Annual Financial Report

RNS Number : 2185S

F&C Capital & Income Inv Tst PLC

28 November 2012

 



Date:                28 November 2012

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 2012

HIGHLIGHTS

·      Three interim dividends totalling 6.15 pence per share paid.

·      Fourth interim dividend of 2.85 pence per share declared.

·      2,075,000 shares issued at a small premium during the year.

Summary of results

Attributable to shareholders	30 September 2012	30 September 2011	% Change
Net assets	£195.11m	£167.29m	+16.6
Net asset value per share	222.01p	194.96p	+13.9
Net revenue after tax	£8.72m	£8.34m	+4.5
Revenue return per share	10.01p	9.75p	+2.7
Dividends per share	9.00p	8.65p	+4.0
Share price	225.50p	206.00p	+9.5

The Chairman, commenting on the results, said:

It is always difficult to take over from a successful Chairman, and my predecessor, Pen Kent, was certainly that. That is why I am glad to be able to report, in my first annual statement to you, a good year in both absolute and relative terms. Furthermore, this is the 20th anniversary of your Company and, for those of you who have been shareholders since the launch, returns have been good. You have seen a total return of over 320% and the annual dividend has risen from an initial 3.4 pence per share to 9 pence per share this year. This represents income growth of 165%. By way of comparison, dividends on the FTSE All-Share Index ("the Index") have risen by 87% over the same period. All this highlights the value of taking a long term approach to investment.

Your company was amongst the first to be involved in the use of share buybacks to control the discount to net asset value and also amongst the first to issue new stock when the share price traded at a premium. If the Board and the Fund Manager can deliver a similar combination of good returns and corporate innovation over the next 20 years, we will have reason to be proud.

Performance

Turning to the year under review, the Net Asset Value ("NAV") rose by 13.9% while the Index rose by 13.0%. Including income, the NAV return, was 18.4%, whilst the Index was 17.3%. In absolute terms, this is a positive result in what was a difficult year for the UK economy. In relative terms it is pleasing that your Fund Manager, Julian Cane, has outpaced the Index by a reasonable margin. As you know, our strategy aims to generate returns from both income growth and capital accretion. This can be particularly challenging relative to an index when either growth or income dominates investment returns. This year, though, our total return was also greater than that of the FTSE 350 High Yield Index of 16.1%.

Turning to the five year returns, we can see the impact of the financial crisis. Our NAV over this period fell by 14.2%, but when we add the income back, that becomes a positive return of 5.2%. This is ahead of the FTSE 350 High Yield index but slightly behind the All Share Index, illustrating the point that it is sometimes hard to serve two masters. Nevertheless, your Board continues to believe that there is an inherent logic in trying to generate returns from solid dividends and dividend growth as well as from capital appreciation.

Over the year, the share price lagged the NAV somewhat, increasing by 9.5%. This reflects the fact that the premium to NAV has shrunk from the rather elevated level it reached at the end of the last financial year.

Revenue account

Our income rose by 4.5%, reflecting a rise in dividends from the portfolio of 7.6%. Dividend increases partly illustrate further recovery from the damage wrought by the financial crisis, but reflect other factors which are more surprising. The absence of corporate activity and the low level of capital spending have combined to allow companies to build up cash in a way which is unusual at this stage of an economic cycle. This is a feature of a rather lacklustre economic environment which might lead one to think that corporations are in poor shape. The opposite is true, though, with margins and free cash flow being surprisingly robust.

This year the income from our option writing strategy was lower than last year, although still a helpful contributor. It will, however, remain a volatile source of extra income because of the innate conservatism of the approach Julian is following.

Putting this together, we have been able to pay three dividends so far this year amounting to 6.15 pence per share, and we are paying a fourth of 2.85 pence per share to give a total for the year of 9.00 pence per share. This represents an increase over the previous year of just over 4% and continues the progressive trend. The fourth payment will, as usual, be paid as an interim rather than final dividend, which means we can pay it at the calendar year end rather than wait until after the AGM in February. This does mean that shareholders do not vote on the matter, but feedback from you has been strongly in favour of maintaining a regular quarterly payment.

