Annual Financial Report
The Edinburgh Investment Trust plc
Annual Financial Report Announcement
For the Year Ended 31 March 2014
FINANCIAL INFORMATION AND PERFORMANCE STATISTICS
Performance Statistics
The Company's Benchmark is the FTSE All-Share Index
FOR THE YEAR TO 31 MARCH 2014 2013
% %
CHANGE CHANGE
Total Return (capital growth with income
reinvested)
Net asset value (NAV) total return(1):
- debt at par +12.5 +21.1
- debt at market value +14.4 +22.4
FTSE All-Share Index total return(1) +8.8 +16.8
Share price total return(1) +8.0 +20.1
AT AT
31 March 31 March %
2014 2013 CHANGE
Capital Return
NAV:
- debt at par 628.18p 581.89p +8.0
- debt at market value 613.25p 559.01p +9.7
FTSE All-Share Index(1) 3555.59 3380.64 +5.2
Share price(1) 594.0p 572.0p +3.8
Discount/(premium):
- debt at par 5.4% 1.7%
- debt at market value 3.1% (2.3)%
Gearing (at par):
- gross gearing 16.3% 17.6%
- net gearing 15.7% 17.6%
%
FOR THE YEAR TO 31 MARCH 2014 2013 CHANGE
Revenue Return
Revenue return per share 23.2p 22.0p +5.5
Dividends:
- first interim 5.0p 5.0p
- second interim 5.0p 5.0p
- third interim 5.0p 5.0p
- final proposed 8.5p 7.8p
- total dividends 23.5p 22.8p +3.1
Retail Price Index(1) 2.5% 3.3%
Ongoing Charges Ratio:
Excluding performance fee 0.67 0.71
Performance fee(2) 0.42 1.21
(1) Source: Thomson Reuters Datastream
(2) The Company's performance fee is capped at 1% of period end net assets. A
full explanation of the Company's performance fee is given in the Annual
Financial Report. No performance fee will be due in future years.
.
CHAIRMAN'S STATEMENT
Dear Shareholder
Equity markets, and UK equity markets in particular, continued their recovery
over the twelve months to 31 March 2014. The net asset value (NAV) has once
again benefited from the value-driven and long-term investment strategy of the
Manager which, combined with the use of gearing, has delivered out-performance
against the benchmark for the year to 31 March 2014. The performance and
conditions on both the economic and market fronts are elaborated on below and
in the Portfolio Manager's Report.
I also report below on the new portfolio manager, Mark Barnett, and amendments
to the investment management agreement.
The income generation of the portfolio remains good and the Board is proposing
a final dividend of 8.5 pence per share for the year which would result in a
full year dividend of 23.5 pence per share, an increase of 3.1% year-on-year.
The Manager and Changes to the Investment Management Agreement
As reported to Shareholders at the half-yearly stage and in two subsequent
letters, the Board was informed by the Manager in October 2013 that Neil
Woodford, the Company's portfolio manager, would be leaving Invesco Perpetual
in April 2014.
As a Board we considered a variety of options for the future management of the
Company's assets, one of which was a set of proposals from Invesco Perpetual.
Having considered the appropriateness of Invesco Perpetual's investment style
and strategy to our objective and the strength of its investment resources, we
decided that Invesco Perpetual should continue as Manager with Mark Barnett
taking responsibility for the management of your Company's portfolio with
effect from 28 January 2014.
At the same time, we conducted a review of the Company's management fees in
light of the changing market conditions with a view to achieving a simple,
transparent and competitive structure, something which I am sure you will
welcome. We also spoke with a number of the Company's largest shareholders to
understand their views and expectations.
As a result of this review, the Board agreed with Invesco Perpetual amendments
to the Company's investment management agreement including changes to the
management fees which from 1 April 2014 will comprise a flat rate fee of 0.55%
(previously 0.6%) per annum of market capitalisation with no performance fee.
Mindful of the potential costs of repositioning the portfolio, a reduction of
up to £7.5 million of the amount of any performance fee for the year ended 31
March 2014 was also agreed.
When I wrote to you in October, I assured you that the Board had your interests
uppermost in its considerations as we determined the future management of the
Company. With Mark Barnett's expertise, continuity of management with Invesco
Perpetual and a reduction in management costs, we believe these new management
arrangements are an excellent outcome for the Company and for you the
shareholders.
UK Equity Market
The UK equity market as measured by the FTSE All Share Index delivered a total
return of 8.8% in the year to 31 March but the graph was far from being a
straight line as the market reacted to both positives, and negatives. The
positives included persistent increases in forecasts for UK economic growth,
rising consumer confidence, and a buoyant housing market. Negatives comprised
the strengthening UK currency, earnings downgrades in the international
sector, and the news that the pace of quantitative easing in the USA would
slow. UK equities continued to outperform UK gilts and the final quarter of the
financial year saw increased M&A activity and subsequent to the year end the
emergence of what could become the largest ever takeover of a UK company.
Off-setting the boost from increased M&A activity has been rising tension in
the Ukraine, the economic slowdown in China, and problems in previously strong
performers such as Brazil and Turkey.
A more detailed discussion on the UK equity market and the Company's portfolio
is contained in the Portfolio Manager's Report.
Investment Strategy
With the continuing prospect of low economic growth in the Western world, a
defensive portfolio remains in place, as has been the case for the last five
years. The Board supports the Manager's strategy, which is to be increasingly
vigilant with regard to company earnings forecasts and to continue focusing on
owning companies that are sensibly valued and able to deliver sustainable and
reliable earnings growth over the longer term, regardless of economic headwinds
or unexpected changes in commodity prices. This bottom up stock selection
strategy continues to result in concentrated positions in the Pharmaceuticals,
Tobacco and Utilities sectors and in largely avoiding the Mining and Banking
sectors. With the repositioning of the portfolio complete, we now have fewer
very large individual positions representing over 5% of the portfolio. Mark's
new additions to the portfolio include BP, Shaftesbury, KCOM, NewRiver Retail
and Thomas Cook.
