Final Results
21 MAY 2003
THE EDINBURGH INVESTMENT TRUST plc
PRELIMINARY RESULTS FOR THE YEAR TO 31 MARCH 2003
The Edinburgh Investment Trust plc is the UK's largest investment trust
focussed entirely on the UK. The objectives of The Edinburgh Investment Trust
plc are the achievement of capital growth at a higher rate that the FTSE
All-Share Index and dividend growth above the rate of UK inflation
Highlights
* A year of challenge and change, positioning the company for the future.
* Performance adversely affected by:
*
+ profound fall in the FTSE All-Share Index
+ impact of gearing
+ one off cost of portfolio realignment
* NAV per share fell on a capital basis by 42.5% compared to the fall in the
FTSE All-Share Index of 32.1%.
* Proposed final dividend of 8.95p making a total dividend for the year of
13.15p per share a 3.1% increase on last year. Underlying rate of inflation
during the period was 3%.
* Lord Eglinton to retire after nine years as Chairman and Scott Dobbie
elected as successor.
For further information, please contact:
The Edinburgh Investment Trust plc 020 7961 4409
Lord Eglinton
Fidelity Investments International
Anne Read 020 7961 4409
Jo Roddan 01737 837848
Robbie Robertson - Dresdner Kleinwort Wasserstein 020 7623 8000
Chris Lunn - UBS Warburg 020 7567 8000
CHAIRMAN'S STATEMENT
Results
The twelve-month period to 31 March 2003 has been one of major change and
challenge for the company, with the appointment of a new manager coinciding
with a profound fall in the FTSE All-Share Index. The one-off cost of
realigning the portfolio following the appointment of Fidelity Investments
International (Fidelity) as manager had a negative impact on performance as did
the impact of the company's gearing in a sharply falling market. During the
period the net asset value per share fell by 42.5% (capital only) compared with
a 32.1% decline in the FTSE All-Share Index (capital only) and the share price
fell by 45.3%. The board is recommending a final dividend of 8.95p per share
which, if approved, will give a total distribution for the year of 13.15p per
share, an increase of 3.1%. During the same period the UK's underlying rate of
inflation was 3.0%.
Change of manager
Fidelity succeeded Edinburgh Fund Managers (EFM) as manager and secretary of
the company with effect from 1 August 2002. I wrote to shareholders on 22 July
2002 explaining the reasons why the range of Fidelity's qualities had impressed
the board and I repeated those reasons in my Review in the interim report last
October. Some shareholders may be disappointed that, as yet, there has not been
a dramatic turn around in the company's performance but conditions have been
extremely difficult and these are still early days. Meanwhile your board
believes that the reasons for appointing Fidelity are as valid today as they
were ten months ago and it will continue to work with the manager to ensure
that the strengths which led to its appointment will benefit the company's
performance in the future.
Performance
Shareholders might find it helpful to review the performance of the company in
three distinct phases. The first, to 31 July 2002, when the investment
management contract with EFM came to an end, the second, from 1 August 2002,
when the portfolio was in transition and the third, from 1 October 2002, when
it was fully managed by Fidelity.
During the period from 1 April to 31 July 2002, the portfolio was not
defensively positioned for a falling market and the net asset value fell by
5.2% relative to the FTSE All-Share Index benchmark - of this 2.2% was the
effect of stock and sector selection. I explained at the Interim stage that, on
assuming the management of the company on 1 August 2002, Fidelity decided to
retain only 60% of the inherited portfolio. However some of the portfolio
inherited by Fidelity proved to be exceptionally illiquid and continuing to
hold certain positions in a falling market had a detrimental impact, estimated
at 1.5%, on performance. This was offset in part by an outperformance of 0.4%
by the remainder of the portfolio during the two month period ending 30
September 2002. Additionally the cost of buying and selling securities in
constructing the Fidelity portfolio was around £9.3m (1% of the portfolio).
Overall, in these two transitional months, the net asset value fell by 4.4%
relative to the benchmark.
During the third period, from 1 October 2002 to 31 March 2003, net asset value
fell by 8.1% compared to a fall of 3.7% in the FTSE All-Share Index over the
same period. The effect of the company's borrowing during this period was
negative and accounted for almost half of the underperformance.
As reported above, during the financial year as a whole the net asset value per
share fell by 42.5% compared to a fall in the FTSE All-Share Index of 32.1%.
