Half Yearly Report

RNS Number : 7314T

Midas Income & Growth Trust PLC

18 December 2012

 



To:                    RNS

From:                Midas Income and Growth Trust plc

Date:                18 December 2012

Unaudited results for the six months ended 31 October 2012

·      Net asset value total return of 5.1%

·      Share price total return of 7.1%

·      Quarterly dividends of 1.30p

·      Share price discount to net asset value of 12.0% (averaged 13.22% over the period)

Introduction

This Interim Report covers the six months from 1 May to 31 October 2012, which may fairly be taken to represent the first reporting period since shareholders approved changes to the Company's investment policy and other related matters on 18 January 2012.  

You may recall that these changes included rebasing the dividend, increasing the core allocation to overseas equities, reducing the core allocation to fixed income and widening asset allocation ranges.

Investment and Share Price Performance 

I am pleased to report that your Company's net asset value total return for the six month period was 5.1 per cent, ahead of the new Benchmark return of 1.9 per cent.  This outperformance was achieved in the context of a volatility level that was substantially lower than that of the market. The Company's share price total return was rather better at 7.1 per cent, the discount at which the Company's shares trade narrowing a little from 12.9 per cent to 12.0 per cent at the period end.

Dividends and Income

Your Company paid two interim dividends of 1.30 pence per share for the period in accordance with the intention stated in the December 2011 Circular to shareholders.  Earnings per share for the six months were 2.55 pence per share and it is anticipated that a dividend for the full year of 5.20 pence will be well covered. 

Investment Strategy and Outlook

I outlined above certain other changes to your Company's investment policy, including an increase in the core allocation to overseas equities and a reduction in the core allocation to fixed income.  It is particularly pleasing that it is this switch which has contributed most to your Company's strong performance during the period.  The Manager speaks of this at greater length in his Review.

Looking ahead, the "fiscal cliff" has replaced the election as a source of uncertainty in the United States, while Europe hopes that it has done enough to provide a measure of stability until after the German election in September next year.  This is an environment in which opportunities will present themselves, and the Manager has left some £2m of cash on the Balance Sheet at the period end against that eventuality.  On the other hand, while the new Chinese leadership promises business as usual, one may doubt whether any change from the world's low growth trajectory is imminent.

Against this backdrop, our commitment to income, preferably equity income, remains.  The period under review is too short to allow for the drawing of any conclusions, but your Company has made a strong start in its new incarnation and I believe that the portfolio is well positioned for the period ahead as we move to the first of your Company's annual continuation votes at the Annual General Meeting in 2013.

Hubert Reid

Chairman

17 December 2012

Manager's Review

Market Commentary

Financial markets began the period with significant weakness in May as a myriad of headwinds undermined investor sentiment. The main concern remained the deteriorating geo-political landscape and in particular the growing debt crisis in Southern Europe. Equity markets fell to their lowest levels this year by early June before rallying, spurred by better economic emerging data from the United States and more concerted monetary policy initiatives from the world's central banks. The more supportive comments by Mario Draghi, President of the European Central Bank, in July proved a further catalyst for better sentiment which developed through the latter part of the summer. However, markets again succumbed to a bout of uncertainty late in the period, as the US Presidential election loomed and commentators began to focus on the 'Fiscal Cliff' faced by the new United States administration early in 2013.

Corporate earnings in the developed markets began to show signs of deterioration as the period progressed and commentators questioned whether a generally weaker economic environment would lead to further downgrades. With equity valuations trading at moderately extended, rather than cheap levels, investors began to once again question the advantages of holding riskier assets. However, with bond yields at multi year lows, equity valuations appeared to many investors to be offering better value.

Investment Report

The returns from the portfolio over this period have been helped by the changes put in place by shareholders in January. In particular the higher weighting to overseas equity markets has proven beneficial. Manager selection has been focussed on income producing strategies, as we continue to feel that income will prove to be a substantial component to overall returns in the low growth, low return environment which seems likely to persist for several years to come.

