Final Results

RNS Number : 5445K

British Portfolio Trust PLC

19 December 2008

 



For Immediate Release                                                                                                                 19th December 2008

BRITISH PORTFOLIO TRUST plc

RESULTS FOR THE YEAR ENDED 31ST OCTOBER 2008

The following comprises extracts from the Company's Annual Financial Report for the year ended 31st October 2008.  The full Annual Financial Report is available to be viewed on or downloaded from the Company's website at www.britishportfoliotrust.co.uk. Copies will be mailed to shareholders shortly.

Chairman's Statement

A final dividend has been declared of 3.30p per Ordinary Share, which will be payable on 3rd March 2009 to shareholders on the register at the close of business on 30th January 2009, together with a special dividend of 0.25p per Ordinary Share relating to the management fee VAT refund as described below, making a total distribution for the year ended 31st October 2008 of 5.35p per Ordinary Share, which compares with 5.00p in the previous financial year, an increase of 7%, including the special dividend.  Shareholders may elect to use their cash dividend to buy further shares in the Company, via a dividend reinvestment plan operated by Capita Registrars.

Our results were bound to be affected by the substantial falls in world markets.  The net asset value per Ordinary Share at 31st October 2008 was 112.5p compared with 201.4p at 31st October 2007, a decrease of 44%.  Over the same period the benchmark index, the FTSE All-Share Index, decreased by 37%. 

In terms of share price return, although we were in the top half of the AIC's UK Growth sector for the financial year ended 31st October, there is no doubt that 2008 was a very disappointing year.

It has been a tumultuous period in financial markets as the problems of the US financial sector have spread, first into a more global banking crisis, and then to affect the prospects for the broader global economy. In retrospect, the scale of the problems in the banking system and the resulting reduction in credit availability to the global economy was not apparent to us a year ago, and this deteriorated rapidly following the failure of Lehman Brothers, the large US investment bank.

The factors which influenced our performance are set out in greater detail in the Investment Manager's Review.

During the year under review the Company bought back 1,122,810 Ordinary Shares for cancellation and a further 1,016,080 Ordinary Shares have been purchased for cancellation since the year end.  The Company also bought back 1,936,500 Ordinary Shares to be held in treasury for reissue into the market or cancellation at a future date.   The Board intends to seek renewed authority from shareholders to buy back up to 15% of the issued share capital of the Company at its forthcoming Annual General Meeting to be held at JP Morgan Cazenove's offices on Tuesday 10th February 2009. We continue to believe that this is an important authority which is in the interests of shareholders. 

This year three directors, George Luckraft, Simon White and I are retiring, George and myself by rotation, and are offering ourselves for re-election at the Annual General Meeting. As advised last year both Oonagh McDonald and Adam Wethered are standing down in 2009. Oonagh is standing down at the Annual General Meeting and Adam is standing down on 20th April 2009. Both have served since the launch of the Company in 2001 and I would like to thank them for their contributions over the last seven years.  I am pleased to report that Nicholas Gold has agreed to join the Board and will stand for election at the forthcoming Annual General Meeting. Nicholas is both a Chartered Accountant and a solicitor and has wide experience of advising investment companies, latterly with ING Bank. Further background is set out on page 11. Simon White, as an employee of the Manager, is standing for annual re-election. 

I am pleased to report that settlement has been reached with the Manager, RCM (UK) Limited, about recovery of VAT paid in the past, following the ruling of the European Court of Justice in the VAT case brought by JP Morgan Fleming Claverhouse Trust plc in conjunction with the AIC. On 16th October 2008 £416,905 was paid to the Company in relation to VAT paid in the period since the Company's launch to 2007, when we ceased paying VAT on management fees.

On 30th October 2008 the Company's existing long term Loan Facility of £12 million with Barclays Bank PLC expired after seven years. A new 364 day Revolving Credit Facility for £6 million has been taken out with ING Bank N.V., London Branch, of which £6 million is drawn down.  These borrowings represented a gearing level of 13.8% of the Company's net assets at the year end. The Board keeps the gearing level under regular review.

