Annual Financial Report

Manchester & London Investment Trust Plc Announcement of the Audited Group Results For the year ended 31st July 2013 The Directors Announce the Audited Results for the year ended 31st July 2013 Company Registered Number: 01009550 Financial Summary Total Return Year to Year to Percentage 31st July 31st July (decrease)/ 2013 2012 increase Total return (£'000) 2,522 (19,945) Return per 25p ordinary share - 11.2p (88.8)p fully diluted Total revenue return per 25p 13.8p 14.3p (3.5) ordinary share Cash dividend per 25p ordinary 13.75p 13.0p 5.8 share Capital At At Percentage 31st July 31st July (decrease)/ 2013 2012 increase Net assets attributable to equity 75,050 75,515 (0.6) shareholders (£'000) Net asset value per 25p ordinary share 334.2p 336.3p (0.6) - fully diluted Benchmark performance 19.9 Performance versus benchmark (20.5) Ongoing Charges Year to Year to 31st July 31st July 2013 2012 Ongoing charges as a percentage of average net assets 0.89% 0.86% Financial Calendar Year ended: 31st July 2013 Results announced: 25th October 2013 Report and Accounts made available to shareholders: 25th October 2013 Annual General Meeting to be held in Manchester: 2nd December 2013 Expected final dividend payment: 6th December 2013 Chairman's Statement Results for the year ended 31st July 2013 Our 2013 financial year was a year marked by strong performances across equity markets but unfortunately for the second year running, it has been a disappointing period for the fund. The majority of the fund is exposed to the cyclical sectors such as Mining, Oil & Gas and Industrial Engineering that have continued to perform badly and hence we remained somewhat static as the market moved ahead of us. We are encouraged that our holdings saw their underlying earnings increase, but the market derated these earnings over the course of the year. More details regarding our performance can be found in the Investment Manager's report. Plenty of issues remain ahead of us in 2014. The problems in the Eurozone remain unresolved and are healing only slowly, the Federal Reserve appears fearful of retracting quantitative easing and there are an abundance of geo-political tensions throughout the globe as the balance of power shifts following the 2008 crisis. In time, and with patience, we believe investors will be drawn back to globally exposed, well established, cash generative growth stocks which is where we are positioned. As a board, we have some sympathy with the investment manager as the cash generative nature of our holdings can be evidenced by the fact that our total dividend last year represented such a material dividend yield premium to the investment trust sector. The fund's long term strategy is to be positioned to gain advantage from the benefits of global population growth, productivity gains, urbanisation and the growth of the middle classes. This strategy used to be popular but it has gone dramatically out of favour and may well not regain popularity for some time. Nonetheless, we will remain patient in our faith that, in the medium term, the future earnings power of the developed markets will be overtaken by the developing markets. Over the last financial year, Manchester & London's net asset per share decreased by 0.6 per cent, which is an underperformance against our benchmark, which generated an increase of 19.9 per cent. The Directors are proposing a final dividend of 8.25p, making a total of 13.75p per share for the year, an increase of 5.8 per cent for the year. This total payment compares with the Total revenue return per ordinary share for the year of 13.8p. The discount between the share price and the net asset value per share has remained in line with its medium term historic level. Post the year end, the founder of the company, Mr Brian Sheppard, retired from the board of directors as the representative of the Sheppard family's shareholding. Brian started the company in 1972 with capital of £100,000 and has done an exceptional job of turning that capital into the £98.3m it reached at our year end in 2011. Between the two dates, the compound annual return has been 19.0 per cent compared with our benchmark which has returned 7.2 per cent per year. We wish Brian well in his retirement. Whilst Mark Sheppard remains the lead manager of the fund there will no longer be a Sheppard on the board of the company. Hence, we also welcomed Mr Brett Miller to the board on 30th August 2013. Brett works directly as executive director and co-manager of the Damille series of closed end funds so offers the board some further financial markets experience. Annual General Meeting I look forward to welcoming shareholders to our forty first Annual General Meeting to be held at a new venue, being St. Ann's Church, St. Ann Street, Manchester M2 7LF, at 1.05 pm on Monday, 2nd December 2013. Mr P H A Stanley. Chairman Investments As at 31st July 2013 Valuation % of Net Listed investments Sector £'000 Assets PZ Cussons plc Personal Goods 17,725 23.6 Weir Group plc Industrial Engineering 9,392 12.5 Vodafone Group plc Mobile 6,962 9.3 Telecommunications Diageo plc Beverages 6,735 9.0 Smith & Nephew plc Healthcare Services 6,613 8.8 Glencore Xstrata plc Mining 6,557 8.7 Standard Chartered plc Banking 6,411 8.5 Syngenta AG¹ Chemicals 6,160 8.2 Unilever plc Food Producers 5,699 7.6 BG Group plc Oil & Gas Producers 5,618 7.5 BP plc Oil & Gas Producers 5,545 7.4 Rio Tinto plc Mining 5,503 7.3 Burberry Group plc Personal Goods 5,083 6.8 Afren plc Oil & Gas Producers 4,628 6.2 Jardine Matheson Holdings Ltd² General Industrial 4,384 5.8 Smiths Group plc General Industrial 3,365 4.5 Hang Seng 50 Index Longs³ Index Long Position 2,682 3.6 Vedanta Resources plc Mining 2,326 3.1 Rolls-Royce Holdings plc Aerospace & Defence 2,209 2.9 Echo Entertainment Group Ltd⁴ Travel & Leisure 1,802 2.4 Etablissements Maurel et Prom Oil & Gas Producers 1,718 2.3 S.A.⁵ Trinity Exploration & Production Oil & Gas Producers 1,419 1.9 plc HMS Hydraulic Machines & Systems Industrial Engineering 1,385 1.8 Group plc² Lloyds Banking Group plc Banking 1,118 1.5 Millennium & Copthorne Hotels plc Travel & Leisure 1,062 1.4 Northern Petroleum plc Oil & Gas Producers 789 1.0 Deere & Company² General Industrial 652 0.9 Joy Global Inc² Mining 504 0.7 Heritage Oil plc Oil & Gas Producers 276 0.4 Walter Energy Inc² Mining 273 0.4 Associated British Foods plc Food Producers 265 0.3 Fortune Oil plc Oil & Gas Producers 119 0.2 Sundance Resources Ltd⁴ Mining 43 0.1 Listed investments 125,022 166.6 Unlisted at Director's valuation 124 0.2 Total Long Positions 125,146 166.8 FTSE 100 Index Shorts (4,834) (6.4) S&P 500 Index Shorts² (48,076) (64.1) Cash and net current assets/ 2,814 3.7 (liabilities) Net assets 75,050 100.0 All investments listed above are equities (unless otherwise stated), denominated in Sterling (except ¹CHF, ²USD, ³HKD, ⁴AUD and ⁵Euro) that have been issued by companies registered in England (save for Glencore Xstrata, Syngenta, Jardine Matheson, Hang Seng 50 Index Longs, Echo Entertainment, Establissements Maurel et Prom, HMS Hydraulic Machines & Systems, Deere & Company, Joy Global, Heritage Oil, Walter Energy, Sundance Resources and S&P 500 Index Shorts that are registered in Jersey, Switzerland, Bermuda, Hong Kong, Australia, France, Cyprus, USA, USA, Jersey, USA, Australia and USA respectively). Portfolio Sector Analysis As at 31st July 2013 % of Net Sector Assets Personal Goods 30.4 Oil & Gas Producers 26.8 Mining 20.3 Industrial Engineering 14.4 General Industrial 11.2 Banking 10.0 Mobile Telecommunications 9.3 Beverages 9.0 Healthcare Services 8.8 Chemicals 8.2 Food Producers 7.9 Travel & Leisure 3.8 Index Long Positions 3.6 Aerospace & Defence 2.9 Unlisted Investments 0.2 Short Positions, Cash and net current assets/(liabilities) (66.8) Net Assets 100.0 Investment Manager's Review An explanation of our core investment style in more detail. We are seeking to invest in stocks for our core portfolio that are characterised by the following attributes: 1. well established, with a strategy that we believe has a future; 2. quality operations with competitive advantages (exhibiting attractive returns on investment); 3. cash generative business models; 4. have the ability to capture the potential for growth; and 5. are trading at reasonable valuations. In periods when low Return on Invested Capital ("ROIC") stocks outperform high ROIC stocks, we are very rarely interested in "dashing for trash". If quality is going to underperform, then so be it. We would rather travel up with the market capturing only a proportion of its returns in the knowledge that we do so with holdings that have the resilience to take a few knocks. Please note our investment style for generating our trading income is somewhat less restrictive and is more event driven. It is important to note that potentially we have three structural advantages over a vanilla open-ended fund, we take a longer-term investment horizon of ten years (due to our ownership structure), we are able to adapt gearing levels to our comfort levels with the market's valuation (a benefit of closed end funds) and we should be able to have a lower cost structure (another historic benefit of closed end funds). What we hope to achieve in any investment period. Our job is multi-fold and we will discuss below how the year under review has progressed. 