The Company's net asset value total return was 5.1% for the period, which compared favourably with the Benchmark return of 1.9%.This outturn was particularly pleasing given the portfolio return has been achieved with roughly half the level of the FTSE 100 Index volatility. The share price total return was even better at 7.1% as the discount at which the shares trade narrowed over the period.

Portfolio

UK equity positions were reduced slightly as profit was taken on several positions. In particular more defensive holdings in Unilever, Reckitt Benckiser, Vodafone, GlaxoSmithKline and AstraZeneca were trimmed. Strong price performance in William Hill, D S Smith, Legal & General, Intermediate Capital and W S Atkins also led to profit taking. Indeed D S Smith was the largest single contributor to portfolio returns over the period (up 27%). Meanwhile the holdings in Diageo and Prudential were sold on valuation grounds, following very strong gains. The position in HSBC was also sold to facilitate a switch into Standard Chartered, which gives a much purer exposure to growth in emerging markets. Other new positions initiated over the period included GKN and Kingfisher, with both companies looking likely to benefit from consolidation in their respective markets. An investment in the Diverse Income Trust was made to improve the breadth of UK equity exposure into the rather overlooked smaller company area. The main detractor from returns over the period was Man Group, which was sold in early October following a bounce in the shares from their very low levels seen in July. Overall focus remains on companies with strong balance sheets and cash-flows, which can support good and growing dividends.

Overseas equity exposure was increased over the period with US Equity positions bolstered by the purchase of Blackrock North American Income Trust.  Emerging market equity positions were added to through a further purchase of the UBS Emerging Market Equity Income Fund, together with a new position in the Magna Emerging Market Dividend Fund.  Asia, Europe and Latin America were increased by small follow on investments respectively in Schroder Asian Income Maximiser Fund, Henderson European Focus Trust and Aberdeen Latin American Income Fund. Holdings have, in general, performed satisfactorily when compared both to local indices and in terms of absolute returns. Within Asia, the Prusik Asian Equity Income Fund continued to demonstrate strong performance, returning over 13%, with its emphasis on mid-sized companies. This was complementary to the Newton Asian Income Fund and Schroder Oriental Income Fund, which also performed well. The bounce in European equities helped produce a 12% return in Henderson European Focus Trust, whilst Japanese Equity positions benefitted from being hedged, as the yen weakened over the period.

It has been pleasing to see that, whilst the Overseas equity manager selection has been made with a view to defensive growth in income generation, the managers have also performed well in the more 'risk on' environment. We believe the combination of high quality, proven managers in both open and closed end structures gives added flexibility, breadth and liquidity to the Company's positioning.

Fixed interest positions were reduced with Invesco Leveraged High Yield Fund and Royal Insurance 7.375% Preference shares being top sliced, whilst the Company's holding in the Lloyds Banking Group 7.975% 2024 was sold completely following strong performance. The holding in Royal London Sterling Extra Yield Fund continued to deliver strong returns, producing 9.4% over the period. Elsewhere there were small additions to AXA US Short Duration High Yield Fund and Harbourvest Senior Loans Europe Fund, as the policy of shortening duration (and interest rate risk) that began earlier in the year, was further pursued. Weakness in the share price of the City Merchants High Yield Trust was used as an opportunity to reinvest on a discount to net asset value. Cash balances were reduced over the period and stood at 3.5% at the period end.

Alternative asset positions have again demonstrated mixed fortunes with quoted private equity performing well, whilst hedge funds have produced slightly disappointing returns. The Company's position in A J Bell Holdings (AJB) was reduced on 29 May at 500p per share, reinforcing the carried value established in June 2011. On 13 June AJB announced excellent interim results, which bodes well for future carried value reviews.

Partners Group Global Opportunities produced a positive contribution as two further redemptions were made at a 5% discount to net asset value (the holding is being carried at a 20% discount due to its limited liquidity). Meanwhile Princess Private Equity produced a very solid 11% return over the period and maintained its high level of dividend distributions. Quoted hedge fund of funds Acencia Debt Strategies produced a positive return, whilst Signet Fixed Interest Strategies proved a drag on performance, despite a tender offer for 20% of its shares at a considerable premium to the share price (the residual holding experiencing price weakness). A rally in the share price of Phaunos Timber in August was used as an opportunity to sell the position, given our growing concerns over the corporate governance of the Company.

