Annual Financial Report

RNS Number : 4542C

Scottish American Investment Co PLC

07 March 2011

 

 

THE SCOTTISH AMERICAN INVESTMENT COMPANY P.L.C.

 

ANNUAL REPORT AND FINANCIAL STATEMENTS

Copies of the Annual Report and Financial Statements for the year ended 31 December 2010 and the proposed new Articles of Association of the Company have been submitted electronically to the National Storage Mechanism (which replaced the UKLA's Document Viewing Facility on 1 September 2010) and will shortly be available for inspection at http://www.hemscott.com/nsm.do.

The Annual Report and Financial Statements for the year ended 31 December 2010 including the Notice of Annual General Meeting is also available on the Company's page of the Baillie Gifford website at:

www.saints-it.com

At the Annual General Meeting to be held on 7 April 2011, it is proposed to adopt new Articles of Association in order to update the Company's current Articles of Association to take account of the implementation on 1 October 2009 of the last parts of the Companies Act 2006 as well as to increase the limits on the Directors' fees.  More detail on the proposed changes to the Articles of Association is set out in the Directors' Report and the Appendix to the Notice of Annual General Meeting within the Annual Report and Financial Statements for the year ended 31 December 2010.  A copy of the new Articles of Association will be available for inspection at the offices of Dickson Minto W.S., Broadgate Tower, 20 Primrose Street, London EC2A 2EW during normal business hours on any weekday (Saturdays, Sundays and public holidays excepted) from the date of the notice of the AGM until the conclusion of the AGM. A copy will also be available at the place of the AGM for 15 minutes before and during the AGM.

The unedited full text of those parts of the Annual Report and Financial Statements for the year ended 31 December 2010 which require to be published by DTR 4.1 is set out on the following pages.

Baillie Gifford & Co

Company Secretaries

7 March 2011

Chairman's Statement

Overview

The global economy continued to recover during 2010 and most investment markets, although volatile from one month to the next, delivered good returns over the year.  Many companies reported strong growth in profits and stockmarkets around the world recorded gains.  SAINTS participated fully in this rally.

Performance

The net asset value total return (income and capital), with the debenture valued at its fair value, was 22.8%.  This compares to a benchmark total return of 15.8%.  The net asset value per share rose from 206p to 242.5p, a rise of 17.7%.  The rise in the share price was stronger still, from 181p to 245.5p.  This 35.6% gain meant that the share price finished the year at a small premium to net asset value.   

Revenues and Dividend

Total income was £16.4m in 2010 compared to £17.2m in the previous year.  This decline is explained by a fall in bond income, itself a function of transactions and declining market rates of interest.  In 2009, the revenue account also benefited from exceptional payments relating to VAT amounting to £1.6m.  These were not repeated in 2010.  The combined effect of these two factors has meant that 2010 earnings per share was 8.51p, some 6% lower than the 9.05p recorded in the previous year. This decline masks a more promising underlying picture.  Strong corporate profitability is encouraging quoted companies to raise their dividends. Our expectation is that this trend will continue in 2011.

The decline in earnings per share means that our dividend this year will not be fully covered by earnings.  However, revenue reserves are substantial (10.6p per share) and this, alongside the expectation for improving investment income in the year ahead, allows us to propose an increased dividend for 2010.

Three payments of 2.3p have already been made and we propose to pay a final dividend of 2.35p making a total of 9.25p for the year as a whole.  This is an increase of 2.2% on last year's dividend.

This rate of increase falls short of the current rate of inflation in the UK.  However, we are confident that the investment portfolio is capable of supporting real dividend growth in the medium term and longer.  Over the last five years, the dividend has risen 42% which compares to an increase in the Retail Price Index of 18%.

Borrowings

SAINTS' borrowings take the form of a single debenture due for repayment in April 2022.  The book value of these borrowed funds is £87.4m. However, since the debenture was issued at a premium to its par value, the final repayment amount will be £80m.

At the start of the year, the book value of the debenture was equivalent to approximately 32% of shareholders' funds.  For much of the year, this borrowed money was fully deployed in funding a range of investments across bond markets and in UK commercial property.  These performed well and, together with gains on the equity portfolio, contributed to a significant rise in shareholders' funds during the year.  This meant that at the year end the debenture's book value had fallen to 26% of shareholders' funds.

Supply and Demand for the Company's Shares

One of the most notable features of the last year has been the strong performance of the share price relative to our net asset value.  At the start of 2010 the discount to net asset value (debenture at fair value) stood at 12.1% but, by the end of the year, a 1.2% premium had emerged. 

This development owes much to SAINTS being able to offer a relatively high and growing dividend whilst many other forms of saving have seen income returns fall.  The Board and the Managers have also put much thought and effort into promoting SAINTS as a cost-effective savings vehicle for private investors, particularly those seeking a growing income stream, which has led to increasing demand for the shares.

Demand for regular and growing income will remain strong.  Should SAINTS continue to benefit from this and the premium to net asset value persist the Board is likely to submit a block listing application to the London Stock Exchange.  This would allow new shares to be issued to the market as well as to meet demand for shares from regular savers in the various savings schemes.  Shares would only be issued at a premium to net asset value. Such issuance is beneficial to existing shareholders as it enhances net asset value and the increase in the size of the Company, although modest, spreads the burden of its administrative costs.

