Final Results - Annual Financ

RNS Number : 0594I

Standard Life Equity Income Tst PLC

13 November 2008

 



STANDARD LIFE EQUITY INCOME TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 SEPTEMBER 2008

1.    CHAIRMAN'S STATEMENT

Income and Dividends

Revenue return per ordinary share was 12.61 pence in respect of the financial year ended 30 September 2008, representing an increase of 5.2% compared with the 11.99 pence in the previous year. Your Board is now recommending an increase of 5.4% in the final dividend per ordinary share to 7.85 pence, which would bring total dividends for the year to 11.00 pence per ordinary share. Total dividends therefore have increased by 5.3% for the year ended 30 September 2008 compared with an increase in the Retail Prices Index of 5.0%. The VAT refund (detailed below) allocated to the revenue account contributed 0.16 pence per share. The dividend cover (revenue reserves divided by the cost of the total dividends) has increased from 1.2 to 1.3. As at 30 September 2008 revenue reserves amounted to £5.47m having been increased over the last year by £761,000.

VAT on Investment Management Fees

As reported at the interim stage, a VAT repayment of £204,000 was received in May 2008, being reimbursement by Standard Life Investments Ltd in relation to the amount paid in the period under their management. Repayments from HMRC in respect of earlier periods since the origin of your Company in 1991 are under negotiation and the Board has been advised by the former investment managers that further repayments could be received during 2009. Any repayment of VAT will be allocated to the revenue account consistent with the Company's accounting policy at the time of the original payment of the VAT.

Performance

For the year ended 30 September 2008, your Company's net asset value decreased by 24.8% compared with falls of 25.1% for the FTSE All-Share Index and 26.2% for the FTSE 350 High Yield Index. The last financial year has proved to be a very difficult period for both the stock-market generally and your Company's asset value in particular. Despite being geared for the majority of the year, the Company's net asset value marginally outperformed the FTSE All-Share Index although this is little consolation when the share price has been savagely cut by the market.

Of the 22 investment trusts included in the Association of Investment Companies' UK Growth & Income Sector, the Company ranks fifth based upon a net asset value total return of -23% for the year ended 30 September 2008 in the context of a range of total returns across the Sector from -35% to -20% (Source: AIC).

The Company's share price was affected by the decline in stock markets and fell by 22.5% over the financial year. The discount to net asset value narrowed during the last financial year from 10.9% at the start of the year and ended at a level of 8.2% (using statutory net asset values).

The Manager's Report provides further information on the UK economy and equity market as well as a review of the portfolio of investments and activity during the year.

Gearing

As explained at the interim stage your Company maintained a gearing level of approximately 10% throughout the first six months and this made a negative contribution to performance in a falling market. Gearing was reduced and eventually replaced by a small cash position during the second half as the Manager became more cautious about the outlook for the UK economy and the increased risk of recession. At the year end, the Company held a net cash position of £3.7m representing 3.7% of net assets. This compares to the parameters set for the Manager by the Board where the Company operates normally in a range between a cash position of 5% of net assets and a maximum gearing level of 15% of net assets.

Share Buy backs

The Company did not buy back any shares in the period. The Board continues to review the level of the Company's discount on an ongoing basis. The renewal of the Company's powers to buy back shares into treasury will be sought at the forthcoming Annual General Meeting. 

Board

In July, David Morrison indicated that he wanted to stand down. The Board valued David's contributions and reluctantly accepted his resignation. 

Outlook

Recent events in the banking sector have led to a once in a generation correction across all markets. This has been especially painful for shareholders in banks both in capital terms and also in the loss of dividends for the next few years.

The process of reducing leverage and distortion in the financial system is likely to be long drawn out but is now being reflected in global markets which are experiencing unprecedented volatility. However the stock market now appears to be taking some account of an economic recession in the UK. The yield on the FTSE All-Share Index, adjusted for the expected loss of dividends from banks, is at least in line with the yield on 10 year UK gilts. Historically this has represented a turning point.

The Company had moved to a small cash position by the end of September ahead of the material falls in stock markets in October. This leaves the Manager well positioned to take account of any buying opportunities which may arise.

Charles Wood OBE

Chairman

12 November 2008

2.     MANAGER'S REPORT

The twelve months to the end of September was a difficult period for investors, with the UK equity market falling by over 25%. The worsening credit crisis started to feed through to the UK economy, causing significant market weakness and elevated levels of volatility. As the situation deteriorated, defensive sectors of the UK market proved more resilient.

The credit crisis was a key theme throughout the period, with concerns intensifying as banks reported massive asset writedowns and sought to raise capital. Events eventually came to a head in September. The failure of several institutions in the US including Lehman Brothers, AIG and Washington Mutual led UK bank shares sharply lower and brought about the rescue sale of HBOS to Lloyds TSB, as well as the nationalisation of Bradford & Bingley. Shortly after the period end, the UK government intervened decisively, introducing a £50 billion bank bail-out plan aimed at stabilising the financial system.

The wider impact of the credit crisis also started to be felt in the UK economy. Frozen credit markets meant that mortgage lending collapsed, leading to reduced activity and lower prices in the housing market. Consumer confidence deteriorated and weaker retail sales hurt share prices. Investors preferred stocks where revenues were deemed more defensive, such as supermarkets, food producers and pharmaceuticals, and these stocks outperformed more cyclical sectors. 