Discount

Yours is one of the fortunate few investment trusts whose shares have rarely traded at a discount in recent years. During the year, it traded at a discount on 3 days and averaged a premium of 2.3% over the course of the year. This general situation has been the case now for nearly four years. There are no doubt many reasons why the shares trade frequently at a premium to NAV, but it is perhaps not a coincidence that investors have a preference for yield in a capital market environment where income is hard to come by from traditional sources such as bank deposits. While nobody likes discounts in investment trusts, they should be just as wary of excessive premiums. For this reason, the Board issues shares to meet demand from shareholders and this year we have issued 2,075,000 shares, which amounts to just over 2.4% of last year's share capital.

Of course, things can change and it is worth reiterating the words of my predecessor that we remain committed to buying shares back should a material discount arise.

At the AGM in 2013 the 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. These shares will only be issued at a premium so as not to dilute the interests of existing shareholders. This authority will give the Board the maximum flexibility to continue to issue shares throughout the year and we believe it to be in the interests of all shareholders.

Board

The succession plan put in place in 2010 continues to develop as foreseen. This year, we appointed Clare Dobie to the Board. She has a background as a financial journalist and then in senior marketing roles in investment management. We regard the issue of shareholder communication as increasingly important, partly as a result of changes in the regulatory environment and partly because it is an area which has too often been overlooked. Clare has expertise in this subject and has already contributed to the shareholder survey which we have been conducting ahead of our continuation vote. She will put herself forward for election at the AGM in February and I hope that she will have your support.

Sadly, Hugh Priestley will be retiring at the AGM. He has served on the Board for 13 years and I would like to thank him on behalf of all of us for his contributions, always delivered with insight and wry humour. It may sound like a bit of a cliché, but we wish him all the best in the future.

My predecessor foreshadowed a review of Directors' fees which were last reviewed in July 2008. The long gap between reviews presents specific problems, not least the sensitivity of proposing an increase. Nevertheless, market evidence suggests that the fees paid to your Company's Directors have fallen well behind the peer group average and do not reflect the increased work load associated with a higher regulatory burden. For this reason, we have decided to phase in over two years the increases needed to bring Directors' fees up to a more competitive level.

Shareholder Communication

The majority of you hold your shares through one or other of the F&C Savings Plans. This makes it difficult to communicate directly with you other than through formal documents like this one. For this reason, and to canvass opinion ahead of the continuation vote which will be held at the AGM in February, we have conducted a shareholder survey to solicit a broad range of your views and opinions on the Company. In order to keep the budget within prudent limits, we conducted the survey by addressing approximately one third of our shareholder base. This does not mean that we are not interested in everyone's views, and we encourage you to let us know directly if you wish to express an opinion, whether good or bad.

The results of this survey have now been collated and I thought you might be interested to hear the general conclusions. The first is that, of the 9,710 surveys sent out, we received 1,887 responses, a rate of 19.4%. This is an excellent rate of response, and I would like to thank all of you who took the time to fill in the questionnaire. Many of you are genuinely involved in the process of making and monitoring your investment. I can assure you that both the Board and the Manager value and will take into account the views you have expressed.

For us as a Board, probably the most important questions you answered related to the Company's objective and how it is doing. On the matter of what we are about, more than half of you felt that the capital growth element of our return was what mattered most, with a smaller number (but still over 40% of responders) seeing dividend growth as particularly important. This seems to reflect the dual mandate implied in our Company name. On the matter of investment performance, nearly 60% of you felt that the performance was satisfactory or very satisfactory, with the balance sitting largely in the neutral camp. Very few shareholders seem to feel dissatisfied with the returns they have been seeing, although many of you note that long term poor performance would be a likely sell trigger should it arise. There was general support for the continuation of the quarterly dividend, and so we intend to carry on as we are on this front.

At the AGM, I will say a few words about the survey and there will be an opportunity to ask questions of the Board and Manager about the issues it raises. The results endorse the Board's view that the Company should continue as an investment trust and that it continues to serve a useful purpose.

