out of the US along with a second round of LTRO from the ECB. The last
month of the period, however, saw optimism waning and some profit taking as
doubts re-emerged about the strength of the global economy and the longer term
resolution of the eurozone debt crisis and investors struggled to find reasons
to propel equities higher.
Portfolio Strategy and Review
The Company's net asset value, including reinvested dividends, rose by 15.2%
during the period, compared to a rise of 1.4% (total return) by the FTSE
All-Share Index.
Against such a turbulent stock market backdrop, there was inevitably volatility
in the performance of the Company during the year. The positioning of the
portfolio, however, mitigated this while also providing a healthy positive
absolute return against a flat performance by the UK stock market. The
significant outperformance of the index by the Company over the year indicates
to the manager that market dynamics appear to have changed. In the previous two
years, equity markets were largely driven by momentum, with fundamentals being
ignored. During the last 12 months, however, fundamentals have started to
reassert themselves, with valuation again starting to matter.
The portfolio has significant exposure to the tobacco sector and this had a
positive impact on performance over the year. The holdings in British American
Tobacco and Imperial Tobacco both delivered returns in excess of 30%, as
investors were again reminded of the attractions of the sector's quality,
dependable characteristics and cashflow. While the valuations in the sector may
no longer be as low as they were a decade ago, in the manager's view they still
look attractive given this dependability and the companies' focus on delivering
returns to shareholders.
Over a quarter of the Company's assets are invested in the pharmaceutical
sector, which also performed well over the year. This was particularly the case
for the holding in GlaxoSmithKline, which announced a 15% increase in its share
buy-back in November and that it may file as many as 10 new drugs for
regulatory approval next year. This wrong-footed the stock market which
appeared to have given up on the industry's ability to discover new drugs. The
Company's holdings in Roche and Novartis gained additionally from the strength
of the Swiss franc and, while the performance of AstraZeneca was pedestrian by
comparison, the total return from the holding still exceeded that of the index
over the 12 months. The manager remains convinced that, over the longer term, a
significant exposure to this sector will prove rewarding.
The holding in BT again delivered positive returns over the year. As well as
pleasing the stock market with news that its roll-out of high speed broadband
is progressing faster than expected, the company announced that it had reached
an agreement with its pension scheme trustees on a reduction plan for the
scheme's deficit. This allows BT scope to increase future returns to
shareholders and the stock market to focus on the value the manager sees within
the shares.
Newsflow over the period from the Company's major holdings was mostly positive.
This was not, however, the case for Tesco. The company's trading update and
profit warning suggested that we had placed too much confidence in the
business's ability to cope with the economic headwinds and also that some of
the company's investment decisions of recent years have not created the value
originally envisaged. For example, the building of much bigger stores to cope
with an expanding product range has coincided with a boom in internet shopping.
There was also disappointing news from the investment in Chemring - the company
announced that unexpected delays in customer orders would hit full year
revenues and profits. A negative impact on performance came from the holding in
Homeserve, the shares of which fell sharply on news last October that,
following an independent review, the company had decided to suspend part of its
sales operation pending a re-training of its telephone sales staff.
The manager disposed of the Company's holding in Tesco for the reasons outlined
above. He also took some profits in the tobacco and telecommunications sectors
following strong outperformance; these, however, remain core holdings. The
proceeds were re-invested in positions across the pharmaceutical sector and new
investments were made in Sanofi, Serco Group and Smith & Nephew. The manager
took advantage of share price weakness to add to holdings in Chemring and
Homeserve.
Outlook
The manager expects concerns about the eurozone debt crisis and the outlook for
the global economy to remain a feature throughout the rest of 2012 and beyond,
as the developed world continues to grapple with the aftermath of the 2008
banking crisis. His view remains that, following this crisis, the economies of
the developed world face a period of inevitably lower growth, as the necessary
de-leveraging takes place. Whilst low interest rates and innovative monetary
policy can help offset the negative impact of this de-leveraging, the tools
available to central banks and governments are not powerful enough to effect a
strong and sustainable recovery.
