Half-yearly Report
Keystone Investment Trust
Half-Yearly Financial Report
for the Six Months to 31 March 2008
KEY FACTS
Keystone Investment Trust plc is an investment trust company listed on the
London Stock Exchange. The Company is managed by Invesco Asset Management
Limited.
Objective of the Company
The objective of Keystone Investment Trust plc is to provide shareholders with
long-term growth of capital, mainly from UK investments.
Full details of the Company's investment policy, risk and limits can be found
in the annual financial report for the year ended 30 September 2007.
Performance Statistics
At At %
31 March 30
September
Assets 2008 2007 Change
Net assets attributable to ordinary 154,918 179,197 -13.5
shareholders (£'000)
Net asset value per ordinary share 1158.8p 1340.4p -13.5
- with net income reinvested -11.8
Share price (mid-market) of ordinary 1055.0p 1190.0p -11.3
shares
- with net income reinvested -9.4
FTSE All-Share Index -11.8
- with income reinvested -10.2
Discount of share price to net asset
value per ordinary share:
- with debt at par 9.0% 11.2%
- with debt at fair value 6.6% 8.5%
Total borrowings as % of net assets 25.7 22.2
attributable to ordinary
shareholders
Effective gearing - equity exposure 110 114
as a % of net assets attributable to
ordinary shareholders
Revenue Six Six %
Months Months Change
Ended Ended
31 March 31 March
2008 2007
Net revenue return per ordinary 21.4p 17.0p +26.9
share
Interim dividend per ordinary share 17.0p 15.0p +13.3
Chairman's Statement
Performance
Over the six months from 30 September 2007 to 31 March 2008, the Company's
shares gave a negative total return of -9.4% to shareholders. During the same
period, the total return of the net asset value per ordinary share was -11.8%,
while the total return of the Company's benchmark for performance measuring
purposes, the FTSE All-Share Index, was -10.2%. (All these figures are with
income reinvested.) On 31 March 2008, the discount of the share price relative
to net asset value (debt at par) was 9.0%.
Borrowings
Equity exposure decreased from 114% of net assets at 30 September 2007 to 110%
at 31 March 2008. During the period the gearing limits set by the Board were
that the Manager must make no net purchases if equity exposure was more than
110% of net assets, and must make sales if (as a result of market movements)
equity exposure rose to more than 115% of net assets. Since the period-end the
Board has reviewed the gearing limits again and has decided that, for the time
being, there should be no gearing.
Dividend
The interim dividend will be 17p per ordinary share, compared with an interim
dividend of 15p last year. The dividend will be paid on 25 June 2008 to
shareholders on the register on 23 May 2008.
Richard Oldfield
Chairman
21 May 2008
Manager's Report
Market Review
The UK equity market experienced considerable volatility during the six months
to 31 March 2008, with the FTSE All-Share Index declining by 10.2% in total
return terms. Throughout the review period, the investment environment was
overshadowed by the ongoing crisis in financial markets, weaker data on the UK
housing market and economy, and further upwards pressure on domestic inflation
from rising fuel, utility and food prices.
Towards the end of 2007 equity investors exited riskier assets, such as
small-cap stocks, and fled to the relative safe haven of large-cap companies.
Positive sector performance was limited to defensive areas, such as tobacco,
food producers, electricity, and utilities, while consumer-facing stocks such
as leisure goods, real estate and general retailers declined. As the credit
crunch unfolded and doubts over the durability of the UK economy grew in the
early months of 2008, the stockmarket sold off sharply, with little
differentiation between companies and sectors. Equities in general were
offering very few safe havens.
On the economic front, the Bank of England Monetary Policy Committee (MPC)
lowered UK interest rates on two occasions to a level of 5.25%. This was in
response to weakening economic data from the domestic economy. However, the MPC
cited the difficulty of balancing increased risks to economic growth with
concerns over higher inflation as the main reason for its decision to cut rates
in a more moderate fashion. This was in sharp contrast to the US Federal
Reserve Committee which took more aggressive monetary action towards the
weakening economic environment and the credit crunch.
Portfolio Strategy & Review
In the first three months of the review period, the fund recorded a resilient
performance as it was a beneficiary of the bias towards large-cap companies
which characterised the investment environment at the time. However, as the
investment environment became more challenging in the second half of the
period, flight-to-quality transformed into a flight-to-liquidity and safety,
and in these circumstances investors saw large-cap defensive stocks as a source
of liquidity and the ensuing sell-off restricted the Fund's returns.