Notwithstanding the above, we also intend to seek shareholders' approval at this year's AGM for the renewal of the Company's authority to buy back its own shares at a discount to net asset value. Although this has not been used in recent years, the Board believes that buy backs can be useful in certain circumstances for reducing volatility in the discount and enhancing net asset value for continuing shareholders.

Outlook

Financial market valuations reached their lowest point of the 2007-2009 financial crisis during the first quarter of 2009. Since then, markets have rallied strongly as exceptional fiscal and monetary policies in many countries have stimulated a substantial recovery in global economic activity and a significant rise in investor confidence.

We think the year ahead will be one of further China led growth in the world economy.  We also expect the corporate sector to show good growth in profits which should allow the companies in which we are invested to raise their dividends.  On this basis, we are expecting our own revenue position to improve.

However, significant economic risks persist including imbalances in world trade, rising inflation and high debt levels in some of the mature economies.  Recent developments in a number of Middle East countries also remind us that unexpected events can, and will, happen.  We therefore start this new financial year with a slightly more cautious outlook than last year.

Annual General Meeting

At the AGM, under Special Business, the Company is proposing to adopt new Articles of Association to reflect the implementation of the last parts of the Companies Act 2006 which came into force on 1 October 2009. It is also proposed that the Articles be amended to increase the limits on the Directors' fees. Whilst it is not the Board's intention to increase Directors' fees for 2011, the fees are near the current limit which allows little scope for an increase in future years. Further information on this resolution can be found on page 27 in the Director's Report in the Annual Report and details of the main changes proposed to the Articles are set out in the Appendix to the Notice of the AGM in the Annual Report.  All of the Directors are seeking re-election this year and will continue to do so on an annual basis.

The AGM will be held at 11am on Thursday 7 April at Baillie Gifford's offices at Calton Square, 1 Greenside Row, Edinburgh (see map on page 53 of the Annual Report). The Managers will make a presentation on the investment portfolio. There will also be an opportunity to ask questions and the Directors and Managers look forward to meeting you there.

Sir Brian Ivory, CBE

Chairman

18 February 2011

Managers' Report

Overview

The global economy strengthened during 2010 and most stockmarkets rose back towards the levels prevailing before the collapse of Lehman Brothers and the financial crisis in late 2008.  Most other investment markets also delivered good returns although government bonds lost some ground towards the end of the year as growth accelerated and some concerns emerged about inflation.

SAINTS returned 22.8%, a strong result.  For most of the year we were fully invested, mainly in equities but also in a variety of bond holdings, in directly held UK commercial property and in listed property and forestry funds.  The proportion invested in equities was a little below what we would normally have but this was not because we were bearish on equities. Instead it reflected a view that a number of other markets were capable of generating equally good if not better returns.  Credit markets in particular offered some very appealing opportunities.

China was, once again, the main engine of growth in the world.  Together with rapid growth in other lower per capita income countries, this meant that 2010 was another year in which the balance of economic and political power shifted south and east.  There was some improvement in the developed economies; after a faltering recovery in 2009, the general trend was for stronger growth particularly in the US and Germany.  However, high debt levels and weak banking systems still weigh on many of these economies and what strength there was owed much to supportive monetary policy and heavy borrowing by governments.

The strong investment returns mask what was another year of considerable volatility in markets.  The first half of the year, and particularly the period between April and June, was dominated by a crisis in European government debt markets which was sufficiently grave as to undermine confidence across a broad swathe of global markets.  The immediate issue was the ability of Greece to refinance certain bond issues but the broader point was the durability of the euro-zone in its current form and the sustainability of government debt levels in some of the smaller European countries. 

In the second half of the year, economic and corporate news increasingly supported a more upbeat assessment of investment prospects.  Financial markets were also buoyed by the decision of the US Federal Reserve to undertake a second round of quantitative easing and an extension of generous tax cuts by the US government.  Although much is rightly made of the declining relative importance of the US (as larger, more populous nations such as India and China grow in wealth and importance), it remains in absolute terms the single largest economy in the world.  Its health and vitality still have a very important bearing on the global economy and financial markets. Whilst the long term sustainability and impact of its current policies are open to question, they appear for the time being to have bolstered confidence in US growth prospects and are giving investors cause for optimism.

Loose monetary policy in the US also boosted growth in the developing nations.  The desire of many of these countries to fix or manage their exchange rates, principally against the dollar, required them to set interest rates at levels which, whilst appropriate for a debt-burdened US economy, were inappropriate for them.  The result was overheating economies, rising domestic prices and significant increases in globally traded food and commodity prices.

How countries react to the emergence of inflationary pressures will be an important influence on investment returns in the year ahead.  However, in 2010 strong growth and rising prices were a good combination for our companies, both in terms of trading results and share prices.  Most reported rising sales and many were able to claim satisfyingly high profit margins.  Rising profits, improving cash flows and generally strong balance sheets also encouraged quoted companies to start raising dividends again.  In the 2010 revenue account, this encouraging development was outweighed by a drop in bond income and the impact of dividend cuts announced in the previous year.  However, we are confident that it will benefit the revenue account in 2011.