The fragile state of the world's credit markets will remain the dominant influence on markets in the short run. A scarcity of credit is influencing companies' capital spending plans, as well as unnerving consumers, who are increasing their savings as job prospects become more uncertain. With unemployment set to rise and negligible growth in the world economy forecast for 2009, the outlook remains challenging. In this environment, it seems likely that company earnings expectations will be revised downwards and some dividends will be cut.   For the year ending 31st October 2009 it is quite likely, therefore, that the Company will use some of the revenue reserves built up since launch.  Although valuations on UK equities look very attractive by any historical measure, share prices will remain volatile, reacting positively to attempts by monetary authorities and governments to support growth through lower interest rates and government spending, and negatively to further earnings' downgrades.

A C Barker

Chairman

19th December 2008

Investment Manager's Review

The UK equity market fell precipitously during the financial year as the credit crunch, which first surfaced in the middle of 2007, lurched into a full financial and economic crisis. Although the fund weathered the early effects of the dislocation in the banking sector prior to the summer reasonably well, the deterioration in credit markets and economic activity in the autumn was shocking in its speed and severity.

The panic was so acute that in September 2008 the independent investment banking model effectively disappeared, with the collapse of Lehman Brothers and Bank of America's purchase of Merrill Lynch. In the US, the government took ownership of Fannie Mae and Freddie Mac, rescued AIG, and proposed a plan to take damaged assets off the balance sheets of financial institutions. In the UK, Lloyds TSB agreed a merger with HBOS, Bradford and Bingley was taken into public ownership, and the short selling of many financial companies was banned. Taken individually each of these events would have been highly significant, but occurring so close together they created extreme levels of volatility and fear. 

With hindsight, the US authorities' decision on 15th September to allow Lehman Brothers to default on its senior unsecured debt was a policy error that led to the almost complete seizure of the credit markets. The rescue of Bear Stearns in February had suggested to investors that whilst equity shareholders in failed financial institutions would receive little, other creditors would be protected. The default on Lehman's bonds led a key US money market fund to 'break the buck' (or lose capital) in a supposedly risk-free product prompting investors to withdraw deposits from these types of funds. This then caused liquidity to dry up in the key international money markets, which are the essential financing conduits for all modern economies. In addition, counterparty risk became a major concern, as already wary banks refused to lend to one another for fear of further failures. Finally,  the managers of some hedge funds who had assets held by Lehman Brothers found they could not access their investments to meet redemptions from their underlying clients. The effect of this was a sharp increase in risk aversion by the hedge funds, prompting the forced sale of assets, including equities.

With credit markets effectively closed and banks hoarding cash the negative impact of the credit crisis on the real economy soon became apparent. Consumer and corporate confidence were both hit by falling equity markets and further weakness in commercial and residential property markets. By October significantly weaker economic data was evident throughout the world and it became clear that the - increasingly interconnected - global economy faced a synchronised slow-down. As a result, expectations for corporate profits growth have fallen rapidly in recent weeks, putting further pressure on equity markets.

The best performing sectors in the UK market during the period were the more economically defensive areas such as pharmaceuticals, food producers, utilities and tobacco, and the hardest hit sectors were financials and consumer cyclicals. After a rise in the mining sector index of over 350% since the end of 2001 to its peak in mid May 2008, the sector has fallen by nearly 70% taking share prices back to end of 2004 levels within a matter of weeks.  

The largest negative contributor to performance in this period was HBOS. Our initial analysis concluded that HBOS offered valuation upside judged by a range of historic valuation measures. However, we underestimated the importance that the equity and credit markets would come to place on its capital and liquidity position. HSBC, where the Trust held a position (but lower than its weighting in the market) was a much better performer. It has a strong balance sheet and has been perceived by the market as a safe haven and, ultimately, a long term beneficiary of the credit crisis. The result was a remarkable 73% differential between the share price performance of the two banks over the period. Other negative contributors to performance were the smaller oil, mining and emerging market exposed companies that have been held by the Trust for a number of years. As the investment climate for these types of companies deteriorated during 2008 Energy XXI, Prosperity Minerals, Mercator Gold and Titan Europe all produced very disappointing returns. These negatives were only partly offset by the large defensive stocks in the portfolio such as GlaxoSmithKline, Compass, Reed Elsevier and AstraZeneca. 