Meanwhile, soaring commodity prices boosted shares in energy and mining companies up to the end of June. A broad-based rise in oil, gas, metals and soft commodities was positive for shares in these sectors. However, the growing realisation that the global economy was slowing significantly led to an abrupt turnaround in commodity prices from July onwards and investors took profits aggressively in these stocks.

Performance

For the year to 30 September 2008, the Trust's net asset value fell by 24.8%, outperforming the FTSE All-Share Index which fell by 25.1% (source: Thomson Datastream). Over the reporting period, the share price fell from 311p to 241p, a decrease of 22.5%, as the discount to net asset value narrowed from 10.9% to 8.2%. The Trust's investment performance compares favorably to others in the UK Growth and Income sector ranking 5th out of 22 for the year (source: AIC).

The Trust's overweight exposure to resource stocks contributed positively to performance over the year. In the mining sector, we held Rio Tinto, Lonmin and Kazakhmys for part of the year before selling out of these positions, taking profits ahead of the sector selling off. In the oil & gas sector, our overweight position in Tullow Oil was beneficial as the oil price soared and the company discovered significant new oil fields in Uganda. Meanwhile, holding nuclear power generator British Energy was positive after the company agreed to a bid from French power group EDF. Utility stocks also added value for the Trust over the year as companies were able to pass on higher prices to consumers. In particular, the Trust's holdings in water and waste management companies United Utilities, Severn Trent, Kelda and Pennon all boosted performance.

The credit crisis triggered heavy selling in the banking sector and several of the Trust's holdings were affected by this. We held overweight positions in Royal Bank of Scotland and Lloyds TSB, both of which fell by more than 50% over the year. Meanwhile, we were underweight in HSBC and Standard Chartered, which proved to be more resilient. Holding consumer finance stock Provident Financial was positive, however, while the Trust's insurance holdings RSA and Hiscox benefited from investors' expectations for higher premiums.

The best performing areas of the market were defensive stocks, whose revenues are deemed more stable in an economic slowdown. This theme delivered mixed results for the Trust. On the downside, performance was hindered by not holding food producer Unilever, supermarket group Tesco and consumer goods company Reckitt Benckiser. However, the Trust did benefit from holding Imperial Tobacco, as well as brewers Greene King and Scottish & Newcastle, recently bought out by Carlsberg and Heineken.

Activity

The main activity over the year was focused on purchasing stocks with secure earnings and dividend streams. In particular we added to BATS, a company with an above average dividend yield which should be able to grow its dividend ahead of the market. In addition there have been earnings upgrades from cost savings and a firmer industry pricing environment. We also bought AstraZeneca, given its attractive valuation and robust earnings outlook. We added to Cable & Wireless given the earnings upgrade potential from the acquisition of THUS.

Within the resource sectors, takeover interest inflated the share price of Rio Tinto to elevated levels so we took profits and sold out of the stock. We replaced it with BHP Billiton, whose shares had been weak due to its competitive bid for Rio Tinto. Later in the year, as commodity prices continued to soar, we felt valuations were becoming stretched so we took profits in several of our holdings. These included Tullow Oil, Vedanta Resources, Kazakhmys and Anglo American.

We bought retailer WH Smith after an encouraging meeting with management. At the same time, we were conscious of concerns over consumer spending, so we reduced our holding in Woolworths. These fears were realised as 2008 progressed and we sold out of Marks & Spencer and Home Retail Group in the first quarter of the calendar year.

Outlook

The economic outlook in the UK continues to worsen and, against this background, we currently prefer stocks with robust balance sheets and a relatively defensive earnings outlook. Nevertheless, the widespread sell-off has meant that fundamentally sound companies have fallen in value along with the wider market and do now offer some compelling opportunities.

Karen Robertson

Standard Life Investments Limited

12 November 2008

3.    RESULTS & DIVIDENDS

Financial Highlights
At 30 September 2008
Total Return
Net asset value per ordinary share	-23.0%
FTSE All-Share Index	-23.6%
At 30 September	2008	2007	% change
Capital Return
Net asset value per ordinary share (including net revenue)	262.5p	348.9p	-24.8
Net asset value per ordinary share (excluding net revenue)	253.1p	339.7p	-25.5
Ordinary share price (mid market)	241.0p	311.0p	-22.5
Discount of share price to net asset value (including net revenue)	8.2%	10.9%	n/a
Discount of share price to net asset value (excluding net revenue)	4.6%	8.5%	n/a
FTSE All-Share Index	2,483.7	3,316.9	-25.1
At 30 September	2008	2007	% change
Total assets	£99.9m	£145.7m	-31.4
Total shareholders' funds	£99.6m	£132.3m	-24.7
Total expense ratio (AIC method)	0.8%	1.1%	n/a
Revenue return per ordinary share	12.61p	11.99p	5.2
Dividend yield	4.8%	3.4%	n/a
Total dividends for the year (net)	11.00p	10.45p	5.3
Ordinary shares in issue (with voting rights)	37,930,579	37,930,579	-

4.     BUSINESS REVIEW

The Directors present their Annual Report and the audited Financial Statements of the Company for the year ended 30 September 2008.

Incorporation and Listing

The Company was incorporated as a public limited company on 24 September 1991 and its ordinary shares were listed on the London Stock Exchange on 14 November 1991.

Business Review

In conjunction with the rest of the Annual Report and Financial Statements, in particular, the Chairman's Statement and Manager's Report, this Business Review is intended to provide information about the Company's business and its results for the year.