1. Controlling costs and generating trading income. Austerity, bonuses and costs are the favourite topics for journalists. One hears constant criticism of fund managers with regard to their fee levels. We think it's important to make the following points regarding our fees: a. We do not charge a performance fee, yet 62 per cent of investment trusts do. (Source: The Financial Times, August 2013) b. Our investment management fee structure is 0.5 per cent per annum whereas the AIC average is 1.2 per cent per annum. (Source: The AIC, July 2013) c. If you analyse Chart 1 below*, you will see that for the last five years the trading income we have generated has exceeded our investment management fees hence, to use an old stockbroking expression, "we have washed our face". In addition, in three of the last five years, trading income has actually covered all the non-finance expenses of the Company. 2013 was another year of positive results for trading income. *Please see Chart 1 in the Annual Report on page 10. 2. Paying our shareholders a dividend. We are in the era of the reach for yield. In 2013, we have increased the total annual dividend per share by 5.8 per cent which is slightly more than the UK benchmark which increased its equivalent dividend per share by 5.6 per cent. Chart 2 below* shows that we have followed a progressive dividend policy and we are fully aware that this is what our shareholders want. Many shareholders may have seen the point that some journalists have been making regarding investment trusts not actually covering all their costs when paying a dividend. We have some sympathy with this point of view so this year we have charged 100 per cent of the cost of our investment management fee to revenue. Previously, we had annually apportioned up to 65 per cent of our investment management fee to capital. Our 2013 dividend yield (using the mid price at the year end) was 4.6 per cent which is materially higher than the 2.4 per cent of the investment trust sector benchmark. *Please see Chart 2 in the Annual Report on page 11. 3. Generating capital returns. We aim to ensure that our total return is positive and preferably exceeds the return on cash. In 2013, we achieved this objective with a total return of 3.3 per cent. However, ideally, we would also like our Net Asset Value per share to increase in line with the stock market. 2013 This year was another depressingly disappointing year for capital returns. We underperformed our benchmark by 20.5 per cent. The constituents of this underperformance are broken down as follows: Underperformance due to maintaining our Net Long materially lower than 5.5% our Net Assets Underperformance of Oil & Gas investments 5.4% Underperformance of Mining investments 4.9% Underperformance of Consumer Goods investments 2.2% Underperformance of Capital Goods investments 1.3% Underperformance of Financial Sector investments 1.1% Other elements of underperformance 0.1% Total underperformance 20.5% Source: MNL Is there a chance matters may improve? The best way to exceed market returns is to ensure that we buy stocks that: 1. increase their earnings equal to, or faster than, the market; and 2. are reasonably valued in relation to the market. Chart 3 below* shows that the underlying forecast earnings per share of our top twenty holdings increased at a greater rate over the last five year period than our benchmark. More importantly, the chart shows that since the middle of 2011, the underlying earnings of Manchester and London Investment Trust's ("MLIT") holdings have increased whilst our Net Asset Value per share has declined. Hence, since mid 2011, our problem has not been that our holdings have lost their earnings power it is that the valuation multiples of our holdings have de-rated. In other words, we actually did achieve point 1 above as we held stocks that increased their earnings faster than the market when one considers that over the relevant time period the market's valuation has also re-rated upwards. Please note it is too difficult to graph the underlying earnings of the exact portfolio throughout the whole period, so we have used our top twenty holdings as at the year end. Many would be correct to criticise this methodology for being skewed by a survivorship bias but it provides a good illustrative example. Forecast earnings per share are used for the year in advance of the year of data capture. It is important to note that our top twenty holdings represented more than 100 per cent of our Net Asset Value as at the year end. *Please see Chart 3 in the Annual Report on page 12. Our problem remains the same as in 2012. Although, we do not believe our holdings were overvalued to start with, they have continued to de-rate for the last two years. The sectors that have felt this most acutely are the Mining and the Oil & Gas sectors. Chart 4 below* shows the material valuation de-rating of both these sectors over the last two years to 31st July 2013. Please note that as at the year end, we held a combined 47.1 per cent of our Net Asset Value in these combined sectors. *Please see Chart 4 in the Annual Report on page 13. More on the Mining sector We note from recent fund managers' surveys that there are now extreme underweight positions in the Mining sector with sector relative performance now at the lows of 2008. We understand investors' views on the end of the "super cycle" and the concern that management teams are just "big hole junkies". However, we are not so sure and we believe that the management team of Glencore Xstrata are driving a revolution of attitude in the industry with cost cuts, lower speculative capital spend and innovative JV ideas. Having recently attended (with thanks) the DB Consumer Goods conference, investors were salivating at the future prospects of global consumer goods companies who were all presenting that the key drivers of their future growth would occur through the urbanisation of developing markets and the swelling of the middle classes. If these factors are drivers for consumer goods companies, why aren't they drivers for the miners too? The answer may lie in the rate of change, but we believe that dividend yields at around 4 per cent and valuations sub-book value are attractive. We see current dividends as defensible and we believe there is material upside potential if commodity prices stabilise, capex drops off and costs continue to be cut. In conclusion, very few funds buy the Mining sector as its constituents move with sickening volatility and within that lies opportunity. More on the Oil & Gas sector Many of the points we have made above are also pertinent for the Oil & Gas sector. In general, Oil & Gas stocks are trading at material discounts to consensus NAVs and are now paying attractive dividends. It must be remembered that over the last 30 years, the Oil & Gas sector has been the third most successful in total shareholder return terms. This is partly because it is volatile, nauseating and risky, and that means many avoid it. Why we think our other stocks are relatively under valued Chart 5 below* shows the expected cumulative operating profit that our top twenty holdings may generate over the next three years as a percentage of their total market value (based largely on consensus forecasts). EBIT can be used as a reasonable proxy for normalised free cash flow before taxation and interest (assuming capex equals depreciation). It can clearly be seen that our portfolio weighted average valuation (shown by the red bar) is materially less expensive than the UK market and, in the case of some of our stocks, significantly so. *Please see Chart 5 in the Annual Report on page 14. The year ahead There are numerous reasons why we are not convinced that markets should be trading at such high multiples: * Markets are correlated to productivity - US productivity has been weak and materially below the +2.2 per cent average over the last 20 years. * Global debt - many countries are still highly leveraged with Japan of particular concern. It is possible that Japan can not sustain these debt levels if trade surpluses were to switch to deficits consistently. It is possible that other Asian exporters will not tolerate the continuing devaluation of the Yen. * Europe - whilst some progress has been made, the periphery still has debt, competitiveness and banking leverage problems. Despite being several years into the "Euro Crisis" we are yet to see a credible plan that would ensure the viability of the bloc in the long-term. Either the periphery leave, or the Germans pay for the weaker nations or the pain and unemployment continue. * Demographics in developed markets - in Japan 32 per cent of the population is over 60, in the UK it is 23 per cent and the US 19 per