Although we believed the portfolio to be reasonably defensively positioned going into the second half of 2008, being underweight banks and with a large exposure to large, diversified companies with strong balance sheets, we did not anticipate the almost complete seizure of credit markets, nor the severe recession that now appears to be discounted by equity markets.

The globalised financial system is enduring a crisis of major proportions, and it is no exaggeration to suggest that markets have been close to a major collapse in recent months. The scale of the problem is now fully understood by governments around the world and for the first time since the credit crisis began in 2007, the policy response is now globally coordinated and of sufficient scale to suggest that it should succeed. Authorities are at last tackling the crisis on three fronts: first, by alleviating illiquidity in credit markets; second, by recapitalising the banking system; and third, by addressing the damage to the real economy. It is too early to be certain that the wide range of policies announced will cure all the problems we face, but there are some hopeful signs. Credit markets have shown some evidence of tentative improvement, but corporate bond markets remain at extremes, in some cases discounting economic conditions not seen since the Second World War.  Some commentators have drawn parallels with the 1930s suggesting that a depression, usually defined as a multi-year recession with price deflation, looms. We believe such a negative outcome is unlikely given the resolve of policy makers and the lessons learned from previous extended periods of economic weakness, of which Ben Bernanke, the Chairman of the US Federal Reserve, is well known to be a student. It is also worth noting that lower oil prices, falling interest rates, and fiscal stimulus announcements are positive offsets for the outlook that did not exist a few months ago. 

In the meantime there remains a painful period of paying down debt - or deleveraging - ahead of us. Borrowing has been over employed by investors in, for example, hedge funds, and by banks via low capital ratios, and by consumers with excessive personal debt levels. This level of debt has influenced a wide range of asset prices. Until house prices stabilise and banks are able to extend credit it is likely that this period of weak economic growth will be extended. Cuts in interest rates will take some time to stimulate growth, and the effectiveness of the recent fiscal stimulus remains to be seen. Economic growth in 2010 is indeed highly likely to be below trend, but we are optimistic that at some point in 2009 investors can begin to look forward to an improving outlook.  

It has been apparent for some time that company profits for 2009 will be disappointing relative to analysts' expectations and further downgrades will continue to be a challenge for investors. However, this trend is well known and on valuation measures based on factors other than short term profits, equity markets appear to be cheap. On normalised or trend earnings that adjust for the effect of the economic cycle, global equity markets trade below valuations reached at the troughs in 1987, 1990 and 2002 and the UK and European markets are cheaper on this measure than the US. It is worth noting that shares have been becoming cheaper relative to their earnings for most of the period since 2001, when valuations peaked at a multiple of over 25 times historic earnings; from this perspective the bear market has lasted nearly 8 years already. Similarly calculations based on replacement cost, historic dividend yield (excluding the financial sector), or enterprise value to sales, all suggest equity markets are arguably cheap, particularly for a period of relatively low inflation and interest rates.  

The fear and panic in markets is providing opportunities to buy good companies at very low prices. There is strong evidence to suggest that some investors are selling assets because they have to, not because they want to. We recognise the risks to the financial system at this point, but we expect the response of the authorities to this crisis will become more aggressive, and in time conditions will improve.  

Jeremy Thomas

19th December 2008

Principal Risks and Uncertainties 

The principal risks and uncertainties fall broadly under the following categories:

 Investment and Strategy: An inappropriate investment strategy, for example asset allocation or the level of gearing, may lead to underperformance against the Company's benchmark index and peer companies, resulting in the Company's shares trading on a wider discount.  The Board manages these risks by diversification of investments through its investment restrictions and guidelines which are monitored and reported on.  

