Annual Financial Report
Keystone Investment Trust plc
Annual Financial Report Announcement
for the Financial Year Ended 30 September 2010
Financial Information and Performance Statistics
Performance Statistics
At At
30 30 September %
September
2010 2009 Change
Assets
Net assets attributable to ordinary 162,154 150,252 +7.9
shareholders (£'000)
Net asset value per ordinary share 1212.9p 1123.9p +7.9
- with income reinvested +15.3
Share price (mid-market) of ordinary 1170.0p 1008.0p +16.1
shares
- with income reinvested +22.6
FTSE All-Share Index +8.8
- with income reinvested +12.5
Discount of share price to net asset
value per
ordinary share (%):
- debt at par 3.5 10.3
- debt at fair value 1.7 8.6
Total borrowings as % of net assets
attributable to
ordinary shareholders 24.6 26.5
Effective gearing - equity exposure as %
of net
assets attributable to ordinary 108 105
shareholders
Revenue
Net revenue available for ordinary 5,428 7,680
shareholders (£'000)
Dividends per ordinary share - interim 17.5p 17.5p
- final 28.0p 28.0p
- total excluding special 45.5p 45.5p -
- special - 11.1p
- total including special 45.5p 56.6p
Total expense ratio:
- excluding performance fee 0.9% 0.9%
- including performance fee 0.9% 1.3%
Historical Record - Last 10 Years
Net Net assets Net Mid-market
revenue asset
Year ended Gross Available Earnings Dividends attributable value price
to per
30 revenue for per per share shareholders share per share
September shares share
£'000 £'000 p p £'000 p p
2001 4,043 2,726 19.3 30.0 115,765 821.4 719.5
2002 3,786 2,647 19.4 25.5 78,286 585.6 455.0
2003 4,524 3,324 24.9 25.5 95,564 714.8 651.0
2004 5,659 4,298 32.2 30.0 111,224 832.0 754.0
2005 5,737 4,315(1) 32.2(1) 31.5 143,415(1) 1072.8 963.0
(1)
2006 6,477 4,984 37.3 35.0 166,739 1247.2 1102.0
2007 7,099 5,566 41.6 40.0 179,197 1340.4 1190.0
2008 8,159 6,745 50.4 44.0 144,908 1083.9 940.0
2009 8,263 7,680 57.4 56.6(2) 150,252 1123.9 1008.0
2010 6,864 5,428 40.6 45.5 162,154 1212.9 1170.0
1. Restated for new UK Accounting Standards.
2. Includes a special dividend of 11.1p per share.
Chairman's Statement
In the year to 30 September 2010, the Company's share price provided a total
return of +22.6%. The total return of the net asset value per share was +15.3%.
In the same period, the total return of the Company's benchmark for the purpose
of performance measurement, the FTSE All-Share Total Return Index, was +12.5%.
All these figures are with income reinvested. The discount of the share price
relative to net asset value per share narrowed considerably from 10.3% at the
end of September 2009 to 3.5% at 30 September 2010.
Performance 6 Months One year Since appointment
of current manager
on
1 January 2003
Share Price Total Return +14.7% +22.6% +209.4%
NAV Total Return per share +3.4% +15.3% +152.8%
FTSE All-Share Total Return +0.2% +12.5% +99.0%
Index
Source: Morningstar
Gearing and investment guidelines
The Company's borrowings, in the form of long-term debentures, amount to £32
million after two of the debentures, the 10.25% Debenture Stock 2010 and the
11.375% Debenture Stock 2010/2015, were redeemed in full on 1 October 2010. The
effective gearing of the Company is determined by the extent to which these
borrowings are invested in shares. The present position is that the Manager
must make no net purchases which would take equity exposure above 107.5% of net
assets, and has to make sales if, as a result of market movements, equity
exposure goes higher than 115% of net assets. It is up to the investment
manager to decide on exposure subject to those limits.
The Board has also authorised in the past some exposure to corporate bonds
which is treated as additional to the gearing limits. The maximum limit on
corporate bond investments is £12 million. At the year-end bonds held by the
Company amounted to only 0.1% of total investments.