The discount to net asset value at which the shares were trading at the start
of the last financial year was 12.8%. During the year it fluctuated in a wide
range, from 17.8% to 7.6%, varying according to market conditions as well as to
supply and demand. The end of the financial year coincided with all the
uncertainty and volatility surrounding the Iraq war and represented a near low
point in markets for the financial year. At this time the discounts on many
investment trusts opened up as market makers attempted to discourage sellers,
and the company's own shares traded at a discount of 17.1% to net asset value.
The combination of underperformance and widening discount led to the share
price falling by 45.3% over the year - some 13% worse than the benchmark index.
Gearing
Like many investment trusts, the company is geared - it has borrowed money in
the expectation that returns to shareholders in rising markets will be
enhanced. The board determines the company's maximum borrowings and the manager
has day-to-day discretion to decide the degree to which these borrowings should
be invested in equities or in cash.
Although the company has from time to time had short-term borrowings, its
gearing has derived principally from £200 million in two Debenture stocks,
which were issued when interest rates were much higher than they are today,
carry coupons of 11½% and 7¾%, and which fall to be redeemed respectively in
2014 and 2022. In conditions of positive market returns, such as those seen in
the 1990s, shareholders have benefited substantially. In three years of falling
markets, however, borrowings, particularly at such high rates, have had a
negative impact on the company's performance. Over the last year as a whole,
and despite Fidelity having offset part of the borrowings with cash holdings,
net borrowings have accounted for virtually half of the net asset value
shortfall relative to the benchmark.
Early redemption of one or both of the Debenture stocks would save interest
costs and the Board has discussed this possibility thoroughly. However, it
believes that the substantial premium to par that would have to be paid, along
with the relative levels of equity and bond markets, make this step
unattractive at present. Nevertheless, the situation will be kept under
constant review.
Accounting policy
Since 1 April 2000 the policy of the company has been to allocate 70% of the
management fee and interest costs to capital. Under the terms of the relevant
accounting standard, the board is required to review regularly this allocation
(between interest and capital) and to adjust the policy where it believes inter
alia that significant changes in long-term trends have occurred. The board has
reviewed the position and at this time it is not convinced that future
expectations necessarily call for change from the present policy. It will,
however, remain mindful of its obligations to keep the matter under review.
Dividends
The board is recommending a final dividend of 8.95p per share making a total
dividend for the year of 13.15p per share, an increase of 3.1% over the
previous year. This recommendation is made despite a fall in the company's
income. This is due to some large dividend cuts by companies held in the
portfolio, the impact on portfolio income of the transition and a significant
fall year on year in short term interest rates. Some of the final dividend will
be met from the revenue reserve which has been built up over many years against
times, such as this, in the economic cycle when the return on the investments
may not be sufficient to cover the dividend to shareholders. After this payment
the revenue reserve will still remain in excess of one year's dividend. The
board is conscious of the importance to shareholders of the present progressive
dividend policy and will be keeping the generation of the requisite amount of
income constantly under review. It will remain prepared prudently to draw
further on the revenue reserve should that become necessary.
The final dividend will be paid on 3 July 2003 to shareholders on the register
at close of business on 6 June 2003 and the shares will go "ex dividend" on 4
June 2003.
Share buy-back programme
During the year the company bought back and cancelled 4.03 million shares,
representing 1.63% of the issued share capital at the beginning of the year.
This has resulted in an increase of approximately 0.2% in the net asset value
per share for the remaining shareholders.
The ability to buy back the company's shares for cancellation is beneficial to
all shareholders and accordingly a special resolution to renew the board's
authority to purchase shares for cancellation will be proposed at the
forthcoming Annual General Meeting.
Marketing
An important reason for selecting Fidelity to manage the company was its
acknowledged position as the industry leader in the provision of ISAs, PEPs,
and other savings solutions. It is not to be expected that the benefits of
Fidelity's retail marketing strengths would be fully realised in a period of
sharply depressed retail demand for investment products. Nevertheless sales of
the company's shares within these wrapper products have been promising and
should, over time, help reduce the size and volatility of the discount to net
asset value per share.
The board has been very pleased with the high level of promotional activity
which The Edinburgh Investment Trust has received since Fidelity was appointed
as manager. This has included considerable national press advertising and
several mailings promoting the company both specifically and as part of the
range of investment trusts managed by Fidelity. The company has also enjoyed
editorial in Fidelity's customer newsletters, it has a suite of dedicated pages
on the website and it has been featured in investment trust seminars.