Property holdings generally gave positive returns with the concentration on Asian investments proving beneficial. Celsius Asian Real Estate Income Fund was the pick of holdings, producing an 8% return, whilst Macau Property Opportunities also produced a positive return, despite the discount to net asset value widening. Duet Real Estate Finance was slightly disappointing, as the shares drifted, with the manager being slow to deploy cash into the commercial property mezzanine finance market.

Portfolio Asset Allocation

The portfolio asset allocation at 31 October 2012 is shown in the table below.

Asset Class	Portfolio Weight	Core Allocation	Allocation Range
	%	%	%
UK Equities	32.3   (34.5)	35	15-60
Overseas Equities	30.7   (23.3)	25	10-40
Total equities	63.0   (57.8)	60	25-85
Fixed Interest (inc Cash)	17.2   (17.9)	15	10-40
Alternative Assets	14.4   (18.3)	15	0-25
Property	5.4   (6.0)	10	0-25

All figures are expressed as a percentage of Gross assets.

Figures in brackets are portfolio weightings at 30 April 2012.

Summary

We believe that the current low growth environment is likely to persist for a period of years and yet inflation risks remain elevated due to the loose monetary policy being pursued by the major central banks. The main thrust of the current investment strategy has been to emphasise income producing assets, particularly equities, where any capital returns will be enhanced by the more reliable (and growing) income stream generated. 

Demographics are dictating that maintaining income in real terms will become ever more important to a wide range of investors and, as such, will lead to a reassessment of the 20 year bull market in bonds. With sovereign bond markets being manipulated by governments and central banks we remain very wary of these assets, where perceptions of safety may prove to be misplaced. To our minds 'real assets' such as equities and, to a lesser extent, property remain more attractive, whilst growing consumerism in emerging market economies also presents long term opportunities, which we are pursuing through the variety of  routes available to our multi asset investment approach.

Midas Capital Partners Limited

17 December 2012

Enquiries:

Alan Borrows

Midas Capital Partners                                       Tel:  [phone]

Martin Cassels, Company Secretary

R&H Fund Services Limited                                Tel:  [phone]

Unaudited Income Statement

		Six months ended 31 October 2012 (unaudited)			Six months ended 31 October 2011 (unaudited)
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Gains / (losses) on investments	2	-	1,543	1,543	-	(2,960)	(2,960)
Income		1,334	-	1,334	1,554	2	1,556
Investment management fee		(93)	(93)	(186)	(124)	(124)	(248)
Administration fee		(184)	-	(184)	(180)	-	(180)
Exchange losses		-	(4)	(4)	-	(1)	(1)
Net return before finance costs and taxation		1,057	1,446	2,503	1,250	(3,083)	(1,833)
Finance costs		(38)	(38)	(76)	(76)	(76)	(152)
Net return on ordinary activities before taxation		1,019	1,408	2,427	1,174	(3,159)	(1,985)
Taxation on ordinary activities		-	-	-	-	-	-
Return on ordinary activities after taxation		1,019	1,408	2,427	1,174	(3,159)	(1,985)
Return per share (pence):	3	2.55	3.53	6.08	2.94	(7.91)	(4.97)

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

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

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

Audited Income Statement

		Year ended 30 April 2012 (audited)
		Revenue	Capital	Total
	Notes	£'000	£'000	£'000
Losses on investments	2	-	(2,745)	(2,745)
Income		3,075	4	3,079
Investment management fee		(225)	(225)	(450)
Administration fee		(418)	-	(418)
Exchange losses		-	(8)	(8)
Net return before finance costs and taxation		2,432	(2,974)	(542)
Finance costs		(118)	(118)	(236)
Net return on ordinary activities before taxation		2,314	(3,092)	(778)
Taxation on ordinary activities	3	-	-	-
Return on ordinary activities after taxation		2,314	(3,092)	(778)
Return per share (pence):	4	5.80	(7.75)	(1.95)