In terms of portfolio activity, several new holdings were initiated into the
Fund over the review period. These included media company ITV, whose shares
look attractively valued and with a new management team are well placed to
benefit from a change in strategy and direction. A new position was also
started in UK Coal, whose valuation has retreated to attractive levels in
recent months. The company is currently benefiting from the high spot price of
coal and the renegotiation of coal contracts with the electricity generators at
higher prices. Furthermore the company's land and property business is likely
to become more highly valued as planning and development permission is granted
over the next few years. A number of existing holdings were increased at
attractive levels. These included Pennon Group and AstraZeneca. Conversely, the
holding in medical-equipment maker Gyrus was sold following a bid approach, and
Reed Elsevier was disposed of following a period of good performance.
Outlook
The UK is undoubtedly entering a period of economic slowdown as the forces of
growth, namely government and consumer spending, make their absence felt in the
economy. It is likely that UK economic growth will remain subdued for the
remainder of 2008 and well into 2009.
Against this backdrop, corporate profitability will come under pressure,
particularly in cyclical areas of the market and sectors which are exposed to
the consumer slowdown. Despite concerns over the prospects for the UK economy,
and the sharp falls in the UK equity market witnessed during the review period,
the Manager believes that there are some areas of the market where valuations
are very attractive and investment opportunities are interesting. These
typically fall within the more defensive parts of the market, such as the
tobacco, telecommunications, pharmaceuticals and oil sectors, which all feature
prominently in the Fund. The Manager has built up a meaningful exposure to the
so-called mega-cap area of the market, which represent the very largest
companies of the FTSE 100 Index. These companies currently offer the greatest
opportunity because they are typically geographically diversified, are less
dependent on the UK economy to drive earnings, they offer defensive earnings
and cash flows and have very strong balance sheets.
Mark Barnett
Fund Manager
21 May 2008
Related Parties
Invesco Asset Management Limited (`IAML'), a wholly owned subsidiary of Invesco
Limited, acts as Manager and Company Secretary to the Company. Details of
IAML's services and fees arrangements are given in the latest annual report,
which is available on the Company's website.
Principal Risks and Uncertainties
There is no guarantee that the investment policy adopted by the Company will
provide the returns sought by the Company. There can therefore be no guarantee
that the Company will achieve its investment objective. The principal risks and
uncertainties that could affect the Company's business can be divided into
various areas:
- Market Movements and Portfolio Performance;
- Gearing;
- Discount to Net Asset Value; and
- Regulatory and Tax Related.
A detailed explanation of these principal risks and uncertainties can be found
on pages 17 and 18 of the latest published annual report, which is available on
the Company's website.
In the view of the Board, these principal risks and uncertainties are equally
applicable to the remaining six months of the financial year as they were to
the six months under review.
Directors' Responsibility Statement
In respect of the preparation of the half-yearly financial report.
The Directors are responsible for preparing the half-yearly financial report
using accounting policies consistent with applicable law and UK Accounting
Standards.
The Directors confirm that to the best of their knowledge:
- the condensed set of financial statements contained within the half-yearly
financial report have been prepared in accordance with the Accounting Standards
Board's Statement "Half-Yearly Financial Report";
- the interim management report includes a fair review of the information
required by DTR 4.2.7 and DTR 4.2.8 of the FSA's Disclosure and Transparency
Rules; and
- the interim management report includes a fair review of the information
required on related party transactions.
Signed on behalf of the Board of Directors.