Performance for the Year
The Company produced a net asset value (NAV) total return for the year of 12.5%
(debt at par) and 14.4 % (debt at market value), which compares with a total
return of 8.8% for the FTSE All-Share Index (the `Index'), the Company's
benchmark. The share price total return (share price with dividends reinvested)
for the year was 8.0%. The portfolio continues to be concentrated in
a relatively small number of sectors and its overweight or underweight
positions in various sectors are material drivers of the Company's relative
investment performance.
The Company's share price ended the year at 594.0p, an increase of 3.8% from
the previous year end of 572.0p. During the year the discount of the shares to
NAV with debt at par moved from 1.7% to a small premium mid-year then returned
to a discount, ending the year at 5.4%. With debt at market value, the 2.3%
premium at the start of the year rose to a maximum of 6.6% and subsequently
dropped back to a discount of 3.1% at the year end. The volatility of the
discount/ premium to share price reflect to some extent the reaction in the
market to the news that Neil Woodford would leave Invesco Perpetual, as
discussed earlier. At 23 May 2014, the latest practical date to signing this
report, the NAV was 639.26p (debt at par) and 623.62p (debt at market value),
the share price was 600.00p and the resultant discount was 6.1% (debt at par)
and 3.8% (debt at market value).
Performance Fee
A performance fee is payable in respect of each three year rolling period in
which the Company outperforms its benchmark index plus a hurdle of 1.25% pa.
This fee was capped at 1% of the period end net assets, before deduction of any
performance fee.
As a result of the Company's very strong performance over three years producing
a total return of 56.9% against the Index total return of 28.8%, a capped
performance fee of £12.3 million arose which, after the £7.5 million reduction
referred to previously, resulted in a fee of £4.8 million. As noted above, no
performance fee will be payable from this year onwards.
Gearing
The Company continues to benefit from debt amounting to £200 million in the
form of two debentures, which the Manager deploys for investment purposes. As a
result of appreciation in assets, the gross gearing level had fallen to 16.3%
(NAV with debt at par) at the year end, a decrease from 17.6% at the previous
year end. Mark has a proactive approach to the use of gearing, and this is
shown at the year end with the balance sheet cash position of £7 million and
net gearing of 15.7%.
As reported in my half-yearly Chairman's Statement, the £100 million 111â„2%
debenture matures in June 2014. The Board has undertaken an extensive exercise
to review whether new borrowings should be put in place, and if so the type -
including duration and cost. As a result the Board has agreed in principle a
new 364 day £100 million revolving credit facility with Bank of New York
Mellon. The mix of fixed and floating debt provides diversity of funding
sources and flexibility. The new facility will be available for the debenture's
redemption date of 30 June 2014, and will represent a material saving in
interest costs for the Company.
Changes to the Investment Objective and Investment Policy
There has been no change in the level of borrowings permitted by the investment
policy for a number of years, which limits borrowing to £200 million. At the
year end this was equivalent to 16.3% of net assets (NAV with debt at par). In
order to make the borrowing limit reflect the assets of the Company, it is
proposed to change this limit from an absolute amount to a relative 25% of net
assets. I can assure shareholders that it is not the current intention of the
Manager to increase gearing to 25%, but to provide more flexibility.
In addition, although we are not changing the substance of the investment
objective and investment policy as shown in the annual financial report, we have taken the
opportunity to make clearer some of the language used within it.
These changes are subject to the approval of shareholders. Accordingly, the
Board recommend that shareholders vote for Ordinary Resolution 13 at the Annual
General Meeting (AGM).
Dividend
Income from the portfolio during the year was £55.4 million (2013: £52.9
million). Of this £3.75 million, which is equal to 1.92p per share, was special
dividends which - by their nature - are non-recurring (2013: £0.46 million;
0.24p). The Board is alert to the income requirement of the Company, and during
the year reviews the situation on a regular basis with the portfolio manager.
The Board is recommending a final dividend of 8.5 pence per share which, if
approved at the AGM, will be paid on 31 July 2014 to Shareholders on the
Company's register on 13 June 2014. Shares will be quoted ex-dividend on
11 June 2014. This gives a total dividend for the year of 23.5p, an increase of
3.1% on last year's total dividend of 22.8p. This is higher than the annual
increase in the Retail Price Index of 2.5% and demonstrates the Company's
commitment to its long term objective of providing income growth which exceeds
the rate of inflation.
Retail Distribution Review (RDR)
More than a year after RDR came into effect (31 December 2012), changes to the
manner in which independent financial advisers (IFAs) are paid for their
services have yet to have much impact on the way that investment funds are
selected for recommendation to their clients. Systems difficulties experienced
by the three major IFA-only execution platforms - CoFunds, Fidelity Funds
Network and Skandia - are cited as the principal reason but this has not
stopped investors from seeking out the attractions of investment trusts
directly. As mentioned in last year's report, your Board and Manager were
confident that the attractions of The Edinburgh Investment Trust - strong
performance, quarterly dividends, good levels of liquidity, a clear strategy
and a well-known brand - would be compelling to such investors and so it has
proved with unadvised investors being the largest shareholder growth category
in 2013.
As dealing systems improve, it is expected that more IFAs will embrace
investment trusts, using the many research capabilities that exist to make the
best choice for clients. Your Company remains well positioned to benefit from
any increase in demand that results.
Referendum on Scottish Independence
This is a serious question for any company, like ours, which is registered in
Scotland. It introduces an element of political uncertainty with associated
practical economic and regulatory implications. The Board will continue to keep
the situation under review and to look to act in shareholders' best interests.
