Interim Results
Keystone Investment Trust plc
Interim Results
Six Months to 31 March 2004
CHAIRMAN'S STATEMENT
Performance
The Company's shares gave a total return to shareholders of 15.3% over the six
months from 30 September 2003 to 31 March 2004. During the same period, the
total return of the net asset value per share was 19.1%, while the total return
of the Company's benchmark for performance measurement purposes, the FTSE
All-Share Index, was 10.1%. (All these figures are with income reinvested.) The
discount of the share price relative to net asset value widened from 9.1% at 30
September to 11.9% at 31 March.
The Manager's stock selection has been good. Portfolio changes have reflected
the Manager's continuing caution about the market as a whole, as discussed in
his report on the following pages.
Gearing
Equity exposure increased from 110.3% of net assets at 30 September 2003 to
114.3% at 31 March 2004. Including fixed interest securities held, gearing
rose from 116.3% to 116.6%. The limits set by the Board are unchanged: the
Manager must make no new net purchases if equity exposure is more than 115% of
net assets, and must make sales if (as a result of market movements) equity
exposure exceeds 120% of net assets. In addition up to £4 million may be held
in corporate bonds.
Dividends
The interim dividend has been based on 50% of last year's total dividends of
25.5p per ordinary share, therefore amounting to 12.75p per share. The
dividend was paid on 2 April 2004 to shareholders on the Register on 12 March
2004. This interim payment was made earlier than usual, before 5 April 2004,
to enable holders of the shares through PEPs and ISAs to take advantage of
their tax credits for one final time, as those tax credits have now been
abolished.
Richard Oldfield
Chairman
20 May 2004
MANAGER'S REPORT
Market and Economic Review
The UK equity market has performed well over the review period driven by strong
economic data particularly in consumer related areas and a pick-up in merger
activity. Generally speaking, smaller and more cyclically biased companies have
outperformed the more defensive and larger-cap counterparts.
High street spending and house prices showed few signs of slowing down despite
record levels of household debt. Furthermore, figures released on 1 March
showed consumer credit rose £1.9 billion in January, the fastest pace since May
2003. Consumption has remained strong despite two interest rises of 0.25%,
increasing the base rate from its low of 3.5% to 4.0%.
The consensus is that the UK economy will grow by 3% in 2004, the lower end of
the Chancellor's growth targets. However, UK government borrowing has reached
its highest monthly level since records began and the UK public sector net cash
requirement rose to £12 billion in December from £11.6 billion in the previous
year.
Portfolio Strategy and Review
Over the review period to 31 March 2004, the Net Asset Value of the Company
rose by 19.1%, in excess of the FTSE All-Share Index which increased by 10.1%.
Over the same period, the trust's share price rose 15.3% (all figures with net
income reinvested).
At the beginning of the review period, the fund had significant exposure to
mid- and small-cap stocks. This position initially contributed to strong
performance for the Trust. However, the weighting in mid and small caps has
been reduced, and the fund currently holds closer to 35%.
The weighting in large caps has been increased to take advantage of depressed
valuations. These purchases were principally in the defensive sectors of the
market, which were trading at very low valuations relative to their recent
history. These defensive stocks such as AB Foods, Unilever, GlaxoSmithKline and
SABMiller should be able to grow profits and cash flows consistently over the
medium term, a factor which appears to have been overlooked recently, given the
market shift to economically sensitive shares.
The portfolio has little in the Banking sector. Although banks such as the
Royal Bank of Scotland and HSBC have recently announced record profits, due to
high levels of demand for consumer credit, we are concerned that rising costs
will constrain earnings growth in the future. This will become of greater
importance to the market if, as we believe, the sector as a whole is unlikely
to benefit from the level of loan growth that it has enjoyed in recent years.
At the end of the review period, there were 83 holdings in the portfolio. The
top 15 holdings accounted for 36.9% of the Trust. The gearing on the fund has
increased over the period from 116.3% to 116.6%. The level of gearing is driven
by the manager's confidence in the cheapness available in the current
portfolio.
Outlook
The manager expects the UK economy to return to a low-growth, low-inflation
environment, burdened by record levels of consumer debt and inflated property
prices. The current record level of consumer expenditure is unsustainable in
the face of rising taxes and higher interest rates. The level of consumption
will need to moderate unless further debt is accumulated. This is unlikely
given that debt levels are very high relative to disposable incomes. In
addition, government expenditure cannot be sustained at present levels without
raising taxes significantly in the near future.
