Annual Financial Report

RNS Number : 7448S

F&C Capital & Income Inv Tst PLC

24 November 2011

 



Date:                24 November 2011

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 2011

HIGHLIGHTS

·      Three interim dividends totalling 6.0 pence per share paid.

·      Fourth interim dividend of 2.65 pence per share declared.

·      465,000 shares issued at a small premium during the year.

·      In a difficult year for equity markets, the Company outperformed with the Net Asset Value per share falling 6.2% vs. a 7.4% fall in the FTSE All-Share Index.

Summary of results

Attributable to shareholders	30 September 2011	30 September 2010	% Change
Net assets	£167.29m	£177.43m	-5.7
Net asset value per share	194.96p	207.90p	-6.2
Net revenue after tax	£8.34m	£6.76m	+23.4
Revenue return per share	9.75p	8.02p	+21.6
Dividends per share	8.65p	8.45p	+2.4
Share price	206.00p	214.25p	-3.9

The Chairman, commenting on the results, said:

We have continued to increase our total dividends, this year by 2.4% to 8.65 pence per share.  This is despite a disastrous year for the global economy in which official growth forecasts have frequently been revised downwards. We are able to do this because many companies have reported surprisingly good progress and dividend growth has been fairly strong.  Partly for this reason the stock market initially took a more positive view of the outlook, but suffered a sharp set back in July and August, leaving share prices generally lower by our year end in September.

Capital performance

Your Company's net asset value ("NAV") per share fell by 6.2% over the financial year.  This compares to a fall of 7.4% for the FTSE All-Share Index ("Index") over the same period.  Our NAV trailed the Index over the first six months but the greater focus in our portfolio on generating income and seeking greater resilience to turbulent markets gave us stronger relative performance in the second half, despite the gearing which might have been a significant hindrance.  This outperformance in the second half of the year was sufficient to overcome the initial shortfall against the Index and enabled us to out-perform it over the year as a whole.

Our approach of combining both capital and income growth in our strategy, can lead to periods of relatively disappointing performance compared to the Index, but it is our firm belief that over the long term dividends and dividend growth comprise an important part of the total return from stock markets and therefore these should be an integral part of any investment process. We explained this in greater detail in our Annual Report and Accounts for last year.

Over fifteen years, which corresponds to the period over which Julian Cane has managed your Company's investments, this approach has been successful in generating a total return (NAV with dividends reinvested) of 126.4% compared to 118.5% for the FTSE All-Share index (with dividends reinvested).

Revenue account

Over the year, we received an increase of almost 20% in income, driven by an 11% increase in dividend income and 150% increase in other income, which was the result of our new but cautious option writing strategy.

In the previous year to September 2010, we had experienced a fall in income of 1.3%, largely because of the suspension of two of BP's four dividends.  During the last year, BP has restarted paying dividends and although we received less than the previous year at least the dividend flow has now resumed.  Dividends elsewhere have generally increased at an encouraging rate, reflecting better earnings and improving finances of the companies in which we have invested.

Our total expenses were down almost 3% over the year and finance costs saw only a small rise, ensuring that the increase in income fed through to shareholders, giving a 21.7% uplift in earnings per share.

Encouragingly, we have reduced the total expense ratio over the year from 0.88% of average net assets to 0.83%.  This maintains and builds on our overall level of cost effectiveness compared to many other investment trusts and the vast majority of unit trusts.

Option Strategy

Since last September we have started a strategy of writing options in order to generate additional income.  Over the course of the year, option writing has generated premiums of £825,000, enhancing income by more than 9%.  The Manager's Report gives more detail on the strategy and its implementation.

Dividend

Over the course of the year, we have paid three dividends of 2.0 pence per share and a fourth dividend of 2.65 pence per share has been declared giving a total for the year of 8.65 pence per share.  This is an increase of 2.4% on the previous year and over 5 years represents an increase of 41.1%, a compound rate of 5.9% per annum.  The fourth dividend will be paid as an interim dividend rather than a final; this mechanism means that shareholders do not vote on its payment, but it does allow us to pay the dividend at the year end, thus standardising the payment of our dividends to each of the quarter ends and accelerating it in the process.  This  responds to feedback the Board has received from shareholders.

Share price performance and discount

Over the last year, the share price fell 3.9%, less than the 6.2% fall in NAV per share.  Demand for your Company's shares has remained strong and at the start of the year, the shares were trading at a premium to NAV of 3.1%, while at the year end the premium had increased to 5.6%.  The shares traded at a premium to NAV on all but five days, with the average premium being 2.7%.

In the event that the shares start to trade at a material discount to NAV, the Directors retain their commitment to the share buyback programme.  This has been used successfully in the past to bring the share price closer in line with the NAV, but it has not been necessary since the last share buyback took place in December 2007.

Shareholders

Most of your Company's shareholders hold their shares through one of F&C's savings plans.  These have provided a solid source of demand, helping to keep the shares trading close to NAV.  In order to satisfy demand, 465,000 new shares were issued during the year.  The issues of the new shares were at a premium to the existing NAV so there was no dilution for existing shareholders and new shareholders benefited from the liquidity of new shares at only a small premium to NAV.