Market: Market risk arises from the uncertainty about the future prices of the Company's investments. It represents the potential loss the Company might suffer through holding investments in the face of negative market movements. The Board considers asset allocation, stock selection and levels of gearing on a regular basis and has set investment restrictions and guidelines which are monitored and reported on by RCM (UK) Limited ('RCM'). The Board monitors the implementation and results of the investment process with the Investment Manager.

Accounting, Legal and Regulatory: In order to qualify as an investment trust, the Company must comply with Section 842 of the Income and Corporation Taxes Act 1988 ('Section 842'). Details of the Company's approval are given under 'Competitive and Regulatory Environment' on page 13. Should the Company breach Section 842, it may lose investment trust status and as a consequence realised capital gains within the Company's portfolio would be subject to Corporation Tax.  The Section 842 qualification criteria are monitored by RCM and results reported to the Board at each Board Meeting.

Corporate Governance and Shareholder Relations: Details of the Company's compliance with Corporate Governance best practice, including information on relations with shareholders, are set out in the Corporate Governance Report on pages 21 to 24.

Operational: Disruption to, or failure of, RCM's accounting, dealing or payments systems or the custodian's records may prevent accurate reporting and monitoring of the Company's financial position. Details of how the Board monitors the services provided by RCM and other suppliers and the key elements designed to provide effective internal control are included within the Internal Control section of the Corporate Governance Report on pages 21 to 24.

Financial: The financial risks faced by the Company are disclosed in Note 22 on pages 41 to 44.

A detailed explanation of the principal risks and uncertainties can be found on pages 14 and 15 of the Annual Financial Report, which will be available shortly on the Company's website.

Related Parties' Transactions

During the financial year, no transactions with related parties have taken place which have materially affected the financial position or the performance of the Company during the period.

Directors' Responsibilities

The Directors each confirm to the best of their knowledge that: 

• the financial statements have been prepared in accordance with applicable UK accounting standards, and     give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

• the Annual Financial Report, to be published shortly, 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 it faces.

155 Bishopsgate                                                                                                For and on behalf of the Board

London EC2M 3AD                                                                                         A C Barker 

19th December 2008                                                                                        Chairman

INCOME STATEMENT

For the year ended 31st October 2008

	Revenue	Capital	Total Return
	£'000s	£'000s	£'000s
Net losses on investments at fair value	-	(35,945)	(35,945)
Income	2,858	-	2,858
Investment management fee	(229)	(538)	(767)
Investment management fee VAT refund	104	313	417
Administration expenses	(191)	(6)	(197)
Net return before finance costs and taxation	2,542	(36,176)	(33,634)
Finance costs: interest payable and similar charges	(93)	(272)	(365)
Net return on ordinary activities before taxation	2,449	(36,448)	(33,999)
Taxation	(2)	-	(2)
Net return attributable to Ordinary Shareholders	2,447	(36,448)	(34,001)
Return per Ordinary Share (Note B)	6.08p	(90.61)p	(84.53)p

BALANCE SHEET

as at 31st October 2008                                

	£'000s
Investments held at fair value through profit or loss	48,437
Net current liabilities	(4,974)
Total assets less current liabilities	43,463
Creditors: Amounts falling due after more than one year	-
Total Net Assets	43,463
Called up Share Capital	425
Share Premium Account	14,819
Capital Redemption Reserve	125
Special Reserve	38,192
Capital Reserves:
Realised         Unrealised	9,347 (22,435)
Hedging Reserve	(6)
Revenue Reserve	2,996
Shareholders' Funds (all equity interests)	43,463
Net asset value per Ordinary Share	112.5p

The Net Asset Value is based on 38,643,300 Ordinary Shares in issue at the year end.