The Bank of England Monetary Policy Committee has clearly stated its position
on the housing market and related consumer debt. The manager believes that the
committee will continue to raise rates up to the point where growth in these
areas starts to moderate. It is likely to result in a base rate of 5% by the
end of 2004.
Ahead of the US Presidential election in November, we have witnessed several
important stimulatory measures in the US economy. These measures appear to be
working at present, but the manager retains a cautious stance towards the
sustainability of economic growth after the election. The US economy faces the
obstacles of rising interest rates, excessive consumer and corporate debt and
inflating government deficits.
Nevertheless, despite this more challenging economic backdrop in the UK and US,
there are a number of attractively valued stocks, particularly in the more
defensive areas of the market, whose prospects do not yet seem to have been
fully appreciated. We believe that our approach of seeking undervalued
companies, with the resilience and financial strength to compete against a
challenging economic backdrop, should continue to benefit the fund over the
medium term.
Mark Barnett
Investment Manager
20 May 2004
Consolidated Statement of Total Return
(Incorporating the Revenue Account)
Six months ended 31 March
2004
(Unaudited)
Revenue Capital Total
£'000 £'000 £'000
Gains on investments - unrealised - 7,409 7,409
Gainss on investments - realised - 7,035 7,035
Exchange rate losses - (69) (69)
Gains on currency hedges - note 1 - 990 990
Special dividends - 209 209
Income:
UK dividends 1,485 - 1,485
Overseas dividends 542 - 542
UK unfranked investment income 153 - 153
Deposit interest 234 - 234
Investment management fee (131) (392) (523)
Performance fee - note 2 - (1,067) (1,067)
Other expenses (135) - (135)
Net return before finance costs
and taxation 2,148 14,115 16,263
Finance costs (382) (1,145) (1,527)
Return on ordinary activities
1,766 12,970 14,736
before taxation
Tax on ordinary activities (40) - (40)
Return on ordinary activities
1,726 12,970 14,696
after taxation
Dividends in respect of non-equity shares (6) - (6)
Return attributable to equity shareholders 1,720 12,970 14,690
Dividends in respect of equity shares (1,705) - (1,705)
Transfer to reserves 15 12,970 12,985
Return per ordinary share - note 3
Basic 12.87p 97.02p 109.89p
The revenue column of this statement is the profit and loss account of the
Company. All revenue and capital items in the above statement derive from
continuing operations. No operations were acquired or discontinued in the
period.
Consolidated Statement of Total Return
(Incorporating the Revenue Account)
Year to
Six months ended 30 September
31 March 2003 2003
(Unaudited) (Audited)
Revenue Capital Total Total
£'000 £'000 £'000 £'000
Gains on investments - unrealised - 16,620 16,620 33,350
Losses on investments - realised - (18,491) (18,491) (12,474)
Exchange rate (losses)/gains - (3) (3) 39
Losses on currency hedges - (22) (22) 212
Income:
UK dividends 987 - 987 2,732
Overseas dividends 353 - 353 588
UK unfranked investment income 153 - 153 723
Deposit interest 247 - 247 481
Investment management fee (51) (153) (204) (609)
Performance fee - note 2 - - - (894)
Other expenses (160) - (160) (233)
Net return before finance costs
and taxation 1,529 (2,049) (520) 23,915
Finance costs (378) (1,134) (1,512) (3,044)
Return on ordinary activities
Before taxation 1,151 (3,183) (2,032) 20,871
Tax on ordinary activities - - - (42)
Return on ordinary activities
after taxation 1,151 (3,183) (2,032) 20,829
Dividends in respect of non-equity
shares (6) - (6) (12)
Return attributable to equity 1,145 (3,183) (2,038) 20,817
shareholders
Dividends in respect of equity shares (1,136) - (1,136) (3,409)
Transfer to/(from) reserves 9 (3,183) (3,174) 17,408
Return per ordinary share - note 3
Basic 8.57p (23.81)p (15.24)p 155.71p
Consolidated Balance Sheet
At At At
31 March 30 Setember 31 March
2004 2003 2003
(Unaudited) (Audited) (Unaudited)
£'000 £'000 £'000
Fixed assets
Listed investments at market value 126,707 111,234 89,036
Unlisted investments at directors' 13 57 66
valuation
126,720 111,291 89,102
Current assets
Amounts due from brokers 302 245 698
Tax recoverable 17 19 19
Unrealised profit on forward contracts - 66 212 -
note 1
Prepayments and accrued income 897 829 772
Cash at bank 24,492 28,395 27,400
25,774 29,700 28,889
Creditors: amounts falling due within
