Annual Financial Report

RNS Number : 8236W

F&C Capital & Income Inv Tst PLC

25 November 2010

 



Date:                25 November 2010

Contact:           Julian Cane                                                   

                        F&C Management Limited                              

                        020 7628 8000                                               

F&C Capital and Income Investment Trust plc

Audited Statement of Results

for the year ended 30 September 2010

HIGHLIGHTS

·      Three interim dividends totalling 5.85 pence per share paid.

·      Fourth interim dividend of 2.60 pence per share declared.

·      1.7 million shares issued at a small premium during the year.

Summary of results

Attributable to shareholders	30 September 2010	30 September 2009	% Change
Net assets	£177.43m	£166.68m	+6.4
Net asset value per share	207.90p	199.28p	+4.3
Net revenue after tax	£6.76m	£7.21m	-6.2
Revenue return per share	8.02p	8.85p	-9.4
Dividends per share	8.45p	* 8.25p	+2.4
Share price	214.25p	199.00p	+7.7

* Excludes a special dividend of 0.4 pence per share, relating to the VAT reclaim, paid in this year.

The Chairman, commenting on the results, said:

The UK stock market was less turbulent than in the previous year as the economic and financial backdrop stabilised somewhat and shares rose slightly more than in the previous year.  Dividend growth has, in general, returned and we have again increased our dividend with an underlying increase of 2.4% to 8.45 pence per share.

Capital performance

Over the course of the financial year, your Company's net asset value ("NAV") per share increased by 4.3%, compared to an increase of 8.8% in the FTSE All-Share Index, which is our main benchmark. This growth in our NAV is still 4% better than the 0.3% gain by the FTSE 350 Higher Yield Index.  As last year, the shortfall against our main benchmark can be explained by the very considerable discrepancy in performance between higher and lower yielding shares, since the FTSE 350 Lower Yield Index leapt ahead by no less than 16.3% over the year. Inevitably, with our mandate to generate a relatively high and growing dividend, your Company has a greater exposure to higher yielding shares than the FTSE All-Share Index as a whole.  We have asked ourselves whether we are right to stick with our original strategy and benchmark giving priority to income rather than chasing the index in pursuit of capital growth.  We believe that we are, and our research shows, that over the long-term the majority of returns from developed stock markets come from dividends and dividend growth.  Whilst our strategy of achieving an above average market yield coupled with dividend growth for our shareholders may result in periods when our capital performance falls short of the mainstream index, it is our belief that this focus will, over the longer-term, result in attractive rates of return. We have essentially decided to stick to our guns, that we can afford to continue our policy of generating an above market yield with dividend growth and that some reduction in our dividend cover is acceptable.

Although we have just experienced two consecutive years of progress for the UK stock market, earlier bear markets at the start of the decade and in 2008/09 mean that the level of the FTSE All-Share Index at 30 September is lower than 10 years ago.  It is however encouraging though that our NAV per share, being up 0.9% over this 10 year period, is ahead of the FTSE All-Share Index (-5.3%) and the Higher Yield Index (-1.7%).  For reference, the Lower Yield Index fell 16.9% over the last 10 years.

Revenue and dividend

The suspension of dividends from BP following the disaster of the Macondo well in the Gulf of Mexico has had a very significant impact not only on your Company's income but also on the level of income from the stock market generally.  Before the catastrophe, BP paid about 13% of the dividends from the UK stock market.  The suspension by BP of two of the anticipated four dividends during our financial year resulted in an effective cut of about 6.5% and for your Company this equated to lost income of just under £0.5 million.  Against this background a fall in income of 1.3% should be viewed fairly positively.

Total expenses increased by 19%, mainly because of an increase in the management fee which automatically reflects changes in the value of the assets of the Company at quarter ends compared to the same periods last year. Other increases reflect increased loan commitment fees and a one-off fee paid to PwC in relation to the potential further recovery of VAT.  These increases have resulted in a deterioration of the total expense ratio from 0.76% to 0.88%.  Whilst the direction of change is unwelcome, the overall level compares very well with many other investment trusts and the vast majority of unit trusts.