Dividends
The Board has declared a final dividend of 28p per share (2009: 28p), giving a
total dividend of 45.5p per share, the same as last year. Based on the share
price at the year-end, this total dividend represents a dividend yield of
3.89%. While the primary objective of the Company is long-term growth of
capital, the Board will continue to pay attention to the importance of dividend
to some of the Company's shareholders. This emphasis is in tune with the
Manager's focus on investing in companies which can maintain and increase
dividends. Earnings per share in this year were 40.6p (2009: 57.4p). The
dividend will be paid on 17 December 2010 to shareholders on the register on 19
November 2010.
Expenses
The Company's total management expenses were 0.9% of average net assets
excluding performance fee in the year ended 30 September 2010 (2009: 0.9%).
Including performance fee the Company's total management expenses were also
0.9% of average net assets (2009: 1.3%).
The Manager
During the year the Board again reviewed all aspects of the service provided by
the Manager and the terms of the Manager's appointment. We remain satisfied
with the service and the current terms of appointment.
Outlook
Kenneth Arrow, twice winner of the Nobel Prize for economics, was employed
during the second World War as a meteorologist in the US Air Force. Required to
produce medium term weather forecasts, he soon realised that his forecasts were
no better than randomly right, and asked to be relieved of this responsibility.
The reply came back: "The Commanding General is well aware that your forecasts
are no good. However, they are essential for planning purposes."
An outlook section is similarly necessary for an annual report. But we do not
know the future. At the beginning of 2008, both the IMF and the OECD expected
world growth to be more than 2.5%. It turned out to be a minus number. The
Board of Keystone is not likely to be better at economic forecasting than the
IMF and the OECD.
Eight years ago the Board chose as the Company's new manager one who focussed
on valuations rather than on prediction. In the Manager's report which follows,
Mark Barnett emphasises some "startling anomalies" in the relative pricing of
corporate bonds and equities, the discount being applied to large companies
with dependable earnings, and the cheap and attractive opportunities available
in equity markets. The investment manager, with the Invesco team, has steered
his way successfully through turbulent waters both in the past year and more
broadly since 2003, finding opportunities which have allowed the share price
(including dividends deemed to be reinvested) to more than triple while the
stock market as a whole has doubled. From time to time we have warned that
every manager, however successful, has a bad patch, and outperformance in every
year cannot be expected. But we have every confidence, now as in 2003, that in
the long term the returns which shareholders in the Company receive will be
satisfactory.
Special Business at the Annual General Meeting (`AGM')
As special business at the AGM, the Board will propose four resolutions:
Share issuance
First, the Board is asking for the usual authority to issue up to an aggregate
nominal amount of £334,219 in new ordinary shares, this being 5% of the
Company's issued ordinary share capital. This will allow Directors to issue
shares within the prescribed limits should any favourable opportunities arise
to the advantage of shareholders. The powers authorised will not be exercised
at a price below net asset value so that the interests of existing shareholders
are not diluted. This authority will expire at the AGM in 2011.
Second, the Directors are also asking for the authority to issue new ordinary
shares pursuant to a rights issue, or otherwise than in accordance with a
rights issue, of up to an aggregate nominal amount of £334,219 (5% of the
Company's issued ordinary share capital) of new ordinary shares disapplying
pre-emption rights. This will allow for shares to be issued to new shareholders
without having to be offered to existing shareholders first, thus broadening
the shareholder base of the Company. This authority will expire at the AGM in
2011.
Share Buybacks
Third, the Board is seeking to renew the authority to purchase up to 2,003,982
of the Company's own shares, this being 14.99 of the issued ordinary shares,
subject to the restrictions referred to in the notice of the AGM. This
authority will expire at the AGM in 2011.
Calling General Meetings at 14 Days' Notice
New UK legislation implementing the EU Shareholder Rights Directive has
increased the notice period for a general meeting from 14 days to 21 days.
However, companies are able to pass a special resolution permitting them to
continue to call general meetings (other than AGMs) on 14 days' notice if they
allow voting by electronic means.
Approval of Special Resolution 12 will therefore enable the Board to call any
general meetings other than AGMs on 14 days' notice, should that be necessary.
It is intended that this flexibility will only be used for non-routine business
and where it is in the interests of shareholders as a whole.
The Board has carefully considered all the resolutions proposed in the Notice
of the AGM and consider them all to be in the best interest of the Company and
its shareholders. The Directors therefore recommend that shareholders vote in
favour of each resolution.
My fellow Directors and I look forward to seeing investors at the AGM of the
Company on 14 December 2010, where there will be an opportunity to meet and
question the investment manager.