cent. This demographic shift is expected to continue and could be a significant drag on equity markets in the longer term. * Inflation - whist the unprecedented level of QE has yet to materially feed into consumer prices or commodities, it would be premature to write this off as a future risk, particularly if the emerging markets decide their own QE is the best way to respond to the aggressive printing in Japan. * China - whilst we remain positive in the long term on the prospects for Asia and do not see a hard landing as the base case in the short term, we would be remiss not to consider the potentially challenging rebalancing China is undergoing as a risk to the global economy. * Bond Bubble - when a 30 year bull market in bonds culminates in Rwanda getting 10 year debt away under 7 per cent one has to be concerned about a bubble in the debt markets. After all, the US 10 year yield was above this level as recently as 1995. Since then, Rwanda's yield has jumped to over 8 per cent, and US yields have also increased to over 2.5 per cent. With the average US ten year yield over the last 100 years close to 5 per cent, we could still be far from a normalised discount rate level, particularly once the QE taper has been unpaused. * Geopolitical tensions - geopolitical risks remain high with continuing unrest in the Middle East, and tensions between China and Japan, and North Korea always on the radar. There are risks of a total breakdown in Sunni and Shia relations in the Middle East, which apart from causing human conflict, could lead to an oil price shock. What about prospects for the USA? * US debt situation - whilst the headline debt figures look manageable at 105 per cent of GDP, once the sizeable unfunded liabilities of Social Security, Medicare and Medicaid are included, total net liabilities soar to 600 per cent of GDP or nearly $100tr. This is a material burden for future tax payers (and bond holders), unless serious policy changes are made. * Households - whilst total household balance sheets are healthy with net assets of $70tr, there is a big disparity around the spread of wealth. The mean US household has over $500k in net assets, but the latest data from the US Census Bureau for 2011 shows a median net worth of just $68k, or $17k excluding home equity. For those in the lowest quintile the situation was even worse, with a net worth of just under $5k. For this group of consumers, the impact of rising mortgage rates could be significant. * US valuations - the S&P 500 is on ~17x PE (FT) which is a 1.2 per cent premium to its long run fair value of 16.4x (DB). More importantly, the current multiple represents a 66 per cent premium to the Hang Seng (FT), a 27 per cent premium to the Singapore Market (FT) and a 134 per cent premium to the Chinese Market (FT). The relative level of the S&P vs the Hang Seng is now at its highest level since 2006. Please see Chart 6 in the Annual Report on page 15. * Shale is not a game changer - whilst lower energy prices have certainly helped, the benefit is not sufficient to close the competiveness gap to emerging markets. In addition, faster than expected shale decline rates are a material risk. Gas exports could improve the US trade balance over the next few years, but the US cannot have its cake and eat it, it must choose between energy exports or lower prices. Where do we think the S&P should be? * Whilst we are not overall bears on the global market, we do think the US is overvalued relative to its own fundamentals and overvalued compared with emerging market equities. * The QE led moves into defensive equity sectors over the last few years has highlighted the key importance of the US bond yield in equity valuations. This is intuitively understandable as on a theoretical level the value of any stock is the discounted value of all future dividends. Therefore the discount rate - which is commonly related to the bond yield - and assumptions regarding future growth are the two key drivers of valuation. * Going back to 1960, the monthly correlation between the Earnings Yield (inverse P/E) and the US 10 year bond yield is 0.7 per cent. Please see Chart 7 in the Annual Report on page 16. * If US 10 year bond yields were to increase to 4 per cent (which is below the long run average) and equity risk premiums increase to the long run average of 4.2 per cent (New York University) then the implied fair value earnings yield becomes 8.2 per cent. That equity earnings yield derives a PE of 12.2x resulting through a 2013 consensus EPS of $109.5 (Source: Factset) to an implied S&P level of ~1335. Clearly, this is materially below the current level so we are not suggesting this is a realistic target, but it is illustrative of the downside risks. Conclusion It seems logical that if QE has pumped the market upwards then its removal may at least lead to some volatility. Hence, although we remain substantially invested into the equity market, we are by no means fully invested. This could be a grave error but we would rather play the situation somewhat more defensively and suffer the ensuing underperformance if we are proved wrong. In the meantime, we will strive every day to seek trading income opportunities to ensure we are able to continue to reward our loyal shareholders with an above-market, covered dividend yield and to ensure our core portfolio is focused on growing, cash generative, well established quality operators at inexpensive valuations. We have little option but to learn the virtues (tediousness) of patience. Investment Manager Midas Investment Management Ltd. Principal Portfolio Holdings PZ Cussons plc ("PZ Cussons") PZ Cussons is a global personal goods manufacturer, with a portfolio of more than 30 brands, including Imperial Leather, Carex, Cussons Baby and Morning Fresh. The company operates in the UK, Africa, Asia, Central Europe and Australia. PZ Cussons has a five year compound earnings per share ("EPS") growth rate of 9.0 per cent. PZ Cussons is exposed to developing markets and the volatility that incurs. We believe medium term prospects are encouraging and we have no intention of reducing our stake in the short term. PZ Cussons' geographic footprints and distribution network should be attractive to a major. Weir Group plc ("Weir") Weir is a global leader in the manufacture of specialised pumps. The group is well-established in each of their three main markets; Mining, Power and Oil & Gas, and generates more than half of their revenues from aftermarket products and services. Weir has a five year compound EPS growth rate of 30.5 per cent. Weir is a quality British engineer exposed to growth markets that should attract the majors in a consolidating market. Vodafone Group plc ("Vodafone") Vodafone is a leading global telecommunications company. While the potential sale of its Verizon Wireless stake was the key driver for our investment, and we were pleased to see a deal on attractive terms, the valuation of the remaining assets remains too low in our opinion. We now see the potential for a takeover by a larger competitor such as AT&T, which has indicated it is looking for European assets. Though the attractive dividend yield and defensive nature of this stock are welcome in the short term, this is primarily an event driven investment part of which has been disposed of since the year end. Diageo plc ("Diageo") Diageo is a global alcoholic beverages company, and the world's largest producer of premium spirits. The company holds an enviable portfolio of iconic brands such as Johnnie Walker, Smirnoff, Baileys and Guinness. Diageo continues to benefit from the growth of the middle classes in emerging economies and their increasing demand for premium brands. The company has targeted medium-term organic sales growth of 6 per cent per annum and has a five year compound EPS growth rate of 11.4 per cent. We believe Diageo is starting to look fully valued however, and this holding may be reduced in the medium term. Smith & Nephew plc ("Smith & Nephew") Smith & Nephew is a global medical devices company focusing on orthopaedics, endoscopy and advanced wound management. The company has distribution channels in over 90 countries and generates annual sales of over $4 billion. Smith & Nephew has a five year compound EPS growth rate of 7.8 per cent. Smith & Nephew remains attractively placed to benefit from the changing demographics and personal activity levels across the world. The stock is inexpensive against its historic trading multiples and with further consolidation expected in the sector, it is a takeover candidate. Glencore Xstrata plc ("Glencore Xstrata") Glencore Xstrata is a leading global mining & trading group, covering a wide range of essential commodities from copper to oil to grain. The recently merged group is undergoing a transformational period, with production ramp up at owned mines, post merger synergies and capex run-off expected to result in material free cash flow generation over the next few years. As a result, we believe Glencore Xstrata is materially undervalued, but we would reduce