Status and Principal Activity

The Company is an investment company within the meaning of Section 833 of the Companies Act 2006 and carries on business as an investment trust. The Company is a member of the Association of Investment Companies. The Company has been approved by HM Revenue & Customs as an investment trust for the purposes of Section 842 of the Income and Corporation Taxes Act 1988 for the year ended 30 September 2007. The Directors are of the opinion, under advice, that the Company has conducted its affairs for the year ended 30 September 2008 so as to be able to continue to obtain approval as an investment trust under Section 842 of the Income and Corporation Taxes Act 1988 for that year. The Company intends to manage its affairs so as to be a qualifying investment for inclusion in the stocks and shares component of an Individual Savings Account and it is the Directors' intention that the Company should continue to be a qualifying investment.

Investment Objective

The Company's investment objective is to provide shareholders with an above average income from their equity investment while also providing real growth in capital and income.

Investment Policy

The Directors intend to achieve the investment objective by investing in a diversified portfolio consisting mainly of quoted UK equities which will normally comprise between 50 and 70 individual equity holdings.

In order to reduce risk in the Trust without compromising flexibility:

• no holding within the portfolio will exceed 10 per cent of aggregate net assets; and

• the top ten holdings within the portfolio will not exceed 50 per cent of net assets. 

Convertible preference shares, convertible loan stocks, gilts and corporate bonds may make up the balance of the portfolio.

The Directors have set parameters of between 95 per cent. and 115 per cent. for the level of gearing that can be employed. The maximum level of borrowings will therefore represent 15 per cent. of net assets and the maximum cash position will be equivalent to 5 per cent. of net assets. Directors have delegated responsibility to the Manager for the operation of the gearing level within the above parameters.

The Manager's investment process combines asset allocation, stock selection, portfolio construction, risk management and dealing. The investment process is research-intensive and is built around the Manager's distinctive focus on change which recognises that different factors drive individual stocks and markets at different times in the cycle. This flexible but disciplined investment process ensures that the Manager has the opportunity to perform in different market conditions.

Performance

In the year ended 30 September 2008, the Company's net asset value (capital, including income) fell by 24.8% which was considered satisfactory by the Directors in the context of the 25.1% decline in the FTSE All-Share Index.

Results and Dividends

Details of the Company's results are shown in the Financial Highlights The total revenue return attributable to ordinary shareholders for the year ended 30 September 2008 amounted to £4,782,000 (2007 - £4,606,000). An interim dividend of 3.15 pence per share was paid to eligible shareholders on 27 June 2008 (2007 - 3.00 pence) and the Directors are now recommending to shareholders that a final dividend per share of 7.85 pence (2007 - 7.45 pence) be paid on 19 December 2008 to shareholders on the share register as at the close of business on 21 November 2008. The ex-dividend date is 19 November 2008. Details of the dividends paid during the year ended 30 September 2008 may be found in Note 7 to the Financial Statements.

An outline of the Company's performance, market background, investment activity and portfolio strategy during the year under review, as well as the Manager's investment outlook, is provided in the Manager's Report.

Monitoring Performance - Key Performance Indicators

The key performance indicators (KPIs) shown below have been identified by the Directors for determining the progress of the Company and a record of these measures, with comparatives, is disclosed in the Financial Highlights:

• Net asset value (Capital return) relative to the Company's benchmark (FTSE All-Share Index)

• Share price (Capital return)

• Discount to net asset value

At each Board meeting, the Directors consider a number of performance measures, including the KPIs, to assess the Company's success in achieving its investment objective.

Principal Risks and Uncertainties

The Directors regularly review the principal risks which they have identified and the Directors have set out delegated controls designed to manage those risks. Key risks within investment and strategy, for example, inappropriate stock selection or gearing, are managed through investment policy, guidelines and restrictions and by the process of oversight at each Board meeting.

The principal risks and uncertainties which give rise to specific risks which are associated with the Company, as identified by the Directors, are as follows:

•     Objective and Strategy risk: the Company and its investment objective become unattractive to investors. The Directors review regularly the Company's investment objective and investment policy in the light of investor sentiment and monitor closely whether the Company should continue in its present form. The Directors, through the Manager, hold regular discussions with major shareholders. A resolution to continue the Company in its present form is put to shareholders at every fifth Annual General Meeting and was last passed by shareholders at the Annual General Meeting held on 20 December 2006.

•     Shareholder Profile risk: activist shareholders, whose interests are not consistent with the long-term objectives of the Company, may be attracted on to the shareholder register. The Manager provides a shareholder analysis to the Directors at every meeting for their consideration of any action required in addition to regular reporting by the Company's stockbroker.

•     Resource risk: in common with most investment trusts, the Company has no employees. The Company therefore relies upon services provided by third parties, including the Manager in particular, to whom responsibility for the management of the Company has been delegated under an investment management agreement. The Directors review the performance of the Manager on a regular basis.

•     Investment and market risk: The Company is exposed to the effect of variations in share prices due to the nature of its business. A fall in the value of its investment portfolio will have an adverse effect on the value of shareholders' funds. Uncertainty over market prices and the Manager's ability to outperform the Company's benchmark and peer group, with due attention given to the preservation of shareholders' funds, are prerequisites to the continued existence of the Company.