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

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

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

Balance Sheet
		As at 31 October	As at 31 October	As at 30 April
		2012	2011	2012
		(unaudited)	(unaudited)	(audited)
		£'000	£'000	£'000
Non-current assets
Investments at fair value through profit or loss		54,213	52,487	52,811
Current assets
Debtors and prepayments		209	225	347
Cash at short term deposits		2,002	2,432	1,828
		2,211	2,657	2,175
Creditors: amounts falling due within one year
Bank loan		(7,000)	(7,000)	(7,000)
Other creditors		(146)	(293)	(97)
		(7,146)	(7,293)	(7,097)
Net current liabilities		(4,935)	(4,636)	(4,922)
Net assets		49,278	47,851	47,889
Capital and reserves
Called-up share capital		9,974	9,974	9,974
Share premium account		1,445	1,445	1,445
Special reserve		41,783	41,783	41,783
Capital redemption reserve		2,099	2,099	2,099
Capital reserve	6	(6,639)	(8,114)	(8,047)
Revenue reserve		616	664	635
Equity shareholders' funds		49,278	47,851	47,889
Net asset value per Ordinary share (pence):	8	123.52	119.94	120.03

Reconciliation of Movements in Shareholders' Funds

Six month ended 31 October 2012 (unaudited)

	Notes	Share capital	Share premium	Special reserve	Capital redemption reserve	Capital reserve	Revenue reserve	Total
		£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 April 2012		9,974	1,445	41,783	2,099	(8,047)	635	47,889
Return on ordinary activities after taxation		-	-	-	-	1,408	1,019	2,427
Dividends paid		-	-	-	-	-	(1,038)	(1,038)
Balance at 31 October 2012		9,974	1,445	41,783	2,099	(6,639)	616	49,278

Six month ended 31 October 2011 (unaudited)

	Notes	Share capital	Share premium	Special reserve	Capital redemption reserve	Capital reserve	Revenue reserve	Total
		£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 April 2011		10,012	1,445	41,954	2,061	(4,955)	790	51,307
Purchase of ordinary shares for cancellation		(38)	-	(171)	38	-	-	(171)
Return on ordinary activities after taxation		-	-	-	-	(3,159)	1,174	(1,985)
Dividends paid		-	-	-	-	-	(1,300)	(1,300)
Balance at 31 October 2011		9,974	1,445	41,783	2,099	(8,114)	664	47,851

Year ended 30 April 2012 (audited)

	Notes	Share capital	Share premium	Special reserve	Capital redemption reserve	Capital reserve	Revenue reserve	Total
		£'000	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 April 2011		10,012	1,445	41,954	2,061	(4,955)	790	51,307
Purchase of ordinary shares for cancellation		(38)	-	(171)	38	-	-	(171)
Return on ordinary activities after taxation		-	-	-	-	(3,092)	2,314	(778)
Dividends paid		-	-	-	-	-	(2,469)	(2,469)
Balance at 30 April 2012		9,974	1,445	41,783	2,099	(8,047)	635	47,889

Cash Flow Statement
	Six months ended 31 October 2012 (unaudited)	Six months ended 31 October 2011 (unaudited)	Year ended 30 April 2012 (audited)
	£'000	£'000	£'000
Net return / (loss) on ordinary activities before finance costs and taxation	2,503	(1,833)	(542)
Adjustments for: (Gains) / losses on investments	(1,543)	2,960	2,745
Exchange losses	4	1	8
Decrease in accrued income	158	232	105
Increase in other debtors	(18)	(14)	(9)
Increase / (decrease) in creditors	50	(6)	(21)
Net cash inflow from operating activities	1,154	1,340	2,286
Net cash outflow from servicing of finance	(78)	(152)	(250)
Net cash inflow from financial investment	140	2,243	1,968
Equity dividends paid	(1,038)	(1,300)	(2,469)
Net cash inflow before financing	178	2,131	1,535
Net cash inflow from financing	-	(170)	(171)
Increase in cash	178	1,961	1,364
Reconciliation of net cash flow to movement in net debt
Increase in cash as above	178	1,961	1,364
Foreign exchange movements	(4)	(1)	(8)
Movement in net debt in the period	174	1,960	1,356
Opening net debt	(5,172)	(6,528)	(6,528)
Closing net debt	(4,998)	(4,568)	(5,172)
Represented by:
Cash at bank and in hand	2,002	2,432	1,828
Debt falling due within one year	(7000)	(7,000)	(7,000)
	(4,998)	(4,568)	(5,172)