this overweight holding should valuations become more realistic. Standard Chartered plc ("Standard Chartered") Standard Chartered is engaged in consumer and wholesale banking globally and has a strong focus on the Asia-Pacific, Middle East and African regions, which provide approximately 90 per cent of the group's profit. The bank has been a strong historic performer and has delivered 10 successive years of record profits, with a five year compound growth rate of 11.5 per cent. Standard Chartered is exposed to developing markets and the volatility that incurs. The current valuation of <1.5x book value seems an undeserved discount to its historic average of around 2.5x. In the longer term, we believe the attractions of Standard Chartered's footprint will be attractive to one of the top 5 global mega-banks. Syngenta AG ("Syngenta") Syngenta is a global agri-science business engaged in crop protection and seeds. Urbanisation and changing dietary preferences across the middle classes of the developing nations is forcing the agricultural industry to increase yields. The strong sector outlook, the group's technological edge and their enviable product pipeline suggest the shares are attractively valued, particularly if Syngenta achieve their target to increase sales in key crop areas to $25bn by the end of the decade. Syngenta has a five year compound EPS growth rate of 14.3 per cent. Syngenta appears to have many years of growth before it so it is viewed as a core holding for the medium term. Unilever plc ("Unilever") Unilever is a multinational consumer goods champion, with universally recognisable brands in personal goods (Dove, Sure, Tresemme, VO5), household goods (Persil, Domestos, Surf) and food (Ben & Jerry's, Flora, PG Tips). It has a high exposure to fast growing emerging markets, driving compound annual revenue growth of 5 per cent over the last 5 years. Despite this, it trades at a discount to pure-play specialists such as L'Oreal. However, Unilever has been slowly divesting non core food brands and over time we look for further non-core disposals to drive a re-rating towards valuations more appropriate for a quality pure-play personal goods company. It is possible that we will then divest our holding at this time. BG Group plc ("BG") BG is a global diversified oil & gas E&P company, with top tier assets in the Santos Basin (Brazil), Australia and the North Sea. The group also has an LNG arm, capitalising on global price differences by transporting gas in liquid form from producing nations to high demand regions such as Asia. BG has a five year compound EPS growth rate of 5.2 per cent and trades at a significant discount to its NAV. As production in Brazil and Australia ramps up, we would anticipate this discount closing in time, given the material shift this should mean to the group's cash flow profile and capacity for shareholder returns. Investment Record of the Last Ten Years Dividend Return per per Total Net Asset Value Total ordinary share ordinary assets less per 25p share Year ended Return Basic Fully share liabilities Basic Fully £'000 p diluted p £'000 p diluted p p 31st July 5,512 73.49 53.15 9.50 28,901 385.35 282.39 2004 31st July 5,426 72.35 52.33 9.50 33,611 448.15 327.34 2005 31st July 3,206 42.75 31.14 9.50 36,107 481.43 351.17 2006 31st July 5,799 41.58 41.58 10.00 52,554 376.80 376.80 2007 31st July (3,490) (25.02) (25.02) 10.00 47,669 341.80 341.80 2008 31st July 645 4.43 4.43 10.50 57,495 328.44 328.44 2009 31st July 13,151 71.75 71.75 11.50 85,203 379.40 379.40 2010 31st July 15,691 69.87 69.87 12.50 98,267 437.60 437.60 2011 31st July (19,945) (88.81) (88.81) 13.00 75,515 336.26 336.26 2012 31st July 2,522 11.23 11.23 13.75 75,050 334.19 334.19 2013 In 2006, the Company adopted International Financial Reporting Standards ("IFRS"). As a result, the data has been restated to reflect the change to IFRS. In the period from 1981 to 2003, total assets less liabilities increased from £ 241,000 to £24,200,000. Net Assets per share increased from 24.1p to 323.2p. Report of the Directors The Directors present their report and financial statements for the year ended 31st July 2013. The Chairman's Statement forms part of the report of the Directors. Business Review The purpose of the business review is to provide an overview of the business of the Company by: * Analysing development and performance using appropriate key performance indicators ("KPIs"). * Outlining the principal risks and uncertainties affecting the Company. * Describing how the Company manages these risks. * Explaining the future business plan of the Company. * Providing information about persons with whom the Company has contractual or other arrangements which are essential to the business of the Company. * Outlining the main trends and factors likely to affect the future development, performance and position of the Company's business. Status The Company is an Investment Company as defined by Section 833 of the Companies Act 2006 and operated as an Investment Trust in accordance with Section 1158 of the Corporation Tax Act 2010. The Company is also governed by the Listing Rules and Disclosure and Transparency Rules of the Financial Conduct Authority and is listed on the main market of the London Stock Exchange under the epic code "MNL". The close company provisions of the Corporation Tax Act 2010 do not apply to the Company. Company registered number: 01009550. Principal activities The Company carries on business as an Investment Company. A review of investment activities for the year ended 31st July 2013 and the outlook for the coming year is given by the Investment Manager. The Company's subsidiaries, OSP Limited (formerly Osprey Smaller Companies Income Fund Limited) ("OSP") and Stakeholders' Momentum Investment Limited (formerly Stakeholders' Momentum Investment Trust plc) ("SMIL") carried on business as a dealing subsidiary and as an investment subsidiary, respectively. OSP, a company incorporated in Guernsey, is the sole branch outside of the United Kingdom. Performance and key performance indicators The key measures by which the Board judges the success of the Company are the share price, the net asset value per share and the ongoing charges measure. The Board considers the most important key performance indicator to be the comparison with its benchmark index. This is referred to in the Financial Summary. Total net assets at 31st July 2013 amounted to £75,050,000 compared with £ 75,515,000 at 31st July 2012, a decrease of 0.6 per cent, whilst the fully diluted net asset value per ordinary share decreased to 334.2p from 336.3p. This decrease of 0.6 per cent compared with an increase over the period of 19.9 per cent by our benchmark index, equated to an underperformance by the Group of 20.5 per cent. Group net revenue after taxation for the year was £3,089,000, a decrease of 4.1 per cent. The share price during the period under review has been quoted at discounts to net asset value of 7.8 to 19.2 per cent which the Directors consider to be satisfactory in the context of the discounts applicable to other investment trusts and was achieved without using the Company's powers to acquire its own shares in the market. Ongoing charges is a measure of the total expenses (including those charged to capital) expressed as a percentage of the average net assets over the year. The Board regularly reviews the ongoing charges measure and monitors Group expenses. Principal risks and uncertainties associated with the Company An investment in the Company is only suitable for financially sophisticated investors who are capable of evaluating the risks and merits of such an investment, or other investors who have been professionally advised with regard to investment and who have sufficient resources to bear any loss which might result from such an investment. There can be no guarantee that investors will recover their initial investment. The investment may employ gearing and may be subject to sudden and large falls in value. Investors should be aware that movements in the price of the Company may be more volatile than movements in the price of the underlying investments and that there is a risk that investors may lose all their invested money. Investors considering an investment should consult their stockbroker, bank manager, solicitor, accountant and/or other independent financial adviser. In respect of some of the companies in which the Company may invest: * the company may be undergoing significant change, or be exposed to the volatility of emerging or developing markets; * they may have less mature businesses, a more restricted depth of management and accordingly a higher risk profile; * the quality of the investments' management may have been overestimated; * the market value of, and income derived from, such shares can fluctuate; and * there may not be a liquid market for their shares. The fact that a share is traded on a market does not guarantee its liquidity. Accordingly, such shares may be difficult to realise at quoted market prices. Any change in the tax treatment of dividends paid, or income received by the Company, may reduce the level of yield received by shareholders. Any change in the Company's tax status, or in legislation, could affect the value of the investments held by the Company and its performance. Investment in the Company should be regarded as long-term in nature. 