Richard Oldfield
Chairman
21 May 2008
INVESTMENTS BY SECTOR AT 31 MARCH 2008
UK listed ordinary shares unless otherwise stated
Market Value % of
Sector/company £'000 Portfolio
Basic Materials
UK Coal 1,847 1.0
1,847 1.0
Consumer Goods
British American Tobacco 9,961 5.3
Reynolds American US Listed Common 9,018 4.8
Stock
Imperial Tobacco 8,039 4.3
Tate & Lyle 2,810 1.5
Associated British Foods 2,163 1.2
Landkom International 1,650 0.9
33,641 18.0
Consumer Services
Tesco 5,551 3.0
TUI Travel 3,881 2.1
British Airways 3,086 1.7
Informa 2,859 1.5
Marks & Spencer 2,276 1.2
Carnival 2,169 1.2
ITV 1,507 0.7
Local Radio 161 0.1
21,490 11.5
Financials
Hiscox 3,051 1.6
Climate Exchange 2,611 1.4
Impax Environment 1,459 0.8
Trading Emissions 1,243 0.7
A J Bell Unquoted 1,200 0.6
Just Retirement 1,112 0.6
Helphire 926 0.5
Macau Property Opportunities Fund 519 0.3
12,121 6.5
Healthcare
GlaxoSmithKline 6,834 3.7
AstraZeneca 3,494 1.9
Protherics 2,074 1.1
Vectura 645 0.3
Biofusion 598 0.3
Xcounter AB 502 0.3
XTL Biopharmaceutical Ordinary 448 0.2
Shares & ADRs
Renovo 419 0.2
BTG 419 0.2
Puricore 418 0.2
XL Techgroup 257 0.1
Lombard Medical Technologies 236 0.1
Napo Pharmaceutical 220 0.1
Phoqus Pharmaceutical 121 0.1
16,685 8.8
Market Value % of
Sector/company £'000 Portfolio
Industrials
BAE Systems 4,215 2.3
Capita 3,832 2.0
Rexam 3,268 1.7
Rolls Royce Ordinary and `B' shares 2,780 1.5
Balfour Beatty 2,756 1.5
Bunzl 2,627 1.4
Homeserve 1,302 0.7
Agcert 7 -
20,787 11.1
Oil & Gas
BP 7,694 4.1
Royal Dutch Shell `A' & `B' Shares 6,792 3.6
BG 6,104 3.3
20,590 11.0
Technology
Sage 2,873 1.5
Arm 995 0.5
Mirada 23 -
3,891 2.0
Telecommunications
Vodafone 6,382 3.4
BT 5,680 3.0
12,062 6.4
Utilities
British Energy 6,978 3.7
Drax 5,166 2.8
National Grid 4,597 2.5
Pennon 3,827 2.1
Scottish & Southern Energy 3,745 2.0
Centrica 669 0.4
24,982 13.5
Total equity investments 168,096 89.8
Fixed Interest Investments
First Hydro Finance 9.00% 31 July 511 0.3
2021
Linde Finance Floating 8.125% 14 501 0.3
July 2066
NTL Cable 9.75% 15 April 2014 426 0.2
British Energy 7.00% 22 March 2022 417 0.2
1,855 1.0
Certificates of Deposit
Bayerische LBK 5.5% 28 April 2008 4,999 2.7
Abbey National 5.610% 27 May 2008 4,998 2.7
Allied Irish 5.63% 27 May 2008 4,998 2.7
Bank of Montreal 5.48% 14 October 1,995 1.1
2008
16,990 9.2
Total Investments 186,941 100.00
Condensed Income Statement
Six Months ended
31 March 2008
Note Revenue Capital Total
£'000 £'000 £'000
(Losses)/gains on investments - (21,941) (21,941)
(Losses)/gains on certificates - (15) (15)
of deposit
Foreign exchange (losses)/gains 2 - (256) (256)
Income:
UK dividends 2,561 - 2,561
Overseas dividends 3 392 - 392
UK unfranked investment 498 - 498
income - interest
Deposit interest 106 - 106
Underwriting commission - - -
Investment management fee (146) (438) (584)
Performance fee 3 - - -
Other expenses (134) - (134)
Net return before finance costs 3,277 (22,650) (19,373)
and taxation
Finance costs:
Interest payable (380) (1,139) (1,519)
Distributions in respect of (6) - (6)
non-equity shares
Return on ordinary activities 2,891 (23,789) (20,898)
before taxation
Tax on ordinary activities (39) - (39)
Return on ordinary activities
after taxation 2,852 (23,789) (20,937)
Return per ordinary share
Basic 5 21.4p (177.9)p (156.5)p
Condensed Income Statement
Six Months ended Year ended
31 March 30
September
2007 2007
Revenue Capital Total Total
£'000 £'000 £'000 £'000
(Losses)/gains on investments - 12,892 12,892 14,045
(Losses)/gains on certificates - 15 15 22
of deposit
Foreign exchange gains/ - 649 649 1,011
(losses)
Income:
UK dividends 2,506 - 2,506 6,111
Overseas dividends 342 - 342 723
UK unfranked investment 177 - 177 263
income - interest
Deposit interest 1 - 1 1
Underwriting commission 1 - 1 1
Investment management fee (181) (543) (724) (1,463)
Performance fee - 7 7 -
Other expenses (147) - (147) (314)
Net return before finance 2,699 13,020 15,719 20,400
costs and taxation
Finance costs:
Interest payable (381) (1,135) (1,516) (3,040)
Distributions in respect of (6) - (6) (12)
non-equity shares
Return on ordinary activities 2,312 11,885 14,197 17,348
before taxation
Tax on ordinary activities (43) - (43) (78)
Return on ordinary activities
after taxation 2,269 11,885 14,154 17,270
Return per ordinary share
Basic 17.0p 88.9p 105.9p 129.1p
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 both prepared under guidance published 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 period.
