Annual Financial Report

RNS Number : 0699S

British Assets Trust PLC

15 November 2011

 



BRITISH ASSETS TRUST PLC

Date:  15 November 2011

Results for the year ended 30 September 2011

Highlights

·      Net asset value total return of -5.1 per cent compared with a total return of -4.3 per cent from the benchmark index

·      Maintained dividend of 6.112p per share, producing a dividend yield of 5.4 per cent at the year end

·      Change in benchmark index with effect from 1 October 2011 and re-alignment of portfolio with the aim of 
generating a higher level of investment income

·      Appointment of Phil Doel as lead fund manager with effect from 1 October 2011

Chairman's Statement

This has been another challenging year for economies and markets. The Company's net asset value total return for the year ended 30 September 2011 was -5.1 per cent. This compares with a total return of -4.3 per cent from the composite index of 75 per cent FTSE All-Share Index and 25 per cent FTSE World (ex UK) Index, which was the Company's benchmark during the year. The share price total return for the year was -4.8 per cent and the debt-adjusted premium of share price to net asset value per share at the end of the year was 2.2 per cent.

For most of the year stock markets made reasonable progress, with generally positive economic indicators and encouraging corporate newsflow. However, markets fell sharply in the final months of the financial year as investors became increasingly concerned about the sovereign debt crisis in Europe and the outlook for global economic growth. During the last quarter of the year, the FTSE All-Share Index fell by 14.3 per cent, its largest quarterly fall since the third quarter of 2002.

In the UK, the government remains committed to reducing debt levels but economic growth has been sluggish at best. However, company balance sheets are generally in good condition and earnings growth during the year was solid. There has also been a good level of dividend growth from UK companies and this was of benefit to the Company during the year.

The table below provides a breakdown of the estimated contributions to the net asset value total return for the year. The relative contribution from UK and overseas stock selection was positive. However, with a fall in total assets there was a negative contribution from gearing. The contribution from asset allocation was also negative as the Company was adversely affected by its overweight exposure to emerging markets which underperformed developed markets as the fears concerning reduced global growth increased. However, we remain confident that this allocation, which has contributed positively to performance over the past three years, will continue to do well over the longer term.

Market/benchmark return	-4.3%
Stock selection
UK equities	1.5%
Overseas equities	0.3%
Asset allocation	-0.9%
Corporate bonds	0.3%
Gearing	-1.3%
Expenses	-0.7%
British Assets Trust net asset value total return	-5.1%

The end of the financial year also marked the end of the three year period since the Company's overseas portfolios were consolidated into two portfolios: a Global Developed (ex UK) portfolio and an Emerging Markets portfolio. Shareholders may recall that this change was designed to provide greater focus on the best individual investment opportunities overseas. The Company's net asset value total return for the three years ended 30 September 2011 was 21.4 per cent and this was ahead of the total return from the benchmark of 18.9 per cent. The share price total return over the three year period was 33.5 per cent.

Benchmark Index and Portfolio Re-Alignment

At the end of the year, the Board announced that, with effect from 1 October 2011, the Company's benchmark index would change from a composite of 75 per cent FTSE All-Share Index and 25 per cent FTSE World (ex UK) Index, to 80 per cent FTSE All-Share Index and 20 per cent FTSE World (ex UK) Index. Since the year end the Company has therefore modestly increased its exposure to UK equities and corporate bonds to around 80 per cent of total assets and reduced its exposure to overseas equities accordingly. The Company has also realigned the Global (ex UK) sub-portfolio to generate a higher level of investment income. The Board expects these changes to be beneficial to the level of dividend cover, whilst maintaining a significant international equity exposure.

Earnings and Dividends

The Company's revenue earnings per share for the year were 5.7p per share (2010: 5.0p). Three interim dividends of 1.442p per share were paid during the year and the Board recommends payment of a final dividend of 1.786p per share, payable on 6 January 2012 to shareholders on the register on 9 December 2011. This brings the total dividend for the year to 6.112p per share, unchanged from the previous year and in accordance with the Board's previously stated expectations. 