one year
Amounts due to brokers (123) (1,305) (260)
Accruals and deferred income (1,427) (1,013) (1,660)
Proposed dividends (1,705) (2,273) (1,136)
Unrealised loss on forward contracts - - - (22)
note 1
(3,255) (4,591) (3,078)
Net current assets 22,519 25,109 25,811
Total assets less current liabilities 149,239 136,400 114,913
Creditors: amounts falling due after more
than
one year (39,574) (39,562) (39,551)
Provisions for liabilities and charges - (736) (894) -
note 2
Net assets 108,929 95,944 75,362
Capital and reserves
Called up 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 - unrealised 15,213 7,815 (8,297)
Capital reserve - realised 81,745 76,173 71,609
Revenue reserve 3,312 3,297 3,391
Equity Shareholders' funds 108,679 95,694 75,112
Non-equity interests:
Cumulative preference shares 250 250 250
Total Shareholders' funds 108,929 95,944 75,362
Net asset value per share - note 3
Basic 812.94p 715.80p 561.84p
Consolidated Cash Flow Statement
Six months Year to Six months
to to
31 March 30 31 March
September
2004 2003 2003
(Unaudited) (Audited) (Unaudited)
£'000 £'000 £'000
Cash flow from operating activities 1,022 3,423 1,150
Servicing of finance (1,516) (3,032) (865)
Taxation - (51) -
Capital expenditure and financial
investment
Purchase of fixed asset investments (36,091) (141,625) (105,969)
Proceeds from sale of fixed asset 33,864 142,820 105,127
investments
Equity dividends paid (2,273) (3,409) (2,273)
Net cash (outflow)/inflow before
management of
liquid resources and financing (4,994) (1,874) (2,830)
Management of liquid resources - 4,933 (967)
Financing - - -
(Decrease)/Increase in cash in the period (4,994) 3,059 (3,797)
Increase in debt (11) (22) (11)
Exchange movements 1,090 39 -
Cash outflow from decrease in liquid - (4,933) 967
resources
Movement in net debt in the period (3,915) (1,857) (2,841)
Net debt at beginning of period (11,167) (9,310) (9,310)
Net debt at end of period (15,082) (11,167) (12,151)
Reconciliation of Movement in Shareholders' Funds
Six months to Year to Six months to
31 March 30 September 31 March
2004 2003 2003
(Unaudited) (Audited) (Unaudited)
£'000 £'000 £'000
Revenue return for the period 15 (85) 9
Capital return for the period 12,970 17,493 (3,183)
Net movement in Shareholders' funds 12,985 17,408 (3,174)
Opening Shareholders' funds 95,944 78,536 78,536
Closing Shareholders' funds 108,929 95,944 75,362
Notes to the Interim Accounts
1. The equity portfolio includes £9,467,000 (30 September 2003: £6,907,000; 31
March 2003: £1,693,000) of equities denominated in currencies other than pounds
sterling. In order to crystallise the value of these holdings in sterling
terms, the Manager has hedged their currency exposure into sterling through the
use of forward foreign exchange contracts. The gains to date on these contracts
are more or less excactly offset by the decrease in value of the equity
investments due to currency movements.
2. The performance fee is based on a calendar year.
31 March 30 31 March
2004 September 2003
2003
(£) (£)
(£)
Performance fee relating to 31 December 2003 331,000 894,000 -
and recognised during the period
Provision for performance fee relating to 31 736,000 - -
December 2004
Total 1,067,000 894,000 -
3. The returns per ordinary share are based on the net revenue return
attributable to equity shareholders and on 13,368,799 (30 September 2003 and 31
March 2003: 13,368,799) ordinary shares, being the number of ordinary shares in
issue in the period.
4. The basic net asset value per ordinary share of 812.94p is calculated on net
assets attributable to equity shareholders of £108,679,000 (30 September 2003:
£95,694,000; 31 March 2003: £75,112,000) and on 13,368,799 (30 September 2003
and 31 March 2003: 13,368,799) ordinary shares in issue.
5. The Directors declared an early interim dividend of 12.75p (2003: 8.50p) per
ordinary share in respect of the six months ended 31 March 2004. This was paid
on 2 April 2004 to ordinary shareholders registered on 12 March 2004. Further
details are given in the Chairman's Statement.
6. 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.
7. The foregoing information at 30 September 2003 is an abridged version of the
Company's full Accounts which carry an unqualified Auditor's report and have
been filed with the Registrar of Companies.
By order of the Board
INVESCO Asset Management Limited
Secretaries
20 May 2004
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