This does not mean that equities will necessarily fall significantly - and
neither does it alter the confidence that the manager has for the scope for an
appropriately positioned portfolio to produce positive returns. His strategy
remains unchanged - he continues to focus the portfolio on what he believes to
be fundamentally cheap companies, many of which are defined as `blue-chip' or
the `new sovereigns', and where he believes valuations continue to
underestimate their ability to grow through a prolonged period of economic
stagnation.
Neil Woodford
Investment Manager
31 May 2012
INVESTMENTS IN ORDER OF VALUATION
AT 31 MARCH 2012
UK listed and ordinary shares unless stated otherwise
AIM Alternative Investment Market
MARKET
VALUE % OF
INVESTMENT SECTOR £'000 PORTFOLIO
GlaxoSmithKline Pharmaceuticals & 110,784 9.4
Biotechnology
AstraZeneca Pharmaceuticals & 98,424 8.4
Biotechnology
British American Tobacco 87,942 7.5
Tobacco
BT Fixed Line 74,819 6.4
Telecommunications
Imperial Tobacco Tobacco 65,682 5.6
Roche - Swiss Pharmaceuticals & 59,991 5.1
common stock Biotechnology
Vodafone Mobile 59,730 5.1
Telecommunications
BG Oil & Gas 55,862 4.7
Producers
Reynolds Tobacco 55,662 4.7
American - US
common stock
Reckitt Household Goods 41,946 3.6
Benckiser
Ten Largest 710,842 60.5
Holdings
Altria - US Tobacco 40,785 3.5
common stock
BAE Systems Aerospace & 40,755 3.5
Defence
Rolls Royce Aerospace & 37,108 3.2
Defence
Capita Support Services 33,547 2.8
Novartis - Swiss Pharmaceuticals & 33,098 2.8
common stock Biotechnology
Centrica Gas & Water 29,273 2.5
Multiutilities
SSE Electricity 22,810 1.9
Drax Electricity 22,237 1.9
Wm Morrison Food & Drug 21,011 1.8
Supermarkets Retailers
Sanofi - French Pharmaceuticals & 19,244 1.6
common stock Biotechnology
Twenty Largest 1,010,710 86.0
Holdings
Tate & Lyle Food Producers 17,297 1.5
Provident General Financial 15,818 1.3
Financial
International Electricity 14,531 1.3
Power
Raven Russia - Real Estate 6,134
preference
- ordinary 5,570
11,704 1.0
BTG Pharmaceuticals & 10,999 0.9
Biotechnology
Amlin Non-life Insurance 10,960 0.9
Hiscox Non-life Insurance 10,356 0.9
Catlin Non-life Insurance 8,382 0.7
Chemring Aerospace & 6,706 0.6
Defence
Serco Support Services 6,637 0.6
Thirty Largest 1,124,100 95.7
Holdings
Rentokil Initial Support Services 6,425 0.5
Smith & Nephew Health Care 6,330 0.5
Equipment &
Services
Burford Equity Investment 6,177 0.5
CapitalAIM Instruments
Stobart Industrial 6,095 0.5
Transportation
Paypoint Support Services 5,543 0.5
Homeserve Support Services 5,466 0.5
IP Group Financial Services 5,319 0.5
Barclays Bank -
Nuclear Power
Notes
  28 Feb 2019(1) Electricity 5,134 0.4
ProximagenAIM Pharmaceuticals & 3,204 0.3
Biotechnology
Yell Media 850 0.1
Forty Largest 1,174,643 100.0
Holdings
EurovestechAIM Financial Services 385 -
Helphire Financial Services 47 -
Total Holdings 1,175,075 100.0
(42)
(1) Contingent Value Rights (`CVRs') referred to as
Nuclear Power Notes (`NPNs') were offered by EDF as a
partial alternative to cash in its bid for British
Energy (`BE'). The NPNs were issued by Barclays Bank.
The CVRs participate in BE's existing business.
.