During the year, BP returned to paying dividends, albeit at only half the level paid prior to the dividend suspension in 2010. This, combined with a continuing trend of increasing dividends in the UK, where the Company earns most of its income, has been beneficial to the revenue account.

The Board pays particular attention to the level of dividend which we consider to be one of the Company's key attractions. As explained above, we expect the changes to the portfolio since the end of the year to be beneficial to the level of dividend cover. 

Gearing

As at 30 September 2011, the Company's level of gearing, net of cash, was 20.5 per cent. This was represented by 4.9 per cent of equity gearing and 15.6 per cent in corporate bonds.

The Company's borrowings comprise £60 million 6.25 per cent Bonds which are due for redemption in 2031, and a £60 million bank facility which matures in March 2013. £23.2 million of the bank facility was drawn down at the year end.

Management Arrangements 

During the year, Julie Dent, who had been the Company's lead fund manager since 2001, decided to retire. It was announced that, with the Board's full support, she would be succeeded by Phil Doel who, with effect from 1 October 2011, has been fully responsible and accountable to the Board for all investment matters.

Unrelated to this change, at the end of the year the Board also announced that it had agreed changes to the management fee arrangements with F&C. F&C was previously entitled to a basic management fee equal to 0.3 per cent per annum of the value of the Company's total assets less current liabilities. F&C was also entitled to a performance-related fee calculated on an annual basis by reference to the performance of the Company against the benchmark index over each 12 month period to 30 September. The maximum performance-related fee which could have been earned by F&C in respect of any annual performance period was 0.3 per cent per annum of the value of equity shareholders' funds at the end of the period, depending on the level of outperformance.

With effect from 1 October 2011, F&C is no longer entitled to a performance-related fee but the basic management fee has been increased to 0.4 per cent per annum of the value of the Company's total assets less current liabilities.

Boardroom Diversity

The Board notes the recent review, by Lord Davies of Abersoch, of gender diversity of the boards of UK-listed companies and the proposed changes to The UK Corporate Governance Code resulting from this review.

Any appointments to the Board are based on merit, but we also take into account the need to have a balance of, amongst other things, skills, experience, independence and gender within the Board. This will continue to be our policy.

Annual General Meeting

The Company's Annual General Meeting will be held at 12 noon on Wednesday 14 December 2011 at the offices of F&C Asset Management plc, 80 George Street, Edinburgh. It will be followed by a presentation from Phil Doel.

Outlook

The near term outlook for equity markets will be heavily influenced by confidence in the enactment and efficacy of the evolving polices to deal with the sovereign debt and banking crisis in the Eurozone. Internationally, the outlook is less negative with the US economy exhibiting moderate growth and emerging markets also making progress, albeit at a more moderate rate than in the recent past.

Encouragingly, company balance sheets are generally in good shape, with low levels of debt, but earnings are likely to come under pressure if the economic position deteriorates further. The Managers' expectation, however, is for continued growth in dividend payments by companies. This, combined with the changes made to the portfolio since the end of the year, as detailed above, should be of benefit to the Company.

Lynn Ruddick

Chairman

Income Statement

For the Year ended 30 September 2011

		2011	2011	2011
	Notes	Revenue	Capital	Total
		£'000	£'000	£'000
Losses on investments		-	(29,080)	(29,080)
Exchange differences		-	(152)	(152)
Income		19,166	-	19,166
Management expenses		(362)	(1,085)	(1,447)
Other expenses		(862)	-	(862)
Net return before finance costs & taxation		17,942	(30,317)	(12,375)
Finance Costs		(1,031)	(3,092)	(4,123)
Return on ordinary activities before tax		16,911	(33,409)	(16,498)
Tax on ordinary activities		(235)	-	(235)
Return attributable to shareholders		16,676	(33,409)	(16,733)
Return per share	3	5.7p	(11.5)p	(5.8)p

The total column of this statement is the Profit and Loss Account of the Company.  The supplementary revenue and capital columns are both prepared under guidance published by The Association of Investment Companies.

All revenue and capital items in the above Income Statement derive from continuing operations.