Condensed Balance Sheet
At At At
31 March 30 31 March
September
2008 2007 2007
Note £'000 £'000 £'000
Non-current assets
Investments at fair value
through profit or loss 169,951 203,889 209,747
Current assets
Certificates of deposit 16,990 5,004 4,997
Amounts due from brokers 1,015 751 168
Tax recoverable 17 17 19
Unrealised profit on forward
currency contracts 2 - 52 165
Prepayments and accrued
income 1,030 644 977
Cash and cash funds 8,058 10,713 3,761
27,110 17,181 10,087
Creditors: amounts falling due
within one year
Amounts due to brokers (1,190) (887) (842)
Unrealised loss on forward
currency contracts 2 (70) -- --
Accruals (1,077) (1,187) (1,115)
(2,337) (2,074) (1,957)
Net current assets 24,773 15,107 8,130
Total assets less current 194,724 218,996 217,877
liabilities
Creditors: amounts falling due
after more than one year
Debenture stock (39,556) (39,549) (39,541)
Cumulative preference shares (250) (250) (250)
Net assets 154,918 179,197 178,086
Capital and reserves
Share capital 6,685 6,685 6,685
Share premium account 1,258 1,258 1,258
Capital redemption reserve 466 466 466
Other reserves:
Capital reserve - realised 141,474 135,804 125,671
Capital reserve - unrealised (1,919) 27,540 37,854
Revenue reserve 6,954 7,444 6,152
Shareholders' funds 154,918 179,197 178,086
Net asset value per share
Basic 6 1158.9p 1340.4p 1332.1p
Condensed Cash Flow Statement
Six Six
Months to Year to Months to
31 March 30 September 31 March
2008 2007 2007
£'000 £'000 £'000
Total return before finance
costs
and taxation (19,373) 20,400 15,720
Adjustment for gains on
investments and 21,956 (14,067) (12,907)
certificates of deposit
Adjustment for exchange 256 (1,011) (649)
losses/(gains)
Decrease/(increase) in (386) 194 (140)
debtors
(Decrease)/increase in (163) (759) (830)
creditors
Tax on unfranked investment
Income (39) (78) (43)
Cash flow from operating 2,251 4,679 1,151
activities
Servicing of finance (1,466) (3,036) (1,517)
Capital expenditure and
financial
Investment
Purchase of investments and
certificates of deposit (73,627) (106,164) (52,613)
Proceeds from sale of
investments and
certificates
of deposit 73,663 117,172 57,148
Equity dividend paid (3,342) (4,812) (2,807)
Net cash (outflow)/inflow
before
management of liquid
resources
and financing (2,521) 7,839 1,362
Management of liquid resources 2,643 (8,750) (1,800)
Increase/(decrease) in cash in
the
period 122 (911) (438)
Cash flow from movement in
liquid resources (2,643) 8,750 1,800
Exchange movements (134) 924 449
Debenture stock non-cash
movement (7) (15) (7)
Movement in net debt in the (2,662) 8,748 1,804
year
Net debt at beginning of period (29,086) (37,834) (37,834)
Net debt at period end (31,748) (29,086) (36,030)
Analysis of changes in net
debt:
Brought forward:
Cash and cash funds 10,713 1,950 1,950
Cumulative preference shares (250) (250) (250)
Debenture stock (39,549) (39,534) (39,534)
Net debt brought forward (29,086) (37,834) (37,834)
Movements in the period:
Cash (outflow)/inflow from
cash
funds and short term (2,521) 7,839 1,363
deposits
Exchange movements (134) 924 448
Debenture stock non-cash (7) (15) (7)
movement
Net debt at period end (31,748) (29,086) (36,030)
Reconciliation of Movements in Shareholders' Funds
Share Capital Capital Capital
Share Premium Redemption Reserve- Reserve- Revenue
Capital Account Reserve Realised Unrealised Reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
For the six
months
ended 31 March
2007
At 1 October 6,685 1,258 466 110,926 40,714 6,690 166,739
2006
Final dividend - - - - - (2,807) (2,807)
for 2006
Net return on - - - 14,745 (2,860) 2,269 14,154
ordinary
activities from
the
Income
Statement
At 31 March 6,685 1,258 - 125,671 37,854 6,152 178,086
2007
For the year
ended
30 September
2007
At 1 October 6,685 1,258 466 110,926 40,714 6,690 166,739
2006
Final dividend - - - - - (4,812) (4,812)
for 2006
and interim
dividend
for 2007
Net return on - - - 24,878 (13,174) 5,566 17,270
ordinary
Activities from
the
Income
Statement
Balance at 6,685 1,258 466 135,804 27,540 7,444 179,197
30 September
2007
For the six
months
ended 31 March
2008
At 1 October 6,685 1,258 466 135,804 27,540 7,444 179,197
2007
Final dividend - - - - - (3,342) (3,342)
for 2007
Net return on - - - 5,670 (29,459) 2,852 (20,937)
ordinary
activities from
the
Income
Statement
At 31 March 6,685 1,258 466 141,474 (1,919) 6,954 154,918
2008
Notes to the Condensed Financial Statements
1. Accounting Policies
The condensed financial statements have been using the same accounting policies
as those adopted in the annual report and accounts for 30 September 2007, which
have been prepared under the historical cost convention and are consistent with
applicable UK Accounting Standards and with the Statement of Recommended
Practice: `Financial Statements of Investment Trust Companies'.