A fourth interim dividend of 2.60 pence per share has been declared which, together with the three previous quarterly dividends each of 1.95 pence per share, takes the total dividend for the year to 8.45 pence per share.  This is an increase of 2.4% over one year, excluding the special dividend of 0.40 pence paid in respect of the prior year, and a compound annual growth rate of 7.8% over the last five years.  As in the previous year, the fourth dividend is to be paid as an interim rather than a final in order that the dividends fall more regularly at each calendar quarter end in line with requests from shareholders.

Share price performance and discount

Over the last year, the share price rose by 7.7%, a little ahead of the rise in the NAV per share, as the shares moved to trade from a small discount to a premium to NAV.  Over the year, the shares have traded within a fairly tight band of 4% around the NAV and have on average stood at a premium of 0.8% as demand for your Company's shares has remained strong.

The Directors retain their commitment to the share buyback programme with the intention of ensuring that the Company's share price does not trade at a material discount to its NAV per share.  The last share buyback took place in December 2007.

Shareholders

The majority of your Company's shares are held by investors through F&C's range of savings plans.  The number of investors within these plans and the amount invested has continued to increase over the year.  The strong demand has kept the shares trading close to NAV throughout the year and we have issued 1.7 million new shares to satisfy the demand.  The issues of the new shares were at a small premium to NAV so there was no dilution for existing shareholders.  The issues were also good for the purchasers of the shares as they limited the price they paid to just a small premium rather than a higher price in the market because of lack of supply.

Your Board is asking for authority to issue further shares at the 2011 annual general meeting ("AGM"), equal to 10% of the Company's shares in issue.  This will give your Directors the maximum flexibility to continue to issue shares when appropriate to the benefit of shareholders over the coming year. 

Gearing

Your Company has the ability to borrow money in order to increase its level of investments when we anticipate that future returns will exceed the cost of borrowing.  In expectation of reasonable returns from our investments and the very low cost of financing, we have used borrowed funds throughout the year, the level of which ranged from £13 million to £18 million.

The use of debt has been beneficial to both earnings and capital appreciation as the returns from the enlarged portfolio have exceeded the low cost of borrowing.

Annual general meeting

The AGM will be held at 11.30 a.m. on 19 January 2011 at the Company's registered office, Exchange House, Primrose Street, London EC2 and all shareholders are encouraged to attend.  As in previous years, Julian Cane, the fund manager, will make a presentation on the results of this year, the investment policy and the outlook for the coming year.

Prospects

The UK stock market has recovered from its low point in March 2009 as the global financial system was stabilised by international government intervention and as economies began to recover from recession on the back of huge monetary and fiscal stimulus.

The withdrawal of this fiscal stimulus with the associated cuts in public sector expenditure makes it unusually difficult to forecast whether demand from home and abroad will be sufficient to sustain the recovery. There are still risks of sovereign debt problems, of a further rise in inflation leading to a rise in interest rates, or of trade and currency disputes. Levels of personal and national debt remain high and banks are under pressure from the markets and from regulators to continue to build their capital bases. It therefore seems likely that growth in the UK will at best be slow by historic standards.

By contrast, companies generally have low levels of debt and many have good exposure to countries and industries with better growth prospects than the domestic economy.  Valuations are clearly not as compelling as they were at the trough but remain attractive compared to the very low yields on government bonds and cash.  The outlook for our own dividend is positive.  We have reserves to draw upon to finance any shortfall caused by the suspension of the BP dividend and are encouraged that dividend growth from the rest of the portfolio is coming through reasonably strongly.

Pen Kent
Chairman
25 November 2010

Income Statement

for the year ended 30 September	2010			2009
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains on investments	-	8,129	8,129	-	884	884
Foreign exchange gains	-	2	2	-	-	-
Income	8,078	-	8,078	8,181	212	8,393
Management fee	(359)	(359)	(718)	(304)	(304)	(608)
Recoverable VAT	-	-	-	167	-	167
Other expenses	(773)	(26)	(799)	(656)	(11)	(667)
Net return before finance costs and taxation	6,946	7,746	14,692	7,388	781	8,169
Finance costs	(166)	(166)	(332)	(154)	(154)	(308)
Net return on ordinary activities before taxation	6,780	7,580	14,360	7,234	627	7,861
Taxation on ordinary activities	(25)	-	(25)	(24)	-	(24)
Net return attributable to shareholders	6,755	7,580	14,335	7,210	627	7,837
Return per share - pence	8.02	9.00	17.02	8.85	0.77	9.62

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

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

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 statement.