AGM

This will take place on 13 February 2013 at the registered office, Exchange House, Primrose Street, London EC2 at 11:30 am. I would encourage all shareholders to attend if they can. My colleagues on the Board and I will be available to answer any questions you may have and Julian will be making a presentation on the investment scene.

Apart from the normal business of an AGM, there are two unusual pieces of business.

1. The first is a continuation vote. The Company holds a continuation vote every five years to give shareholders the opportunity to vote on whether they wish the Company to continue as an investment trust. The Company has returned strong performance over the long term and my fellow Directors and I have no hesitation in recommending that you vote in favour of the Company's continuation. Those Directors who hold shares intend to vote their own beneficial holdings the same way.

2. The second is a proposal to amend the articles of association so as to allow the Company to pay dividends out of its capital profits. This is a change permitted by new provisions in the Companies Act to provide boards with greater flexibility in how to make dividend payments. Although technical in nature, this is a liberalisation of the rules which had allowed dividends to be paid only out of revenue. While your Board has no current intention of paying dividends out of capital and indeed has revenue reserves of £7,522,000, it seems prudent to update the articles to reflect the new state of affairs.

Investment Outlook

It has been one of those years when investors look at the economy and try to relate it to the stock market performance find the whole thing rather confusing. The economic prognosis at home remains difficult, with the prospect of several more years where we all face further austerity as the headwinds to growth remain powerful. On the global front, the fiscal cliff in the US and the continuing crisis in Europe are potentially unsettling and it can seem mystifying then that the stock market should put in a very respectable performance for the year.

There are many reasons, though, why it is doing fairly well. The first is that there is a dearth of investment opportunity elsewhere: cash yields almost nothing; government bonds look more expensive than at any time in history; and that interest rates, and therefore returns on cash, are likely to remain low for the foreseeable future. Second, the corporate sector is in good shape: balance sheets are sound; sales have held up fairly well; and returns on capital remain strong. Third, the stock market offers reasonable value: yields are relatively high; dividends are growing; and on longer term comparisons, the market is as much as 20% below its average 10 year valuation.

Most of these influences will remain powerful in the year ahead. Of course, a strong rise in the market would undermine the valuation pillar of the argument, but for now and in the absence of a major geopolitical accident, they are supportive.

The Board is confident that Julian Cane and his team have the experience and resources needed to take advantage of the opportunities in the markets and that the next twenty years should be rewarding, albeit with many fluctuations.

Steven Bates

Chairman

28 November 2012

Income Statement

for the year ended 30 September	2012			2011
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains/(losses) on investments and derivatives	-	23,037	23,037	-	(11,582)	(11,582)
Foreign exchange (losses)/gains	(10)	(178)	(188)	-	12	12
Income	9,940	-	9,940	9,671	-	9,671
Management fee	(392)	(392)	(784)	(397)	(397)	(794)
Other expenses	(692)	(9)	(701)	(714)	(14)	(728)
Net return before finance costs and taxation	8,846	22,458	31,304	8,560	(11,981)	(3,421)
Finance costs	(82)	(82)	(164)	(178)	(178)	(356)
Net return on ordinary activities before taxation	8,764	22,376	31,140	8,382	(12,159)	(3,777)
Taxation on ordinary activities	(49)	-	(49)	(41)	-	(41)
Net return attributable to shareholders	8,715	22,376	31,091	8,341	(12,159)	(3,818)
Return per share - pence	10.01	25.69	35.70	9.75	(14.21)	(4.46)

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 2012
		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 2011	21,452	88,374	4,146	4,434	42,413	6,471	167,290
Movements during the year      ended 30 September 2012
Dividends paid	-	-	-	-	-	(7,664)	(7,664)
Ordinary shares issued	519	3,876	-	-	-	-	4,395
Net return attributable to     shareholders	-	-	-	-	22,376	8,715	31,091
Balance at 30 September 2012	21,971	92,250	4,146	4,434	64,789	7,522	195,112