•     Capital structure and gearing risk: The Company's capital structure at 30 September 2008 consisted of equity share capital comprising ordinary shares and debt in the form of a revolving credit facility with Lloyds TSB Bank plc for up to £20m. In rising markets, the effect of the borrowings would be beneficial but in falling markets the gearing effect would adversely affect returns to shareholders. The Manager is able to increase or decrease the gearing level by repaying or drawing down periodically from the bank facility subject to Directors' overall restrictions on gearing. The bank facility is subject to regular monitoring by Lloyds TSB Bank plc and covenants are supplied monthly to the bank by the Company.

•     Income and dividend risk: In view of the Company's investment objective, to provide for shareholders an above average income from their equity investment, the Manager is required to strike a balance more in favour of income return over capital growth. The Directors have adopted an accounting policy which permits 70 per cent. of the aggregate of the finance costs and investment management fees to be charged to the capital account within the Income Statement as opposed to the revenue account. This policy is reviewed regularly by the Directors in light of the expected long term split of returns between income and capital. The Directors receive frequent updates as to the progress made by the Manager towards the achievement of the income requirements of the Company's investment objective.

•     Regulatory risk: The Company operates in a complex regulatory environment and faces a number of regulatory risks. A breach of Section 842 of the Income and Corporation Taxes Act 1988 would result in the Company being subject to capital gains tax on any portfolio investment gains. Breaches of other regulations, including the UKLA Listing Rules or the UKLA Disclosure and Transparency Rules, could lead to a number of detrimental outcomes and reputational damage. Breaches of controls by service providers such as the Manager and Company Secretaries could also lead to reputational damage or loss. 

The Directors have adopted a robust framework of controls which is designed to monitor the principal risks facing the Company and to provide a monitoring system to enable the Directors to mitigate these risks as far as possible. A full analysis of the Directors' system of internal controls is set out in the Statement of Corporate Governance in the Annual Report.

•     Financial instruments and derivatives risk: further information relating to these risks may be found in Note 17.

5.    STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and the 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 they have elected to prepare the financial statements in accordance with UK Accounting Standards. The financial statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing these financial statements, the Directors are required to:

- select suitable accounting policies and then apply them consistently;

- make judgments and estimates that are reasonable and prudent; and

- state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements.

The Directors are responsible for keeping proper accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Act 1985. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's webpage hosted by the Manager. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors' Responsibility Statement

Each Director confirms, to the best of their knowledge, that:

- the Financial Statements have been prepared in accordance with UK Accounting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss as applicable; and that

- the Directors' Report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that the Company faces.

For and on behalf of the Board of Standard Life Equity Income Trust PLC

Charles Wood, OBE

Chairman

12 November 2008

  INCOME STATEMENT 

for the year ended 30 September 2008 (audited) 

		2008			2007
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Net (losses)/gains on investments at fair value	9	-	(32,659)	(32,659)	-	9,519	9,519
Income	2	5,479	-	5,479	5,404	-	5,404
Investment management fee	3	(174)	(404)	(578)	(336)	(783)	(1,119)
Administrative expenses	4	(311)	-	(311)	(280)	-	(280)
		________	________	________	________	________	________
NET RETURN BEFORE FINANCE COSTS AND TAXATION		4,994	(33,063)	(28,069)	4,788	8,736	13,524
Finance costs	5	(199)	(458)	(657)	(176)	(390)	(566)
		________	________	________	________	________	________
RETURN ON ORDINARY ACTIVITIES BEFORE TAXATION		4,795	(33,521)	(28,726)	4,612	8,346	12,958
Taxation	6	(13)	-	(13)	(6)	-	(6)
		________	________	________	________	________	________
RETURN ON ORDINARY ACTIVITIES AFTER TAXATION		4,782	(33,521)	(28,739)	4,606	8,346	12,952
		________	________	________	________	________	________
RETURN PER ORDINARY SHARE	8	12.61p	(88.38p)	(75.77p)	11.99p	21.73p	33.72p
		________	________	________	________	________	________

The total column of this statement represents the profit and loss account of the Company.

A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses are recognised in the Income Statement.

No operations were acquired or discontinued in the year.

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

The accompanying notes are an integral part of the financial statements.

  BALANCE SHEET

as at 30 September 2008 (audited) 

		2008		2007
	Notes	£'000	£'000	£'000	£'000
NON-CURRENT ASSETS
Investments at fair value through profit or loss	9		95,255		141,018
CURRENT ASSETS
Debtors	10	931		882
AAA money market funds		3,635		3,713
Cash and short term deposits		50		50
		________		________
			4,616		4,645
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR	11
Bank Loan		-		(13,000)
Other Creditors		(298)		(330)
		________		________
			(298)		(13,330)
			________		________
NET CURRENT LIABILITIES			4,318		(8,685)
			________		________
NET ASSETS			99,573		132,333
			________		________
CAPITAL AND RESERVES
Called-up share capital	12		9,935		9,935
Share premium account			20,373		20,373
Capital redemption reserve			12,615		12,615
Capital reserve	13		51,178		84,699
Revenue reserve			5,472		4,711
			________		________
EQUITY SHAREHOLDERS' FUNDS			99,573		132,333
			________		________
NET ASSET VALUE PER ORDINARY SHARE	14		262.51p		348.88p
			________		________