  INCOME STATEMENT

For the year ended 31st October 2007

	Revenue	Capital	Total Return
	£'000s	£'000s	£'000s
Net gains on investments at fair value	-	7,549	7,549
Income	2,914	-	2,914
Investment management fee	(284)	(689)	(973)
Administration expenses	(220)	(4)	(224)
Net return before finance costs and taxation	2,410	6,856	9,266
Finance costs: interest payable and similar charges	(88)	(259)	(347)
Net return on ordinary activities before taxation	2,322	6,597	8,919
Taxation	(9)	-	(9)
Net return attributable to Ordinary Shareholders	2,313	6,597	8,910
Return per Ordinary Share (Note B)	5.66p	16.13p	21.79p

BALANCE SHEET

as at 31st October 2007                                

	£'000s
Investments held at fair value through profit or loss	88,152
Net current assets	1,817
Total assets less current liabilities	89,969
Creditors: Amounts falling due after more than one year	(6,000)
Total Net Assets	83,969
Called up Share Capital	436
Share Premium Account	14,819
Capital Redemption Reserve	113
Special Reserve	43,215
Capital Reserves:
Realised         Unrealised	7,092 16,268
Hedging Reserve	(56)
Revenue Reserve	2,082
Shareholders' Funds (all equity interests)	83,969
Net asset value per Ordinary Share	201.4p

The Net Asset Value is based on 41,702,610 Ordinary Shares in issue at the year end.

     RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 31st October 2008 

	Called up  Share Capital (£000s)	Share Premium Account (£000s)	Capital   Redemption Reserve (£000s)	Special Reserve (£000s)	Capital Reserve Realised (£000s)	Capital Reserve Unrealised (£000s)	Hedging Reserve (£000s)	Revenue  Reserve (£000s)	Total     (£000s)
Net Assets at 31st October 2006	443	13,388	106	42,576	3,181	13,581	(106)	2,081	72,250
Amortisation of Hedging Reserve	-	-	-	-	-	-	50	-	50
Revenue Return	-	-	-	-	-	-	-	2,313	2,313
Shares repurchased during the year	(7)	-	7	(3,751)	-	-	-	-	(3,751)
Treasury shares issued during the year	-	1,431	-	4,390	1	-	-	-	5,822
Dividends on Ordinary Shares	-	-	-	-	-	-	-	(2,312)	(2,312)
Capital Return	-	-	-	-	3,910	2,687	-	-	6,597
Net Assets at 31st October 2007	436	14,819	113	43,215	7,092	16,268	(56)	2,082	83,969

	Called up  Share Capital (£000s)	Share Premium Account (£000s)	Capital Redemption Reserve (£000s)	Special Reserve (£000s)	Capital Reserve Realised (£000s)	Capital Reserve Unrealised (£000s)	Hedging Reserve (£000s)	Revenue  Reserve (£000s)	Total  (£000s)
Net Assets at 31st October 2007	436	14,819	113	43,215	7,092	16,268	(56)	2,082	83,969
Amortisation of Hedging Reserve	-	-	-	-	-	-	50	-	50
Revenue Return	-	-	-	-	-	-	-	2,447	2,447
Shares repurchased during the year	(11)	-	11	(5,022)	-	-	-	-	(5,022)
Dividends on Ordinary Shares	-	-	-	-	-	-	-	(1,533)	(1,533)
Capital Return	-	-	-	-	2,255	(38,703)		-	(36,448)
Net Assets at 31st October 2008	425	14,819	124	38,192	9,347	(22,435)	(6)	2,996	43,463

CASH FLOW STATEMENT

For the year ended 31st October 2008 and 31st October 2007

	2008		2007
	£'000s		£'000s
Net cash inflow from operating activities	2,223		2,024
Returns on investments and servicing of finance
Interest paid	(359)		(296)
Capital expenditure and financial investments
Purchase of fixed asset investments	(43,601)		(31,546)
Sale of fixed asset investments	47,359		37,520
Net cash inflow from capital expenditure and financial investments	3,758		5,974
Equity dividends paid	(1,533)		(2,312)
Net cash inflow before financing	4,089		5,390
Financing
Purchase of Ordinary Shares for cancellation and holding in treasury	(5,023)		(3,751)
Repayment of medium term loan	(6,000)		-
Drawdown of short term loan	6,000		-
Cash transferred from Greene King Acquisitions (No.3) Limited	-		236
Net cash outflow from financing	(5,023)		(3,515)
(Decrease) Increase in cash	(934)		1,875