Outlook
Your Board and Manager remain vigilant in light of a mixed global
macro-economic outlook and also as a result of higher share prices and higher
valuations across the UK equity market. Taking this into account, we look to
the current financial year with guarded optimism whilst not anticipating a
repeat of the returns enjoyed last year. That said, the Company's strategy
remains to continue to identify pockets of value. The recent bid approach by
Pfizer for AstraZeneca, a long term core holding for your Company, suggests
that certain companies continue to be undervalued by the market and that, as is
often the case in investing, patience can be rewarded. In conclusion, I believe
that in the present market environment the Company's current investment
approach should provide resilience in periods of market weakness, whilst still
providing the opportunity for creating growth in shareholder value over the
longer term.
125th Annual General Meeting (AGM)
The Notice of the AGM of the Company, which is to be held on Friday, 18 July
2014, is contained in the Annual Financial Report and a summary of the
resolutions is set out in the Directors' Report in the Annual Financial Report.
My fellow directors and I will be voting in favour of all the resolutions and I
urge all shareholders to register their vote by returning their completed
voting papers or voting on-line.
I hope that as many shareholders as possible will attend the AGM in person and
take part in celebrating the 125th AGM of the Company. Shareholders will have
the opportunity to hear from Mark Barnett about the portfolio and his views on
the outlook, and meet myself and my fellow directors.
Jim Pettigrew
Chairman
27 May 2014
.
STRATEGIC REPORT
for the year ended 31 March 2014
BUSINESS REVIEW
The Edinburgh Investment Trust plc is an investment company and its investment
objective is set out below. The strategy the Board follows to achieve that
objective is to set investment policy and risk guidelines, together with
investment limits, and to monitor how they are applied. These are also set out
below and have been approved by shareholders.
The business model the Company has adopted to achieve its investment objective
has been to contract the services of Invesco Asset Management Limited (the
`Manager') to manage the portfolio in accordance with the Board's strategy and
under its oversight.
Since the Manager was appointed in 2008, the named portfolio manager with
individual responsibility for the day-to-day management of the portfolio has
been Neil Woodford. As explained both in the Chairman's Statement and update
letters sent to shareholders, Neil Woodford notified Invesco Perpetual that he
would be leaving the firm in April 2014 and Mark Barnett was appointed by the
Board as the named portfolio manager with effect from 28 January 2014.
Investment Objective and Policy
Whilst the Board continues to be satisfied with the investment objective and
generally with the investment policy of the Company, the investment policy
shown below has been changed to reflect the following:
• a change to the current borrowing limit of £200 million. This absolute limit
does not reflect the increase in net assets of the Company over the years. It
is proposed that it be revised to a relative limit of 25% of net assets. This
is intended to give increased flexibility and foreshadows the change in
borrowing from solely the £200 million debentures to a mixture of fixed and
floating debt. For clarity: there is no intention to increase borrowing to 25%
of net assets; and
• some minor changes to the drafting of the investment policy to clarify the
language used.
The investment policy shown below reflects these changes which are subject to
the approval of shareholders at the forthcoming Annual General Meeting (AGM).
Should such approval not be forthcoming, the investment policy will remain as
published in the 2013 annual financial report, which is available at
www.invescoperpetual.co.uk/investmenttrusts.
Investment Objective
The Company invests primarily in UK securities with the long term objective of
achieving:
1. an increase of the Net Asset Value per share by more than the growth in the
FTSE All-Share Index; and
2. growth in dividends per share by more than the rate of UK inflation.
Investment Policy
The Company will generally invest in companies quoted on a recognised stock
exchange in the UK. The Company may also invest up to 20% of the market value
of the Company's investment portfolio, measured at the time of any acquisition,
in securities listed on stock exchanges outside the UK. The portfolio is
selected by the Manager on the basis of its assessment of the fundamental value
available in individual securities. Whilst the Company's overall exposure to
individual securities is monitored carefully by the Board, the portfolio is not
primarily structured on the basis of industry weightings. The securities of no
one company may, as determined at the time of acquisition, represent more than
10% of the market value of the Company's equity portfolio. Similarly, the
Company may not hold more than 5% of the issued share capital (or voting
shares) in any one company. Investment in convertibles is subject to normal
security limits. Should these or any other limit be exceeded by subsequent
market movement, each resulting position is specifically reviewed by the Board.
The Company may borrow money to provide gearing to the equity portfolio up to
25% of net assets.
Use of derivative instruments is monitored carefully by the Board and permitted
within the following constraints: the writing of covered calls against
securities which in aggregate amount to no more than 10% of the value of the
portfolio and the investment in FTSE 100 futures which when exercised would
equate to no more than 15% of the value of the portfolio. Other derivative
instruments may be employed, subject to prior Board approval, provided that the
cost (and potential liability) of exercise of all outstanding derivative
positions at any time should not exceed 25% of the value of the portfolio at
that time. The Company may hedge exposure to changes in foreign currency rates
in respect of its overseas investments.
Results and Dividends
At the year end the mid-market price was 594p per ordinary share (2013: 572p).
The net asset value (debt at par) and net asset value (debt at market value)
per ordinary share were 628.18p and 613.25p respectively. The comparative
figures on 31 March 2013 were 581.89p and 559.01p.
Subject to approval at the AGM, the final proposed dividend for the year ended
31 March 2014 of 8.50p (2013: 7.8p) per ordinary share will be payable on 31
July 2014 to shareholders on the register on 13 June 2014. The shares will be
quoted ex-dividend on 11 June 2014. This will give total dividends for the year
of 23.50p per share, an increase of 3.1% on the previous year's dividend of
22.8p. The revenue return per share for the year was 23.2p, a 5.5% increase on
the 2013 return of 22p.
Performance
The Board reviews the Company's performance by reference to a number of key
performance indicators (KPIs) which are set out below. Notwithstanding that
some KPIs are beyond its control, they are measures of the Company's absolute
and relative performance. The KPIs assist in managing performance and
compliance and are reviewed by the Board at each meeting.