REPORT OF THE DIRECTORS
Principal Risks and Uncertainties
The Company's key long-term investment objectives are an increase in the
capital net asset value per share by more than the growth in the FTSE All-Share
Index (the `benchmark' or `index') and an increase in dividends by more than
the growth of RPI. The principal risks and uncertainties facing the Company are
an integral consideration when assessing the operations in place to monitor
these objectives, including the performance of the portfolio, share price and
dividends. The Board is ultimately responsible for the risk control systems but
the day-to-day operation and monitoring is delegated to the Manager.
Market Risk
The uncertainty over future equity market price movements is an inherent part
of the rationale for the Company's existence. The Company's assets principally
consist of quoted securities. The prices of these securities and the income
derived from them are influenced by many factors such as general economic
conditions, interest rates, inflation, political events, and government
policies as well as by supply and demand reflecting investor sentiment. Over
the coming months, there is the risk that European policy makers fail to
restore market confidence by implementing an effective and lasting solution to
the Eurozone sovereign debt crisis. Such failure could lead to a general
curtailment of credit availability in global banking and add significantly to
market risk in the near term. Such factors are outside the control of the Board
and Manager and may give rise to high levels of volatility in the prices of
investments held by the Company. The asset value and price of the Company's
shares and its earnings and dividends may consequently also experience
volatility and may decline.
Investment Performance Risk
The Board sets performance objectives and delegates the investment management
process to the Manager. The achievement of the Company's performance objectives
relative to the market requires active management of the portfolio of assets
and securities. The Manager's approach is to construct a portfolio which is
compatible with the Manager's view of future trends in the UK and global
economies. The Manager is a long term investor, prepared to take substantial
positions in securities and sectors which may well be out of fashion, but which
the Manager believes will have potential for material increases in earnings
and, in due course, dividends and share prices. Strategy, asset allocation and
stock selection decisions by the Manager can lead to underperformance of the
benchmark index and/or income targets. The Manager's style may result in a
concentrated portfolio with significant overweight or underweight positions in
individual stocks or sectors compared to the index and consequently the
Company's performance may deviate significantly, possibly for extended periods,
from that of the benchmark index. However the Board and Manager believe that
the investment process and policy outlined above should, over the long term,
meet the Company's objectives of capital growth in excess of the benchmark
index and real dividend growth.
Investment selection is delegated to the Manager. The Board does not specify
asset allocations. Information on the Company's performance against the
benchmark and peer group is provided to the Board on a quarterly basis. The
Board uses this to review the performance of the Company, taking into account
how performance relates to the Company's objectives. The Manager is responsible
for monitoring the portfolio selected and seeks to ensure that individual
stocks meet an acceptable risk-reward profile.
Gearing Risk
The Company has the ability to invest up to £200 million from its Debenture
Stocks in the equity market. The principal gearing risk is that the level of
gearing may have an adverse impact on performance. Secondary risks relate to
whether the cost of gearing is too high and whether the length of gearing is
appropriate. The Manager has full discretion over the amount of cash from the
Company's Debenture Stocks to be invested in the equity market whilst the
issuance, repurchase or restructuring of debt are for the Board to decide.
Information related to gearing is provided to the Directors as part of the
Board papers. The Board regularly reviews the level of gearing. Additionally,
the Board keeps under review the cost of buying back debt.
Income/Dividend Risk
The Company is subject to the risk that income generation from its investments
fails to reach the level of income required to meet its objectives.
The Board monitors this risk through the review of detailed income forecasts
and comparison against budget. These are contained within the Board papers. The
Board considers the level of income at each meeting.
Share Price Risk
There is a risk that the Company's prospects and NAV may not be fully reflected
in the share price from time to time.
The share price is monitored on a daily basis. The Board is empowered to
repurchase shares within agreed parameters. The discount at which the shares
trade to NAV can be influenced by share repurchases. The Company has not
repurchased shares in the last year.
Control Systems Risk
The Board delegates a number of specific risk control activities to the Manager
including:
• best practice standards in fund management operations;
• financial controls;
• meeting regulatory requirements;
• the management of the relationship with the Custodian in respect of the
custody and security of the Company's assets; and
• the management of the relationship with the Registrar.