  Reconciliation of Movements in Shareholders' Funds

for the year ended 30 September 2008		Share	Capital
	Share	premium	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 September 2007	9,935	20,373	12,615	84,699	4,711	132,333
Return on ordinary activities after taxation	-	-	-	(33,521)	4,782	(28,739)
Dividends paid (see note 7)	-	-	-	-	(4,021)	(4,021)
Purchase of own shares	-	-	-	-	-	-
	________	________	________	________	________	________
BALANCE AT 30 SEPTEMBER 2008	9,935	20,373	12,615	51,178	5,472	99,573
	________	________	________	________	________	________
for the year ended 30 September 2007
		Share	Capital
	Share	premium	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 September 2006	9,935	20,373	12,615	82,279	3,969	129,171
Return on ordinary activities after taxation	-	-	-	8,346	4,606	12,952
Dividends paid (see note 7)	-	-	-	-	(3,864)	(3,864)
Purchase of own shares	-	-	-	(5,926)	-	(5,926)
	________	________	________	________	________	________
BALANCE AT 30 SEPTEMBER 2007	9,935	20,373	12,615	84,699	4,711	132,333
	________	________	________	________	________	________

The accompanying notes are an integral part of the financial statements.

  CASHFLOW STATEMENT

Year ended 30 September 2008 (audited)

		2008		2007
	Notes	£'000	£'000	£'000	£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES	15		4,980		3,862
NET CASH OUTFLOW FROM SERVICING OF FINANCE			(795)		(485)
FINANCIAL INVESTMENT
Purchase of investments		(45,067)		(70,094)
Sales of investments		57,825		76,875
		________		________
NET CASH INFLOW FROM FINANCIAL INVESTMENT			12,758		6,781
EQUITY DIVIDENDS PAID			(4,021)		(3,864)
			________		________
			12,922		6,294
MANAGEMENT OF LIQUID RESOURCES
Purchase of AAA money market funds		(44,281)		(63,476)
Sale of AAA money market funds		44,359		59,763
		________		________
NET CASH INFLOW/(OUTFLOW) FROM MANAGEMENT OF LIQUID RESOURCES			78		(3,713)
			________		________
NET CASH INFLOW BEFORE FINANCING			13,000		2,581
FINANCING
Purchase of own shares		-		(5,926)
(Repayment)/drawdown of loan		(13,000)		2,500
		________		________
NET CASH OUTFLOW FROM FINANCING			(13,000)		(3,426)
			________		________
DECREASE IN CASH			-		(845)
			________		________
RECONCILIATION OF NET CASH FLOW TO MOVEMENTS IN NET DEBT
Decrease in cash as above		-		(845)
Net change in liquid resources		(78)		3,713
Repayment/(drawdown) of loan		13,000		(2,500)
		________		________
MOVEMENT IN NET DEBT IN YEAR			12,922		368
Opening net debt			(9,237)		(9,605)
			________		________
CLOSING NET FUNDS/(DEBT)			3,685		(9,237)
			________		________

The accompanying notes are an integral part of the financial statements.

  NOTES TO FINANCIAL STATEMENTS:

Notes to the Financial Statements

For the year ended 30 September 2008

1.	Accounting policies
	(a)	Basis of accounting
		The financial statements have been prepared on the historical cost basis, except for the measurement at fair value of investments, in accordance with applicable UK Accounting Standards and with the Statement of Recommended Practice for 'Financial Statements of Investment Trust Companies' (issued January 2003 and revised in December 2005). They have also been prepared on the assumption that approval as an investment trust will continue to be granted. The financial statements and the net asset value per share figures have been prepared in accordance with UK Generally Accepted Accounting Practice (UK GAAP).  During the year the Company adopted FRS 29 'Financial Instruments: Disclosures'. This standard primarily concerns the disclosure of financial instruments and risks.
	(b)	Valuation of fixed asset investments The Company's business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided internally on that basis to the Company's Board of Directors. Accordingly, upon initial recognition the Company designates the investments 'at fair value through profit or loss'. They are included initially at fair value, which is taken to be their cost (excluding expenses incidental to the acquisition which are written off in the Income Statement, and allocated to 'capital' at the time of acquisition). Subsequent to initial recognition, investments are valued at fair value through profit or loss. For listed investments, this is deemed to be bid market prices or closing prices for SETS stocks sourced from the London Stock Exchange. SETS is the London Stock Exchange electronic trading service covering most of the market including all FTSE 100 constituents and most liquid FTSE 250 along with some other securities.  Gains and losses arising from changes in fair value are included in net profit or loss for the period as a capital item in the Income Statement and are ultimately recognised in the capital reserve.
	(c)	AAA money market funds The AAA money market funds are used by the Company to provide additional short term liquidity. As they are not listed on a recognised exchange and due to their short term nature, they are recognised in the financial statements as a current asset and are included at fair value.
	(d)	Income Income from equity investments (other than special dividends), including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend. Special dividends are credited to revenue or capital according to the circumstances. Foreign income is converted at the exchange rate applicable at the time of receipt. Interest receivable on short term deposits is accounted for on an accruals basis.
	(e)	Expenses and interest payable Expenses are accounted for on an accruals basis. Expenses are charged to the capital column of the Income Statement when they are incurred in connection with the maintenance or enhancement of the value of investments. In this respect, the investment management fee and relevant finance costs are allocated between revenue and capital in line with the Board's expectation of returns from the Company's investments over the long term in the form of revenue and capital respectively (see notes 3 and 5). Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the Income Statement.
	(f)	Dividends payable In accordance with FRS 21, dividends that are declared and approved by the Company after the Balance Sheet date are not recognised as a liability of the Company at the Balance Sheet date.
	(g)	Capital reserve Gains or losses on realisation of investments and changes in fair values of investments which are readily convertible to cash, without accepting adverse terms, are transferred to the capital reserve. The capital element of the management fee and relevant finance costs are charged to this reserve. Any associated tax relief is also credited to this reserve.
	(h)	Taxation Deferred taxation is recognised in respect of all timing differences that have originated, but not reversed, at the Balance Sheet date, where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred.  A deferred tax asset is only recognised if it is more likely than not that the asset will be recoverable. Owing to the Company's status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
	(i)	Foreign currency Overseas monetary assets and liabilities are converted into Sterling at the rate of exchange ruling at the Balance Sheet date. Transactions during the year involving foreign currencies are converted at the rate of exchange ruling at the transaction date. Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in the Income Statement.