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. There can be no guarantee that the investment objective of the Company will be met. The Company is exposed to a range of economic and market risks, liquidity, interest rates, exchange rates and general financial risks. The market capitalisation of the Company will make the market of the ordinary shares less liquid than would be the case for a larger company. Whilst the use of borrowings by the Company should enhance the net asset value of the ordinary shares when the value of the Company's underlying assets is rising, it will have the opposite effect when the underlying asset value is falling. Furthermore, should any fall in the underlying assets' values result in the Company breaching the financial covenants applicable to the borrowings, the Company may be required to repay such borrowing in whole or in part together with any attendant costs. In order to repay such borrowings, the Company may have to sell assets at less than their quoted market values. A positive net asset value for the ordinary shares will be dependent upon the Company's assets being sufficient to meet any debt. On a winding-up of the Company, the ordinary shares rank for repayment of capital after repayment of all other creditors of the Company. Ordinary shares are only appropriate for investors who understand that they may receive an amount less than their original investment. Risk management The risks with regards to financial instruments, and the Company's policies for management of these risks, are detailed in note 18 to the financial statements - "Risks - Contracts for differences, derivatives, other financial instruments and other risks". The Company manages the risks inherent in portfolio management by investing in approximately 20 to 40 securities of companies operating in a range of industrial sectors and varying the extent of cash holdings or gearing in relation to the Investment Manager's assessment of overall market conditions. The Company does not have any employees and consequently relies upon the services provided by a number of third parties. The Board therefore relies on the control procedures of these third parties which include the Company's Investment Manager, Registrar, Custodian and Broker. This type of operational structure is not uncommon with Investment Trust companies. The Board via reports from the Administrator reviews the internal control procedures of its third party service providers and assesses the reliability of these procedures as part of its risk management strategy. The Risk Management function is a responsibility of the Administrator, M & M Investment Services, which is a division of Manchester & Metropolitan Investment Limited and operates as a standalone unit, comprised of individuals who are not members of the Board or the Sheppard family. Further details with regards to the Board's risk management procedures are detailed in the "Internal Financial Control" section of the Statement of Corporate Governance. Gearing The company operates a Flexible Revolving Loan Facility with a limit of £11m with Pershing Securities Limited, a subsidiary of The Bank of New York Mellon Corporation. No arrangement fee is payable on this facility and interest is charged at the Bank of England Base Rate plus three per cent per annum on drawdowns. By the year end the portfolio had been geared, using this facility and CFDs, to a level whereby gross long investments represented 166.8 per cent of net assets and the net long position represented 96.3 per cent of net assets. In addition, the weighted average percentage of gearing (calculated as net debt divided by market capitalisation) held by our top 20 portfolio holdings (excluding banks) on their own balance sheets was 16 per cent. (Sources: FactSet Research Systems Inc. plus other.) Management Details of the Company's management agreement with Midas Investment Management Limited ("the Investment Manager" or "Midas") are contained in note 3 to the financial statements. Future development A commentary on the trends and factors likely to affect the future development, performance and position of the Company, which includes an assessment of market sentiment and the effectiveness of government intervention, is set out in the Chairman's Statement and the Investment Manager's Report and is also released monthly in a fund factsheet published via the Company's website. Investment objective and policy The Group's investment objective and policy has not changed during the year under review. Results The Group's total comprehensive profit for the year, after taxation, amounted to £2,522,000 (2012: £19,945,000 total comprehensive loss). Total net assets at 31st July 2013 amounted to £75,050,000 compared with £ 75,515,000 at 31st July 2012, whilst the fully diluted net asset value per ordinary share decreased to 334.2p from 336.3p. Ordinary dividends An interim dividend of 5.5p per ordinary share was paid on 29th April 2013 (2012: 5.2p) and the Directors are recommending a final dividend of 8.25p per ordinary share (2012: 7.8p), a total for the year of 13.75p per ordinary share (2012: 13.0p). Subject to shareholders' approval at the Annual General Meeting, the final dividend will be paid on 6th December 2013 to shareholders registered on 15th November 2013. The shares will be declared ex-dividend on 13th November 2013. Share valuations On 31st July 2013, the middle market quotation and the net asset value per ordinary 25p share were 299.9p and 334.2p, respectively. This indicates that the discount on the Company's shares was 10.3 per cent. This is not uncommon as the share prices of closed-end funds are often traded at a discount to their net asset values. Events after the reporting period There have been no significant events since the end of the reporting period. Supplier terms It is the Group's policy to obtain the best terms for all business, including purchases of investments and to abide by those agreed terms. The Group had trade payables of £99,000 (2012: £106,000) at the year end. Trade payables are settled by the due date for payment. Payables in respect of investment purchases are settled in accordance with Stock Exchange regulations. Directors' Responsibilities in Relation to the Annual Report and the Financial Statements The Directors are responsible for preparing the Annual Report, the Directors Remuneration Report and the Group and Parent Company financial statements 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 prepared the Group and Parent Company financial statements in accordance with International Financial Reporting Standards (IFRS) adopted by the European Union and Article 4 of the EU IAS Regulation. Under Company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of the affairs of the Company and the Group and of the profit or loss of the Company and Group for that period. In preparing those financial statements, the Directors are required to: * properly select suitable accounting policies and apply them consistently; * present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; * make judgements and accounting estimates that are reasonable; * provide additional disclosure when compliance with the specific requirements of IFRS are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's and Company's financial position and financial performance; * state that the Group and Company financial statements have been prepared in accordance with IFRS, subject to any material departures disclosed and explained in the financial statements; and * make an assessment of the ability of the Group and Company to continue on a going concern basis. The Directors are responsible for keeping adequate accounting records that show and explain the Group and Company's transactions and disclose with reasonable accuracy, at any time, the financial position of the Company and of the Group and to enable them to ensure that the financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report and Corporate Governance Statement that comply with that law and those regulations. To the best of the knowledge of each of the Directors: a. the financial statements, prepared in accordance with the IFRS adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and b. the Directors' Report includes a fair review of the development and performance of the fund and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. Each of the Directors accepts responsibility accordingly. On behalf of the Board of Directors Mr P H A Stanley Chairman 23rd October 2013 Independent Auditor's Report To The Members of Manchester & London Investment Trust plc The Company's financial statements for the year ended 31st July 2013 have been audited by CLB