Equities

On average during the year 69% of the portfolio was invested in equities.  Expressed as a percentage of shareholders' funds, the figure was 89%.  The total return for the year was 19.3%.

The direction of change in the geographic distribution of the portfolio is still away from the UK and towards overseas markets, in particular the developing nations.  However, the scale of change during 2010 was modest.  We made reductions to holdings in such traditionally familiar names as Vodafone, BP, Tesco and GlaxosmithKline and outright sales of several smaller holdings.  As a result of these, UK listed stocks represented less than 30% of SAINTS' total portfolio by the end of the year.  Because of their relatively high yields,   a more substantial reduction in the UK listed holdings would have had an unhelpful impact on the revenue account this year. 

We applied the proceeds from those sales to a variety of opportunities listed elsewhere in the world.  It is worth recording that the spur to buying a particular stock is invariably its strengths and prospects as a business rather than where it happens to be domiciled or listed.  Nonetheless, the fortunes of several holdings that entered the portfolio for the first time this year are closely tied to the long term development of the emerging nations.  Examples of these include South African listed Standard Bank, the Hong Kong and Brazilian stock exchanges and a toll road operator in western China, Sichuan Expressway.

Closer to home, we took holdings in several European listed companies.  Svenska Handelsbanken is a remarkably successful and disciplined Swedish bank that has long emphasised organic growth and capital strength.  We think these attributes will bring it good fortune in the years ahead.   As a good example of how domicile of listing matters little nowadays, we purchased Portuguese listed food retailer Jeronimo Martins but did so because of its large and successful Polish business.  We also bought Roche, the Swiss listed pharmaceuticals company.  Our positioning in the pharmaceutical industry is somewhat cautious as we are wary of the industry's ability to maintain current levels of profitability.  However we think Roche may be capable of growth and is on an undemanding rating.

Most of our other transactions were in US stocks.  The US market is, in our view, the most susceptible to a bearish assessment of valuations because the ratio of US stockmarket prices to earnings, once allowance is made for the ups and downs of the economic cycle, is significantly ahead of its long run average.  This observation prompted a general review of US holdings which, allied with some loss of patience or confidence in the investment case led to sales of several stocks including insurance and investment group Berkshire Hathaway, vet hospital group VCA Antech, document storage company Iron Mountain and swimming pool supplier Pool Corporation.  The transactions in the US were not all one way though.  We bought McDonalds, the eponymous burger and fast food chain; we think its long term prospects are excellent as it rolls out its format into the many developing nations.

In absolute terms, virtually all parts of the portfolio delivered positive returns during 2010. In comparison to our benchmark, on which the return was 15.8%, we benefited most from our European and North American investments. 

The size of our European investments was not much greater than those of the benchmark index, but their performance was considerably stronger with a 29% gain during the year compared to 6% from the benchmark's European component.  The Swedish engineering holding Atlas Copco was particularly important but we also had very significant gains on our holdings in the aforementioned Jeronimo Martins, lifts company Schindler and Swiss based private equity manager Partners Group.  North American stockmarkets enjoyed strong gains, helped by recovery in the US economy and rising overseas earnings.  Overall, our holdings performed well, notably online retailer Amazon, insurance software provider Solera and mortgage lender New York Community Bank.  Canadian listed oil company Penn West also performed well, reflecting strength in the price of crude oil.

The performance of our Emerging Market investments was actually less good than the relevant indices for those markets but we had a substantially larger allocation than contained in SAINTS' benchmark (22% against 8%). The main reasons for the performance shortfall were the relatively large allocation to Chinese stocks (which despite that country's economic strength delivered somewhat muted returns) and a holding in Brazilian oil company Petrobras (which fell over the year on concerns about equity issuance and government involvement). More positively, and in contrast to the general performance of the Chinese market, we had striking gains from a holding in Chinese internet search company Baidu (which returned over 140%).  One of our emerging market retailers, South African based Massmart, also benefited from a bid approach.

Looking at our industry exposure over the year, the strong contribution from industrial stocks gives a good indication of how the strengthening economic environment drove equity returns.  We have already mentioned Atlas Copco, but US listed agricultural machinery company Deere made almost as large a contribution.  Various companies involved in the distribution of goods through economies also fared well, notably US delivery firm UPS and Australian listed pallet distributor Brambles.  We own a varied selection of financial stocks and these did well as credit markets and the western banking system continued to heal.  Our retailing exposure is very much focused on the developing world where rising living standards and low consumer debt burdens contrast sharply with the situation faced by western consumers. We also continue to be impressed by the rate of technological change in the modern world and the way in which some companies are leading that change in a very profitable way.  The low dividend yields typically offered by these companies will prevent us owning them in as large a size as we would ideally like.  Their share price performance can also be volatile from one year to the next.  Nonetheless, ownership of companies such as internet search companies Google and Baidu and electronics manufacturer Samsung Electronics is, we believe, likely to prove a rewarding experience in the long run.