Reconciliation of Movements in Shareholders' Funds

for the year ended 30 September 2010
		Share	Capital				Total
	Share	premium	redemption	Special	Capital	Revenue	shareholders'
	capital	account	reserve	reserve	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 September 2009	20,911	84,399	4,146	4,434	46,992	5,802	166,684
Movements during the year      ended 30 September 2010
Dividends paid	-	-	-	-	-	(7,070)	(7,070)
Ordinary shares issued	425	3,053	-	-	-	-	3,478
Net return attributable to     shareholders	-	-	-	-	7,580	6,755	14,335
Balance at 30 September 2010	21,336	87,452	4,146	4,434	54,572	5,487	177,427

for the year ended 30 September 2009
		Share	Capital				Total
	Share	premium	redemption	Special	Capital	Revenue	shareholders'
	capital	account	reserve	reserve	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 September 2008	19,731	77,630	4,146	4,434	46,365	5,895	158,201
Movements during the year      ended 30 September 2009
Dividends paid	-	-	-	-	-	(7,303)	(7,303)
Ordinary shares issued	1,180	6,769	-	-	-	-	7,949
Net return attributable to     shareholders	-	-	-	-	627	7,210	7,837
Balance at 30 September 2009	20,911	84,399	4,146	4,434	46,992	5,802	166,684

Balance Sheet

at 30 September		2010		2009
	£'000s	£'000s	£'000s	£'000s
Fixed assets
Investments		188,905		178,710
Current assets
Debtors	1,417		946
Cash at bank and short-term deposits	2,209		2,466
	3,626		3,412
Creditors: amounts falling due within one   year
Loans	(14,000)		(14,000)
Other	(1,104)		(1,438)
	(15,104)		(15,438)
Net current liabilities		(11,478)		(12,026)
Net assets		177,427		166,684
Capital and reserves
Share capital		21,336		20,911
Share premium account		87,452		84,399
Capital redemption reserve		4,146		4,146
Special reserve		4,434		4,434
Capital reserves		54,572		46,992
Revenue reserve		5,487		5,802
Total shareholders' funds		177,427		166,684
Net asset value per ordinary share - pence		207.90		199.28

Cash Flow Statement

for the year ended 30 September		2010		2009
	£'000s	£'000s	£'000s	£'000s
Operating activities
Investment income received	7,808		8,018
Interest received	6		32
Other revenue	134		225
Distribution from subsidiary (in liquidation)	-		472
VAT recovered (including interest thereon)	-		924
Fee paid to management company	(702)		(592)
Fees paid to Directors	(91)		(91)
Other payments	(665)		(565)
Net cash inflow from operating activities		6,490		8,423
Servicing of finance
Interest paid	(312)		(304)
Net cash outflow from the servicing of finance		(312)		(304)
Financial investment
Purchases of investments	(19,013)		(43,181)
Sales of investments	16,472		23,691
Other capital charges	(26)		(11)
Net cash outflow from financial investment		(2,567)		(19,501)
Equity dividends paid		(7,070)		(7,303)
Net cash outflow before use of      liquid resources and financing		(3,459)		(18,685)
Management of liquid resources
Increase in short-term deposits		(229)		(1,543)
Financing
Sterling loans raised	-		14,000
Shares purchased	-		-
Shares issued	3,137		7,543
Net cash inflow from financing		3,137		21,543
(Decrease)/increase in cash		(551)		1,315

Notes

1   Return per ordinary share

Revenue return

The revenue return per share is based on the revenue return attributable to shareholders of £6,755,000 profit (2009: £7,210,000 profit).

Capital return

The capital return per share is based on the capital return attributable to shareholders of £7,580,000 profit

(2009: £627,000 profit).

Total return

The total return per share is based on the total return attributable to shareholders of £14,335,000 profit (2009: £7,837,000 profit).

Weighted average ordinary shares in issue

Both the revenue and capital returns per share are based on a weighted average of 84,177,419 (2009: 81,433,763) ordinary shares in issue during the year.

