Half-yearly Report
Keystone Investment Trust plc
Half-Yearly Financial Report for the Six Months to 31 March 2012
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 2011.
.
Performance Statistics
At At
31 MARCH 30 MARCH %
2012 2011 CHANGE
Assets
Net assets attributable to ordinary shareholders 176,256 164,253 +7.3
(£'000)
Net asset value per ordinary share 1318.4p 1228.6p +7.3
- with income reinvested +10.8
Share price (mid-market) of ordinary shares 1225.0p 1135.5p +7.9
- with income reinvested +10.8
FTSE All-Share Index +13.1
- with income reinvested +15.0
Discount of share price to net asset value per
ordinary share:
- debt at par 7.1% 7.6%
- debt at fair value 4.4% 5.1%
Gearing - gross 18.1% 19.4%
- net 8.5% 9.0%
SIX SIX
MONTHS MONTHS
ENDED ENDED
31 MARCH 31 MARCH %
2012 2011 CHANGE
Revenue
Net revenue return per ordinary share 21.4p 19.5p +9.7
Interim dividend per ordinary share 18.0p 17.5p +2.9
.
INTERIM MANAGEMENT REPORT INCORPORATING THE CHAIRMAN'S STATEMENT
.
Chairman's Statement
Performance
Over the six months from 30 September 2011 to 31 March 2012, the Company's
shares gave a total return of 10.8% to shareholders. During the same period,
the total return of the net asset value per ordinary share was also 10.8%,
while the total return of the Company's benchmark for performance measuring
purposes, the FTSE All-Share Index, was 15.0% (all these figures are with
income reinvested). On 31 March 2012, the discount of the share price relative
to net asset value (debt at par) was 7.1%.
Gearing and Investment Guidelines
Equity exposure ranged from 108% to 110% of net assets for most of the period
and stood at 108.5% at 31 March 2012 (109% at 30 September 2011). During the
period the gearing limits set by the Board were unchanged, requiring 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.
Dividend
The Board has declared an interim dividend of 18p per ordinary share which will
be paid on 29 June 2012 to shareholders on the register on 1 June 2012.
Beatrice Hollond
Chairman
15 May 2012
.
Manager's Report
Market Review
The stock market saw a strong recovery into the end of 2011, driven by a
significant shift in policy by the European Central Bank (`ECB'), which
announced its longer-term refinancing operation (`LTRO'). This provided
liquidity to the banking system and was seen as removing the near term risk of
a major European banking crisis. The pattern continued into 2012 as the UK
stock market rose on the back of improved economic news from the US along with
a second round of LTRO from the ECB. The last month of the period however, saw
optimism waning and some profit taking, as doubts re-emerged about the strength
of the global economy and the longer term resolution of the Eurozone debt
crisis. Stock market volatility remained ever present throughout the period.
Portfolio Strategy & Review
The Company's focus on investing in companies which have historically exhibited
dependable earnings and dividend growth saw it delivering double digit absolute
returns over the period, while also mitigating a large amount of the
volatility. However, in an environment where investors had discovered a renewed
appetite for risk, the zero weighting in some of the more cyclical industries,
notably banks, saw the Company's returns lagging the index.
Positive contributions to performance came from a spread of the portfolio's
largest investments. The tobacco sector, in particular, continued to deliver
outperformance as investors again focused on the sector's reliable
characteristics and cash flow.
The holding in BT Group again delivered good returns over the period. As well
as pleasing the stock market with news that its roll-out of high speed
broadband is progressing faster than expected, the company announced that it
had reached an agreement on a reduction plan for the pension scheme's deficit.
This allows BT greater flexibility to increase future returns to shareholders.
Shares in BG Group also performed strongly. Higher oil prices contributed to a
sharp rise in quarterly profits but more importantly the company gave a
confident outlook for the LNG (liquefied natural gas) market, increasing its
LNG profit guidance by 30% for 2012. Speculation about the possible disposal of
a stake in its Brazilian business further confirmed the value in the shares.
Compass Group was another holding to deliver a noteworthy contribution to the
Company's performance. The company pleased the market with news that
challenging conditions in Europe are being offset by better volumes in North
America and particularly emerging markets.
Newsflow over the period from the Company's major holdings was mostly positive.
This was not, however, the case for Tesco. The company's trading update and
profit warning suggested that too much confidence had been placed in the
business's ability to cope with the economic headwinds and also a realisation
that some of the company's investment decisions of recent years have not
created the value originally envisaged. For example, the building of much
larger stores to cope with an expanding product range coincided with a boom in
internet shopping.