This will be my last AGM as Chairman of the Company before I hand over to
Beatrice Hollond. I would like to thank the investment manager Mark Barnett,
the company secretary Kerstin Rucht and all their colleagues at Invesco for the
service they have given to the Company during my time as chairman and for what
they have achieved for shareholders. I know that the Company is in good hands
and I wish the Board and the Company every success.
Richard Oldfield
Chairman
12 November 2010
Managers Report
The UK equity market rose by 12.5% in the 12 months to 30 September 2010, as
measured by the FTSE All-Share Index. The best performing sectors in the index
included personal goods and leisure goods, while banks and oil & gas producers
were among the worst performing. By market capitalisation, smaller companies
were the strongest performers. The market performance was enhanced by a number
of factors: positive corporate earnings, renewed merger activity and the
beneficial impact of the Bank of England's policy of quantitative easing which
was stopped having bought £200 billion of gilts by February 2010. One of the
most significant corporate events over the period was the BP oil spill in the
Gulf of Mexico. The repercussions of the spill were far-reaching, culminating
in the company agreeing to US government demands to place US$20 billion into a
compensation fund, supported by asset sales and the suspension of dividend
payments until 2011. The performance of the overall market is even more
impressive considering that BP, its largest constituent, had fallen by almost a
quarter over the year.
In terms of economic developments, the most important event was the sovereign
debt crisis, which emanated from Greece and spread to other peripheral European
countries such as Spain and Portugal. This led to equity-market volatility as
the scale of the debt problem and the difficulty of finding a solution came
into the market's focus.
The new government's emergency budget on 22 June contained a number of measures
designed to arrest the growth of the UK's budget deficit. The features of the
budget included a new £2 billion levy on banks, downward revisions to GDP
forecasts by the newly formed Office for Budget Responsibility, a rise in
capital gains tax (to 28% for higher rate taxpayers), an increase in VAT to 20%
from 17.5%, and stepped reductions in corporation tax to 24% by 2015. The
autumn spending review is going to give more detail on the long-term goals to
reduce the UK government's debt.
Inflation, as measured by the consumer prices index, remained above the Bank of
England's 2% target throughout the review period, while the Monetary Policy
Committee (MPC) kept interest rates on hold at 0.5%. Since June this year, one
member of the MPC, Andrew Sentance, has repeatedly voted for a 25 basis point
rise in interest rates.
Portfolio Strategy & Review
The Company's net asset value rose by 15.3% during the 12 months to the end of
September 2010, compared to a rise of 12.5% from the FTSE All-Share Index (both
figures include reinvested income).
The Trust's holdings in some of the defensive areas of the market performed
particularly well over the review period and were the primary drivers of the
outperformance of the FTSE All-Share Index.
AstraZeneca's share price increased in line with the generally positive
environment for pharmaceuticals businesses. Specifically, AstraZeneca enjoyed
success in several of its drug trials and was also the beneficiary of a number
of positive regulatory decisions in relation to its leading products. In
financial terms, the company outperformed expectations for cash generation and
the growth of their emerging markets businesses.
International Power received a takeover offer from French utility GDF Suez to
combine their international power generation portfolio. The deal was well
received by the market. GDF Suez have paid a cash premium for International
Power to acquire a controlling interest in the new company which offers better
growth prospects and a much stronger balance sheet.
The better pricing environment for tobacco products saw BAT and Reynolds
American enhance the Trust's performance over the review period. Specifically,
BAT benefited from the strong performance of its western brands in the emerging
markets, while Reynolds American's tobacco business in the US (the largest
profit pool in the tobacco industry) continued to grow their core tobacco
brands.
Vodafone was a further positive contributor to the Trust's outperformance.
Following the sale of its holding in China Mobile, its shares started to
recover in the belief that value will be realised from the disparate portfolio
of Vodafone's non-core assets. There was also positive news from Vodafone's
core businesses. The European business is starting to benefit from strong
growth in mobile data services which is offsetting declining revenues derived
from voice calls.
The most negative contributor to the Trust's performance was Yell. The company
continued to suffer as a result of the underperformance of its directory
business, and on continued speculation concerning its long-term future. The
Manager remains cautiously optimistic as a result of the new strategy to
migrate more of Yell's business online. Elsewhere, UK Coal restricted the
fund's progress as a result of production delays at its largest UK pit. Given
that this is a very high cost business, the delay was a drain on UK Coal's cash
position which led to market speculation that UK Coal may need to undertake a
fund raising exercise to strengthen its balance sheet.