Bonds

Bond markets again presented us with some very appealing investment opportunities, the best evidence for which is the 35.1% return which our holdings delivered during 2010.  These were also significant investments for us, on average they made up just over 15% of the portfolio equivalent to 20% of shareholders' funds.

The largest single holding was in a pooled fund managed by London based investment firm Prytania.  We invested in their Athena Debt Opportunities Fund during 2008 but the structured debt instruments in which it specialises suffered badly during the crisis that engulfed financial markets, and credit markets in particular, during the closing months of that year.  These markets have staged a significant recovery since then, particularly over the last twelve months during which the Athena fund gained over 40%.  Its unit price now stands approximately 10% higher than when we made our original investment and we have also received significant interest payments.

The next largest holding is in an index-linked bond issued by the government of Brazil.  We have held this bond for five years now, attracted by its high real yield and the prospect that Brazil's currency would appreciate against sterling.    Both factors came good in 2010 and the sterling value of the holding rose almost 30%.

The same improvement in credit markets which bolstered the Athena fund also led to large gains on many of our other bond holdings.  The most significant of these was the holding in the Baillie Gifford High Yield Fund.  This fund typically invests in bonds issued by more highly indebted companies and was an unsurprising beneficiary of improving conditions on credit markets and in the broader economy.

With the environment so supportive for our holdings, we made few changes during the year.  Our remaining insurance linked securities matured and this type of bond, which effectively sees the investor providing insurance to the issuer against specified natural catastrophes, no longer features in the portfolio.  Our experience with them was profitable and we may take similar holdings in the future should the terms look attractive.  We sold our holding of a bond issued by hedge fund manager Man Group (and switched the money into Man Group shares).  We also purchased a floating rate note whose fortunes are tied to the rental income on a large portfolio of German residential and social housing units.

Listed Investment Funds

SAINTS owns a number of listed investment funds which we use as a convenient way of getting exposure to some markets and asset classes.  Currently we own one forestry fund and several funds invested in overseas property markets.  In aggregate, these represented 5% of the portfolio during 2010 or a little under 7% of shareholders' funds.  The return from the forestry fund was a disappointing 1.1% but the property funds returned 42.2%.

The forestry holding is a UK listed fund called Cambium Global Timberland.  This fund owns forestry plantations in various locations around the world including the United States, Brazil and Australia.  The investment was made in the first half of 2007 at 100p per share and it is disappointing that, as at the end of 2010, the share price and the fund's net asset value were both significantly below this level (68p and 80p respectively). 

The investments in listed property funds allow us to participate in commercial property markets in Europe, Japan and China.  To a large extent, the strong returns delivered by this part of the portfolio reflect a recovery from distressed valuations - these same funds lost considerable value during the financial crisis and large gaps emerged between their share prices and their underlying net asset values.  As we look forward, we believe there is scope for the valuation of these funds to rise, driven either by a narrowing of discounts or by gains on their underlying portfolios.

Direct Property

The direct investments in UK commercial property are managed by OLIM Ltd, a specialist property manager.  The total return for 2010 was 12% which compares to the return on the IPD All Property Index of approximately 15%.

Two properties were sold during the year and three purchased.  These transactions, along with a small capital gain on properties held throughout the year, took the value of the property portfolio to £32m by the year end, approximately 8% of the total portfolio.  Since the year end, another property has been purchased for £3m and we may make further investments if suitable candidates can be found.

We and OLIM believe that commercial property valuations in the UK are attractive, both in absolute terms and when compared to other major asset classes such as gilts or equities.  The average yield on the properties that SAINTS now own is 7.7% and we would expect rental income to grow broadly in line with inflation over the medium to long term.

Outlook

At this time last year, we wrote that few investment markets offered compelling value but continued improvement in the global economy and strength in corporate profits might yet allow good investment returns.  It is possible to argue a similar case now and indeed our central expectation is that stockmarkets will finish the year higher than they currently are. 

In the very near term, world GDP growth is likely to be strong.  The structural factors underpinning growth in China and the other developing nations remain firmly in place and their cyclical momentum is substantial.  Growth in the developed economies may be more varied but should still be positive.

We believe this economic backdrop will allow many companies to report rising profits over the next year.  This should be accompanied by further growth in dividend payments and may also encourage a pick-up in acquisition activity and in corporate investment. 

However, the rise in stockmarket levels over the last year has captured at least some of this prospect.  We also think the sustainability of current economic strength is open to question.  An increasing number of the developing nations now face rising inflation and some have already begun to tighten monetary policy in response.  As for the developed economies, it is not clear what underlying strength will be left once the various fiscal and monetary stimulus programmes deployed during the financial crisis are withdrawn. 

We suspect we are still in what will prove a long period of adjustment and change in the world economy.  The developed nations borrowed too much for too long and must now adjust to consuming less and saving more.  The developing nations will continue their long march to economic dominance based on their overwhelming population advantage, but they may have to proceed at a slower pace than they would like if they are to avoid a serious inflation problem in the next few years.

Adjustment and change, on this global scale at least, rarely proceed in a straight, orderly fashion.  As this report is being prepared, we are being served a powerful reminder (in Egypt and other Middle Eastern countries) that unexpected events happen.  Sometimes their impact will be benign, positive even.  On other occasions, their impact can be more costly.  Either way, they tend to invoke volatility in markets and can lead to large swings in investor confidence and market levels. 