2   Dividends

The Directors have declared a fourth interim dividend in respect of the year ended 30 September 2010 of 2.60 pence per share, payable on 31 December 2010 to all shareholders on the register at close of business on 10December 2010.

3   Financial risk management

The Company is an investment company, listed on the London Stock Exchange, and conducts its affairs so as to qualify in the United Kingdom ("UK") as an investment trust under the provisions of section 1158 of the Corporation Tax Act 2010. In so qualifying, the Company is exempted in the UK from corporation tax on capital gains on its portfolio of investments.

The Company's investment objective is to secure long-term capital and income growth from a portfolio consisting mainly of FTSE All-Share companies. The Company can also have exposure to leading overseas companies, with the value of the non-UK portfolio not exceeding 10% of the Company's gross assets. In pursuing this objective, the Company is exposed to financial risks which could result in a reduction of either or both of the value of the net assets and the profits available for distribution by way of dividend. These financial risks are principally related to the market (currency movements, interest rate changes and security price movements), liquidity and credit. The Board, together with the Manager, is responsible for the Company's risk management. The Directors' policies and processes for managing the financial risks are set out in (a), (b) and (c) below.

The accounting policies which govern the reported Balance Sheet carrying values of the underlying financial assets and liabilities, as well as the related income and expenditure, are in compliance with UK accounting standards and best practice and include the valuation of financial assets and liabilities at fair value. The Company does not make use of hedge accounting rules.

(a) Market risks

The fair value of equity and other financial securities including derivatives held in the Company's portfolio fluctuates with changes in market prices. Prices are themselves affected by movements in currencies and interest rates and by other financial issues, including the market perception of future risks. The Board sets policies for managing these risks within the Company's objective and meets regularly to review full, timely and relevant information on investment performance and financial results. The Manager assesses exposure to market risks when making each investment decision and monitors ongoing market risk within the portfolio. 

As up to 10% of the Company's gross assets can be invested in non-UK assets, other assets and liabilities may be denominated in currencies other than sterling and may also be exposed to interest rate risks. The Manager and the Board regularly monitor these risks. The Company does not normally hold significant cash balances. It is not the Board's general policy to borrow in currencies other than sterling and any such borrowings would be limited to amounts and currencies commensurate with the portfolio's exposure to those currencies, thereby limiting the Company's exposure to future changes in foreign exchange rates.

A description of derivative positions, which are also exposed to market price changes, together with the Manager's and Board's strategies for using these positions for efficient portfolio management, is contained in "Other market risk exposures", the Manager's Report and in the Directors' Report and Business Review.  The exposure on the Company's positions at 30 September 2010 amounted to £60,000 (30 September 2009 - £nil).

Gearing may be short or long-term in foreign currencies and enables the Company to take a long-term view of the countries and markets in which it is invested without having to be concerned about short-term volatility.

Income earned in foreign currencies is converted to sterling on receipt. The Board regularly monitors the effects on net revenue of interest earned on deposits and paid on gearing.

Other market risk exposures

The portfolio of investments, valued at £188,905,000 at 30 September 2010 (2009: £178,710,000) is exposed to market price changes.  The Manager assesses these exposures at the time of making each investment decision.  The Board reviews the overall exposures at each meeting against indices and other relevant information.  Derivative contracts entered into during the year comprise options written in the expectation that they will not be exercised.  These contracts are not connected to the maintenance or enhancement of the Company's investments.  No derivative contracts were entered into in the prior year.

(b) Liquidity risk

The Company is required to raise funds to meet commitments associated with financial instruments and share buybacks. These funds may be raised either through the realisation of assets or through increased borrowing. The risk of the Company not having sufficient liquidity at any time is not considered by the Board to be significant, given: the number of quoted investments held in the Company's portfolio (69 at 30 September 2010); the liquid nature of the portfolio of investments; the industrial and geographical diversity of the portfolio; and the existence of an ongoing loan facility agreement. Cash balances are held with approved banks, usually on overnight deposit. The Manager reviews liquidity at the time of making each investment decision. The Board reviews liquidity exposure at each meeting.

The Company has a loan facility with Lloyds TSB Scotland plc of £20 million, which is renewable in March 2011.

(c) Credit risk and counterparty exposure

The Company is exposed to potential failure by counterparties to deliver securities for which the Company has paid, or to pay for securities which the Company has delivered. Such transactions must be settled on the basis of delivery against payment (except where local market conditions do not permit).