Year to 31 March 2014 2013
Total Return:
Net asset value (per share debt at par)(1) 12.5% 21.1%
Net asset value (per share debt at market value)(1) 14.4% 22.4%
FTSE All-Share Index(1) 8.8% 16.8%
Share price(1) 8.0% 20.1%
Discount to NAV (debt at par) 5.4% 1.7%
Discount/(premium) to NAV (debt at market value) 3.1% (2.3)%
Revenue return per share 23.2p 22.0p
Dividend per share 23.5p 22.8p
Gross gearing 16.3% 17.6%
Ongoing charges ratio(2) - excluding performance fee 0.7 0.7
Performance fee(3) 0.4 1.2
(1) Source: Thomson Reuters Datastream
(2) Calculated in accordance with AIC Guidelines i.e. total ongoing expenses ÷
average NAV (debt at market value ).
(3) Note that since the Company's performance fee was capped at 1%. For a full
explanation of the Company's performance fee, see the Annual Financial Report.
Past performance is not a guide to future returns.
The Chairman's Statement above gives a commentary on the performance of the
Company during the year, the performance fee, the gearing and the dividend.
Expenses are reviewed at each Board meeting enabling the Board, amongst other
things, to review costs and consider any expenditure outside that of its normal
operations. For the year being reported, all KPIs are considered satisfactory.
The Board also regularly reviews the performance of the Company in relation to
the 21 investment trusts in the UK Equity Income sector. As at 31 March 2014,
the Company was ranked 12th by NAV performance in this sector over one year,
4th over three years and 6th over five years (source: JPMorgan Cazenove).
Analysis of Performance
for year Analysis of Performance -
analyses the relative
Total return Basis ended performance of the Company
to its benchmark index.
31 MARCH
2014 Relative performance -
represents the arithmatic
% difference between the NAV
and the benchmark.
Net asset value 12.5
total return Net gearing effect -
measures the impact of the
Benchmark total 8.8 debenture stocks and cash
return on the Company's relative
performance. This will be
Relative 3.7 positive if the portfolio
performance has positive performance.
Analysis of Interest - arising from the
Relative debenture stocks reduces
Performance the assets available to
invest and has a negative
Portfolio total 13.1 impact on performance.
return
Management fees - the base
Less Benchmark 8.8 fee and any performance fee
total return - reduce the Company's net
assets and decrease
Portfolio 4.3 performance.
outperformance
Other expenses and tax -
Debenture reduce the level of assets
borrowings: and therefore result in a
negative effect for
Net gearing 2.3 relative performance.
effect
Interest (1.7)
Base management (0.6)
fee
Performance fee (0.4)
Other expenses (0.1)
Tax (0.1)
Total 3.7
Financial Position and Borrowings
At 31 March 2014 the Company's net assets were valued at £1,227.8 million
(2013: £1,137.7 million) comprising principally a portfolio of equity
investments, cash and borrowings. Borrowings were in the form of two £100
million debentures. The 7 3/4% debenture matures in 2022 and the 11 1/2%
debenture matures on 30 June 2014. As discussed in the Chairman's Statement,
the Company has negotiated a new £100 million bank revolving credit facility
and this will be used to repay the debenture and provide more flexible gearing.
The Company also has a bank overdraft facility of up to 10% of assets held by
the Custodian which was undrawn at 31 March 2014; this facility is available to
facilitate settlement of short-term cash timing differences and was largely
unused during the year.
Outlook, including the Future of the Company
The main trends and factors likely to affect the future development,
performance and position of the Company's business can be found in the
Portfolio Manager's Report of this Strategic Report. Further details of the
principal risks affecting the Company follow.
Principal Risks and Uncertainties
The Company's key long-term investment objectives are an increase in the net
asset value per share by more than the growth in the FTSE All-Share Index (the
`benchmark') and an increase in dividends by more than the growth in 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. 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 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. In a similar way, the Manager manages other
portfolios holding many of the same stocks as the Company which reflects the
Manager's high conviction style of investment management. This could
significantly increase the liquidity and price risk of certain stocks under
certain scenarios and market conditions. 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 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.
As shown in the investment policy, derivatives may be used provided that the
market exposure arising is less than 25% of the value of the portfolio. For
part of the year, forward currency contracts were used for hedging, however, no
derivatives were held at the year end.
Gearing and Borrowing 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 borrowing is too high, whether the term of borrowing is
appropriate, and if the Company could not replace the £100 million debenture
which matures on 30 June 2014. However, the Board are confident that the steps
they have taken to replace the £100 million borrowing, represented by the
debenture, will be successful.
The Manager has full discretion over the amount of the borrowing it uses to
gear its portfolio, whilst the issuance, repurchase or restructuring of
borrowing are for the Board to decide. Information related to borrowing and
gearing is provided to the Directors as part of the Board papers. 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:
• good practice industry 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 operated 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 is
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 pursue
successfully 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 the named
portfolio manager. This changed from Neil Woodford to Mark Barnett, effective
28 January 2014. Neil was Head of UK Equities at Invesco Perpetual until April
2014, when this role was taken over by Mark. Mark has worked in equity markets
since 1992 and has been part of the UK equities team at Invesco Perpetual for
17 years.
• 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.
• The Board has set guidelines within which the portfolio manager is permitted
wide discretion. Any proposed variation outside these guidelines is referred to
the Board and compliance with the guidelines and the guidelines themselves are
reviewed at every board meeting.
Referendum on Scottish Independence
The Company is registered in Scotland and the Board is mindful of the
referendum on Scottish independence in September 2014. The Board considers that
a vote for Scottish independence will create major prolonged uncertainties,
both for the Scottish economy (including tax and currency) and for the
regulatory environment in which the Company operates.
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 credit, 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.
The Manager is regulated by the Financial Conduct Authority and failure to
comply with the relevant regulations could harm the Manager's reputation with a
potential detrimental effect on the Company.