		2008	2007
2.	Income	£'000	£'000
	Income from investments
	Franked investment income	5,021	5,139
	Unfranked investment income	275	149
	Scrip dividends	38	11
		________	________
		5,334	5,299
		________	________
	Other income
	AAA money market interest	135	86
	Bank interest	7	19
	Underwriting commission	3	-
		________	________
		145	105
		________	________
	Total income	5,479	5,404
		________	________

		2008	2007
3.	Investment management fee	£'000	£'000
	Investment management fee	782	952
	VAT repayment	(204)	167
	Charged to capital reserve	(404)	(783)
		________	________
		174	336
		________	________
	The Company has an agreement with Standard Life (Corporate Funds) Limited for the provision of management services. The contract is terminable by either party on not less than six months notice. The fee is based on 0.65% of total assets, payable quarterly in arrears and is chargeable 30% to revenue and 70% to capital (see note 1(e)). The fee was subject to VAT at the appropriate rate for the year ended 30 September 2007. On 5 November 2007, the European Court of Justice ruled that management fees on investment trusts should be exempt from VAT. HMRC has announced its intention not to appeal against this ruling to the UK VAT Tribunal and therefore protective claims which have been made in relation to the Company will be processed in due course. The balance of these claims has not been finalised and the Company has made no further provision in these financial statements for further repayment. In the meantime a refund of approximately £204,000 of VAT has been made to the Trust by Standard Life (Corporate Funds) Limited. This repayment has been allocated 30% to revenue and 70% to capital in line with the accounting policy of the Company for the periods in which the VAT was charged.

		2008	2007
4.	Administrative expenses	£'000	£'000
	Directors' fees	85	88
	Fees payable to the Company's Auditor (excluding VAT):
	- for the audit of the annual financial statements	18	15
	- other services pursuant to legislation:
	- regulatory reporting	-	1
	Professional fees	58	43
	Other expenses	150	133
		________	________
		311	280
		________	________
	With the exception of fees payable to the Company's Auditor, irrecoverable VAT has been included under the relevant expense line above. Irrecoverable VAT on fees payable to the Company's Auditor is included within other expenses.

		2008	2007
5.	Interest payable and similar charges	£'000	£'000
	On bank loans and overdrafts:
	Charged to revenue reserve	199	176
	Charged to capital reserve	458	390
		________	________
		657	566
		________	________
	Finance costs are chargeable 30% to revenue and 70% to capital (see note 1(e)).

		2008	2007
6.	Taxation	£'000	£'000
	(a)    Analysis of charge for the year
	Overseas withholding tax	13	6
		________	________
	(b)    Factors affecting current tax charge for the year The corporation tax rate was 30% until 31 March 2008 and 28% from 1 April 2008 giving an effective rate of 29%. The tax assessed for the year is lower than that resulting from applying the standard rate of corporation tax in the UK. The differences are explained below:
	Revenue on ordinary activities before taxation	4,795	4,612
		________	________
	Revenue on ordinary activities at 29% (2007 - 30%)	1,391	1,384
	Effects of:
	Non-taxable income	(1,496)	(1,545)
	Excess management expenses and loan relationship debit expenses	105	161
	Overseas withholding tax	13	8
	Prior year adjustment	-	(2)
		________	________
	Current revenue tax charge for the year	13	6
		________	________
	(c)     Provision for deferred taxation At 30 September 2008, the Company had unutilised management expenses and loan relationship losses of £10,916,000 (2007-£9,549,000). No deferred tax asset has been recognised on the unutilised management expenses and loan relationship losses as it is unlikely there will be suitable taxable profits from which the future reversal of the deferred tax asset could be deducted.

		2008	2007
7.	Dividends on ordinary shares	£'000	£'000
	Amounts recognised as distributions to equity holders in the year:
	Final dividend for 2007 of 7.45p per share (2006 - 6.90p)	2,826	2,725
	Interim dividend for 2008 of 3.15p per share (2007 - 3.00p)	1,195	1,139
		________	________
		4,021	3,864
		________	________
	The proposed final dividend for 2008 is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements. We set out below the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Section 842 of the Income and Corporation Taxes Act 1988 are considered. The revenue available for distribution by way of dividend for the year is £4,782,000 (2007 - £4,606,000).
		2008	2007
		£'000	£'000
	Interim dividend for 2008 of 3.15p per share (2007 - 3.00p)	1,195	1,139
	Proposed final dividend for 2008 of 7.85p per share  (2007 - 7.45p)	2,978	2,826
		________	________
		4,173	3,965
		________	________

		2008		2007
8.	Return per ordinary share	£'000	p	£'000	p
	The returns per Ordinary share have been based on the following figures:
	Revenue return	4,782	12.61	4,606	11.99
	Capital return	(33,521)	(88.38)	8,346	21.73
		________	________	________	________
	Total return	(28,739)	(75.77)	12,952	33.72
		________	________	________	________
	Weighted average number of ordinary shares in issue*		37,930,579		38,414,493
			___________		___________
	* Calculated excluding shares held in treasury.