Coopers. The entire Auditor's report, which is unqualified, can be found in the Company's Annual Report and Financial Statement at www.manchesterandlondon.co.uk. Consolidated Statement of Comprehensive Income For the year ended 31st July 2013 2013 2013 2013 2012 2012 2012 Note Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Gains Losses on investments 10 - (240) (240) - (22,448) (22,488) at fair value through profit or loss Trading income 2 627 - 627 934 - 934 Investment income 2 3,189 - 3,189 2,690 - 2,690 Gross return 3,816 (240) 3,576 3,624 (22,488) (18,864) Expenses Investment management 3 (411) - (411) (145) (268) (413) fee Cost of investment (82) - (82) (8) (43) (51) transactions Other operating 4 (232) - (232) (250) - (250) expenses Total expenses (725) - (725) (403) (311) (714) Return before finance 3,091 (240) 2,851 3,221 (22,799) (19,578) costs and tax Finance costs 6 (2) (327) (329) - (367) (367) Return on ordinary 3,089 (567) 2,522 3,221 (23,166) (19,945) activities before tax Tax expense 7 - - - - - - Return on ordinary 3,089 (567) 2,522 3,221 (23,166) (19,945) activities after tax Earnings per ordinary share (pence) Basic 9 13.76 (2.53) 11.23 14.34 (103.15) (88.81) Fully diluted 9 13.76 (2.53) 11.23 14.34 (103.15) (88.81) The total column of this statement represents the Statement of Comprehensive Income of the Group prepared in accordance with IFRS. The supplementary revenue return and capital return columns are both prepared under guidance published by the Association of Investment Companies. The Group does not have any Other Comprehensive Income and hence the return on ordinary activities after tax, as disclosed above, is the same as the Group's Total Comprehensive Income/(Loss). All items in the above statement derive from continuing operations. Consolidated and Company Statements of Changes in Equity For the year ended 31st July 2013 Group Capital Capital Share Share Other reserve reserve Retained capital premium reserves (unrealised) (realised) earnings Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 1st 5,614 35,132 (79) 27,171 27,057 3,372 98,267 August 2011 Changes in equity for 2012 Total - - - - - (19,945) (19,945) comprehensive loss Transfer of - - - (19,025) (4,141) 23,166 - capital loss Ordinary dividend - - - - - (2,807) (2,807) paid (note 8) Balance at 31st 5,614 35,132 (79) 8,146 22,916 3,786 75,515 July 2012 Changes in equity for 2013 Total - - - - - 2,522 2,522 comprehensive income Transfer of - - - (2,550) 1,983 567 - capital loss Ordinary dividend - - - - - (2,987) (2,987) paid (note 8) Balance at 31st 5,614 35,132 (79) 5,596 24,899 3,888 75,050 July 2013 Company Share Share Other Capital Capital capital premium reserves reserve reserve Retained (unrealised) (realised) earnings Total £'000 £'000 £'000 £'000 £'000 £'000 £'000 Balance at 1st 5,614 35,295 (79) 27,171 3,256 26,581 97,838 August 2011 Changes in equity for 2012 Total - - - - - (19,851) (19,851) comprehensive loss Transfer of - - - (19,092) (4,145) 23,237 - capital loss Ordinary dividend - - - - - (2,807) (2,807) paid (note 8) Balance at 31st 5,614 35,295 (79) 8,079 (889) 27,160 75,180 July 2012 Changes in equity for 2013 Total - - - - - 2,865 2,865 comprehensive income Transfer of - - - (2,483) 2,419 64 - capital loss Ordinary dividend - - - - - (2,987) (2,987) paid (note 8) Balance at 31st 5,614 35,295 (79) 5,596 1,530 27,102 75,058 July 2013 Consolidated Statement of Financial Position At 31st July 2013 2013 2012 Note £'000 £'000 £'000 £'000 Non-current assets Investments at fair value through 10 75,689 79,966 profit or loss Contracts for differences - longs 18 49,457 23,443 125,146 103,409 Current assets Trade and other receivables 12 190 81 Contracts for differences - shorts 18 55,673 34,637 Cash and cash equivalents 13 21,802 11,432 77,665 46,150 Gross Assets 202,811 149,559 Current liabilities Borrowings 14 (10,967) (9,899) Trade and other payables 15 (1,863) (2,052) Contracts for differences - 18 (114,931) (62,093) liability Net assets 75,050 75,515 Equity attributable to equity holders Ordinary share capital 16 5,614 5,614 Share premium 35,132 35,132 Other reserves Capital reserve - realised 24,899 22,916 Capital reserve - unrealised 5,596 8,146 Goodwill reserve (79) (79) Retained earnings 3,888 3,786 Total equity 75,050 75,515 Net asset value per share Ordinary shares - basic 17 334.2p 336.3p 18 Ordinary shares - fully diluted 17 334.2p 336.3p The financial statements were approved by the Board of Directors and authorised for issue on 23rd October 2013 and are signed on their behalf by: Mr P H A Stanley (Chairman) Mr D Harris Directors Company Statement of Financial Position At 31st July 2013 2013 2012 Note £'000 £'000 £'000 £'000 Non-current assets Investments at fair value through 10 75,689 79,009 profit or loss Contracts for differences - longs 18 31,027 23,443 Investment in subsidiaries 11 17 2,180 106,733 104,632 Current assets Trade and other receivables 12 2,761 83 Contracts for differences - shorts 18 34,180 34,637 Cash and cash equivalents 13 14,134 11,336 51,075 46,056 Gross Assets 157,808 150,688 Current liabilities Borrowings 14 (10,967) (9,899) Trade and other payables 15 (1,880) (3,516) Contracts for differences - 18 (69,903) (62,093) liability Net assets 75,058 75,180 Equity attributable to equity holders Ordinary share capital 16 5,614 5,614 Share premium 35,295 35,295 Other reserves Capital reserve - realised 1,530 (889) Capital reserve - unrealised 5,596 8,079 Goodwill reserve (79) (79) Retained earnings 27,102 27,160 Total equity 75,058 75,180 The financial statements were approved by the Board of Directors and authorised for issue on 23rd October 2013 and are signed on their behalf by: Mr P H A Stanley (Chairman) Mr D Harris Directors Consolidated Statement of Cash Flows For the year ended 31st July 2013 2013 2012 £'000 £'000 Cash flow from operating activities Return on operating activities before taxation 2,522 (19,945) Interest paid 329 367 (Profit)/loss on investments (9,106) 17,288 (Increase)/decrease in receivables (109) 122 (Decrease)/increase in payables (189) 1,829 Decrease in contracts for differences 5,788 3,371 Net cash (used in)/generated from operating (765) 3,032 activities Cash flow from investing activities Purchase of investments (16,548) (6,759) Sale of investments 29,931 11,703 Net cash generated from investing activities 13,383 4,944 Cash flow from financing activities Equity dividends paid (2,987) (2,807) Drawn from/(Repaid to) loan facility 1,068 (969) Interest paid (329) (367) Net cash used in financing activities (2,248) (4,143) Net increase in cash and cash equivalents 10,370 3,833 Cash and cash equivalents at beginning of year 11,432 7,599 Cash and cash equivalents at end of year 21,802 11,432 Company Statement of Cash Flows For the year ended 31st July 2013 2013 2012 £'000 £'000 Cash flow from operating activities Return on operating activities before taxation 2,865 (19,851) Interest paid 329 367 (Profit)/loss on investments (9,605) 17,596 (Increase)/decrease in receivables (2,678) 1,350 (Decrease)/increase in payables 1,162 1,964 Decrease in contracts for differences 683 3,637 Net cash generated from operating activities (7,244) 5,063 Cash flow from investing activities Purchase of investments (16,368) (4,353) Sale of investments 28,658 9,946 Net cash generated from investing activities 12,290 5,593 Cash flow from financing activities Equity dividends paid (2,987) (2,807) Drawn from/(Repaid to) loan facility 1,068 (969) Interest paid (329) (367) Net cash used in financing activities (2,248) (4,143) Net increase in cash and cash equivalents 2,798 6,513 Cash and cash equivalents at beginning of year 11,336 4,823 Cash and cash equivalents at end of year 14,134 11,336 Notes Forming Part of the Financial Statements For the year ended 31st July 2013 1. Accounting policies Manchester & London Investment Trust plc ("MLIT") is a public limited company, which is listed on the London Stock Exchange and is incorporated and domiciled in the United Kingdom. The consolidated financial statements of the Company for the year ended 31st July 2013 comprise the Company and its subsidiaries (together referred to as the `Group' and individually as `Group entities'). a) Basis of preparation and statement of compliance In accordance with European Union regulations, these financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board ("IASB"), as adopted for use in the EU effective at 31st July 2013. The financial statements have been prepared on the historical cost basis except where IFRS require an alternative treatment. To the extent that presentational guidance set out in the Statement of Recommended Practice ("SORP") for investment trusts revised by the Association of Investment Companies ("AIC") is inconsistent with the requirements of IFRS, the Directors have sought to prepare the financial statements on a basis compliant with the recommendations of the SORP. 2. Income 2013 2012 £'000 £'000 Trading income 627 934 Income from investments Dividend income 3,181 2,681 Other income Deposit interest 8 9 Investment income 3,189 2,690 Total income 3,816 3,624 Total income comprises Trading income 627 934 Dividends 3,181 2,681 Interest 8 9 3,816 3,624 Income from investments Listed 3,181 2,681 3,181 2,681 3. Investment management fee 2013 2013 2013 2012 2012 2012 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Investment management 411 - 411 145 268 413 fee Midas provides investment services to the Company under a management agreement with a termination period of three months. The annual fee is 0.5 per cent of the total portfolio value including cash and short term deposits, payable quarterly in arrears. The fee is not subject to Value Added Tax ("VAT"). Transactions with Midas during the year are disclosed in note 19. The investment management fee is chargeable 100 per cent to revenue (2012: 35 per cent to revenue and 65 per cent to capital). 