Over the review period, a new holding in Ladbrokes was purchased for the Trust.
Ladbrokes has embarked on a new strategy to improve the performance of its
retail estate and online businesses. The company has recently appointed a new
chairman and CEO who have initiated these changes.
In the defence sector, Rolls-Royce was sold following a period of strong
performance. The Manager felt that valuations were more attractive in other
parts of the defence sector and in keeping with this view, a new holding in
Chemring was introduced into the Trust. Chemring, a high-quality mid-cap
defence company, is exposed to some fast growing consumable markets, with
prospects for large contract orders in products for armed forces around the
world. The shares had become more attractively valued as the market became
concerned about troop withdrawals from Afghanistan.
Outlook
The Manager's view on the economy remains unchanged from the interim report.
The Manager continues to believe that the economic outlook remains challenging.
Credit growth is largely absent, banks continue to repair balance sheets and
consumers remain intent on rebuilding their finances following a decade of
debt-fuelled spending. This process of deleveraging of the domestic economy
will remain a dominant theme for many years and GDP growth will be subdued
during this period of time. The government's recent spending announcements also
represent an increased risk to the domestic economy.
Given that the economic outlook is so uncertain, it is perhaps surprising that
the stockmarket is not awarding a higher rating to the companies with the most
reliable earnings and cashflows. In fact, the continued asset allocation shift
out of equities into bonds which is characterising investment flows from both
institutional and private clients has created some startling anomalies in the
way that the bond and the equity of the same corporate entity are being priced.
Given the general lack of top-line growth which is seen in the current
environment, the discount that is being applied to large companies with
dependable earnings looks too wide. It is not unreasonable to expect these
kinds of companies to be trading at a premium to the rest of the market,
particularly given their other important characteristics of balance sheet
strength, diversified revenues and proven business models. Investors' present
infatuation with bonds and emerging market equities seems increasingly
unsustainable given the cheap and attractive alternative investment
opportunities which exist in other parts of the UK equity market and in which a
large proportion of the portfolio is currently invested.
Mark Barnett
Investment Manager
12 November 2010
Principal Risks and Uncertainties
The principal risk factors relating to the Company can be divided into the
following areas:
Investment Objective
The Company's investment objective is described on page 15 of the annual
financial report. There is no guarantee that the Company's investment objective
will be achieved or will provide the returns sought by the Company.
The Board has established guidelines to ensure that the investment policy that
has been approved is pursued by the Manager.
Investment Process
The investment process employed by the Manager combines top down assessment of
economic and market conditions with stock selection. Fundamental analysis forms
the basis of the Company's stock selection process, with an emphasis on sound
balance sheets, good cash flows, the ability to pay and sustain dividends, good
asset bases and market conditions. The process is complemented by constant
assessment of market valuations. It is important to have a sense of a company's
realistic valuation which, to some extent, will be independent of the price at
which the company currently trades in the market.
Overall, the investment process is aiming to achieve absolute returns through a
genuinely active fund management approach. This can therefore result in a
portfolio which looks substantially different from the index.
Risk management is an integral part of the investment management process. The
Manager effectively controls risk by ensuring that the Company's portfolio is
always appropriately diversified. In depth and continual analysis of the
fundamentals of all holdings gives the Manager a full understanding of all the
financial risks associated with any particular security.
Market Movement and Portfolio Performance
The majority of the Company's investments are traded on the London Stock
Exchange. The principal risk for investors in the Company is of a significant
fall in the markets and/or a prolonged period of decline in the markets
relative to other forms of investment as well as bad performance of individual
portfolio investments. The value of investments held within the portfolio is
influenced by many factors including the general health of the economy in the
UK, interest rates, inflation, government policies, industry conditions,
political events, tax laws, environmental laws, and by changing investor
demand. The Manager strives to maximise the total return from the securities in
which it invests, but these securities are influenced by market conditions and
the Board acknowledges the external influences on portfolio performance.
While the Board obviously cannot influence market movements, it is vigilant in
monitoring the Manager's performance and additionally in reviewing regularly
the degree of gearing, through borrowings, which it permits the Manager to
undertake. The continuation of the Manager's mandate is formally reviewed each
year.
Past performance of the Company is not necessarily indicative of future
performance.