As to how this impacts our investment strategy, we think a slightly more cautious tone is warranted.   We still expect positive returns, but would be pleasantly surprised if they approach the levels enjoyed in the last twelve months.

Patrick Edwardson

Baillie Gifford & Co.

18 February 2011

ASSET ALLOCATION

	At 31 December 2010 %		At 31 December 2009 %
UK Quoted Equities*	24.6		28.9
Overseas Quoted Equities*	45.4		39.9
Total Quoted Equities*	70.0		68.8
Quoted Fixed Interest	15.4		14.6
Direct property	7.7		8.5
Quoted Equity Property Investments	2.9		2.0
Quoted Equity Forestry Investments	2.4		2.8
Unquoted	0.4		0.5
Net Liquid Assets	1.2		2.8
	100.0		100.0

* Excludes quoted equity property and forestry investments.

 

PERFORMANCE ATTRIBUTION

for the year ended 31 December 2010

Portfolio Breakdown	Average allocation		Total return
	SAINTS %	Benchmark %	SAINTS %	Benchmark %
Quoted Equities*	89.3	100.0	19.3	15.8
Quoted Fixed Interest	20.1		35.1
Direct Property	10.0		12.0
Quoted Equity Forestry Investments	3.6		1.1
Quoted Equity Property Investments	3.2		42.2
Unquoted	0.6		3.1
Deposits	2.5		-
Debenture at Book Value	(29.3)		(6.8)
Portfolio Total Return (debenture at book value)			24.2	15.8
Other items #			0.1
Fund Total Return (debenture at book value)			24.3	15.8
Adjustment for change in fair value of debenture			(1.5)
Fund Total Return (debenture at fair value)			22.8	15.8

 

The above returns are calculated on a total return basis with net income reinvested.

Past performance is not a guide to future performance.

Source: Baillie Gifford & Co

* Excludes quoted equity property and forestry investments.

# This includes Baillie Gifford and OLIM management fees, other costs of running the trust such as marketing expenditure and a residual item which arises because of a disparity between the NAV total return figure and the individual asset class portfolio return numbers as calculated by Baillie Gifford's performance measurement system (provided by Statpro).

THIRTY LARGEST HOLDINGS at 31 December 2010
Name	Classification	Business	2010		2009
			Value £'000	% of total assets	Value £'000
Athena Debt Opportunities   Fund	Fixed Interest	Debt opportunities fund	22,063	5.3	14,501
Brazil CPI Linked 15/05/2045	Fixed Interest	Brazilian government bond	18,780	4.5	14,487
Baillie Gifford High Yield    Bond Fund	Fixed Interest	High yield bond fund	13,545	3.2	9,663
Baillie Gifford Greater China   Fund	Overseas	Equity investment fund	10,338	2.5	9,075
Cambium Global Timberland	Quoted Equity   Forestry Inv	Forestry investment fund	9,975	2.4	10,350
Atlas Copco	Overseas	Engineering	8,061	1.9	3,653
British American Tobacco	United Kingdom	Cigarette manufacturer	7,459	1.8	6,104
Rio Tinto	United Kingdom	Mining	7,089	1.7	4,509
Holiday Village in New Romney	Direct Property	Holiday village	6,800	1.6	6,500
BHP Billiton	United Kingdom	Mining	6,735	1.6	5,267
Penn West Energy Trust	Overseas	Oil and natural gas income trust	6,584	1.6	4,704
DBS	Overseas	Banking	6,158	1.5	5,851
Deere	Overseas	Farm machinery	6,142	1.5	3,874
Taiwan Semiconductor   Manufacturing	Overseas	Semiconductor manufacturer	5,669	1.4	5,013
Philip Morris International	Overseas	Cigarette manufacturer	5,574	1.3	4,444
HSBC	United Kingdom	Banking	5,491	1.3	7,118
New York Community Bank	Overseas	Banking	5,466	1.3	4,079
CVRD	Overseas	Mining	5,428	1.3	4,318
Nursing home in Kenilworth	Direct Property	Nursing home	5,200	1.2	5,000
Samsung Electronics	Overseas	Electronic devices	5,032	1.2	3,541
Canon	Overseas	Imaging devices	4,907	1.2	3,849
Royal Dutch Shell	United Kingdom	Integrated oil	4,865	1.2	4,165
Petrobras	Overseas	Integrated oil	4,817	1.2	5,789
Man Group	United Kingdom	Hedge fund manager	4,644	1.1	3,282
Quorum Oil and Gas	United Kingdom	Oil industry technology fund	4,250	1.0	6,255
Massmart	Overseas	Food retailer	4,249	1.0	2,255
Japan Residential Investment   Company	Quoted Equity   Property Inv	Japanese residential property fund	4,172	1.0	1,600
Jeronimo Martins	Overseas	Discount retailer	4,169	1.0	-
Vodafone	United Kingdom	Mobile telecommunication services	4,052	1.0	5,463
Aviva	United Kingdom	Life assurance	4,048	1.0	4,079
			211,762	50.8	168,788

 

 

RELATED PARTY TRANSACTIONS

The Directors' fees for the year are detailed in the Directors' Remuneration Report in the Annual Report. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 412 of the Companies Act 2006. Baillie Gifford & Co were appointed as Investment Managers and Secretaries with effect from 1 January 2004. The management contract can be terminated at six months' notice. Baillie Gifford's fee is 0.45% of total assets less current liabilities, excluding the property portfolio. The property portfolio is managed by OLIM Limited. This agreement can be terminated on three months' notice. OLIM's annual fee is 0.5% of the value of the property portfolio, subject to a minimum quarterly fee of £6,250.