			2008	2007
9.	Investments		£'000	£'000
	Fair value through profit or loss
	Opening book cost		125,077	121,028
	Opening appreciation on investments held		15,941	17,319
			________	________
	Opening valuation		141,018	138,347
	Movements in the year:
	Purchases at cost		45,108	69,481
	Sales	- proceeds	(58,212)	(76,329)
		- gains on sales	2,441	10,897
	Decrease in appreciation on investments held		(35,100)	(1,378)
			________	________
	Closing valuation		95,255	141,018
			________	________
	Closing book cost		114,414	125,077
	Closing (depreciation)/appreciation on investments held		(19,159)	15,941
			________	________
	Closing valuation		95,255	141,018
			________	________
	Net (losses)/gains on investments at fair value
	Realised gains on sales		2,441	10,897
	Decrease in unrealised appreciation		(35,100)	(1,378)
			________	________
			(32,659)	9,519
			________	________
All investments are equity shares listed on the London Stock Exchange. Transaction costs During the year, expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within losses and gains on investments in the Income Statement. The total costs were as follows:

		2008	2007
		£'000	£'000
	Purchases	268	413
	Sales	86	101
		________	________
		354	514
		________	________

		2008	2007
10.	Loans and receivables	£'000	£'000
	Amounts due from brokers	387	-
	Net dividends and interest receivable	522	861
	Other debtors	22	21
		________	________
		931	882
		________	________

		2008	2007
11.	Creditors: amounts falling due within one year	£'000	£'000
	Bank loan	-	13,000
	Amounts due to brokers	41	-
	Investment management fee payable (including VAT where applicable)	163	91
	Sundry creditors	94	239
		________	________
		298	13,330
		________	________
	As at 30 September 2008, the Company had not drawn down any of the £20 million (2007 - £20 million) loan facility arranged with Lloyds TSB. As at 30 September 2007, £13 million was drawn down at an interest rate of 6.36%.

		30 September 2008		30 September 2007
12.	Called up share capital	Number	£'000	Number	£'000
	Authorised:
	Ordinary shares of 25p each	148,000,000	37,000	148,000,000	37,000
		____________	________	___________	________
	Issued and fully paid:
	Ordinary shares of 25p each	37,930,579	9,483	37,930,579	9,483
	Treasury shares	1,807,328	452	1,807,328	452
		____________	________	____________	________
		39,737,907	9,935	39,737,907	9,935
		____________	________	___________	________
	There were no shares repurchased during the year. In 2007, 1,807,328 ordinary shares of 25p each were repurchased by the Company at a total cost, including transaction costs, of £5,926,000. All of these shares were placed in treasury. The total shares held in treasury is 1,807,328. Shares held in treasury represented 4.5% of the Company's total issued share capital at 30 September 2008.

			Investment	Total
			holding	capital
		Realised	gains	reserve
13.	Capital reserve	£'000	£'000	£'000
	Year ended 30 September 2008
	At 30 September 2007	68,758	15,941	84,699
	Movement in fair value gains	2,441	(35,100)	(32,659)
	Expenses allocated to capital	(862)	-	(862)
		________	________	________
	At 30 September 2008	70,337	(19,159)	51,178
		________	________	________
	Year ended 30 September 2007
	At 30 September 2006	64,960	17,319	82,279
	Movement in fair value gains	10,897	(1,378)	9,519
	Purchase of own shares	(5,926)	-	(5,926)
	Expenses allocated to capital	(1,173)	-	(1,173)
		________	________	________
	At 30 September 2007	68,758	15,941	84,699
		________	________	________

14.	Net asset value The net asset value per share and the net asset value attributable to the Ordinary shares at the year end calculated in accordance with the Articles of Association were as follows:
		2008	2007
	Total shareholders' funds	£99,573,000	£132,333,000
	Number of Ordinary shares in issue at year end*	37,930,579	37,930,579
	Net asset value per share	262.51p	348.88p
	* Excludes shares in issue held in treasury.

15.	Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities	2008 £'000	2007 £'000
	Net returns before finance costs and taxation	(28,069)	13,524
	Adjustments for:
	Net losses/(gains) on investments at fair value	32,659	(9,519)
	Decrease/(increase) in accrued income	339	(157)
	Decrease in other debtors	-	1
	Increase in other creditors	65	24
	Net overseas tax paid	(14)	(11)
		__________	__________
	Net cash inflow from operating activities	4,980	3,862
		__________	__________

16.    Analysis of changes in net          debt	At 30 September 2007 £’000	Cashflow £’000	At 30 September 2008 £’000
Cash at bank and in hand	50	-	50
AAA money market funds	3,713	(78)	3,635
Bank loan	(13,000)	13,000	-
	___________	___________	___________
Net (debt)/funds	(9,237)	12,922	3,685
	___________	___________	___________