For a fuller discussion of economic and market conditions and prospects for
future performance of the portfolio, please see the Chairman's Statement and
the Manager's Report on pages 5 to 8 of the annual financial report.
The Ordinary Shares
The market price of an ordinary share may trade at a discount to its NAV. As at
30 September 2010, an ordinary share of the Company traded at a discount of
3.5% (debt at par). During the year, the Company's shares traded at an average
discount of 7.5%.
There can be no guarantee that any appreciation in the value of the Company's
investments will occur and investors may not get back the full value of their
investment. Due to the potential difference between the mid-market price of the
ordinary shares and the prices at which they are sold, there is no guarantee
that their realisable value will reflect their market price.
While it is the intention of the Directors to pay dividends to ordinary
shareholders twice a year, the ability to do so will depend upon the level of
income received from securities and the timing of receipt of such income by the
Company. Accordingly, the amount of the twice-yearly dividends paid to ordinary
shareholders may fluctuate. Any change in the tax or accounting treatment of
dividends or other investment income received by the Company may also affect
the level of dividend paid on the ordinary shares in future years.
Bond Holdings
Fixed-interest securities are subject to credit, liquidity, duration and
interest rate risks. Adverse changes in the financial position of an issuer or
in general economic conditions may impair the ability of the issuer to make
payments of principal and interest or may cause the liquidation or insolvency
of an issuer.
Gearing
Gearing levels may change from time to time in accordance with the Manager's
and the Board's assessment of risk and reward. Whilst the use of borrowings by
the Company should enhance the total return on the ordinary shares where the
return on the Company's underlying securities is rising and exceeds the cost of
borrowing, it will have the opposite effect where the underlying return is
falling. As at 30 September 2010, gearing stood at 108% (equity exposure as a
percentage of net assets attributable to ordinary shareholders).
Regulatory and Tax-related
The Company is subject to various laws and regulations by virtue of its status
as an investment company under s833 of the Companies Act 2006, as an investment
trust, and its listing on the London Stock Exchange. A breach of s1158 CTA
(previously s842 ICTA) could lead to the Company being subject to capital gains
tax on the profits arising from the sale of its investments. A serious breach
of other regulatory rules might lead to suspension from the Stock Exchange or
to a qualified Audit Report. Other control failures, either by the Manager or
any other of the Company's service providers, might result in operational or
reputational problems, erroneous disclosures or loss of assets through fraud,
as well as breaches of regulations.
The Manager reviews the level of compliance with s1158 CTA (previously s842
ICTA) and other financial regulatory requirements on a daily basis. All
transactions, income and expenditure are reported to the Board. The Board
regularly considers all risks, the measures in place to control them and the
possibility of any other risks that could arise. The Board ensures that
satisfactory assurances are received from service providers. The Manager's
Compliance Officer produces regular reports for review by the Company's Audit
Committee.
Further details of risks and risk management policies as they relate to the
financial assets and liabilities of the Company are detailed in note 19 to the
financial statements in the annual financial report.
Reliance on Third Party Service Providers
The Company has no employees and the Directors have all been appointed on a
non-executive basis. The Company is therefore reliant upon the performance of
third party service providers for its executive function. In particular, the
Manager performs services which are integral to the operation of the Company.
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.
The Manager may be exposed to reputational risks. In particular, 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
potential 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 successfully.
Statement of Directors' Responsibilities in respect of the preparation of
financial statements
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 that law the Directors have elected to prepare financial
statements in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards and applicable law). 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 judgments and estimates that are reasonable and prudent; and
• state whether applicable UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the financial statements.
The Directors are responsible for keeping adequate accounting records which 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 accounts comply with company law. They are also
responsible for safeguarding the assets of the Company and hence for taking
reasonable steps for the prevention and detection of 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.
The Directors of the Company, whose names are shown on page 12 of the annual
financial report, each confirm to the best of their knowledge that:
• the accounts, which have been prepared in accordance with applicable
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss 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.
Richard Oldfield
Chairman
Signed on behalf of the Board of Directors
12 November 2010
Electronic Publication
The annual financial report is published on www.invescoperpetual.co.uk/
investmenttrusts which is the Company'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
legislations in other jurisdictions.