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

Balance Sheet

at 30 September		2012		2011
	£'000s	£'000s	£'000s	£'000s
Fixed assets
Investments		197,312		182,317
Current assets
Debtors	580		996
Cash at bank and short-term deposits	5,587		134
	6,167		1,130
Creditors: amounts falling due within one   year
Loans	(7,967)		(15,000)
Other	(400)		(1,129)
Derivative financial instruments	-		(28)
	(8,367)		(16,157)
Net current liabilities		(2,200)		(15,027)
Net assets		195,112		167,290
Capital and reserves
Share capital		21,971		21,452
Share premium account		92,250		88,374
Capital redemption reserve		4,146		4,146
Special reserve		4,434		4,434
Capital reserves		64,789		42,413
Revenue reserve		7,522		6,471
Total shareholders' funds		195,112		167,290
Net asset value per ordinary share - pence		222.01		194.96

Cash Flow Statement

for the year ended 30 September		2012		2011
	£'000s	£'000s	£'000s	£'000s
Operating activities
Investment income received	9,455		8,809
Interest received	15		5
Other revenue	54		40
Premium from option writing	399		875
Fee paid to management company	(762)		(802)
Fees paid to Directors	(100)		(100)
Other payments	(586)		(589)
Net cash inflow from operating activities		8,475		8,238
Servicing of finance
Interest paid	(180)		(359)
Net cash outflow from the servicing of finance		(180)		(359)
Financial investment
Purchases of investments and derivatives	(33,567)		(52,110)
Sales of investments and derivatives	41,937		46,065
Other capital charges	(10)		(11)
Net cash inflow/(outflow) from financial investment		8,360		(6,056)
Equity dividends paid		(7,664)		(7,357)
Net cash inflow/(outflow) before use of      liquid resources and financing		8,991		(5,534)
Management of liquid resources
(Increase)/decrease in short-term deposits		(5,326)		2,075
Financing
Loans (repaid)/raised	(6,909)		1,000
Shares issued	4,409		1,786
Net cash (outflow)/inflow from financing		(2,500)		2,786
Increase/(decrease) in cash		1,165		(673)

Notes

1   Return per ordinary share

Revenue return

The revenue return per share is based on the revenue return attributable to shareholders of £8,715,000 profit (2011: £8,341,000 profit).

Capital return

The capital return per share is based on the capital return attributable to shareholders of £22,376,000 profit

(2011: £12,159,000 loss).

Total return

The total return per share is based on the total return attributable to shareholders of £31,091,000 profit (2011: £3,818,000 loss).

Weighted average ordinary shares in issue

Both the revenue and capital returns per share are based on a weighted average of 87,096,700 (2011: 85,560,145) 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 2012 of 2.85 pence per share, payable on 31 December 2012 to all shareholders on the register at close of business on 7 December 2012.

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. 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 euros, 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 2012 amounted to £nil (30 September 2011 - £4,771,000).

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 £197,312,000 at 30 September 2012 (2011: £182,317,000) 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. 

(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 (78 at 30 September 2012 and 82 at 30 September 2011); the liquid nature of the portfolio of investments; the industrial and geographical diversity of the portfolio; and the existence of an ongoing loan and overdraft 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 13 February 2013 at 11.30 a.m.

5    Report and accounts

The report and accounts for the year ended 30 September 2012 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

28 November 2012

 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 strategy in relation to investor demands in a 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, gearing and currency

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

Mitigation: Investments are primarily in a diversified spread of FTSE All-Share companies. Investment policy and performance are 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 limits on gearing and option writing.

Management resource, stability and controls

Risk description: The Company has no employees and therefore all of its 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 its financial position and performance.  The contract can be moved at six months' 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 providers of services relating to investments settlement and record keeping and to administration of the F&C Savings Plans. Such regular oversight includes: audit site visits; technical compliance monitoring; service delivery meetings including key performance indicators; and detailed reviews and investigation of complaints, errors and breaches. The Manager also has arrangements in place to limit risks from safe custody and counterparty failures and reports regularly to the Board in that regard.

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 2012 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

Steven Bates

Chairman

28 November 2012

 

END

 

 

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