17.	Financial instruments Risk Management The Company's financial instruments comprise securities and other investments, cash balances, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income. The Company also has the ability to enter into derivative transactions for the purpose of managing currency and market risks arising from the Company's activities. The main risks the Company faces from its financial instruments are (i) market price risk (comprising interest rate risk, currency risk and other price risk), (ii) liquidity risk and (iii) credit risk. The Board regularly reviews and agrees policies for managing each of these risks. The Manager's policies for managing these risks are summarised below and have been applied throughout the year.
(i)	Market price risk The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk and other price risk. Interest rate risk Interest rate movements may affect: - the fair value of the investments in fixed interest rate securities; - the level of income receivable on cash deposits; - interest payable on the Company's variable rate borrowings. The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.   It is the Company's policy to increase its exposure to equity market price risk through the judicious use of borrowings. When borrowed funds are invested in equities, the effect is to magnify the impact on shareholders' funds of changes - both positive and negative - in the value of the portfolio.
	Interest rate profile The interest rate risk profile of the portfolio of financial assets and liabilities at the Balance Sheet date was as follows:
		Weighted average period for which rate is fixed	Weighted  average  interest rate	Floating  rate £'000
	As at 30 September 2008	Years	%	£000
	Assets
	AAA Money Market funds	-	5.40	3,635
	Cash deposits	-	1.96	50
		________	________	________
	Total assets	-	5.35	3,685
		________	________	________
	Liabilities
	Bank loans	-	-	-
		________	________	________
	Total liabilities	-	-	-
		________	________	________
	As at 30 September 2007
	Assets
	AAA Money Market funds	-	6.00	3,713
	Cash deposits	-	2.81	50
		________	________	________
	Total assets	-	5.96	3,763
		________	________	________
	Liabilities
	Bank loans	0.1	6.36	13,000
		________	________	________
	Total liabilities	0.1	6.36	13,000
		________	________	________
	The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average interest rate on bank loans is based on the interest rate payable, weighted by the total value of the loans.  The floating rate assets consist of AAA Money Market Funds and cash deposits on call earning interest at prevailing market rates. All financial liabilities are measured at amortised cost. Maturity profile The Company did not hold any assets at 30 September 2008 or 30 September 2007 that had a maturity date. Interest rate sensitivity The sensitivity analyses below have been determined based on the exposure to interest rates at the Balance Sheet date and with the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates. If interest rates had been 100 basis points higher or lower and all other variables were held constant, the Company's: -          profit for the year ended 30 September 2008 would increase / decrease by £37,000 (2007 - increase / decrease by £38,000). This is mainly attributable to the Company’s exposure to interest rates on its floating rate cash balances. Other price risk Other price risks (ie changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments.
	It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular sector. The allocation of assets and the stock selection process both act to reduce market risk. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy. The investments held by the Company are listed on the London Stock Exchange. Other price risk sensitivity If market prices at the Balance Sheet date had been 10% higher or lower while all other variables remained constant, the return attributable to ordinary shareholders and equity for the year ended 30 September 2008 would have increased/decreased by £9,526,000 (2007 - increase/decrease of £14,102,000). This is based on the Company's equity portfolio held at each year end.
(ii)	Liquidity risk This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.   Liquidity risk is not considered to be significant as the Company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the use of loan and overdraft facilities (note 11).
(iii)	Credit risk This is failure of the counterparty to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss. The risk is not significant, and is managed as follows: -     where the investment manager makes an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Company of default; -     investment transactions are carried out with a large number of brokers, whose credit risk and credit-standing is reviewed periodically by the investment manager, and limits are set on the amount that may be due from any one broker; -     cash and money invested in AAA money market funds are held only with reputable banks with high quality external credit enhancements. None of the Company's financial assets are secured by collateral or other credit enhancements. Fair values of financial assets and financial liabilities The fair value of borrowings has been calculated at £13,001,000 as at 30 September 2007 compared to an accounts value in the financial statements of £13,000,000 (note 11). The fair value of each loan is determined by aggregating the expected future cash flows for that loan discounted at a rate comprising the borrower's margin plus an average of market rates applicable to loans of a similar period of time and currency. All other assets and liabilities of the Company are included in the Balance Sheet at fair value.

18.    Capital management policies and procedures

The Company's capital management objectives are:

-       to ensure that the Company will be able to continue as a going concern; and

-       to maximise income and capital return to its equity shareholder through an appropriate balance of equity capital and debt. The Board normally seeks to limit gearing to 15% of net assets. At the year end, the Company had no gearing (2007 – 9.8% of net assets).

The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the Manager's views on the market and the extent to which revenue in excess of that which is required to be distributed should be retained.

The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period.

Additional Notes to Annual Financial Report

This Annual Financial Report announcement is not the Company's statutory accounts for the year ended 30 September 2008. The statutory accounts for the year ended 30 September 2008 received an audit report which was unqualified, did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report and did not include a statement under either section 237(2) or 237(3) of the Companies Act 1985.  

The statutory accounts for the financial year ended 30 September 2008 were approved by the Directors on 12 November 2008 but will not be filed with the Registrar of Companies until after the Company's Annual General Meeting which is to be held at 11.00am on Tuesday 16 December 2008 at Andaz (formerly The Great Eastern Hotel), 40 Liverpool Street, London, EC2M 7QN.

The Annual Report will be posted to shareholders in November 2008 and additional copies will be available from the Manager (Investor Helpline - Tel. [phone]) or by download from the Company's webpage hosted by the Manager (www.standardlifeinvestments.co.uk/its).

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise and may be affected by exchange rate movements. Investors may not get back the amount they originally invested.

For Standard Life Equity Income Trust PLC

Aberdeen Asset Management PLC, Secretaries

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