Investments by Sector
at 30 September 2010
UK listed ordinary shares unless stated otherwise
Market
Value % of
Sector/Company £'000 Portfolio
Basic Materials
UK Coal 574 0.3
574 0.3
Consumer Goods
British American Tobacco 8,836 4.4
Reynolds American - US Common Stock 8,782 4.3
Imperial Tobacco 7,746 3.8
Reckitt Benckiser 4,735 2.3
Tate & Lyle 2,152 1.1
Altria - US Common Stock 1,099 0.5
Landkom International 746 0.4
34,096 16.8
Consumer Services
Tesco 5,528 2.7
Compass 3,241 1.6
Morrison 2,753 1.4
Ladbrokes 1,691 0.8
13,213 6.5
Financials
Hiscox 3,969 2.0
Provident Financial 2,613 1.3
A J Bell - Unquoted 2,400 1.2
Beazley 2,359 1.2
Impax Environmental Markets 1,158 0.6
Damille Investment 1,144 0.6
Impax Asian Environmental Markets 1,027 0.5
Trading Emissions 789 0.4
Macau Property Opportunities Fund 517 0.3
Helphire 334 0.2
Walton & Co 13 0.0
16,323 8.3
Health Care
AstraZeneca 8,782 4.3
GlaxoSmithKline 8,173 4.0
BTG 2,731 1.4
Napo Pharmaceuticals - Unquoted 2,534 1.2
Biocompatibles 1,582 0.8
Lombard Medical Technologies 1,113 0.5
Puricore 793 0.4
Imperial Inno 752 0.4
Vectura 582 0.3
Fusion IP 366 0.2
Renovo 281 0.1
Xcounter AB 81 0.0
XTL Biopharmaceutical - US ADR (10 Ordinary 43 0.0
Shares)
27,813 13.6
Market
Value % of
Sector/Company £'000 Portfolio
Industrials
International Power 5,986 3.1
Capita 5,817 2.9
BAE Systems 4,968 2.4
Babcock International 4,099 2.0
Balfour Beatty 3,746 1.8
Homeserve 2,567 1.3
Bunzl 2,475 1.2
Rentokil Initial 2,266 1.1
Chemring 2,221 1.1
Serco 887 0.4
35,032 17.3
Oil & Gas
BG 8,064 4.0
Altus Resource 1,430 0.7
9,494 4.7
Technology
Sage 1,738 0.9
Yell Group 574 0.3
Nexeon Series B - Unquoted 300 0.1
Mirada 5 0.0
2,617 1.3
Telecommunications
Vodafone 8,085 4.0
BT 6,353 3.1
Kcom 2,232 1.1
16,670 8.2
Utilities
Centrica 4,941 2.4
Scottish & Southern Energy 4,043 2.0
Pennon 3,467 1.7
Drax 2,647 1.3
Northumbrian Water 2,640 1.3
Ecofin Water & Power 638 0.3
Opportunities
Barclays Bank - Nuclear Power
Notes
28 February 2019(1) 468 0.2
18,844 9.2
Total Equity Investments 174,676 86.2
Fixed Interest
Ecofin 6% May 2016 157 0.1
157 0.1
Total Fixed Asset Investments 174,833 86.3
Certificates of Deposit
Barclays Bank 0.75% 29 October 10,001 4.9
2010
Lloyds Bank 0.7% 29 November 9,999 4.9
2010
RBS 0.66% 6 October 2010 8,000 3.9
28,000 13.7
Total Investments 202,833 100.0
(1) Contingent Value Rights (`CVR') referred to as Nuclear Power Notes (`NPNs')
were offered by EDF as a partial cash alternative to its cash bid for British
Energy (`BE'). The NPNs were issued by Barclays Bank. The CVRs participate in
BE's existing business.