No operations were acquired or discontinued in the year.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above Income Statement.

Income Statement

For the Year ended 30 September 2010

	Notes	2010	2010	2010
		Revenue	Capital	Total
		£'000	£'000	£'000
Gains on investments		-	30,471	30,471
Exchange differences		-	323	323
Income		17,156	-	17,156
Management expenses		(334)	(1,452)	(1,786)
Other expenses		(845)	-	(845)
Net return before finance costs & taxation		15,977	29,342	45,319
Finance costs		(1,030)	(3,090)	(4,120)
Return on ordinary activities before tax		14,947	26,252	41,199
Tax on ordinary activities		(353)	-	(353)
Return attributable to shareholders		14,594	26,252	40,846
Return per share	3	5.0p	9.0p	14.0p

Reconciliation of Movements in Shareholders' Funds

For the year ended 30 September 2011

	Called up Share Capital	Capital Redemption Reserve	Capital Reserve	Revenue Reserve	Shareholders' Funds
	£'000	£'000	£'000	£'000	£'000
Opening shareholders' funds	72,778	15,563	257,244	32,208	377,793
Dividends paid	-	-	-	(17,767)	(17,767)
Return attributable to ordinary shareholders	-	-	(33,409)	16,676	(16,733)
Closing shareholders' funds	72,778	15,563	223,835	31,117	343,293

Reconciliation of Movements in Shareholders' Funds

For the year ended 30 September 2010

	Called up Share Capital	Capital Redemption Reserve	Capital Reserve	Revenue Reserve	Shareholders' Funds
	£'000	£'000	£'000	£'000	£'000
Opening shareholders' funds	72,778	15,563	230,992	35,409	354,742
Dividends paid	-	-	-	(17,795)	(17,795)
Return attributable to ordinary shareholders	-	-	26,252	14,594	40,846
Closing shareholders' funds	72,778	15,563	257,244	32,208	377,793

Balance Sheet

As at 30 September 2011

	2011	2010
	£'000	£'000
Non-current assets
Investments at fair value through profit or loss	413,563	457,280
Current assets
Debtors	2,945	4,364
Cash in bank and on deposit	10,671	7,002
	13,616	11,366
Creditors: amounts falling due within one year	(24,412)	(31,405)
Net current liabilities	(10,796)	(20,039)
Total assets less current liabilities	402,767	437,241
Creditors: amounts falling due after more than one year	(59,474)	(59,448)
Net assets	343,293	377,793
Capital and reserves
Called-up share capital	72,778	72,778
Capital redemption reserve	15,563	15,563
Capital reserve	223,835	257,244
Revenue reserve	31,117	32,208
Equity shareholders' funds	343,293	377,793
Net asset value per share	117.9p	129.8p

Cash Flow Statement

For the Year Ended 30 September 2011

	2011	2010
	£'000	£'000
Operating activities
Investment income received	17,894	16,423
Deposit interest received	24	26
Option premiums received	942	-
Underwriting commission received	25	121
Management expenses paid	(1,897)	(2,091)
Other cash payments	(880)	(851)
Net cash inflow from operating activities	16,108	13,628
Servicing of finance
Interest on 6.25 per cent Bonds 2031	(3,750)	(3,750)
Interest on revolving advance facility	(442)	(346)
Net cash outflow from servicing of finance	(4,192)	(4,096)
Capital expenditure and financial investment
Purchases of investments	(225,647)	(185,907)
Sales of investments	239,751	187,576
Net cash inflow from capital expenditure and financial investment	14,104	1,669
Equity dividends paid	(17,767)	(17,795)
Net cash inflow/(outflow) before financing	8,253	(6,594)
Financing
Revolving advance facility repaid	(4,312)	(304)
Net cash outflow from financing	(4,312)	(304)
Increase/(decrease) in cash	3,941	(6,898)
Reconciliation of net cash flow to movement in net debt
Increase/(decrease) in cash in the year	3,941	(6,898)
Revolving advance facility repaid	4,312	304
Change in net debt resulting from cash flows	8,253	(6,594)
Currency (losses)/ gains	(310)	209
Increase in 6.25 per cent Bonds 2031 liability	(26)	(27)
Movement in net debt in the period	7,917	(6,412)
Opening net debt	(79,871)	(73,459)
Closing net debt	(71,954)	(79,871)

Principal Risks and Risk Management

The Company's assets consist mainly of listed securities and its principal risks are therefore market-related. The Company is also exposed to currency risk in respect of overseas markets in which it invests. More detailed explanations of these risks and the way in which they are managed are contained in note 2.