4. Other operating expenses 2013 2012 £'000 £'000 Directors' fees 57 70 Staff costs (note 5) - - Auditors' remuneration - audit 28 28 Registrar fees 10 9 Exchange rate variances 3 4 Other expenses 134 139 232 250 Directors' fees - Subsidiaries 12 25 Directors' fees - Company 45 45 57 70 Fees payable to the Company's auditor for the audit 25 25 of the parent company and consolidated financial statements Fees payable to the Company's auditor for other services: * the audit of the Company's subsidiaries pursuant 3 3 to legislation * other services relating to taxation 7 8 35 36 Other operating expenses include irrecoverable VAT where appropriate. 5. Staff numbers and costs Excluding Directors, the Group employs no members of staff. Included in Directors' fees above (note 4) are the emoluments paid to the Chairman as follows: 2013 2012 £'000 £'000 P H A Stanley (Chairman) 18 18 6. Finance costs of flexible revolving loan facility 2013 2012 £'000 £'000 Charged to revenue 2 - Charged to capital 327 367 329 367 7. Taxation 2013 2013 2013 2012 2012 2012 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Current UK corporation tax - - - - - - The charge for the year can be reconciled to the profit per the income statement as follows: Profit/(loss) before tax 3,089 (567) 2,522 3,221 (23,166) (19,945) Tax at the UK corporation 731 (134) 597 773 (5,560) (4,787) tax rate of 23.67% (2012: 24%) Tax effect of non-taxable (727) - (727) (643) - (643) dividends/unrealised profits Income not subject to UK (32) - (32) (213) - (213) corporation tax Brought forward losses - (30) (30) (1) - (1) utilised during the period Losses on investments not - 165 165 - 5,495 5,495 relieved Other non-taxable income (112) - (112) - - - less expenses not deductible for tax Excess management expenses 140 (1) 139 84 65 149 Current year tax charge - - - - - - The Company's taxable income exceeded its management expenses, which include the capital and revenue elements of the management fee. The Company has surplus management expenses at 31st July 2013 of £2,538,000 (2012: £1,951,000). At 31st July 2013, there is an unrecognised deferred tax asset, measured at the standard rate of 23 per cent, of £584,000 (2012: £468,000). This deferred tax asset relates to surplus management expenses. It is unlikely that the Group will generate sufficient taxable profits in the future to recover these amounts and therefore the asset has not been recognised in the year, or in prior years. As at 31st July 2013, the Company has unrelieved capital losses of £9,330,000 (2012: £9,330,000). There is therefore, a related unrecognised deferred tax asset, measured at the standard rate of 23 per cent, of £2,146,000 (2012: £ 2,239,000). These capital losses can only be utilised to the extent that the Company does not qualify as an investment trust in the future and, as such, the asset has not been recognised. 8. Dividends 2013 2012 £'000 £'000 Amounts recognised as distributions to equity holders in the period: Final dividend for the year ended 31st July 2012 of 7.8p 1,752 1,639 (2011: 7.3p) per share Interim dividend for the year ended 31st July 2013 of 1,235 1,168 5.5p (2012: 5.2p) per share 2,987 2,807 A final dividend in respect of 2013 of 8.25p per share which, together with the interim dividend, amounts to a total dividend of £3,087,843 is to be proposed at the Annual General Meeting on 2nd December 2013 and has been excluded as a liability in these financial statements in accordance with IFRS. We also set out below the total dividend payable in respect of the financial year, which is the basis on which the requirements of section 1158 of the Corporation Tax Act 2010 are considered. 2013 2012 £'000 £'000 Interim dividend for the year ended 31st July 2013 of 5.5p 1,235 1,168 (2012: 5.2p) per share Proposed final dividend for the year ended 31st July 2013 1,853 1,752 of 8.25p (2012: 7.8p) per share 3,088 2,920 9. Return per ordinary share The calculation of the basic and fully diluted earnings per ordinary share is based on the following: 2013 2013 2013 2012 2012 2012 Revenue Capital Total Revenue Capital Total £'000 £'000 £'000 £'000 £'000 £'000 Return: Basic and fully diluted 3,089 (567) 2,522 3,221 (23,166) (19,945) Basic revenue, capital and total return per ordinary share is based on the net revenue, capital and total return for the period and on the weighted average number of ordinary shares in issue of 22,457,042 (2012: 22,457,042). 10. Investments at fair value through profit or loss Group Company 2013 2012 2013 2012 £'000 £'000 £'000 £'000 Investments as below 75,689 79,966 75,689 79,009 Group Group Group Company Company Company Listed Unlisted Total Listed Unlisted Total £'000 £'000 £'000 £'000 £'000 £'000 Opening cost at 1st 67,751 56 67,807 66,861 56 66,917 August Opening unrealised 12,089 70 12,159 12,022 70 12,092 appreciation at 1st August Opening fair value at 79,840 126 79,966 78,883 126 79,009 1st August Purchases at cost 16,548 - 16,548 16,368 - 16,368 Sales proceeds (29,931) - (29,931) (28,658) - (28,658) Realised profit on 5,761 - 5,761 5,558 - 5,558 sales Increase/(decrease) in 3,347 (2) 3,345 3,414 (2) 3,412 unrealised appreciation Closing fair value at 75,565 124 75,689 75,565 124 75,689 31st July Closing cost at 31st 60,129 56 60,185 60,129 56 60,185 July Closing unrealised 15,436 68 15,504 15,436 68 15,504 appreciation at 31st July Closing fair value at 75,565 124 75,689 75,565 124 75,689 31st July Gross capital return Group Company 2013 2012 2013 2012 £'000 £'000 £'000 £'000 Realised gains/(losses) on sale of 1,859 (2,726) 1,656 (2,967) investments Transfer of investments to contracts 3,902 450 3,902 450 for differences Realised profit on sales and transfers 5,761 (2,276) 5,558 (2,517) of investments Realised gains on short duration (289) (231) (284) - investment holdings Realised gain on subsidiaries - - 635 - Increase/(decrease) in unrealised 3,238 (15,012) 3,304 (15,079) appreciation Contracts for differences movement (8,950) (4,969) (8,950) (4,969) excluding trading income (240) (22,488) 263 (22,565) 11. Subsidiary undertakings Company 2013 2012 £'000 £'000 Opening cost at 1st August 2,180 2,180 Subsidiaries purchase of own shares (2,163) - Closing cost at 31st July 17 2,180 The Company has investments in the following subsidiary undertakings: Name of undertaking Principal Country % of shares held Activity of incorporation Ordinary Preference and operation shares shares OSP Limited Trading Company Guernsey 100 - Stakeholders' Momentum Investment England 100 - Investment Limited Company Manchester & London Dormant England 100 - Securities Limited Saintclose Limited Dormant England 100 - Beacontree Plaza Limited Dormant England 100 100 Beaconbranch Limited Dormant England 100* - Darethrift Limited Dormant England 100 - Fileglow Limited Dormant England 100 - Zealgate Limited Dormant England 100 - All these subsidiary undertakings are included in the consolidation. *Beaconbranch Limited is 100 per cent owned by Beacontree Plaza Limited. On 15th February 2013 Stakeholders' Momentum Investment Limited implemented a buyback of its own shares. Under the terms of the buyback agreement SMIL bought and cancelled, via a capital reduction, 5,727,693 of its issued ordinary 25 pence shares for a consideration of £1,626,000. This was settled via a corresponding reduction in the SMIL loan balance due from MLIT. On 11th July 2013 OSP implemented a buyback of its own shares. Under the terms of the buyback agreement OSP bought and cancelled, via a capital reduction, 1,156,202 of its issued ordinary 10 pence shares for a consideration of £1,172,000. This was settled via a corresponding reduction in the OSP loan balance due from MLIT. In the opinion of the Directors, there is no material difference between the book value and fair value of these investments. 