Income Statement
For The Year Ended 30 September
2010 2009
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments - 17,312 17,312 - 6,538 6,538
Gains on certificates
of
deposit - 1 1 - 29 29
Foreign exchange - (149) (149) - (931) (931)
losses
Income 6,864 - 6,864 8,263 - 8,263
Investment management (280) (840) (1,120) (245) (1,318) (1,563)
VAT recovered on
investment
management fees - - - 840 1,576 2,416
Other expenses (294) - (294) (298) - (298)
Net return before
finance
costs and taxation 6,290 16,324 22,614 8,560 5,894 14,454
Finance costs (772) (2,283) (3,055) (772) (2,280) (3,052)
Return on ordinary
activities
before tax 5,518 14,041 19,559 7,788 3,614 11,402
Tax on ordinary (90) - (90) (108) - (108)
activities
Return on ordinary
activities
after tax for the 5,428 14,041 19,469 7,680 3,614 11,294
financial year
Return per ordinary
share
Basic 40.6p 105.0p 145.6p 57.4p 27.1p 84.5p
The total column of this statement represents the Company's profit and loss
account, prepared in accordance with the accounting policies detailed in note 1
to the financial statements. 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 total 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 30 September
Capital
Share Share Redemption Capital Revenue
Capital Premium Reserve Reserve Reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
Balance as at 30 6,685 1,258 466 127,925 8,574 144,908
September 2008
Dividends paid - - - - (5,950) (5,950)
Net return on - - - 3,614 7,680 11,294
ordinary activities
Balance as at 30 6,685 1,258 466 131,539 10,304 150,252
September 2009
Dividends paid - - - - (7,567) (7,567)
Net return on - - - 14,041 5,428 19,469
ordinary activities
Balance as at 30 6,685 1,258 466 145,580 8,165 162,154
September 2010
The accompanying notes are an integral part of these statements.
Balance Sheet
at 30 September
2010 2009
£'000 £'000
Fixed assets
Investments held at fair value through profit or 174,833 165,788
loss
Current assets
Certificates of deposits 28,000 20,999
Debtors 731 1,889
Cash and cash funds - 3,762
28,731 26,650
Creditors: amounts falling due within one year (9,559) (2,354)
Net current assets 19,172 24,296
Total assets less current liabilities 194,005 190,084
Creditors: amounts falling due after more than one (31,851) (39,832)
year
Provisions - -
Net assets 162,154 150,252
Capital reserves
Share capital 6,685 6,685
Share premium 1,258 1,258
Capital redemption reserve 466 466
Capital reserve 145,580 131,539
Revenue reserve 8,165 10,304
Shareholders' funds 162,154 150,252
Net asset value per ordinary share
Basic 1212.9p 1123.9p
These financial statements were approved and authorised for issue by the Board
of Directors on
12 November 2010.
Signed on behalf of the Board of Directors
Richard Oldfield
Chairman
The accompanying notes are an integral part of this statement.
Cash Flow Statement
for the Year Ended 30 September
2010 2009
£'000 £'000
Cash inflow from operating activities 5,946 8,395
Servicing of finance (3,036) (3,034)
Capital expenditure and financial 811 (2,956)
investment
Equity dividends paid (7,567) (5,950)
Net cash outflow before management of
liquid resources and financing (3,846) (3,545)
Management of liquid resources - -
Decrease in cash (3,846) (3,545)
Reconciliation of net cash flow to
movement in net debt
Decrease in cash (3,846) (3,545)
Exchange movements (397) (660)
Debenture stock non-cash movement (19) (18)
Movement in net debt in the year (4,262) (4,223)
Net debt at beginning of the year (36,070) (31,847)
Net debt at end of the year (40,332) (36,070)
The accompanying notes are an integral part of this statement.
Notes to the Financial Statements
1. Accounting policies
(a) Basis of preparation
i. 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. The disclosures on going concern in the Report of the Directors on page
26 of the annual financial report form part of the financial statements.
2. Income
2010 2009
£'000 £'000
Income from investments
UK dividends 5,901 5,537
Overseas dividends 601 609
UK unfranked investment income - interest 310 1,285
Scrip dividends 38 135
6,850 7,566
Other income
Interest on VAT recovered on management fees - 640
Deposit interest 8 18
Underwriting commission 6 39
14 697
Total income 6,864 8,263
3. Investment management fee
2010 2009
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management 280 840 1,120 245 734 979
fee
Performance-related fee
relating
to 31 December 2008 - - - - 584 584
280 840 1,120 245 1,318 1,563
Details of the management agreement are disclosed in the Report of the
Directors in the annual financial report. Performance-related fees are based on
a calendar year. No performance fee has been provided for the year ended 31
December 2010 (31 December 2009: £nil and 31 December 2008: £584,000).
VAT is no longer payable on management or performance fees. An amount of £
2,416,000 was recognised in 2009 in respect of VAT recoverable on management
fees paid to both Invesco Asset Management Limited and the previous manager,
Merrill Lynch Investment Managers Limited. This was credited £840,000 to
revenue and £1,576,000 to capital, in the same proportion as originally charged
to the income statement. In addition, £640,000 of interest thereon was credited
to revenue.