The Alternative Investment Fund Managers Directive came into force during the
year. Although it imposes certain obligations on the Company and the Manager
that will increase compliance and regulatory costs going forward, the impact is
not expected to be material.
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.
Alternative Investment Fund Managers Directive (AIFMD)
The Board is taking independent legal advice in relation to the Directive and
has decided, in principle, to appoint Invesco Fund Managers Limited (IFML) as
the Company's Alternative Investment Fund Manager (AIFM). IFML is in the
process of seeking approval as an AIFM before the AIFMD implementation date of
22 July 2014, so that your Company will be fully compliant. IFML is an
associated company of Invesco Asset Management Limited (IAML), the current
Manager, and it is expected that IAML will continue to manage the Company's
investments under delegated authority from IFML.
An additional requirement of the AIFMD is for the Company to appoint a
depositary, which will oversee the custody and cash arrangements and other
AIFMD required depositary responsibilities. To this end the Board has agreed in
principle to appoint BNY Mellon Trust & Depositary (UK) Limited to act as the
Company's depositary.
Board Diversity
The Company's policy on diversity is set out in the Annual Financial Report.
The Board considers diversity, including the balance of skills, knowledge,
diversity (including gender) and experience, amongst other factors when
reviewing its composition and appointing new directors, but does not consider
it appropriate to establish targets or quotas in this regard. As a norm the
Board comprises either five or six non-executive directors. However, as a
result of Board changes there were seven directors for some of the year. At all
times there was at least one female director and, as Victoria Hastings joined
the Board before Nicola Ralston retired, there were two female directors for
part of the year. Summary biographical details of the Directors are set out in
the Annual Financial Report. The Company has no employees.
Social and Environmental Matters
As an investment company with no employees, property or activities outside
investment, environmental policy has limited application. The Manager considers
various factors when evaluating potential investments. While a company's policy
towards the environment and social responsibility, including with regard to
human rights, is considered as part of the overall assessment of risk and
suitability for the portfolio, the Manager does not necessarily decide to, or
not to, make an investment on environmental and social grounds alone. The
Company does not have a human rights policy, although the Manager does apply
the United Nations Principles for Responsible Investment.
PORTFOLIO MANAGER'S REPORT
Market Review
The stock market's good performance over the past 12 months was punctuated by
periods of volatility, as sentiment was impacted by the anticipation of a
change in the US Federal Reserve's policy of quantitative easing. This was
highlighted by comments last June from Ben Bernanke, Chairman of the Federal
Reserve, that "it would be appropriate to moderate the pace of purchases later
this year", with subsequent reassurance that US interest rates would be kept
low for some time. However, the period was overall positive for market returns
and saw a revaluation of the equity asset class in preference to fixed interest
or cash.
There was also positive news on the UK economy. The commencement of Mark
Carney's tenure as Governor of the Bank of England last summer was followed by
a series of increases in forecasts for UK economic growth and an upbeat
assessment of the economic outlook by the Chancellor of the Exchequer in his
March budget. However, the period under review ended with a more difficult
quarter as concerns grew over the outlook for economic growth in emerging
markets, most notably China.
Change of Named Portfolio Manager and Portfolio Activity
The Board appointed me as the named portfolio manager on 28 January. I am very
honoured to take on this role, supported by a strong team at Invesco Perpetual.
The portfolio activity from that date reflected the transition to my preferred
investment strategy, which was completed prior to the Company's year end.
The holdings in AstraZeneca, BT Group, Capita, GlaxoSmithKline and Reckitt
Benckiser have been reduced and new investments made in Babcock International,
Beazley, BP, Brown (N), CLS, Compass, Derwent London, KCOM, London Stock
Exchange, NewRiver Retail, Reed Elsevier, Shaftesbury, Thomas Cook and Vectura.
The histogram in the Annual Financial Report shows the industry analysis of the
portfolio which reflects these changes including, amongst other things, a
reduced exposure to the Heath Care sector and a doubling of investment in
Financials. The portfolio's holdings in BG, Elan, Wm Morrison and Smiths were
disposed of prior to my appointment.
Portfolio Strategy and Review
The Company's net asset value, including reinvested dividends, rose by 12.5%
during the year, compared to a rise of 8.8% (total return) by the FTSE
All-Share Index.
The portfolio's out-performance over the period is encouraging and reflects a
continuing shift in the market towards companies able to deliver sustainable
growth in earnings and, particularly, dividends.
The portfolio's holding in BT Group delivered the most significant positive
contribution to performance. Investors have increasingly focused on that
company's on-going scope for cost cutting and its dominant position in the UK
broadband and fibre markets. It's most recent results were accompanied by a 13%
increase in the dividend and it announced that its recently introduced BT Sport
TV channel had made a "confident start".
The portfolio is heavily invested in the pharmaceutical sector. This performed
well over the year, delivering a flow of positive news. AstraZeneca, in
particular, has unveiled a series of positive surprises on the drug pipeline
front while the industry as a whole is benefiting from an increased rate of
drug approvals by the FDA. Despite the re-rating of the sector by the stock
market, it still offers a yield premium, highlighting the scope for further
outperformance as new drugs drive future profit and dividend growth. At the
time of writing AstraZeneca has become the target for a proposed takeover by
Pfizer which highlights the strategic value of these global companies.
The portfolio is also heavily invested in the tobacco sector. This faced some
headwinds in 2013, notably concerns over the possible impact of e-cigarettes,
plain packaging and emerging market exposure. Headwinds are, of course, nothing
new for this sector and the sector has rallied strongly in 2014, as results
from the companies have served to remind the stock market of their ability to
deliver profit and dividend increases despite a backdrop of declining cigarette
volumes.
The holding in Provident Financial contributed strongly to performance. Full
year results confirmed the strength of the company's market position in the
provision of consumer credit and subprime lending. The company's Vanquis credit
card, which provides a credit card for people who cannot otherwise get access
to one due to impaired credit history, grew profits by over 50%. The company
sees significant growth opportunities here as well as in a newer division -
Satsuma, its personal unsecured loan business. This competes in the short term
loans business, leveraging the existing infrastructure of the Vanquis call
centre.