There was disappointing news from the investment in Chemring - the company
announced that unexpected delays in customer orders would hit full year
revenues and profits. A negative impact on performance also came from the
holding in Homeserve, the share price of which fell sharply on news last
October that, following an independent review, the company had decided to
suspend part of its sales operation pending a re-training of its telephone
sales staff.
In terms of portfolio activity, it is noteworthy that overall activity was
limited as the fund manager's views on the market and the wider economy were
largely unaltered. The holding in Tesco was sold for the reasons outlined
above. New investments were made in Filtrona, Lancashire Holdings, Novartis and
Regus.
Outlook
In many respects the recent performance of the UK stock market has borne a
strong similarity to the early months of last year. It is likely that the
similarities will continue for the foreseeable future as there remains a high
correlation between equity market returns and Government stimulus measures in
the form of quantitative easing or Central Bank liquidity schemes. The market
will remain extremely sensitive to changes in the future direction of this kind
of stimulus.
However, it has become increasingly clear that the equity asset class in this
environment is highly attractive relative to bonds or cash, notwithstanding the
extra volatility which accompanies it. Through this period of Government
stimulus, the underlying performance of the companies within the market has
begun to polarise, whereby companies with specific characteristics have become
more highly valued. The most valued characteristics include earnings
reliability, financial strength, sustainable growing dividends and geographic
diversification. The portfolio has the advantage that companies exhibiting
these features are well represented in the UK stock market, mainly within the
largest companies but increasingly within the mid-caps as well. The Company
will also continue to take advantage of overseas equities which fit these
criteria.
This theme remains in place as it is likely that the re-rating of these stocks
will be maintained against a backdrop of mediocre growth in the economies of
the developed world, the intractable nature of the problems in these economies
and the glacial pace at which incumbent governments are acting. It may well be
the case that, given the volatile nature of equity markets in the short term, a
higher proportion of the shareholders' return will be received in the form of
income. However, the risk of owning these stocks is low and the inherent nature
of markets means that undervalued companies delivering a sustainably growing
level of dividend income will not remain unnoticed.
Mark Barnett
Fund Manager
15 May 2012
.
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 fee arrangements are given in the latest annual financial
report, which is available on the Manager's website.
.
Principal Risks and Uncertainties
The principal risk factors relating to the Company can be summarised as:
- Investment Objective and Process - the investment process may not achieve the
Company's published objective.
- Market Movement and Portfolio Performance - a fall in the stock market as a
whole will affect the performance of the portfolio and individual investments.
- Shares - share price is affected by market sentiment, supply and demand, and
dividends declared as well as portfolio performance.
- Bond Holdings - fixed interest securities are subject to credit, liquidity,
duration and interest rate risks.
- Gearing - borrowing will amplify the effect on shareholders' funds of
portfolio gains and losses.
- Regulatory - whilst compliance with rules and regulations is closely
monitored, breaches could affect returns to shareholders.
- Reliance on Third Party Service Providers - failure by any service provider
to carry out its obligations to the Company could have a materially detrimental
impact on the operations of the Company and affect the ability of the Company
to successfully pursue its investment policy.
A detailed explanation of these principal risks and uncertainties can be found
on pages 18 to 20 of the 2011 annual financial report, which is available on
the Manager'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.
.
Going Concern
This half-yearly financial report has been prepared on a going concern basis.
The Directors consider this is the appropriate basis as they have a reasonable
expectation that the Company has adequate resources to continue in operational
existence for the foreseeable future, being taken as 12 months after the
date of this report. In considering this, the Directors took into account
the diversified portfolio of readily realisable securities which can be used to
meet short-term funding commitments, and the ability of the Company to meet all
of its liabilities, including the debentures, and ongoing expenses. The
Directors also considered the revenue forecasts for the year and future
dividend payments in concluding on the going concern basis.
.
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 this 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 4.2.7R and DTR 4.2.8R 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.
The half-yearly financial report has not been audited or reviewed by the
Company's auditors.
Signed on behalf of the Board of Directors.
Beatrice Hollond
Chairman
15 May 2012
.