Notes

1.   Accounting policies

Basis of accounting

The accounts have been prepared in accordance with applicable UK Accounting Standards, with pronouncements on half-yearly reporting issued by the Accounting Standards Board and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (issued in January 2009). They have also been prepared on the assumption that approval as an investment trust will continue to be granted. The financial statements have been prepared on a going concern basis.

The financial statements and the net asset value per share figures have been prepared in

accordance with UK Generally Accepted Accounting Practice (UK GAAP).

The half yearly financial statements have been prepared using the same accounting policies as the preceding annual accounts.

2.   Income

	Six months ended 31 October 2012 £'000	Six months ended 31 October 2011 £'000	Year ended 30 April 2012 £'000
Income from investments
UK franked income	671	772	1,580
UK unfranked income	340	376	787
Overseas dividends	318	400	697
	1,329	1,548	3,064
Other income:
Deposit interest	5	4	11
Interest from HMRC	-	2	-
	5	6	11
Total income	1,334	1,554	3,075

3 Return per share

The revenue return of 2.55 pence (31 October 2011 - 2.94 pence; 30 April 2012 - 5.80 pence) per Ordinary share is calculated on net revenue on ordinary activities after taxation for the year of £ 1,019,000 (31 October 2011 - £1,174,000; 30 April 2012 - £2,314,000) and on 39,896,361 (31 October 2011 - 39,911,035; 30 April 2012 - 39,903,738 Ordinary shares being the weighted average number of Ordinary shares in issue during the period.

The capital return of 3.53 pence (31 October 2011 - loss - 7.91 pence; 30 April 2012 - loss - 7.75 pence) per Ordinary share is calculated on net capital returns for the period of £ 1,408,000 (31 October 2011 - losses - £3,159,000; 30 April 2012 - losses - £ 3,092,000) and on 39,896,361 (31 October 2011 - 39,911,035; 30 April 2012 - 39,903,738) Ordinary shares being the weighted average number of Ordinary shares in issue during the period.

The total gain of 6.08 pence (31 October 2011 - loss - 4.97 pence; 30 April 2012 - loss - 1.95 pence) per ordinary share is calculated on the total gains for the period of £ 2,427,000 (31 October 2011 - losses - £1,985,000; 30 April 2012 - losses - £778,000) and on 39,896,361 (31 October 2011 - 39,911,035; 30 April 2012 - 39,903,738) Ordinary shares being the weighted average number of Ordinary shares in issue during the period.

4 Dividends

Ordinary dividends on equity shares deducted from reserves are analysed below:

	Six months ended 31 October 2012	Six months ended 31 October 2011	Year ended 30 April 2012
	£'000	£'000	£'000
2011 fourth interim dividend - 1.63p	-	650	650
2012 first interim dividend - 1.63p	-	650	650
2012 second interim dividend - 1.63p	-	-	650
2012 third interim dividend - 1.30p	-	-	519
2012 fourth interim dividend - 1.30p	519	-	-
2013 first interim dividend - 1.30p	519	-	-
	1,038	1,300	2,469

The Company has declared a second interim dividend in respect of the year ending 30 April 2013 of 1.30p (2012 - 1.63p) per Ordinary 25p share which was paid on 14 December 2012 to Ordinary shareholders on the register on 23 November 2012.

5 Analysis of capital reserve

The capital reserve reflected in the Balance Sheet at 31 October 2012 includes losses of

£1,040,000 (31 October 2011 - losses of £4,077,000; 30 April 2012 - losses of (2,652,000) which relate to the revaluation of investments held at the reporting date.