2. Forward Currency Contracts
The equity portfolio includes £9,466,000 (30 September 2007: £10,130,000; 31
March 2007: £8,772,000) of equities denominated in currencies other than pounds
sterling. In order to manage the currency risk, the Manager has hedged their
currency exposure into sterling through the use of forward foreign exchange
contracts. The gains and losses to date on these contracts are more or less
exactly offset by the changes in value of the equity investments due to
currency movements. These foreign exchange contracts are designated as fair
value hedges through profit or loss.
3. Management and Performance-related fees
The investment management fee is charged 75% to capital and 25% to revenue.
Performance-related fee is allocated wholly to capital.
The performance-related fee is based on a calendar year and there is no
performance fee due for the six months ended 31 March 2008.
31 March 30 September 31 March
2008 2007 2007
£'000 £'000 £'000
Performance fee relating to
31 December 2006 - (7) (7)
31 December 2007 - - -
Provision for performance fee
relating to
31 December 2007 - - -
Total - (7) (7)
No performance-related fee was due for the calendar year ended 31 December
2007. The performance-related fee provision as at 30 September 2007 was £
815,000 and the actual amount paid was £808,000 for the calendar year ended 31
December 2006.
4. Tax
The tax effect of expenditure is allocated between capital and revenue on the
same basis as the particular item to which it relates, using the Company's
effective rate of tax for the accounting period.
5. Basis of returns
Six Months Six Months Year to
to to
30
31 March 31 March September
2008 2007 2007
£'000 £'000 £'000
Returns after tax:
Revenue 2,852 2,269 5,566
Capital (23,789) 11,885 11,704
Total (20,937) 14,154 17,270
The number of ordinary shares in issue for each period has remained unchanged
at 13,368,799.
6. Net Asset Value per Ordinary Share
At At Year to
Six Months Six Months 31 March
to to
31 March 30
September
2008 2007 2007
Shareholders' funds - £ 154,918,000 178,086,000 179,197,000
Ordinary shares in issue at 13,368,799 13,368,799 13,368,799
period end
7. The Directors have declared an interim dividend of 17.00p (2007: 15.00p) per
ordinary share in respect of the six months ended 31 March 2008. This will be
paid on 25 June 2008 to ordinary shareholders registered on 23 May 2008.
8. It is the intention of the Directors to conduct the affairs of the Company
so that it satisfies the conditions for approval as an investment trust company
set out in section 842 of the Income and Corporation Taxes Act 1988.
9. The financial information contained in this half-yearly report, which has
not been reviewed or audited by the independent auditors, does not constitute
statutory accounts as defined in section 240 of the Companies Act 1985. The
financial information for the half-years ended 31 March 2007 and 31 March 2008
have not been audited. The figures and financial information for the year ended
30 September 2007 are extracted and abridged from the latest published accounts
and do not constitute the statutory accounts for that year. Those accounts have
been delivered to the Registrar of Companies and included the Report of the
Independent Auditors, which was unqualified and did not include a statement
under either section 237(2) or 237(3) of the Companies Act 1985.
By Order of the BoardInvesco Asset Management LimitedCompany Secretary
21 May 2008
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