INVESTMENTS BY SECTOR AT 31 MARCH 2012
UK listed ordinary shares unless otherwise stated
MARKET VALUE % OF
SECTOR/COMPANY £'000 PORTFOLIO
Basic Materials
UK Coal 264 0.1
Halosource 174 0.1
438 0.2
Consumer Goods
Imperial Tobacco 10,625 5.1
British American Tobacco 9,882 4.8
Reynolds American - US Common Stock 9,540 4.6
Reckitt Benckiser 6,254 3.0
Tate & Lyle 1,707 0.8
38,008 18.3
Consumer Services
Compass 4,041 2.0
Wm Morrison Supermarkets 2,494 1.2
Ladbrokes 2,352 1.1
Brown (N) 1,549 0.8
Yell 149 0.1
Mirada 3 -
10,588 5.2
Financials
Provident Financial 4,659 2.3
Hiscox 4,215 2.0
Amlin 3,503 1.7
A J BellUQ 3,000 1.5
Beazley 2,949 1.4
Doric Nimrod Air Two 1,410 0.7
Impax Asian Environmental Markets - ordinary and 1,301 0.6
subscription shares
Workspace 1,272 0.6
Imperial Innovations - convertible `B' SharesUQ 644 }
- ordinary Shares 536 }0.6
Damille Investments II 1,100 0.5
Fusion IP 951 0.5
Impax Environmental Markets 890 0.4
Altus Resource 764 0.4
Damille Investments 731 0.4
Lancashire 581 0.3
Macau Property Opportunities Fund 444 0.2
Trading Emissions 241 0.1
Walton & CoUQ 39 -
Helphire 17 -
29,247 14.2
Healthcare
GlaxoSmithKline 8,896 4.3
AstraZeneca 7,167 3.5
Roche - Swiss Common Stock 6,594 3.2
BTG 3,771 1.8
Napo PharmaceuticalsUQ 2,727 1.3
Novartis - Swiss Common Stock 2,459 1.2
Lombard Medical Technologies 1,314 0.6
Vectura 609 0.3
PuriCore 494 0.2
XCounter AB - Swedish Common Stock 435 0.2
Renovo 130 0.1
XTL Biopharmaceutical - US ADR 83 -
34,679 16.7
Industrials
BAE Systems 5,775 2.8
Babcock International 4,937 2.4
Capita 4,252 2.1
Rentokil Initial 3,118 1.5
Serco 2,701 1.3
Chemring 2,000 1.0
Homeserve 1,776 0.9
Filtrona 1,066 0.5
Rolls Royce 1,049 0.5
Nexeon - preference `C' sharesUQ 400 }
- series `B' sharesUQ 388 }0.4
- ordinary sharesUQ 3 }
Regus 196 0.1
27,661 13.5
Oil & Gas
BG 8,453 4.1
Telecommunications
BT 10,578 5.1
Vodafone 8,138 3.9
KCOM 3,670 1.8
TalkTalk Telecom 1,914 0.9
24,300 11.7
Utilities
Centrica 4,551 2.2
Drax 3,753 1.8
International Power 3,680 1.8
Pennon 3,459 1.7
SSE 2,500 1.2
Barclays Bank - Nuclear Power Notes 28 Feb 2019 520 0.3
18,463 9.0
Total Equity Investments 191,837 92.9
PuriCoreUQ Convertible Notes 500 0.2
6% Dec 2013
Ecofin Water & Power Opportunities 6% Jul 2016 148 0.1
648 0.3
Total Fixed Asset Investments 192,485 93.2
RBS 0.96% Jun 2012 8,999 4.4
RBS 0.59% Apr 2012 4,999 2.4
Total Certificates of Deposit 13,998 6.8
Total Investments 206,483 100.0
UQ: Unquoted
.
CONDENSED INCOME STATEMENT
YEAR ENDED
SIX MONTHS TO SIX MONTHS TO 30 SEPTEMBER
31 MARCH 2012 31 MARCH 2011 2011
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL TOTAL
NOTE £'000 £'000 £'000 £'000 £'000 £'000 £'000
Gains on - 14,429 14,429 - 9,460 9,460 4,930
investments
Gains/ - 9 9 - - - (6)
(losses) on
certificates
of deposit
Foreign 2 - 82 82 - 92 92 (295)
exchange
gains/
(losses)
Income:
  UK 2,798 - 2,798 2,677 - 2,677 6,463
dividends
  Overseas 644 - 644 477 - 477 752
dividends
  UK 89 - 89 97 - 97 174
unfranked
investment -
interest
  Scrip 9 - 9 25 - 25 -
dividends
  Deposit 6 - 6 2 - 2 2
interest
Investment 3 (155) (676) (831) (154) (461) (615) (1,247)
management
and
performance
fees
Other (158) - (158) (166) - (166) (323)
expenses
Net return 3,233 13,844 17,077 2,958 9,091 12,049 10,450
before
finance costs
and taxation
Finance costs
  Interest (274) (821) (1,095) (274) (820) (1,094) (2,188)
payable
   (6) - (6) (6) - (6) (12)
Distributions
in respect of
non-equity
shares
Return on 2,953 13,023 15,976 2,678 8,271 10,949 8,250
ordinary
activities
before
taxation
Tax on 4 (96) - (96) (70) - (70) (112)
ordinary
activities
Return on 2,857 13,023 15,880 2,608 8,271 10,879 8,138
ordinary
activities
after
taxation
Return per
ordinary
share
Basic 6 21.4p 97.4p 118.8p 19.5p 61.9p 81.4p 60.9p
The total column of this statement represents the Company's profit and loss
account prepared in accordance with UK Accounting Standards. The supplementary
revenue and capital columns are presented for information purposes in
accordance with the Statement of Recommended Practice issued by the Association
of Investment Companies. All items in the above statement derive from
continuing operations and the Company has no other gains or losses and
therefore no statement of total recognised gains or losses is presented. No
operations were acquired or discontinued in the period.