The details of the management fees are as follows:

	2010 £'000		2009 £'000
Investment management fee	1,612		1,320
Property management fee	153		132
	1,765		1,452

PRINCIPAL RISKS AND UNCERTAINTIES

As an investment trust, the Company invests in equities and makes other investments so as to secure its investment objective of increasing capital and growing income in order to deliver real dividend growth. The Company borrows money when the Board and Managers have sufficient conviction that the assets funded by borrowed monies will generate a return in excess of the cost of borrowing. In pursuing its investment objective, the Company is exposed to a variety of risks that cause short term variation in the Company's net assets and could result in either a reduction in the Company's net assets or a reduction in the profits available for dividend.

These risks are categorised here as market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk. The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent reduction in the Company's net assets or its profits available for dividend rather than to minimise the short term volatility.

The risk management policies and procedures outlined in this note have not changed substantially from the previous accounting period.

Market Risk

The fair value or future cash flows of a financial instrument or other investment held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - currency risk, interest rate risk and other price risk. The Board reviews and agrees policies for managing these risks and the Company's Investment Manager both assesses the exposure to market risk when making individual investment decisions and monitors the overall level of market risk across the investment portfolio on an ongoing basis.  Details of the Company's investment portfolio and of its derivative financial instruments outstanding at the balance sheet date are shown below.

Currency Risk

Certain of the Company's assets, liabilities and income are denominated in currencies other than sterling (the Company's functional currency and in which it reports its results). Consequently, movements in exchange rates may affect the sterling value of those items. The Investment Manager monitors the Company's exposure to foreign currencies and reports to the Board on a regular basis.

The Investment Manager assesses the risk to the Company of the foreign currency exposure by considering the effect on the Company's net asset value and income of a movement in the rates of exchange to which the Company's assets, liabilities, income and expenses are exposed. However, the country in which a company is listed is not necessarily where it earns its profits. The movement in exchange rates on overseas earnings may have a more significant impact upon a company's valuation than a simple translation of the currency in which the company is quoted.

Forward currency contracts are used periodically to limit the Company's exposure to anticipated future changes in exchange rates which might otherwise adversely affect the value of the portfolio of investments. Where appropriate, they are used also to achieve the portfolio characteristics that assist the Company in meeting its investment objectives. Cash amounts received in foreign currencies are generally converted to sterling on a daily basis.

Exposure to currency risk through asset allocation, which is calculated by reference to the currency in which the asset or liability is quoted, is shown below.

At 31 December 2010	Investments £'000	Cash and deposits £'000	Forward currency contracts £'000	Debentures £'000	Other debtors and creditors* £'000	Net exposure £'000
US dollar	107,893	-	(14,054)	-	174	94,013
Euro	21,456	-	(2,999)	-	54	18,511
Other overseas currencies	110,119	-	-	-	219	110,338
Total exposure to currency risk	239,468	-	(17,053)	-	447	222,862
Sterling	173,721	6,154	17,112	(87,446)	(1,580)	107,961
	413,189	6,154	59	(87,446)	(1,133)	330,823

*      Includes net non-monetary assets of £139,000.

At 31 December 2009	Investments £'000	Cash and deposits £'000	Forward currency contracts £'000	Debentures £'000	Other debtors and creditors* £'000	Net exposure £'000
US dollar	102,453	-	(18,579)	-	251	84,125
Euro	15,638	-	(977)	-	51	14,712
Other overseas currencies	68,631	-	-	-	194	68,825
Total exposure to currency risk	186,722	-	(19,556)	-	496	167,662
Sterling	168,227	10,683	19,468	(87,892)	(973)	109,513
	354,949	10,683	(88)	(87,892)	(477)	277,175

*      Includes net non-monetary assets of £33,000.

Currency Risk Sensitivity

At 31 December 2010, if sterling had strengthened by 5% in relation to all currencies, with all other variables held constant, total net assets and total return on ordinary activities would have decreased by the amounts shown below. A 5% weakening of sterling against all currencies, with all other variables held constant, would have had an equal but opposite effect on the financial statement amounts. The analysis is performed on the same basis for 2009.

	2010 £'000		2009 £'000
US dollar	4,701		4,206
Euro	925		736
Other overseas currencies	5,517		3,441
	11,143		8,383

Interest Rate Risk

Interest rate movements may affect directly:

• the fair value of the investments in fixed interest rate securities;

• the level of income receivable on cash deposits;

• the fair value of the Company's fixed-rate borrowings; and

• the interest payable on any variable rate borrowings which the Company may take out.