Other risks faced by the Company include the following:

·    External - events such as terrorism, protectionism, inflation or deflation, economic shocks and recessions, regulatory changes and movements in interest rates and exchange rates could affect share prices in particular markets.

·    Investment and strategic - incorrect strategy, asset allocation, stock selection and the use of gearing could all lead to poor returns for shareholders.

·    Regulatory - breach of regulatory rules could lead to suspension of the Company's Stock Exchange listing, financial penalties, or a qualified audit report.  Loss of investment trust status could lead to the Company being subject to tax on capital gains.

·    Operational - failure of the Managers' accounting systems or disruption to the Managers' business, or that of third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders' confidence.

·    Financial - inadequate controls by the Managers or third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations. Breaching bond and loan covenants or being unable to replace maturing borrowing facilities could lead to a loss of shareholders' confidence and financial loss for shareholders.

The Board seeks to mitigate and manage these risks through continual review, policy setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Company's investment portfolio. Investment risk is spread through holding a wide range of securities in different countries and industrial sectors. The Managers make use of third party risk systems to monitor investment risk and the Board receives quarterly risk reports. The Board applies the principles detailed in the internal control guidance issued by the Financial Reporting Council.

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge, in respect of the Annual Report for the year ended 30 September 2011, of which this statement of results is an extract:

·      The financial statements have been prepared in accordance with applicable UK Accounting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      The Annual Report includes a fair review of the important events that have occurred during the financial year and their impact on the financial statements;

·      The Annual Report includes a description of the Company's principal risks and uncertainties; and

·      The Annual Report includes details of related party transactions that have taken place during the financial year.

On behalf of the Board

Lynn Ruddick

Director

Notes

1.         The financial statements have been prepared under UK Generally Accepted Accounting Practice ('UK GAAP') and in accordance with guidelines set out in the Statement of Recommended Practice ('SORP') for investment trust companies and venture capital trusts, issued in January 2009 by The Association of Investment Companies, except as disclosed in the following paragraph.

            Expenses which are allocated to capital are available to reduce the Company's liability to corporation tax.  The SORP recommends that the benefit of that tax relief should be allocated to capital and a corresponding charge made to revenue.  This is known as the 'marginal method' of allocating tax relief between capital and revenue.  The Company does not adopt the marginal method for two reasons.  Firstly, the Company has only one class of share and any allocation of tax relief between capital and revenue would have no impact on shareholders' funds.  Secondly, the significant unutilised management expenses and interest carried forward make it unlikely that the Company will be liable to corporation tax in the foreseeable future.  Had this allocation been made, the charge to revenue and corresponding credit to capital for the year ended 30 September 2011 would have been £541,000 (2010: £348,000).

2.         Financial instruments

The Company's financial instruments comprise equity and fixed interest investments, foreign currency exchange contracts, cash balances, bonds, a bank loan and debtors and creditors that arise directly from its operations. As an investment trust the Company holds a portfolio of financial assets in pursuit of its investment objective. The Company makes use of borrowings to achieve improved performance in rising markets. The risk of borrowings may be reduced by raising the level of cash balances held.  The Company also has the ability to enter into derivative transactions in the form of financial currency contracts and futures and options, subject to Board approval, for the purpose of managing currency and market risk arising from the Company's portfolio, and enhancing income. 

Listed fixed asset investments held are valued at fair value. For listed securities this is either bid price or the last traded price depending on the convention of the exchange on which the investment is listed.  Unquoted investments are valued by the Directors on the basis of all information available to them at the time of valuation.  The fair value of the Company's financial assets and liabilities is represented by their carrying value in the Balance Sheet.