Consequently in respect of these activities the Company is dependent on the
Manager's control systems and those of its Custodian and Registrars, both of
which are monitored by the Manager in the context of safeguarding the Company's
assets and interests. There is a risk that the Manager fails to ensure that
these controls are performed in a satisfactory manner. In addition, the Company
relies on the soundness and efficiency of the Custodian for good title and
timeliness of receipt and delivery of securities.
A risk-based programme of internal audits is carried out by the Manager
regularly to test the controls environment. An internal controls report
providing an assessment of these risks is prepared by the Manager and
considered by the Audit Committee, and is formally reported to and considered
by the Board.
Reliance on Third Party Providers
The Company has no employees and the Directors are all appointed on a
non-executive basis. The Company is reliant upon the performance of third party
providers for its executive function. The Company's most significant contract
is with the Manager, to whom responsibility both for the Company's portfolio
and for the provision of company secretarial and administrative services are
delegated. The Company has other contractual arrangements with third parties to
act as Auditor, Registrar, Custodian and Broker. Failure by any service
provider to carry out its obligations to the Company in accordance with the
terms of its appointment could have a materially detrimental impact on the
operation of the Company and could affect the ability of the Company to
successfully pursue its investment policy and expose the Company to risk of
loss or to reputational risk.
In particular, the Manager performs services which are integral to the
operation of the Company. The Manager may be exposed to the risk that
litigation, misconduct, operational failures, negative publicity and press
speculation, whether or not it is valid, will harm its reputation. Any damage
to the reputation of the Manager could result in counterparties and third
parties being unwilling to deal with the Manager and by extension the Company.
This could have an adverse impact on the ability of the Company to pursue its
investment policy.
The Board seeks to manage these risks in a number of ways:
• The Manager monitors the performance of all third party providers in relation
to agreed service standards on a regular basis, and any issues and concerns are
dealt with promptly and reported to the Board. The Manager formally reviews the
performance of all third party providers and reports to the Board on an annual
basis.
• The Board reviews the performance of the Manager at every board meeting and
otherwise as appropriate. The Board has the power to replace the Manager and
reviews the management contract formally once a year.
• The day-to-day management of the portfolio is the responsibility of Neil
Woodford, Head of Investment at Invesco Perpetual, who has worked in equity
markets since 1981 and has been the portfolio manager of the Company since
Invesco's appointment in September 2008. The Board has adopted guidelines
within which the portfolio manager is permitted wide discretion. Any proposed
variation outside these guidelines is referred to the Board and the guidelines
themselves are reviewed at every board meeting.
• The risk that the portfolio manager might be incapacitated or otherwise
unavailable is mitigated by the fact that he works within, and is supported by,
the wider Invesco Perpetual UK Equity team.
Other Risks
The Company may be exposed to other business and strategic risks in the future,
including fiscal, legal or regulatory changes, and the perceived impact of the
designated Investment Manager ceasing to be involved with the Company.
The instruments in which the Company's cash positions are invested are reviewed
by the Board to ensure liquidity and concentration risks are adequately
managed. Where an Invesco Group vehicle is utilised, it is assessed for
suitability against other similar investment options.
The Company is subject to laws and regulations by virtue of its status as an
investment trust and is required to comply with certain regulatory requirements
that are applicable to listed closed-ended investment companies. The Company is
subject to the continuing obligations imposed by the UK Listing Authority on
all companies whose shares are listed on the Official List. A breach of the
conditions for approval as an investment trust could lead to the Company being
subject to capital gains tax on the sale of the investments in the Company's
portfolio. A serious breach of other regulatory rules may lead to suspension
from listing on the Stock Exchange or a qualified Audit Report.
The Manager reviews compliance with investment trust tax conditions and other
financial and regulatory requirements on a daily basis.
There is an ongoing process for the Board to consider these other risks. In
addition, the composition of the Board is regularly reviewed to ensure the
membership offers sufficient knowledge and experience to assess and anticipate
these risks, as far as possible.
.