Interest rate movements may also impact upon the market value of the Company's investments other than its fixed income securities. The effect of interest rate movements upon the earnings of a company may have a significant impact upon the valuation of that company's equity.

The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment decisions and when entering borrowing agreements.

The Board reviews on a regular basis the amount of investments in cash and fixed income securities and the income receivable on cash deposits, floating rate notes and other similar investments.

The Company finances part of its activities through borrowings at approved levels. The amount of such borrowings and the approved levels are monitored and reviewed regularly by the Board. Where fixed rate borrowings are not being used to fund active investments, the borrowed funds are invested in a diversified portfolio of fixed income securities in order to provide a hedge against movements in interest rates.

Movements in interest rates, to the extent that they affect the fair value of the Company's fixed rate borrowings, may also affect the amount by which the Company's share price is at a discount or a premium to the net asset value.

The interest rate risk profile of the Company's financial assets and liabilities at 31 December is shown below.

Financial Assets	2010			2009
	Fair value £'000	Weighted average interest rate	Weighted average fixed rate period	Fair value £'000	Weighted average interest rate	Weighted average fixed rate period
Fixed rate:
UK structured notes†	-	-	-	5,204	8.3%	6 months
US structured notes†	-	-	-	3,478	5.0%	6 months
UK bonds	6,250	13.3%	7 years	6,006	6.0%	8years
US bonds*	1,724	2.6%	5 years	5,889	7.9%	4 years
Floating rate:
US bonds (interest rate linked to US dollar LIBOR)	-	-	-	2,797	3.1%	n/a
Brazilian bonds (interest rate linked to Brazilian CPI)	18,780	10.0%	n/a	14,487	10.9%	n/a
Euro bonds (interest rate linked to Euroibor)	2,969	23.7%	n/a	993	45.9%	n/a
Fixed Interest Collective Investment Funds:
UK funds	14,157	6.1%	n/a	10,061	9.5%	n/a
US dollar denominated fund	22,063	1.5%	n/a	14,501	5.5%	n/a

The main change in the interest rate risk profile of the Company's financial assets during the year was net disposals of £11,670,000.

†  Structured notes have been classified as equities as, although they receive interest at a fixed rate, their capital values are linked to the share prices of the respective ordinary shares.

* Includes a convertible security which has been classified as an equity holding.

Financial Liabilities	2010 £'000	2009 £'000
The interest rate risk profile of the Company's financial liabilities at 31 December was:
Fixed rate - sterling	87,446	87,892

The maturity profile of the Company's financial liabilities at 31 December was:
In more than five years - 13 years (2009 - 14 years)	87,446	87,892

Interest Rate Risk Sensitivity

An increase of 100 basis points in bond yields as at 31 December 2010 would have decreased total net assets and total return on ordinary activities by £3,543,000 (2009 - £2,713,000) and would have increased the net asset value per share (with debentures at fair value) by 3.2p (2009 - 3.5p). A decrease of 100 basis points would have had an equal but opposite effect.

Other Price Risk

Changes in market prices other than those arising from interest rate risk or currency risk may also affect the value of the Company's net assets. The Board manages the market price risks inherent in the investment portfolio by ensuring full and timely access to relevant information from the Investment Manager. The Board meets regularly and at each meeting reviews investment performance, the investment portfolio and the rationale for the current investment positioning to ensure consistency with the Company's objectives and investment policies.

Other Price Risk Sensitivity

A full list of the Company's investments is shown on pages 15 to 18 of the Annual Report. In addition, a list of the 30 largest holdings (shown above) together with various analysis of the portfolio by assets class and industrial sector are contained in the Managers' Review section of the Annual Report. 89% of the Company's net assets are invested in quoted equities (excluding quoted property and forestry investments). A 5% increase in quoted equity valuations at 31 December 2010 would have increased total assets and total return on ordinary activities by £14,645,000 (2009 - £12,554,000). A decrease of 5% would have had an equal but opposite effect.

Liquidity Risk

This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not significant as the majority of the Company's assets are investments in quoted securities that are readily realisable. The Company's holdings in direct property and unlisted investments, which are not considered to be readily realisable, amount to 8.1% of total assets at 31 December 2010. The Company has the power to take out borrowings, which give it access to additional funding when required.

The Board gives guidance to the Investment Managers as to the maximum amount of the Company's resources that should be invested in any one holding and to the maximum aggregate exposure to any one entity (see investment policy on pages 20 and 21 of the Annual Report). The Board also sets parameters for the degree to which the Company's net assets are invested in quoted equities.  