.
CONDENSED BALANCE SHEET
Registered number 538179 AT AT AT
31 MARCH 31 MARCH 30 SEPTEMBER
2012 2011 2011
NOTE £'000 £'000 £'000
Fixed assets
Investments held at fair value through 192,485 185,495 179,393
profit or loss
Current assets
Certificates of deposit 13,998 14,002 13,000
Amounts due from brokers 10 696 429
Unrealised profit on forward currency 2 - - 83
contracts
Prepayments and accrued income 887 1,025 835
Tax recoverable 112 32 33
Cash and cash funds 2,288 1,257 3,441
17,295 17,012 17,821
Creditors: amounts falling due within one
year
Amounts due to brokers (320) (282) -
Unrealised loss on forward currency 2 (4) (12) -
contracts
Accruals (1,107) (1,062) (1,089)
(1,431) (1,356) (1,089)
Net current assets 15,864 15,656 16,732
Total assets less current liabilities 208,349 201,151 196,125
Creditors: amounts falling due after more
than one year
Debenture stock 5 (31,633) (31,611) (31,622)
Cumulative preference shares (250) (250) (250)
Provision 3 (210) - -
Net assets 176,256 169,290 164,253
.
Capital and reserves
Share capital 6,685 6,685 6,685
Share premium 1,258 1,258 1,258
Capital redemption reserve 466 466 466
Capital reserve 160,656 153,851 147,633
Revenue reserve 7,191 7,030 8,211
Shareholders' funds 176,256 169,290 164,253
Net asset value per share
Basic 7 1318.4p 1266.3p 1228.6p
.
CONDENSED CASH FLOW STATEMENT
SIX SIX
MONTHS TO MONTHS TO YEAR TO
31 MARCH 31 MARCH 30 SEPTEMBER
2012 2011 2011
£'000 £'000 £'000
Total return before finance costs and taxation 17,077 12,049 10,450
Adjustment for gains on investments and (14,438) (9,460) (4,924)
certificates of deposit
Adjustment for exchange (gains)/losses (82) (92) 295
Scrip dividends (9) (25) -
Increase in debtors (131) (338) (149)
Increase/(decrease) in creditors and 228 (16) 11
provisions
Tax on overseas dividends (96) (70) (112)
Cash inflow from operating activities 2,549 2,048 5,571
Servicing of finance (1,090) (1,090) (2,179)
Capital expenditure and financial investment
   Purchases of investments and certificates (70,086) (59,334) (104,051)
of deposit
   Proceeds from sale of investments and 71,182 71,741 118,986
certificates of deposit
Equity dividend paid (3,877) (3,743) (6,039)
(Decrease)/increase in cash in the period (1,322) 9,622 12,288
Exchange movements 169 116 (366)
Debenture stock non-cash movement (11) (10) (21)
Movement in net debt in the period (1,164) 9,728 11,901
Net debt at beginning of period (28,431) (40,332) (40,332)
Net debt at period end (29,595) (30,604) (28,431)
Analysis of changes in net debt
Brought forward:
  Cash and cash funds/(overdraft) 3,441 (481) (481)
  Debenture stock (31,622) (39,601) (39,601)
  Cumulative preference shares (250) (250) (250)
Net debt brought forward (28,431) (40,332) (40,332)
Movements in the period:
  Cash (outflow)/inflow from cash funds and (1,322) 1,622 4,288
short term deposits
  Debenture repayment - 8,000 8,000
  Exchange movements 169 116 (366)
  Debenture stock non-cash movement (11) (10) (21)
Net debt at period end (29,595) (30,604) (28,431)
.