DIRECTORS' RESPONSIBILITY STATEMENT
in respect of the preparation of the annual financial report
The Directors are responsible for preparing the annual financial report in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under the law the Directors have elected to prepare financial
statements in accordance with applicable law and UK Accounting Standards
(United Kingdom Generally Accepted Accounting Practice). Under company law, the
Directors must not approve the accounts unless they are satisfied that they
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 judgements 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 adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and which
enable them to ensure that the 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 Directors' Report, a Directors' Remuneration Report and a Corporate
Governance Statement that comply with that law and those regulations.
In so far as each of the Directors is aware:
• there is no relevant audit information of which the Company's auditors are
unaware; and
• the Directors have taken all steps that they ought to have taken to make
themselves aware of any relevant audit information and to establish that the
auditors are aware of that information.
The Directors of the Company each confirm to the best of their knowledge, that:
• the financial statements, prepared in accordance with the applicable set of
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit of the Company; and
• this annual financial report includes 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 it faces.
Jim Pettigrew
Chairman
Signed on behalf of the Board of Directors
31 May 2012
Electronic Publication
The annual financial report is published on www.invescoperpetual.co.uk/
investmenttrusts which is the Manager's website maintained by the Company's
Manager. The work carried out by the Auditors does not involve consideration of
the maintenance and integrity of this website and accordingly, the Auditors
accept no responsibility for any changes that have occurred to the financial
statements since they were initially presented on the website. Visitors to the
website need to be aware that legislation in the United Kingdom governing the
preparation and dissemination of the financial statements may differ from
legislation in other jurisdictions.
INCOME STATEMENT
FOR THE YEAR ENDED 31 MARCH
2012 2011
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Gains on - 109,922 109,922 - 70,285 70,285
investments
Foreign - 6 6 - (131) (131)
exchange
profits/
(losses)
Income - note 2 52,857 398 53,255 52,460 - 52,460
Investment (1,662) (7,461) (9,123) (1,464) (3,417) (4,881)
management
fee - note 3
VAT recovered
on management
  fees - note 3 - - - 1,809 1,367 3,176
Other expenses (776) (1) (777) (775) (1) (776)
Net return
before finance
  costs and 50,419 102,864 153,283 52,030 68,103 120,133
taxation
Finance costs (5,850) (13,653) (19,503) (5,851) (13,655) (19,506)
Return on
ordinary
activities
  before tax 44,569 89,211 133,780 46,179 54,448 100,627
Tax on ordinary (1,490) - (1,490) (1,305) - (1,305)
activities
Return on
ordinary
activities
  after tax for 43,079 89,211 132,290 44,874 54,448 99,322
the financial
year
Return per
ordinary share
Basic - note 4 22.1p 45.7p 67.8p 23.0p 27.9p 50.9p
The total column of this statement represents the Company's profit and loss
account, prepared in accordance with UK Accounting Standards. The supplementary
revenue and capital columns are presented for information purposes in
accordance with the Statement of Recommended Practice issued by the Association
of Investment Companies. All items in the above statement derive from
continuing operations and the Company has no other gains or losses therefore no
statement of recognised gains or losses is presented. No operations were
acquired or discontinued in the year.
.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
FOR THE YEAR ENDED 31 MARCH
Capital
Share SHARE redemption CAPITAL REVENUE
Capital PREMIUM RESERVE RESERVE RESERVE TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 48,779 6,639 24,676 698,000 49,231 827,325
31 March
2010
Dividends - - - - (32,741) (32,741)
paid -
note 5
Net return - - - 54,448 44,874 99,322
on
ordinary
activities
Balance at 48,779 6,639 24,676 752,448 61,364 893,906
31 March
2011
Dividends - - - - (44,018) (44,018)
paid -
note 5
Net return - - - 89,211 43,079 132,290
on
ordinary
activities
Balance at 48,779 6,639 24,676 841,659 60,425 982,178
31 March
2012
BALANCE SHEET
FOR THE YEAR ENDED 31 MARCH
2012 2011
£'000 £'000
Fixed assets
  Investments held at fair 1,175,075 1,088,478
value through profit or
loss
Current assets
  Debtors 11,399 7,506
  Cash and cash funds 207 184
11,606 7,690
Creditors: amounts falling (7,139) (3,439)
due within one year
Net current assets 4,467 4,251
Total assets less current 1,179,542 1,092,729
liabilities
Creditors: amounts falling (197,364) (197,112)
due after more than one
year
Provision - (1,711)