The board
Sir Gavin Laird has now reached the age of 70 and, as required by the company's
Articles of Association, he will not be seeking re-election at the forthcoming
Annual General Meeting. Sir Gavin was appointed to the board in 1994 and he
became Chairman of the Audit and Management Engagement Committee in 1996. The
board has benefited immeasurably from his wise counsel and from his wide range
of experience of both the public and private sectors. I know that I speak for
all my colleagues when I thank him for his friendship and support and wish him
well for the future.
Sir Gavin retired as chairman of the Audit and Management Engagement Committee
on 19 August 2002 and was succeeded by Mr Ian Inglis.
As to my own position, I have told my colleagues that I have decided to retire
as chairman and from the board at the end of the Annual General Meeting. I
shall have been a member of the board for eleven years and its chairman for
nine years and current thinking is that these periods of office are quite long
enough. That apart, however, I would still have reached the same decision. All
the steps necessary to implement the change of manager have been taken, the
company is beginning a new chapter in its history and I believe it appropriate
for that chapter to be written by a new hand.
I am very pleased to be able to report that the board has unanimously elected
Scott Dobbie as my successor. Scott joined the board in 1998 and since 1999 has
been its extremely effective senior independent director. He brings with him a
wealth of knowledge about the City, the investment industry in general and
investment trusts in particular and I am confident that he will be a great
success as the company's chairman.
The Way Ahead
The recurring theme of this, my final statement, has been challenge and change.
The last year has been challenging for both the company and its manager.
Implementing a change of manager was anticipated to be a major undertaking and
one that was expected to cause upheaval, but that period of change and upheaval
is now behind us. The board is fully committed to the strategy implemented by
Fidelity and is entirely satisfied with the way that it has applied its large
and experienced team to issues that have arisen since its appointment. I am
sure that the foundations for improved long-term investment performance and
stability have now been put in place and that, in the hands of my successor,
The Edinburgh Investment Trust will continue to be seen as an excellent vehicle
for long-term investors in the UK market.
The Earl of Eglinton and Winton
Chairman
20 May 2003
THE EDINBURGH INVESTMENT TRUST plc
Statement of Total Return (incorporating the revenue account1) of the company
For the year ended 31 March 2003
2003 2002
revenue capital total revenue capital total
notes £'000 £'000 £'000 £'000 £'000 £'000
Realised losses - (171,217) (171,217) - (30,040) (30,040)
on investments
Decrease in - (315,766) (315,766) - (96,227) (96,227)
unrealised
appreciation
TOTAL CAPITAL - (486,983) (486,983) - (126,267) (126,267)
LOSSES ON
INVESTMENTS
Currency losses - (2) (2) - (2) (2)
Income from
investments:
- franked 32,635 - 32,635 35,712 - 35,712
investment income
- unfranked 37 - 37 612 - 612
investment
income
Interest 1,682 - 1,682 3,457 - 3,457
receivable on
short term
deposits
Income from other 914 - 914 - - -
securities
Underwriting 43 - 43 4 - 4
commission
Investment (1,174) (2,738) (3,912) (1,531) (3,573) (5,104)
management fee
Administrative (1,222) - (1,222) (1,260) - (1,260)
expenses
NET RETURN/ 32,915 (489,723) (456,808) 36,994 (129,842) (92,848)
(LOSS) BEFORE
FINANCE COSTS AND
TAXATION
Interest payable (5,850) (13,651) (19,501) (5,850) (13,651) (19,501)
and similar
charges
RETURN/(LOSS) ON 2 27,065 (503,374) (476,309) 31,144 (143,493) (112,349)
ORDINARY
ACTIVITIES BEFORE
TAX
Tax on ordinary - - - (1) - (1)
activities
RETURN/(LOSS) ON 27,065 (503,374) (476,309) 31,143 (143,493) (112,350)
ORDINARY
ACTIVITIES AFTER
TAX FOR THE YEAR
ATTRIBUTABLE TO
EQUITY
SHAREHOLDERS
Dividends (32,016) - (32,016) (31,230) - (31,230)
TRANSFER FROM (4,951) (503,374) (508,325) (87) (143,493) (143,580)
RESERVES
RETURN/(LOSS) PER 11.05p (205.49p) (194.44p) 12.50p (57.59p) (45.09p)
ORDINARY SHARE
TOTAL DIVIDEND 13.15p 12.75p
PER ORDINARY
SHARE
1 The revenue column on this statement represents the profit and loss account
of the Company.