The main risks that the Company faces arising from its financial instruments are:

(i)         market price risk, being the risk that the value of investment holdings will fluctuate as a result of changes in market prices caused by factors other than interest rate or currency rate movements;

            (ii)         interest rate risk, being the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates;

(iii)        credit risk, being the risk that a counterparty to a financial instrument will fail to       discharge an obligation or commitment that it has entered into with the Company;

(iv)        liquidity risk, being the risk that the Company may not be able to liquidate its investments quickly enough to meet its ongoing financial commitments; and

(v)         foreign currency risk, being the risk that the value of investment holdings, investment purchases, investment sales and income will fluctuate because of movements in currency rates.

Market price risk

The management of market price risk is part of the fund management process and is typical of equity -investment. The portfolio is managed with an awareness of the effects of adverse price movements through detailed and continuing analysis with an objective of maximising overall returns to shareholders. Derivatives may be used from time to time to hedge - specific market risk, gain exposure to a specific market or enhance income.

Interest rate risk

(a)  Floating rate

Interest payments are received on cash balances by reference to the bank base rate for the relevant currency for each deposit.

(b)  Fixed rate

The Company holds fixed interest investments and has fixed interest liabilities.

The bonds are denominated in sterling. In the event that the Company decides to repay the bonds before their maturity date the terms of issue may result in a penalty for early repayment.

Credit risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The carrying amounts of financial assets best represents the maximum credit risk exposure at the balance sheet date.

Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the diversity of counterparties used.

All the assets of the Company which are traded on a recognised exchange are held by JPMorgan Chase Bank, the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed or limited. The Board monitors the Company's risk by reviewing the custodian's internal control reports.  The Managers have a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis.

The credit risk on liquid funds and derivative financial instruments is controlled through the Managers' process for approving counterparties, which incorporates both a quantitative and qualitative review process in order to achieve a substantial overview of the credit worthiness of all counterparties. Bankruptcy or insolvency of such counterparties may cause the Company's ability to access cash placed on deposit to be delayed, limited or lost. 

Liquidity risk

The Company maintains sufficient investments in cash and readily realisable securities to pay accounts payable and expenses as they fall due. Short term flexibility is achieved, where necessary, through the use of overdraft facilities.  The Company's liquidity risk is managed on an ongoing basis by the Managers.

Foreign currency risk

The Company invests in overseas securities and holds foreign currency cash balances which give rise to currency risks. In the year to 30 September 2011, the Company entered into US Dollar and Euro foreign currency contracts with a view to partially hedging these currency risks

3.         Return per Ordinary Share is based on a weighted average of 291,112,282 (2010 same) Ordinary Shares in issue during the year. 

4.         The proposed final dividend of 1.786p per Ordinary Share will be paid on 6 January 2012 to  shareholders on the register at close of business on 9 December 2011.

            The last date for receipt of mandate instructions for those shareholders who wish to join the Dividend Reinvestment Plan is 16 December 2011.

5.         The Company had 291,112,282 (2010: same) Ordinary Shares in issue as at 30 September 2011.

6.         The Company's geographic exposure as a percentage of ordinary shareholders' funds at 30 September 2011 was as follows (comparative figures are for 30 September 2010).

	2011	2010
UK	79.3	76.2
Global Developed (ex UK)	17.8	17.3
Emerging Markets	7.8	12.7
Corporate Bonds	15.6	14.8
Gearing	(20.5)	(21.0)
Total	100.0	100.0

7.         This announcement is not the Company's statutory accounts.  The statutory accounts for the year ended 30 September 2010 have been delivered to the Registrar of Companies and have received an audit report which was unqualified and did not contain any emphasis of matter.

The Annual Report for the year ended 30 September 2011 will be posted to shareholders and is available for inspection at 80 George Street, Edinburgh EH2 3BU, the registered office of the Company, and on the Company's website, www.british-assets.co.uk.

Enquiries:         

Phil Doel

Investment Manager

F&C Asset Management plc - 0207 628 8000

 

END

 

 

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