4. Dividends
2010 2009
£'000 £'000
Dividends on equity shares paid and recognised in
the year:
Final dividend for 2009 of 28p (2008: 27p) 3,743 3,610
Special dividend of 11.1p in respect of VAT refunds 1,484 -
Interim dividend for 2010 of 17.5p (2009: 17.5p) 2,340 2,340
7,567 5,950
2010 2009
£'000 £'000
Dividends on equity shares payable in respect of
the year:
Interim paid 17.5p per ordinary share (2009: 17.5p) 2,340 2,340
Final dividend of 28p per ordinary share (2009: 3,743 3,743
28p)
Special dividend per ordinary share (2009: 11.1p) - 1,484
6,083 7,567
5. Return per ordinary share
Basic revenue, capital and total return per ordinary share is based on each of
the returns on ordinary activities after taxation and on 13,368,799 (2009:
13,368,799) shares being the number of ordinary shares in issue throughout the
year.
6. Share capital
2010 2009
Number £'000 Number £'000
Authorised
Ordinary shares of 50p each 20,000,000 10,000 20,000,000 10,000
Allotted, called-up and fully
paid:
Ordinary shares of 50p each 13,368,799 6,685 13,368,799 6,685
The ordinary shares are fully participating and carry one vote per £1 nominal
held.
7. Net asset value per ordinary share
The net asset value per ordinary share and the net assets attributable at the
year end were as follows:
Net Asset Value Net Assets
Per Share Attributable
2010 2009 2010 2009
Pence Pence £'000 £'000
Ordinary shares
- Basic 1212.9 1123.9 162,154 150,252
Net asset value per ordinary share is based on net assets at the year end and
on 13,368,799 (2009: 13,368,799) ordinary shares, being the number of ordinary
shares in issue at the year end.
8. Notes to the cash flow statement
(a) Reconciliation of operating profit to operating cash flows
2010 2009
£'000 £'000
Total return before finance costs and taxation 22,614 14,454
Adjustment for gains on investments and certificates of (17,313) (6,567)
deposit
Adjustment for exchange losses 149 931
Scrip dividends (38) (135)
Decrease/(increase) in debtors 604 (194)
Increase in creditors and provisions 20 14
Tax on overseas dividends (90) (108)
Net cash inflow from operating activities 5,946 8,395
(b) Analysis of cash flow for headings netted in the cash flow statement
2010 2009
£'000 £'000
Servicing of finance
Preference dividends paid (12) (12)
Bank interest paid (2) -
Interest paid on debenture stocks (3,022) (3,022)
Net cash outflow from servicing of finance (3,036) (3,034)
Capital expenditure and financial investment
Purchase of investments* (35,103) (69,489)
Sale of investments 42,914 52,530
Purchase of certificates of deposit (101,002) (103,503)
Sale of certificates of deposit 94,002 117,506
Net cash inflow/(outflow) from capital expenditure and
financial
investments 811 (2,956)
*Excludes scrip dividends received as income.
9. Related Party Transactions
Invesco Asset Management Limited (`IAML'), a wholly owned subsidiary of Invesco
Limited, acts as Manager, Company Secretary and Administrator to the Company.
Details of IAML's services and fees are disclosed in the Report of the
Directors. Full details of Directors' interests are set out in the Report of
the Directors in the annual financial report. There are no other related party
transactions.
10. This announcement does not constitute the Company's statutory accounts. It
is an abridged version of the audited Annual Financial Report of the
Company for the year ended 30 September 2010. The opinion of the auditors
on the 2010 Annual Financial Report is unqualified, and the auditors have
not drawn attention to any matter, nor have they sought to make a statement
under section 498 of the Companies Act 2006. Information relating to the
year ended 30 September 2009 is taken from the audited Annual Financial
Report for that year which has been delivered to the Registrar of
Companies. The Annual Financial Report for 2010, once approved by
shareholders, will be delivered to the Registrar in due course.
11. 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, 30 Finsbury Square, London EC2A 1AG. A copy of the
Annual Financial Report will be available shortly from Invesco Perpetual on
the following website:
http://investmenttrusts.invescoperpetual.co.uk/portal/site/iptrust/investmentrange/investmenttrusts/keystone
12. The Annual General Meeting will be held at Invesco Perpetual's offices in
43-45 Portman Square, London W1H 6LY, on Tuesday 14 December 2010 at 2.30pm.
By order of the Board
Invesco Asset Management Limited, Secretaries
12 November 2010
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