BRITISH PORTFOLIO TRUST PLC

LISTED HOLDINGS at 31st October 2008

	Value (£'000s)		Sector
Royal Dutch Shell 'B' Shares	3,858		Oil and Gas Producers
BP	3,804		Oil and Gas Producers
GlaxoSmithKline	3,675		Pharmaceuticals and Biotechnology
Vodafone Group	3,363		Mobile Telecommunications
HSBC Holdings	2,217		Banks
BG Group	1,998		Oil and Gas Producers
AstraZeneca	1,990		Pharmaceuticals and Biotechnology
Rio Tinto	1,686		Mining
Energy XXI	1,427		Oil and Gas Producers
BHP Billiton	1,421		Mining
BAE Systems	1,095		Aerospace and Defence
Compass Group	1,071		Travel and Leisure
Aviva	1,016		Life Insurance
Unilever	993		Food Producers
Man Group	973		General Financial
Xstrata	949		Mining
International Power	944		Electricity
Prudential	940		Life Insurance
Reed Elsevier	895		Media
Centrica	758		Gas, Water and Multiutilities
Daily Mail & General Trust	648		Media
Carillion	643		Support Services
Royal Bank of Scotland	639		Banks
BT Group	636		Fixed Line Telecommunications
Whitbread	620		Travel and Leisure
Dana Petroleum	576		Oil and Gas Producers
Melrose	567		Industrial Engineering
PV Crystalox Solar	549		Alternative Energy
HBOS	535		Banks
3i Group	535		General Financial
Informa	529		Media
Tullett Prebon	515		General Financial
Cobham	502		Aerospace and Defence
Renewable Energy	478		Electricity
SABMiller	437		Beverages
Intermediate Capital Group	426		General Financial
Morgan Crucible	425		Electronic and Electrical Equipment
BBA Aviation	418		Industrial Transportation
Laird	407		Electronic and Electrical Equipment
TUI Travel	371		Travel and Leisure
Camco International	351		Support Services
Ashmore Group	349		General Financial
Barclays	346		Banks
Hyder Consulting	344		Support Services
Bluebay Asset Management	256		General Financial
Meggitt	219		Aerospace and Defence
Inchcape	193		General Retailers
Lloyds TSB	192		Banks
Prosperity Minerals	152		Construction and Materials
Unite Group	125		Real Estate
Hansen Transmission	112		Alternative Energy
Wellstream Holdings	108		Oil Equipment, Services and Distribution
Titan Europe	86		Industrial Engineering
Fieldbury	38		Leisure Goods
Mercator Gold	37		Mining
Total Investments	48,437

  Note A 

The financial statements have been prepared under the historical cost convention, modified to include the revaluation of investments, and in accordance with United Kingdom law and United Kingdom Generally Accepted Accounting Principles (UK GAAP) and the Statement of Recommended Practice - Financial Statements of Investment Trust Companies (SORP) issued in December 2005 by the Association of Investment Companies (formerly the Association of Investment Trust Companies).

Note B 

The return per Ordinary Share is based on a weighted average number of shares in issue during the year of 40,227,697 (2007- 40,881,996).

Note C

The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 31st October 2008 or 31st October 2007. The financial information for the year ended 31st October 2007 has been extracted from the statutory accounts for that year, which were filed with the Registrar of Companies on 13th February 2008. The auditors' report on those accounts was unqualified and did not contain a statement under either section 237(2) or (3) of the Companies Act 1985. The statutory accounts for the year ended 31st October 2008 will be finalised on the basis of the financial information presented by the Directors in this announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting. 

For further information please contact:

Peter Ingram

Company Secretary

Telephone : [phone]

 

END

 

 

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