Since the year end, demand has continued to be strong and we have issued a further 600,000 shares..

At the 2011 annual general meeting ("AGM") your Board is asking for authority to issue further shares, without pre-emption rights, equal to 10% of the Company's shares in issue at the date of this report.  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

When we expect future returns to be greater than the cost of debt we are prepared to borrow money in order to enhance returns.  We have borrowed up to £15m throughout the year and although this was a profitable strategy in absolute terms during the first half of the year while markets rose, it has not been successful during the second half in a falling market.  The cost of borrowing remains very low at (around 2.5% annualised), which is well below long-term expected returns from equities and is even well below the dividend yield of our portfolio of companies.  For these reasons the Board believes it is appropriate to maintain modest gearing in the portfolio.

Board

In our Corporate Governance Statement last year we briefly reported on the implementation of a succession plan to be completed over the next few years. In addition to the appointment of Steve Bates as Chairman Designate in May 2011, we have also agreed a timetable for the succession of the other longer serving Directors. We favour diversity and welcome appointments that contribute to it, but our first objective will be to find Directors with relevant and complementary skills.  We are therefore unwilling with such a small Board to commit to numerical diversity targets. 

As a new Director, Steve Bates will stand for election by shareholders at the Annual General Meeting.  I will be retiring immediately following the meeting in the comfort that the chairmanship is being passed to a well experienced Director with a deep knowledge of investment matters and board appointments. It has been a privilege for me to serve as a Director and as Chairman of your Company.  I wish my colleagues, the management team and all shareholders every success in the future.

Annual general meeting

The AGM will be held on 15 February 2012 at the Company's registered office, Exchange House, Primrose Street, London EC2.  We would like to encourage all shareholders to attend; the Board will be available to answer any questions you may have and 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

At the time of writing the eurozone is in deep crisis with the most serious concern shifting from Greece to Italy. Whatever the immediate outcome major sovereign debt risks will overshadow financial markets, including our own, for some time to come. The shock of recent events, coupled with widespread over-indebtedness in the western economies, seems likely to have caused a sea-change in the appetite and the ability of the personal sector to consume. Against this background forecasting models become even less reliable than usual. Some years of subdued growth are likely. The authorities in all the western economies are faced with acute dilemmas of how to balance the necessity of fiscal prudence with adequate stimulus to the economy in the face of angry voters.

How can we square this rather bleak picture with a relatively upbeat prospect for earnings in the corporate sector on which we depend to maintain our record of annual growth in our own dividend? The answer is by drawing an important and so far valid distinction between national and individual finances on the one hand, and the prospects for companies and share prices on the other.  Although economic growth in the UK and Europe is expected to be tepid, many companies have been able to control costs and adjust their business plans to secure growth elsewhere.  Share prices have also anticipated much of this slower growth leaving the return on equities looking attractive relative to many other asset classes on which real returns are negative after allowing for inflation. We certainly cannot rule out a double-dip recession but over the long-run dividends and dividend growth will continue to be a major part of stock market returns. On both of these counts our broadly diversified portfolio gives us some confidence that we can continue our progress.

Pen Kent
Chairman
24 November 2011

Income Statement

for the year ended 30 September	2011			2010
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
(Losses)/gains on investments and derivatives	-	(11,582)	(11,582)	-	8,129	8,129
Foreign exchange gains	-	12	12	-	2	2
Income	9,671	-	9,671	8,078	-	8,078
Management fee	(397)	(397)	(794)	(359)	(359)	(718)
Other expenses	(714)	(14)	(728)	(773)	(26)	(799)
Net return before finance costs and taxation	8,560	(11,981)	(3,421)	6,946	7,746	14,692
Finance costs	(178)	(178)	(356)	(166)	(166)	(332)
Net return on ordinary activities before taxation	8,382	(12,159)	(3,777)	6,780	7,580	14,360
Taxation on ordinary activities	(41)	-	(41)	(25)	-	(25)
Net return attributable to shareholders	8,341	(12,159)	(3,818)	6,755	7,580	14,335
Return per share - pence	9.75	(14.21)	(4.46)	8.02	9.00	17.02

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 2011
		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 2010	21,336	87,452	4,146	4,434	54,572	5,487	177,427
Movements during the year      ended 30 September 2011
Dividends paid	-	-	-	-	-	(7,357)	(7,357)
Ordinary shares issued	116	922	-	-	-	-	1,038
Net return attributable to     shareholders	-	-	-	-	(12,159)	8,341	(3,818)
Balance at 30 September 2011	21,452	88,374	4,146	4,434	42,413	6,471	167,290