6 Net asset value per share

	Six months ended 31 October 2012	Six months ended 31 October 2011	Year ended 30 April 2012
Net asset value per share	£'000	£'000	£'000
Attributable net assets (£'000)	49,278	47,851	47,889
Number of Ordinary shares in issue	39,896,361	39,896,361	39,896,361
Net asset value per Ordinary share (p)	123.52	119.94	120.03

7 Half-Yearly Financial Report

The financial information contained in this Half-Yearly Financial Report does not constitute statutory accounts as defined in Sections 434 - 436 of the Companies Act 2006 and has not been audited or reviewed by the Company's auditors. The financial information for the year ended 30 April 2012 has been extracted from the latest published audited financial statements which have been filed with the Registrar of Companies. The report of the auditors on those accounts contained no qualification or statement under Section 498 (2),(3) or (4) of the Companies Act 2006.

The report and accounts for the half-year ended 31 October 2012 will be posted to shareholders and made available on the website www.midascapital.co.uk.  Copies may also be obtained from the Company Secretary, R&H Fund Services Limited, Lochside House, 7 Lochside Avenue, Edinburgh, EH12 9DJ.

Principal Risks and Uncertainties

Investment and Market Risks: Managing a portfolio of shares and debt security investments necessarily involves certain risks, the most important of which are set out in the Annual Report for the year ended 30 April 201 2. A significant proportion of the assets of the Company may be invested in debt security investments and overseas equities. Whilst this

broader spread of investments is intended to reduce the volatility and risk profile of the Company's portfolio this cannot be assured.

Shares: The market value of the Ordinary shares, as well as being affected by the net asset value, also takes into account their supply and demand. The market value of an Ordinary share can fluctuate and may not always reflect its underlying net asset value. Investment in the Company should be regarded as long term in nature. There can be no guarantee that

appreciation in the value of the Company's investments will occur and investors may not get back the full value of their original investment.

Investment Objective: There is no guarantee that the investment policy adopted by the Company will provide the returns sought by the Company.

Borrowings: The Company currently utilises gearing in the form of bank borrowings. Gearing has the effect of magnifying market falls and increasing market gains.

Currency: A proportion of the Company's portfolio may be invested in assets denominated in currencies other than sterling. This will increase the currency risk that the Company is exposed to as a result in fluctuations in the exchange rate between the denomination of the investments and the sterling denomination of the Company's base currency.

Dividends: The ability of the Company to pay dividends in respect of the Ordinary shares and any future dividend growth will depend on the level of income received from its investments. Accordingly, the amount of dividends paid to shareholders may fluctuate.

Discount: While the Board has a discount management policy, the ability to implement such a policy is dependent on a number of factors including; the ability to buy back shares in the market, the ability to fund share buybacks, the authority to buy back shares being renewed annually and the Board's discretion over the making and timing of any buybacks.

Key Individuals: The Company is substantially dependent on the services of key individuals working for its Manager, namely Alan Borrows and Simon Callow. The loss of either or both of these individuals could have an adverse effect on the Company's performance.

Taxation: Any change in the Company's tax status or in taxation legislation (including the tax treatment of dividends or other investment income received by the Company) or failure to satisfy the conditions of Sections 1158 - 1159 of the Corporation Tax Act 2010 (including the requirement for a listing) could affect the value of the investments held by the Company, affect the Company's ability to provide returns to shareholders or alter the post tax returns to shareholders.

Directors' Responsibility Statement in Respect of the Interim Report

The Directors are responsible for preparing the Interim Report.

We confirm that to the best of our knowledge:

• the condensed set of financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting' issued by the International Accounting Standards Board and give a true and fair view of the assets, liabilities, financial position and return of the company;

• the Chairman's Statement includes a fair review of the information required by DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the financial statements;

• the Statement of Principal Risks and Uncertainties shown above is a fair review of the information required by DTR 4.2.7R; and

• the condensed set of financial statements include a fair review of the information required by DTR 4.2.8R, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Company during that period  and any changes in the related party transactions described in the last Annual Report that could do so.

 

END

 

 

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