2 Returns per ordinary share are based on the net revenue return on ordinary
activities after taxation of £27,065,000 (2002: £31,143,000), and the capital
depreciation in the year of £503,374,000 (2002: depreciation of £143,493,000)
and on 244,959,865 ordinary shares (2002: 249,160,152) being the weighted
average number of ordinary shares in issue during the year.
All revenue and capital items in the above statement derive from continuing
operations. No operations were acquired or discontinued in the year.
THE EDINBURGH INVESTMENT TRUST plc
Balance Sheet
As at 31 March 2003
2003 2002
£'000 £'000
FIXED ASSETS
Investments 806,197 1,329,615
CURRENT ASSETS
Debtors 12,380 12,878
AAA Money Market Funds - 73,000
UK Treasury Bills - 24,831
Fidelity Institutional Cash Fund 68,414 -
Cash and short term deposits 14,808 2,797
95,602 113,506
CREDITORS - AMOUNTS FALLING DUE (25,380) (46,693)
WITHIN ONE YEAR
NET CURRENT ASSETS 70,222 66,813
TOTAL ASSETS LESS CURRENT LIABILITIES 876,419 1,396,428
CREDITORS - AMOUNTS FALLING DUE AFTER (195,101) (194,850)
MORE THAN ONE YEAR
TOTAL NET ASSETS 681,318 1,201,578
CAPITAL AND RESERVES
Called up share capital - equity 60,699 61,705
Share premium 6,639 6,639
Capital redemption reserve 12,756 11,750
Capital reserve - realised 685,793 885,336
Capital reserve - unrealised (120,792) 194,974
Revenue reserve 36,223 41,174
TOTAL EQUITY SHAREHOLDERS' FUNDS 681,318 1,201,578
NET ASSET VALUE PER ORDINARY SHARE: 278.59p 484.73p
Cash Flow Statement
For the year ended 31 March 2003
2003 2002
£'000 £'000
NET CASH INFLOW FROM OPERTATING ACTIVITIES 33,393 33,778
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest paid (19,250) (19,250)
NET CASH OUTFLOW FROM SERVICING OF FINANCE (19,250) (19,250)
TAXATION
Overseas tax paid - (1)
UK tax paid - (768)
TAX PAID - (769)
FINANCIAL INVESTMENT
Purchase of investments (722,771) (387,035)
Exchange losses (2) -
Disposal of investments 734,795 473,535
NET CASH INFLOW FROM FINANCIAL INVESTMENT 12,022 86,500
EQUITY DIVIDENDS PAID (31,636) (31,247)
NET CASH (OUTFLOW)/INFLOW BEFORE USE OF LIQUID (5,471) 69,012
RESOURCES AND FINANCING
NET CASH INFLOW(OUTFLOW) FROM MANAGEMENT OF LIQUID 29,417 (43,226)
RESOURCES
NET CASH INFLOW BEFORE FINANCING 23,946 25,786
FINANCING
Repurchase of ordinary shares (11,935) (28,125)
NET CASH OUTFLOW FROM FINANCING (11,935) (28,125)
INCREASE/(DECREASE) IN CASH 12,011 (2,339)
Notes
1. The directors recommend that a final dividend of 8.95p (2002 - 8.65p) per
ordinary share be paid. The final dividend will be paid on 3 July 2003 to
shareholders on the register on 6 June 2003. The ex dividend date is 4 June
2003.
2. The financial information for the year ended 31 March 2002 has been
extracted from the annual report and accounts of the company which have
been filed with the Registrar of Companies and on which the auditors'
report was unqualified.
3. The statutory accounts for 2003 which contain an unqualified audit report
will be delivered to the Registrar of Companies following the company's Annual
General Meeting which will be held at The Caledonian Hilton Hotel, Princes
Street, Edinburgh on Wednesday 2 July 2003 at 12 noon.
The accounts have been prepared under the same accounting policies used for the
year to 31 March 2002.
4. The statement of total return (incorporating the revenue account), balance
sheet and cashflow set out above do not represent full accounts in accordance
with Section 240 of the Companies Act 1985. The accounts have been prepared in
accordance with the Statement of Recommended Practice: `Financial Statements of
Investment Trust Companies'.
5. The annual report will be posted to shareholders on 2 June 2003 and copies
will be available from the Secretary - Fidelity Investments International,
Oakhill House, 130 Tonbridge Road, Hildenborough, Tonbridge, Kent. TN11 9DZ.
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