The portfolio's holdings in the support services sector enjoyed mixed fortunes
over the year. Capita maintained its very impressive run of good news, twice
confirming a major increase in its pipeline of tendered work - now up to £5.5
billion. There was disappointing news from both G4S and Serco, both of whom
announced profit warnings and the departure of their Chief Executives. G4S had
a rights issue to raise extra capital and since the period end Serco has made a
further profits warning and raised equity. I am confident in the recovery plan
in place at G4S, having met the new management team. Serco's new CEO, Nicholas
Soames, is in the process of conducting a strategic review.
The on-going political debate over electricity retail prices had a negative
impact on the share prices of SSE and Centrica. Both have subsequently shown
some recovery as SSE announced its own price freeze and Ofgem confirmed a full
competition industry review. The referral by Ofgem of the industry to the
Competition Commission noted that there is no meaningful evidence of wrong
doing or excessive returns, but just that some elements of the market are not
functioning optimally. We expect the review to conclude that industry returns
are not excessive, while moves such as that by SSE are already addressing the
political agenda of pricing and transparency of margins. Meanwhile there was
strong performance from the share price of Drax. The company confirmed the
government approval for a revised price support to enable it to switch half its
capacity from coal to biomass.
There was disappointing news from the holding in Rolls-Royce which surprised
the market with its first profit warning in a decade, and confirmed that this
year will see no growth in sales or profits. This is largely blamed on defence
spending cuts and the company claims that this is a pause, not a change in
direction, and that growth will resume in 2015. BAE Systems, meanwhile, warned
that profits would be hit by defence cuts. However, the company reassuringly
announced that it had agreed pricing with Saudi Arabia over the rising cost of
a long running Eurofighter contract.
Outlook
The UK equity market has struggled to find a convincing direction in 2014. The
outlook is likely to remain challenging for the foreseeable future due to a
combination of elevated valuations and an environment of continued flat
corporate profit growth. In fact the recent earnings season was notable for the
number of profit warnings from large corporates. Despite the well-publicised
improvements in economic growth in the UK and US economies, the current
valuation of the market represents a level which reflects this optimism and
which may struggle to be maintained if the pace of earnings growth does not
accelerate. The other significant reasons for caution over the near term are a
reduction in the scale of asset purchases under the policy of quantitative
easing in the US, uncertainty about the strength of economic growth in the
developing world especially China, and a heightened level of political risk
both in a domestic context ahead of the UK General Election and internationally
due to the Ukrainian/Russian situation.
Despite the overall cautious tone of these comments, I believe there remain
some pockets of undervaluation within the UK stock market. The key to
navigating the near term is to remain highly vigilant about the strength of
corporate performance and to remain judicious in portfolio selection, given the
increase in valuations. It is unlikely that the performance of the overall
market in the coming year will be much better than the 8.8% rise we saw in the
financial year under review. Under my management the portfolio will continue
with a strong preference for companies that have proven ability to grow
revenues, profits and free cash flow in what is a fairly low growth world. We
favour management teams that are fully cognisant of the need to deliver
sustainable, long term, dividend growth. It is this type of investment
opportunity that forms the majority of the portfolio and that I believe offers
the potential to deliver good risk adjusted returns over the long term. I will
therefore continue to use the gearing facility to seek enhanced returns,
particularly since the overall cost of borrowing will be significantly reduced
by the redemption of the 11 1/2% debenture.
Mark Barnett
Portfolio Manager
The Strategic Report was approved by the Board of Directors on 27 May 2014.
Invesco Asset Management Limited
Company Secretary
INVESTMENTS IN ORDER OF VALUATION
at 31 MARCH 2014
UK listed and ordinary shares unless stated otherwise
AIM Investments quoted on AIM
MARKET
VALUE % OF
INVESTMENT SECTOR £'000 PORTFOLIO
British American Tobacco Tobacco 88,483 6.2
Roche - Swiss common stock Pharmaceuticals & 75,842 5.3
Biotechnology
Imperial Tobacco Tobacco 69,562 4.9
GlaxoSmithKline Pharmaceuticals & 69,279 4.9
Biotechnology
BT Group Fixed Line Telecommunications 68,509 4.8
AstraZeneca Pharmaceuticals & 64,083 4.5
Biotechnology
Reynolds American Tobacco 63,967 4.5
- US common stock
BAE Systems Aerospace & Defence 59,988 4.2
Reckitt Benckiser Household Goods & Home 47,756 3.4
Construction
Rolls-Royce Aerospace & Defence 44,078 3.1
Ten Top Holdings 651,547 45.8
SSE Electricity 39,806 2.8
Altria - US common stock Tobacco 34,303 2.4
Novartis - Swiss common stock Pharmaceuticals & 32,062 2.3
Biotechnology
BP Oil & Gas Producers 31,354 2.2
Capita Support Services 31,319 2.2
Provident Financial Financial Services 30,966 2.2
Drax Electricity 30,486 2.1
Hiscox Non-life Insurance 29,732 2.1
Smith & Nephew Healthcare Equipment & 29,700 2.1
Services
Sanofi - French common stock Pharmaceuticals & 29,537 2.1
Biotechnology
Twenty Top Holdings 970,812 68.3
Reed Elsevier Media 29,058 2.0
Compass Travel & Leisure 27,734 2.0
Amlin Non-life Insurance 25,949 1.8
Centrica Gas & Water Multiutilities 25,873 1.8