CONDENSED RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
CAPITAL
SHARE SHARE REDEMPTION CAPITAL REVENUE
CAPITAL PREMIUM RESERVE RESERVE RESERVE TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
For the six months ended 31
March 2012
At 30 September 2011 6,685 1,258 466 147,633 8,211 164,253
Dividends paid - note 8 - - - - (3,877) (3,877)
Net return on ordinary - - - 13,023 2,857 15,880
activities
At 31 March 2012 6,685 1,258 466 160,656 7,191 176,256
For the six months ended 31
March 2011
At 30 September 2010 6,685 1,258 466 145,580 8,165 162,154
Dividends paid - note 8 - - - - (3,743) (3,743)
Net return on ordinary - - - 8,271 2,608 10,879
activities
At 31 March 2011 6,685 1,258 466 153,851 7,030 169,290
For the year ended 30
September 2011
At 30 September 2010 6,685 1,258 466 145,580 8,165 162,154
Dividends paid - note 8 - - - - (6,039) (6,039)
Net return on ordinary - - - 2,053 6,085 8,138
activities
At 30 September 2011 6,685 1,258 466 147,633 8,211 164,253
.
Notes to the Condensed Financial Statements
1. Accounting Policies
The condensed financial statements continue to use the same accounting policies
as those adopted in the annual financial report for the year ended 30 September
2011.
2. Forward Currency Contracts
The equity portfolio includes £19,111,000 (31 March 2011: £14,151,000; 30
September 2011:£14,335,000) of equities denominated in currencies other than
pounds sterling. In order to manage the currency risk, the Manager can hedge
part of their currency exposure into sterling through the use of forward
foreign exchange contracts. Any foreign exchange contracts are designated as
fair value hedges through profit or loss.
3. Investment Management and Performance Fees
The investment management fee is charged 75% to capital and 25% to revenue. The
performance fee is based on calendar years and is allocated wholly to capital.
No performance fee was earned for the year ended 31 December 2011, and no fee
was provided in the half-yearly financial report to 31 March 2011 or in the
annual financial report to 30 September 2011.
The current performance fee period for the year to 31 December 2012 has given
rise to a performance fee of £210,000 at 31 March 2012, and this has been
provided for in these financial statements.
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. Debenture Stock
The Company's structured debt is provided by 250,000 5% Cumulative Preference
shares of £1 each, £7 million 7.75% Debenture Stock 2020 and £25 million 6.5%
Debenture Stock 2023.
6. Basis of Returns
SIX MONTHS SIX MONTHS YEAR TO
TO TO 30 SEP
31 MAR 2012 31 MAR 2011 2011
£'000 £'000 £'000
Returns after tax:
Revenue 2,857 2,608 6,085
Capital 13,023 8,271 2,053
Total 15,880 10,879 8,138
The number of ordinary shares in issue for each period has remained unchanged
at 13,368,799.
7. Basis of Net Asset Value per Ordinary Share
AT AT AT
31 MAR 2012 31 MAR 2011 30 SEP 2011
Shareholders' funds £176,256,000 £169,290,000 £164,253,000
Ordinary shares in issue at period end 13,368,799 13,368,799 13,368,799
8. Dividends Paid
SIX MONTHS SIX MONTHS YEAR TO
TO TO 30 SEP
31 MAR 2012 31 MAR 2011 2011
£'000 £'000 £'000
Final 29p (2011: 28p) 3,877 3,743 3,743
Interim 17.5p - - 2,340
Return of unclaimed dividends from - - (44)
previous years
Total paid 3,877 3,743 6,039
The interim dividend of 18p will be paid on 29 June 2012 to shareholders on
the register on 1 June 2012. Last year the interim dividend of 17.5p was paid
on 24 June 2011 to shareholders on the register on 3 June 2011.
9. Investment Trust Status
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 sections 1158-1165 of the Corporation Tax Act 2010.
10. Status of Half-Yearly Financial Report
The financial information contained in this and the previous half-yearly
financial report has not been reviewed or audited by the independent auditors
and does not constitute statutory accounts within the meaning of section 434
of the Companies Act 2006. The figures and financial information for the year
ended 30 September 2011 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 include the
Report of the Independent Auditors, which was unqualified and did not include
a statement under section 498 of the Companies Act 2006.
.
By order of the Board
Invesco Asset Management Limited
Company Secretary
15 May 2012
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