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

Balance Sheet

at 30 September		2011		2010
	£'000s	£'000s	£'000s	£'000s
Fixed assets
Investments		182,317		188,905
Current assets
Debtors	996		1,417
Cash at bank and short-term deposits	134		2,209
	1,130		3,626
Creditors: amounts falling due within one   year
Loans	(15,000)		(14,000)
Other	(1,129)		(1,044)
Derivative financial instruments	(28)		(60)
	(16,157)		(15,104)
Net current liabilities		(15,027)		(11,478)
Net assets		167,290		177,427
Capital and reserves
Share capital		21,452		21,336
Share premium account		88,374		87,452
Capital redemption reserve		4,146		4,146
Special reserve		4,434		4,434
Capital reserves		42,413		54,572
Revenue reserve		6,471		5,487
Total shareholders' funds		167,290		177,427
Net asset value per ordinary share - pence		194.96		207.90

Cash Flow Statement

for the year ended 30 September		2011		2010
	£'000s	£'000s	£'000s	£'000s
Operating activities
Investment income received	8,809		7,808
Interest received	5		6
Other revenue	40		134
Premium from option writing	875		-
Fee paid to management company	(802)		(702)
Fees paid to Directors	(100)		(91)
Other payments	(589)		(665)
Net cash inflow from operating activities		8,238		6,490
Servicing of finance
Interest paid	(359)		(312)
Net cash outflow from the servicing of finance		(359)		(312)
Financial investment
Purchases of investments and derivatives	(52,110)		(19,013)
Sales of investments and derivatives	46,065		16,472
Other capital charges	(11)		(26)
Net cash outflow from financial investment		(6,056)		(2,567)
Equity dividends paid		(7,357)		(7,070)
Net cash outflow before use of      liquid resources and financing		(5,534)		(3,459)
Management of liquid resources
Decrease/(increase) in short-term deposits		2,075		(229)
Financing
Sterling loans raised	1,000		-
Shares purchased	-		-
Shares issued	1,786		3,137
Net cash inflow from financing		2,786		3,137
Decrease in cash		(673)		(551)

Notes

1   Return per ordinary share

Revenue return

The revenue return per share is based on the revenue return attributable to shareholders of £8,341,000 profit (2010: £6,755,000 profit).

Capital return

The capital return per share is based on the capital return attributable to shareholders of £12,159,000 loss

(2010: £7,580,000 profit).

Total return

The total return per share is based on the total return attributable to shareholders of £3,818,000 loss (2010: £14,335,000 profit).

Weighted average ordinary shares in issue

Both the revenue and capital returns per share are based on a weighted average of 85,560,145 (2010: 84,177,419) 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 2011 of 2.65 pence per share, payable on 30 December 2011 to all shareholders on the register at close of business on 2 December 2011.

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 the Manager's Report and in the Directors' Report and Business Review.  The exposure on the Company's positions at 30 September 2011 amounted to £4,771,000 (30 September 20010 - £2,888,000).

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 £182,317,000 at 30 September 2011 (2010: £188,905,000) 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. 

(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 (82 at 30 September 2011 and 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 Scotiabank (Ireland) Limited of £20 million.

(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 15 February 2012 at 11.30 a.m.

5    Report and accounts

The report and accounts for the year ended 30 September 2011 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

24 November 2011

Principal risks

Like all businesses, the Company faces risks and uncertainties.  Most of the Company's principal risks and, and its opportunities, are market related and no different to those of other investment trusts investing primarily in listed markets.  The principal risks and uncertainties faced by the Company, and its mitigation approach, are described below:

Objective and strategy

Risk description: Inappropriate objective and long-term strategy in relation to investor demands in rapidly changing financial services and savings market.

Mitigation: The Board regularly reviews the Company's position within the investment trust industry and considers strategic issues annually.

Investment policy and gearing

Risk description: Inappropriate asset allocation, sector and stock selection and use of gearing leading to investment underperformance

Mitigation: Investments are primarily in a diversified spread of FTSE All-Share companies.  Investment policy and performance is reviewed with the Fund Manager at each Board meeting, along with the monitoring of cash and borrowing levels as well as options written.  The Board approves all borrowing facility agreements and has set a limit on gearing and option writing.

Management resource, stability and controls

Risk description: The Company has no employees and therefore all of its investments and operational functions are delegated to service providers.  The Manager is the main service provider and its failure to continue operating effectively could put in jeopardy the business of the Company.

Mitigation: The Board meets regularly with the senior management of the Manager and reviews its appointment annually.  Control Reports are provided by the Manager's Internal Audit function.  The Board has access to publicly available information indicative of the Manager's financial position and performance.  The contract can be moved at short notice.

Service providers

Risk description: Administrative errors or control failures by or between service providers could be damaging to the interests of investors and the Company.

Mitigation: The Board receives regular reports from the Manager on its oversight of service providers which, for the administration of the F&C Plans, includes audit site visits; monthly technical compliance monitoring; monthly service delivery meetings; quarterly financial crime prevention forums; and the detailed review and investigation of breaches and complaints.  Arrangements are also in place to mitigate other service provider risks, including those relating to safe custody.

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 2011 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 and their impact on the financial statements;

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

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

On behalf of the Board

Pen Kent

Chairman

24 November 2011

 

END

 

 

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