Legal & General Life Insurance 24,737 1.7
Babcock International Support Services 23,762 1.7
G4S Support Services 23,269 1.6
Shaftesbury Real Estate Investment Trusts 21,777 1.5
BTG Pharmaceuticals & 21,421 1.5
Biotechnology
Rentokil Initial Support Services 16,592 1.2
Thirty Top Holdings 1,210,984 85.1
London Stock Exchange Financial Services 15,682 1.1
KCOM Fixed Line Telecommunications 14,802 1.0
Raven Russia - Preference Real Estate Investment & 10,421
Services
- Ordinary 4,157
14,578 1.0
Lancashire Non-life Insurance 14,282 1.0
Derwent London Real Estate Investment Trusts 13,534 1.0
NewRiver RetailAIM Real Estate Investment Trusts 13,486 1.0
Serco Support Services 13,002 0.9
IP Group Financial Services 12,325 0.9
Beazley Non-life Insurance 11,373 0.8
HomeServe Support Services 10,539 0.8
Forty Top Holdings 1,344,587 94.6
MARKET
VALUE % OF
INVESTMENT SECTOR £'000 PORTFOLIO
CLS Real Estate Investment & 10,365 0.7
Services
PayPoint Support Services 9,946 0.7
Vectura Pharmaceuticals & 9,481 0.7
Biotechnology
Catlin - US common stock Non-life Insurance 9,401 0.7
Thomas Cook Travel & Leisure 9,063 0.7
Brown (N) General Retailers 7,328 0.5
Stobart Industrial Transportation 6,274 0.4
Burford CapitalAIM Investment Instruments 4,912 0.4
Chemring Aerospace & Defence 4,081 0.3
Barclays Bank - Nuclear Power
Notes 28 Feb 2019(1) Investment Instruments 2,310 0.2
Fifty Top Holdings 1,417,748 99.9
HelphireAIM Financial Services 1,593 0.1
Eurovestech - Unquoted Financial Services 501 -
Proximagen - Rights 12 Sept Pharmaceuticals & 378 -
2014 Biotechnology
- Unquoted
Total Holdings (53) 1,420,220 100.0
(1) Contingent Value Rights (CVRs) referred to as Nuclear Power Notes (NPNs)
were offered by EDF as a partial alternative to its cash bid for British Energy
(BE). The NPNs were issued by Barclays Bank. The CVRs participate in BE's
existing business.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
in respect of the annual financial report and the financial statements
The Directors are responsible for preparing the annual financial report and the
financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under the law the Directors have elected to prepare financial
statements in accordance with UK Accounting Standards.
Under company law, the Directors must not approve the financial statements
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 Strategic Report, Directors' Report, a Directors' Remuneration
Report and a Corporate Governance Statement that complies 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;
• 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; and
• they consider that this annual financial report, taken as a whole, is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the Company's performance, business model and strategy.
Jim Pettigrew
Chairman
Signed on behalf of the Board of Directors
27 May 2014
INCOME STATEMENT
FOR THE YEAR ENDED 31 MARCH
2014 2013
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments - 112,468 112,468 - 185,241 185,241
Foreign exchange profits - 154 154 - (377) (377)
/(losses)
Income - note 2 55,360 22 55,382 52,887 - 52,887
Investment management (2,084) (9,689) (11,773) (1,804) (15,699) (17,503)
fee - note 3
Other expenses (785) (2) (787) (722) (2) (724)
Net return before 52,491 102,953 155,444 50,361 169,163 219,524
finance costs and
taxation
Finance costs (5,850) (13,651) (19,501) (5,850) (13,651) (19,501)
Return on ordinary 46,641 89,302 135,943 44,511 155,512 200,023
activities before tax
Tax on ordinary (1,417) - (1,417) (1,565) - (1,565)
activities
Return on ordinary 45,224 89,302 134,526 42,946 155,512 198,458
activities after tax for
the financial year
Return per ordinary
share
Basic - note 4 23.2p 45.8p 69.0p 22.0p 79.7p 101.7p
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 31 March 2012 48,779 6,639 24,676 841,659 60,425 982,178
Dividends paid - note 5 - - - - (42,890) (42,890)
Net return on ordinary - - - 155,512 42,946 198,458
activities
Balance at 31 March 2013 48,779 6,639 24,676 997,171 60,481 1,137,746
Dividends paid - note 5 - - - - (44,461) (44,461)
Net return on ordinary - - - 89,302 45,224 134,526
activities
Balance at 31 March 2014 48,779 6,639 24,676 1,086,473 61,244 1,227,811
.
BALANCE SHEET
FOR THE YEAR ENDED 31 MARCH
2014 2013
£'000 £'000
Fixed assets
Investments held at fair value through 1,420,220 1,340,948
profit or loss
Current assets
Debtors 10,500 9,410
Cash and cash funds 7,025 87
17,525 9,497
Creditors: amounts falling due within one (112,068) (15,084)
year
Net current liabilities (94,543) (5,587)
Total assets less current liabilities 1,325,677 1,335,361
Creditors: amounts falling due after more (97,866) (197,615)
than one year
Net assets 1,227,811 1,137,746
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 1,086,473 997,171
Revenue reserve 61,244 60,481
Shareholders' funds 1,227,811 1,137,746
Net asset value per ordinary share
Basic - note 7 628.18p 581.89p
These financial statements were approved and authorised for issue by the Board
of Directors on 27 May 2014.
Signed on behalf of the Board of Directors
Jim Pettigrew
Chairman
.
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MARCH
2014 2013
£'000 £'000
Cash inflow from operating activities 32,888 38,965
Servicing of finance (19,250) (19,250)
Capital expenditure and financial investment 37,761 23,055
Equity dividends paid - note 5 (44,461) (42,890)
Net cash inflow/(outflow) before management of 6,938 (120)
liquid resources and financing
Management of liquid resources (6,800) 160
Increase in cash 138 40
Reconciliation of net cash flow to movement in
net debt
Increase in cash 138 40
Cashflow from movement in liquid resources 6,800 (160)
Debenture stock non-cash movement (251) (251)
Movement in net debt in the year 6,687 (371)
Net debt at beginning of year (197,528) (197,157)
Net debt at end of year (190,841) (197,528)
.