12. Trade and other receivables Group Company 2013 2012 2013 2012 £'000 £'000 £'000 £'000 Receivables from - - 2,571 8 subsidiary undertakings Dividend receivables 49 61 49 61 Other receivables 133 6 133 - Prepayments 8 14 8 14 190 81 2,761 83 13. Cash and cash equivalents Group Company 2013 2012 2013 2012 £'000 £'000 £'000 £'000 Cash & cash equivalents 21,802 11,432 14,134 11,336 14. Borrowings The Company operates a Flexible Revolving Loan Facility with a limit of £11m with Pershing Securities Limited ("Pershing"), a subsidiary of The Bank of New York Mellon Corporation. No arrangement fee is payable on this facility and interest is charged at the Bank of England Base Rate plus three per cent per annum on drawdowns. This facility is secured against the Company's investments. In respect of this loan Pershing have a floating charge on the assets it holds for the group in custody alongside any margin requirements in respect of group investments. As at 31st July 2013, the balance on the facility was £10,967,000 (2012: £ 9,899,000). 15. Trade and other payables Group Company 2013 2012 2013 2012 £'000 £'000 £'000 £'000 Trade payables 99 106 99 106 Payables to - - 17 3,345 subsidiary undertakings Accruals 1,764 1,946 1,764 65 1,863 2,052 1,880 3,516 16. Share Capital Ordinary share capital 2013 2012 No.(`000) £'000 No.(`000) £'000 Authorised Ordinary shares of 25p each 28,000 7,000 28,000 7,000 Non-voting Convertible Preference shares 1,000 1,000 1,000 1,000 of £1 each Ordinary shares of 25p each issued and fully paid Balance as at 1st August 22,457 5,614 22,457 5,614 Balance as at 31st July 22,457 5,614 22,457 5,614 Each ordinary share carries the right to one vote in any circumstances and the right to dividends paid. 17. Net asset value per share Net asset value Net assets per share attributable 2013 2012 2013 2012 p p £'000 £'000 Ordinary shares: 334.2 336.3 75,050 75,515 basic and fully diluted The basic net asset value per ordinary share is based on net assets at the year end and 22,457,042 (2012: 22,457,042) ordinary shares in issue, adjusted for any shares held in treasury. 18. Risks - Contracts for differences, derivatives, other financial instruments and other risks In order to manage its portfolio efficiently and to enable the Investment Manager to pursue the investment objectives, the Group holds contracts for differences, derivatives and other financial instruments. All contracts for differences, derivative transactions and financial instruments are accounted for at fair value and comprise securities, cash balances, trade receivables and trade payables arising directly from financial operations. The main risk arising from the Group's investment strategy is market price risk. There is also exposure to liquidity risk, interest rate risk and currency rate risk. The Board regularly reviews and agrees policies for managing these risks, which are monitored by the Administrator, as summarised below. Market price risk Market price risk arises mainly from uncertainty about future prices of financial instruments held. It represents the potential loss the Group might suffer through holding market positions in the face of price movements. Both the Investment Manager and the Administrator actively monitor market prices throughout the year and report to the Board which meets regularly to review investment strategy. If the price of these investments and the contracts for differences had increased by 3 per cent at the reporting date with all other variables remaining constant, the capital return in the statement of comprehensive income and the net assets attributable to equity holders of the Group would increase by £2,081,000. A 3 per cent decrease in share prices would have resulted in an equal and opposite effect of £2,081,000, on the basis that all other variables remain constant. At the year end the Group's assets exposed to market price risk were as follows: Group Company 2013 2012 2013 2012 £'000 £'000 £'000 £'000 Non-current assets Investments held in equity form 75,689 79,966 75,706 81,189 Contracts for differences - longs 49,457 23,443 31,027 23,443 Current assets Contracts for differences - shorts 55,673 34,637 34,180 34,637 180,819 138,046 140,913 139,269 During the year the Group transacted in contracts for differences and derivative investments. The positions held in CFDs as at the year end are as follows: Group Company 2013 2012 2013 2012 £'000 £'000 £'000 £'000 Non-current assets 49,457 23,443 31,027 23,443 Contracts for differences - longs Current assets 55,673 34,637 34,180 34,637 Contracts for differences - shorts Current liabilities (114,931) (62,093) (69,903) (62,093) Contracts for differences - liability (9,801) (4,013) (4,696) (4,013) Interest rate risk Interest rate risk arises from uncertainty over the interest rates charged by financial institutions. It represents the potential increased costs of financing for the Group. The Investment Manager actively monitors interest rates and the Group's ability to meet its financing requirements throughout the year and reports to the Board. At 31st July 2013, there is a flexible loan facility within the Group. See note 14 for further details. Liquidity risk The Directors have minimised liquidity risk by investing in a portfolio of quoted companies that are readily realisable. The Group's un-invested funds are held almost entirely with the Custodian or on interest bearing deposits with UK banking institutions. As at 31st July 2013 the financial liabilities comprised: Group Company 2013 2012 2013 2012 £'000 £'000 £'000 £'000 Contracts for differences - liability 114,931 62,093 69,903 62,093 Loan facility 10,967 9,899 10,967 9,899 Trade payables and accruals 1,863 2,052 1,880 3,516 127,761 74,044 82,750 75,508 Group Company 2013 2012 2013 2012 £'000 £'000 £'000 £'000 Of the above liabilities the following 126,081 72,168 81,070 75,508 are due within one month All the above liabilities are stated at fair value. The Group manages liquidity risk through constant monitoring of the Group's gearing position to ensure the Group is able to satisfy any and all debts within the agreed credit terms. Currency rate risk The only material foreign currency holdings are S&P 500 Index shorts, Jardine Matheson stock and HMS Hydraulics stock with market values of £48,076,000, £ 4,384,000 and £1,385,000 respectively, denominated in US Dollars, Echo Entertainment stock with market value of £1,802,000, denominated in Australian Dollars, Etablissements Maurel et Prom stock with market value of £1,718,000 denominated in Euro and Syngenta stock with a market value of £6,160,000, denominated in Swiss Francs. The Group constantly monitors currency rate risk to ensure balances wherever possible are translated at rates favourable to the group. 19. Related party transactions The Investment Manager of the Company is Midas Investment Management Limited ("Midas"), a Company controlled by Mr M Sheppard. Midas receives a quarterly investment management fee for these services which in the year under review amounted to a total of £411,000 (2012: £413,000) excluding VAT, together with a corporate fee for acting as financial adviser amounting to £30,000 (2012: £ 30,000) excluding VAT to the Company and commission fees of £141,000 (2012: £ 100,000) excluding VAT to the Group. The balance owing to Midas at 31st July 2013 was £96,000 (2012: £102,000). The Company's subsidiaries are listed in note 11, along with details of loan reductions in SMIL and OSP. To support revenue recognition in line with accounting policy, during the year positions of £2,563,000 were transferred from MLIT into OSP (2012: £2,430,000 transferred from OSP into MLIT). In addition dividends of £Nil (2012: £ 1,050,000) were paid from subsidiaries. As at 31st July 2013, the Company had the following outstanding interest free loans: i. £2,563,000 due from OSP Limited (2012: £2,837,000 due to OSP Limited). ii. £Nil due to Stakeholders' Momentum Investment Limited (2012: £491,000). iii. £10,000 due to Saintclose Limited (2012: £10,000). iv. £8,000 due from Manchester & London Securities Limited (2012: £8,000). v. £7,000 due to Beacontree Plaza Limited (2012: £7,000). 20. Capital Management There are no externally imposed capital requirements. The capital managed is noted in the Statements of Changes in Equity and managed in accordance with the Investment Policies and Objectives. 21. Ultimate control The holding company and ultimate parent throughout the year and the previous year was Manchester & Metropolitan Investment Limited, a company incorporated in England and Wales. This company was controlled throughout the year and the previous year by Mr M Sheppard and his immediate family. A copy of the consolidated financial statements of Manchester & Metropolitan Investment Limited can be obtained by writing to The Company Secretary, 2nd Floor, Arthur House, Chorlton Street, Manchester M1 3FH. 22. Annual General Meeting The Company's forty first Annual General Meeting will be held at St. Ann's Church, St. Ann Street, Manchester M2 7LF, on Monday 2 2nd December 2013 at 1.05pm. The notice of this meeting can be found along with the full Annual Report and Financial Statements on the Company's website www.manchesterandlondon.co.uk. For further information, please contact: Manchester & London Investment Trust plc Tel: 0161 228 2389 Midas Investment Management Limited Tel: 0161 228 1709

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