Responsibility for the approval, limit setting and monitoring of counterparties is delegated to the Manager and a list of approved counterparties is periodically reviewed by the Board. Broker counterparties are selected based on a combination of criteria, including credit rating, balance sheet strength and membership of a relevant regulatory body. The rate of default in the past has been negligible. Cash and deposits are held with approved banks.

The Company has an ongoing contract with its custodian for the provision of custody services. The contract is reviewed regularly. Details of securities held in custody on behalf of the Company are received and reconciled monthly.

To the extent that the Manager carries out management and administrative duties (or causes similar duties to be carried out by third parties) on the Company's behalf, the Company is exposed to counterparty risk. The Board assesses this risk through regular meetings with the management of F&C (including the fund manager) and with the Manager's internal audit function. In reaching its conclusions, the Board also reviews the Manager's parent group's annual audit and assurance faculty report.

None of the Company's financial liabilities are past their due date or impaired.

4    Annual general meeting

The annual general meeting will be held at the registered office of the Company, Exchange House, Primrose Street, London EC2A 2NY on Wednesday 19 January 2011 at 11.30 a.m.

5    Report and accounts

The report and accounts for the year ended 30 September 2010 will be posted to shareholders and made available on the website www.fandccit.com shortly. Copies may also be obtained from the Company's registered office, Exchange House, Primrose Street, London EC2A 2NY.

By order of the Board

F&C Management Limited, Secretary

25 November 2010

Principal risks

The Company's assets consist mainly of listed equities and its principal risks are therefore market related.  The specific key risks faced by the Company, include the following:

·      Investment strategy - inappropriate long-term strategy, asset allocation and stock selection and use of derivatives might lead to underperformance against the Company's benchmark index and peer group.  The Board periodically reviews the investment strategy and regularly monitors the Company's investment portfolio, investment selection, performance and operations of the Manager.

·      Investment management resources - the quality of the management team is a crucial factor in delivering good performance and loss of the Manager's key staff could affect investment returns. The Manager develops its recruitment and remuneration packages in order to retain key staff, has training and development programmes in place and undertakes succession planning.

·      Regulatory - failure to comply with applicable legal and regulatory requirements could result in the Company losing its listing and/or being subject to corporation tax on the sale of its investments. The Board reviews regular reports from the Manager on the controls in place to ensure the Company's compliance with these requirements, together with regular investment listings and income forecasts, as part of its monitoring of compliance with section 1158 of the Corporation Tax Act 2010.

·      Operational - failure of the Manager's core accounting systems, or a disastrous disruption to its business, could lead to an inability to provide accurate reporting and monitoring. The Manager is contractually obliged to ensure that its conduct of business conforms to applicable laws and regulations. The Manager has confirmed that reliable back-up systems are in place.

·      Financial - inadequate financial controls could result in misappropriation of assets, loss of income and debtor receipts and inaccurate reporting of NAV per share. The Board regularly reviews the Manager's statements on its internal controls and procedures and subjects the books and records of the Company to an annual audit.

·      Safe custody - failure of the custodian to provide a secure service or continue operating could result in the Company's assets being at risk.  The Board receives regular information on the service of the custodian from the Manager, which reviews service levels and receives an annual SAS70 report on the custodian by an independent auditor.

·      Counterparties - the Company is exposed to potential failures by counterparties to deliver securities for which it has paid or to pay for securities which it has delivered.  Further details are included in note 3.

Statement of Directors' Responsibilities in Respect of the Financial Statements

In accordance with Chapter 4 of the Disclosure and Transparency Rules the Directors confirm, in respect of the annual report for the year ended 30 September 2010 of which this statement of results is an extract, that to the best of their knowledge:

·      the financial statements have been prepared in accordance with applicable UK generally accepted 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 development and performance of the Company and the important events that have occurred during the financial year; the principal risks and uncertainties and their impact on the financial statements;

·      the Directors' Report and Business Review describes the principal risks and uncertainties for the forthcoming financial year;

·      the financial statements and the Directors' Report and Business Review include details on related party transactions.

On behalf of the Board

Pen Kent

Chairman

25 November 2010

 

END

 

 

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