NOTES TO THE FINANCIAL STATEMENTS
1. Principal Accounting Policies
Accounting policies describe the Company's approach to recognising and
measuring transactions during the year and the position of the Company at the
year end.
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
This note shows the income generated from the portfolio (investment assets) of
the Company and income received from any other source.
2014 2013
£'000 £'000
Income from listed investments
UK dividends
- Ordinary dividends 40,502 40,609
- Special dividends 3,441 462
Overseas dividends
- Ordinary dividends 10,125 10,986
- Special dividends 311 -
Scrip dividends 969 823
Income from money market funds 11 7
55,359 52,887
Other income
Underwriting commission 1 -
Total income 55,360 52,887
A special dividend of £22,000 was recognised in capital during the year (2013:
£nil).
3. Investment Management Fees
This note shows the fees due to the Manager. These are made up of the
management fee calculated and paid monthly and a performance fee calculated and
paid annually. The rate of the investment management fee was changed subsequent
to the year end, and a performance fee will no longer be charged. Page 28 of
the Directors' Report explains the changes.
2014 2013
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management 2,084 4,863 6,947 1,804 4,207 6,011
fee
Performance fee - 4,826 4,826 - 11,492 11,492
2,084 9,689 11,773 1,804 15,699 17,503
Details of the investment management agreement are disclosed in the Annual
Financial Report. At 31 March 2014 investment management fees of £579,000
(2013: £558,000) and a performance fee of £4,826,000 (2013: £11,492,000) were
accrued.
4. Return per Ordinary Share
Return per share is the amount of gain generated for the financial year divided
by the weighted average number of ordinary shares in issue.
The basic, capital and total returns per ordinary share are based on each
return on ordinary shares after tax and on 195,116,734 (2013: 195,116,734)
ordinary shares, being the number of shares in issue during the year.
5. Dividends
Dividends represent the distribution of income to shareholders. The Company
pays four dividends a year - three interim and one final dividend.
2014 2013
pence £'000 pence £'000
Dividends paid and recognised in the
year:
Third interim paid in respect of 5.00 9,756 5.00 9,756
previous year
Final paid in respect of previous year 7.80 15,219 7.00 13,658
First interim paid 5.00 9,756 5.00 9,756
Second interim paid 5.00 9,756 5.00 9,756
22.80 44,487 22.00 42,926
Unclaimed dividends - (26) - (36)
22.80 44,461 22.00 42,890
Dividends on shares payable in respect
of
the year:
First interim 5.00 9,756 5.00 9,756
Second interim 5.00 9,756 5.00 9,756
Third interim 5.00 9,756 5.00 9,756
Proposed final 8.50 16,585 7.80 15,219
23.50 45,853 22.80 44,487
The proposed final dividend is subject to approval by ordinary shareholders at
the AGM.
6. Share Capital
Share capital represents the total number of shares in issue, on which
dividends accrue.
2014 2013
NUMBER £'000 NUMBER £'000
Allotted, called-up and fully paid
Ordinary shares of 25p each 195,116,734 48,779 195,116,734 48,779
7. Net Asset Value (NAV) per Ordinary Share
The Company's total net assets (total assets less total liabilities) are often
termed shareholders' funds and are converted into NAV per ordinary share by
dividing by the number of shares in issue.
The NAV - debt at par is the NAV with the value of the £200 million debentures
(the debt) at their nominal (equivalent to the par) value of £200 million. The
NAV - debt at market value reflects the debenture stock at the value that a
third party would be prepared to pay for the debt, and this amount fluctuates
owing to various factors including changes in interest rates and the remaining
life of the debt. The number of ordinary shares in issue at the year end was
195,116,734 (2013: 195,116,734).
(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:
2014 2013
NAV Shareholders' NAV Shareholders'
Per share Funds Per share Funds
PENCE £'000 PENCE £'000
Shareholders' funds 629.27 1,227,811 583.11 1,137,746
Less: Unamortised discount
and
Less: expenses arising from
debenture
Less: issue (1.09) (2,134) (1.22) (2,385)
NAV - debt at par 628.18 1,225,677 581.89 1,135,361
(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:
2014 2013
NAV Shareholders' NAV Shareholders'
per share Funds Per share Funds
PENCE £'000 PENCE £'000
NAV - debt at par 628.18 1,225,677 581.89 1,135,361
Debt at par 102.50 200,000 102.50 200,000
Debt at market value
- 111/2% Debenture Stock (52.91) (103,231) (57.64) (112,469)
2014
- 73/4% Debenture Stock 2022 (64.52) (125,892) (67.74) (132,162)
NAV - debt at market value 613.25 1,196,554 559.01 1,090,730
8. RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH THE MANAGER
A related party is a company or an individual who has direct or indirect
control or who has significant influence over the Company. Under accounting
standards, the Manager is not a related party but disclosures are made in
accordance with industry practice.
Under UK GAAP, the Company has identified the Directors as related parties. The
Directors' remuneration and interests have been disclosed in the Annual
Financial Report with additional disclosure in the notes to the financial
statements. No other related parties have been identified.
Invesco Asset Management Limited (IAML), a wholly owned subsidiary of Invesco
Limited, acts as Manager to the Company. Details of the investment management
agreement are disclosed in the Annual Financial Report and management fees
payable to IAML are shown in note 3 above.
9. This Annual Financial Report announcement is not the Company's statutory
accounts. The statutory accounts for the year ended 31 March 2013 have been
delivered to the Registrar of Companies. The statutory accounts for the year
ended 31 March 2013 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 2014 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:
www.invescoperpetual.co.uk/investmenttrusts
11. The Annual General Meeting of the Company will be held at 11.00 am on 18
July 2014 at the Weston Link, National Galleries of Scotland, Princes Street,
Edinburgh.
By order of the Board
Invesco Asset Management Limited - Company Secretary
27 May 2014
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