Net assets 982,178 893,906
Capital and reserves
Share capital - note 6 48,779 48,779
Share premium 6,639 6,639
Capital redemption reserve 24,676 24,676
Capital reserve 841,659 752,448
Revenue reserve 60,425 61,364
Shareholders' funds 982,178 893,906
Net asset value per
ordinary share
Basic - note 7 502.03p 456.66p
These financial statements were approved and authorised for issue by the Board
of Directors on
31 May 2012.
Signed on behalf of the Board of Directors
Jim Pettigrew
Chairman
.
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MARCH
2012 2011
£'000 £'000
Cash inflow from 42,082 47,725
operating activities
Servicing of finance (19,251) (19,253)
Capital expenditure 21,204 4,353
and financial
investment
Equity dividends (44,018) (32,741)
paid - note 5
Net cash inflow
before management of
   liquid resources 17 84
and financing
Management of liquid (160) -
resources
(Decrease)/increase (143) 84
in cash
Reconciliation of
net cash flow to
movement in net debt
(Decrease)/increase (143) 84
in cash
Cashflow from 160 -
movement in liquid
resources
Exchange movements 6 (131)
Debenture stock (252) (253)
non-cash movement
Movement in net debt (229) (300)
in the year
Net debt at (196,928) (196,628)
beginning of year
Net debt at end of (197,157) (196,928)
year
NOTES TO THE FINANCIAL STATEMENTS
1. Principal Accounting Policies
The principal accounting policies adopted in the preparation of these financial
statements are set out below. These policies have been consistently applied
during the year and the preceding year, unless otherwise stated.
(a) Basis of preparation
Accounting Standards Applied
The financial statements have been prepared in accordance with applicable
United Kingdom Accounting Standards and with the Statement of Recommended
Practice (`SORP') `Financial Statements of Investment Trust Companies and
Venture Capital Trusts', issued by the Association of Investment Companies in
January 2009. The financial statements are also prepared on a going concern
basis.
2. Income
2012 2011
£'000 £'000
Income from listed
investments
UK dividends 41,547 39,841
Scrip dividends 743 689
Overseas dividends 10,527 9,314
Income from money market 9 9
funds
52,826 49,853
Other income
Interest on VAT recovered 18 2,459
on management fees
* note 3
Underwriting commission 13 148
Total income 52,857 52,460
A GlaxoSmithKline special dividend of £398,000 (2011: nil) has been recognised
in capital.
3. Investment Management Fees
2012 2011
RevenuE Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment 1,662 3,877 5,539 1,464 3,417 4,881
management fee
Performance - 3,584 3,584 - - -
fee
1,662 7,461 9,123 1,464 3,417 4,881
Details of the investment management agreement are disclosed on page 24 in the
Report of the Directors. At 31 March 2012 investment management fees of £
485,000 (2011: £435,000) were accrued. At 31 March 2012, a performance fee of £
3,584,000 (2011: none) was due.
During the year, no amounts in respect of VAT recovered on management fees has
been recognised (2011: £3,176,000). Interest of £18,000 (2011: £2,459,000) was
received during the year in respect of VAT recovered in previous periods and is
credited wholly to revenue.
4. Return per Ordinary Share
The basic, capital and total returns per ordinary share are based on each
return on ordinary shares after tax and on 195,116,734 (2011: 195,116,734)
ordinary shares, being the weighted average number of shares in issue during
the year.
5. Dividends
2012 2011
pence £'000 pence £'000
Dividends paid and
recognised in the
year:
Third interim paid in 4.75 9,268 - -
respect of previous
year
Special paid in 1.26 2,458 - -
respect of previous
year
Final paid in respect 6.55 12,780 6.35 12,390
of previous year
First interim paid 5.00 9,756 4.75 9,268
Special paid - - 0.93 1,815
Second interim paid 5.00 9,756 4.75 9,268
22.56 44,018 16.78 32,741
Dividends on shares
payable in respect of
  the year:
First interim 5.00 9,756 4.75 9,268
First special - - 0.93 1,815
Second interim 5.00 9,756 4.75 9,268
Third interim 5.00 9,756 4.75 9,268
Second special - - 1.26 2,458
Proposed final 7.00 13,658 6.55 12,780
22.00 42,926 22.99 44,857
The proposed final dividend is subject to approval by Ordinary Shareholders at
the AGM.
6. Share Capital
2012 2011
NUMBER £'000 NUMBER £'000
Authorised
Ordinary shares of 25p 316,099,929 79,025 316,099,929 79,025
each
Allotted, called-up
and fully paid
Ordinary shares of 25p 195,116,734 48,779 195,116,734 48,779
each
7. Net Asset Value (`NAV') per Ordinary Share
(a) NAV - debt at par
The shareholders' funds in the balance sheet are accounted for in accordance
with accounting standards; however, this does not reflect the rights of
shareholders on a return of assets under the Articles of Association. These
rights are reflected in the net assets with debt at par and the corresponding
NAV per share. A reconciliation between the two sets of figures follows:
2012 2011
NAV Shareholders' NAV Shareholders'
per Funds Per Funds
share share
PENCE £'000 PENCE £'000
Shareholders' 503.38 982,178 458.14 893,906
funds
Less:
Unamortised
discount and
expenses
arising from
debenture
issue (1.35) (2,636) (1.48) (2,888)
NAV - debt at 502.03 979,542 456.66 891,018
par
(b) NAV - debt at market value
The market value of the debenture stocks is determined by reference to the
daily closing price, and is subject to review against various data providers to
ensure consistency between data providers and against the reference gilts.
The net asset value per share adjusted to include the debenture stocks at
market value rather than at par is as follows:
2012 2011
NAV Shareholders' NAV Shareholders'
per Funds Per Funds
share share
PENCE £'000 PENCE £'000
NAV - debt at par 502.03 979,542 456.66 891,018
Debt at par 102.50 200,000 102.50 200,000
Debt at market
value
- 111â„2% (61.67) (120,341) (63.59) (124,081)
Debenture Stock
2014
- 73â„4% Debenture (64.56) (125,965) (61.55) (120,102)
Stock 2022
NAV - debt at 478.30 933,236 434.02 846,835
market value
The number of ordinary shares in issue at the year end was 195,116,734 (2011:
195,116,734).
8. Related Party Transactions
Invesco Asset Management Limited (`IAML'), a wholly owned subsidiary of Invesco
Limited, is Manager, Company Secretary and Administrator to the Company.
Details of management fees payable to IAML, together with details of Directors'
interests, are disclosed in the Report of the Directors. There are no other
related party transactions.
9. This Annual Financial Report announcement is not the Company's statutory
accounts. The statutory accounts for the year ended 31 March 2011 have been
delivered to the Registrar of Companies. The statutory accounts for the year
ended 31 March 2011 received an audit report which was unqualified, did not
include a reference to any matters to which the auditors drew attention by way
of emphasis without qualifying the report, and did not include a statement
under either section 498(2) or 498(3) of the Companies Act 2006. The statutory
accounts for the financial year ended 31 March 2012 have been approved and
audited but have not yet been filed.
10. The Audited Annual Financial Report will be posted to shareholders shortly.
Copies may be obtained during normal business hours from the Company's
registered office, Quartermile One, 15 Lauriston Place, Edinburgh EH3 9EP.
A copy of the Annual Financial Report will be available from Invesco
Perpetual on the following website:
http://investmenttrusts.invescoperpetual.co.uk/portal/site/iptrust/
investmentrange/investmenttrusts/edinburgh
11. The Annual General Meeting of the Company will be held at 11.00 am on 20
July 2012 at the Weston Link, National Galleries of Scotland, Princes
Street, Edinburgh.
By order of the Board
Invesco Asset Management Limited - Company Secretary
31 May 2012
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