Credit Risk

This is the risk that a failure of a counterparty to a transaction to discharge its obligations under that transaction could result in the Company suffering a loss. This risk is managed as follows:

·    where the Investment Manager makes an investment in a bond or other security with credit risk, that credit risk is assessed and then compared to the prospective investment return of the security in question;

·    the Board regularly receives information from the Investment Manager on the credit ratings of those bonds and other securities in which the Company has invested;

·    the Company's listed investments are held on its behalf by Bank of New York Mellon, the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed. The Investment Manager monitors the Company's risk by reviewing the custodian's internal control reports and reporting its findings to the Board;

·    investment transactions are carried out with a large number of brokers whose credit worthiness is reviewed by the Investment Manager. Transactions are ordinarily done on a delivery versus payment basis whereby the Company's custodian bank ensures that the counterparty to any transaction entered into by the Company has delivered on its obligations before any transfer of cash or securities away from the Company is completed;

·    transactions involving derivatives, structured notes and other arrangements, wherein the creditworthiness of the entity acting as broker or counterparty to the transaction is likely to be of sustained interest are subject to rigorous assessment by the Investment Manager of the creditworthiness of that counterparty. The Company's aggregate exposure to each such counterparty is monitored regularly by the Board; and

·    cash is only held at banks that have been identified by the Managers as reputable and of high credit quality.

Credit Risk Exposure

The exposure to credit risk at 31 December was:

	2010 £'000	2009 £'000
Fixed interest investments	64,219	53,198
Cash and short term deposits	6,154	10,683
Debtors and prepayments	1,542	2,086
	71,915	65,967

None of the Company's financial assets are past due or impaired.

Fair value of financial assets and financial liabilities

The Directors are of the opinion that the financial assets and liabilities of the Company are stated at fair value in the balance sheet with the exception of the long term borrowings which are stated at amortised cost in accordance with FRS 26. The fair value of the debenture stock is shown below.

	2010			2009
	Nominal £'000	Book £'000	Fair £'000	Nominal £'000	Book £'000	Fair £'000
8% debenture stock 2022	80,000	87,446	97,032	80,000	87,892	92,152

Gains and losses on hedges

The following forward currency contracts were open at 31 December:

At 31 December 2010 Currency sold	Currency amount sold	Currency bought	Currency amount bought	Settlement date	Fair value £'000
US dollar	$22,000,000	Sterling	£14,151,000	26/1/11	97
Euro	€3,500,000	Sterling	£2,961,000	26/1/11	(38)
					59

At 31 December 2009 Currency sold	Currency amount sold	Currency bought	Currency amount bought	Settlement date	Fair value £'000
US dollar	$30,000,000	Sterling	£18,482,000	14/1/10	(96)
Euro	€1,100,000	Sterling	£986,000	14/1/10	8
					(88)

Realised currency gains/(losses) are taken to the capital reserve and are not reflected in the revenue account unless they are of a revenue nature.

Capital Management

The Company does not have any externally imposed capital requirements. The capital of the Company is the ordinary share capital (see note 13 on page 42 of the Annual Report) which is managed in accordance with its investment policy in pursuit of its investment objective, both of which are detailed on pages 20 and 21 of the Annual Report. Shares may be issued and/or repurchased as explained on page 26 of the Annual Report.

Investments

At 31 December 2010	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Securities
Listed equities	311,551	1,909	-	313,460
Listed convertible securities	1,724	-	-	1,724
Listed debt securities	20,407	18,780	25,032	64,219
Unlisted equities	-	-	1,836	1,836
Total financial asset investments	333,682	20,689	26,868	381,239
Property
Freehold                                                                                                                                                                          31,950								5,000
Long  leasehold				-
				31,950
Total investments				413,189

At 31 December 2009	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
Securities
Listed equities	258,753	-	-	258,753
Listed structured notes	-	8,682	-	8,682
Listed convertible securities	1,536	-	-	1,536
Listed debt securities	20,420	17,284	15,494	53,198
Unlisted equities	-	-	1,780	1,780
Total financial asset investments	280,709	25,966	17,274	323,949
Property
Freehold				26,000
Long  leasehold				5,000
				31,000
Total investments				354,949

Investments in securities are financial assets designated at fair value through profit or loss on initial recognition. In accordance with Financial Reporting Standard 29 'Financial Instruments: Disclosures', the above table provides an analysis of these investments based on the fair value hierarchy described below which reflects the reliability and significance of the information used to measure their fair value. Property investments are not financial assets and therefore the fair value hierarchy does not apply to these assets.

Fair Value Hierarchy

The fair value hierarchy used to analyse the fair values of financial assets is described below. The levels are determined by the lowest (that is the least reliable or least independently observable) level of input that is significant to the fair value measurement for the individual investment in its entirety as follows:

Level 1 - investments with quoted prices in an active market;

Level 2 - investments whose fair value is based directly on observable current market prices or is indirectly being derived from market prices; and

Level 3 -- investments whose fair value is determined using a valuation technique based on assumptions that are not supported by observable current market prices or are not based on observable market data.

Other Risks

Other risks faced by the Company include the following:

Regulatory Risk

Failure to comply with applicable legal and regulatory requirements could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report. Breach of section 1158 of the Corporation Tax Act 2010 (formerly section 842 ICTA 1988) could lead to the Company being subject to tax on capital gains. The Managers monitor investment movements and the level of forecast income and expenditure to ensure the provisions of section 1158 are not breached. Baillie Gifford's Heads of Business Risk & Internal Audit and Regulatory Risk provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes.

Operational/Financial Risk 

Failure of the Managers' accounting systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. The Board reviews the Managers' Report on Internal Controls and the reports by other key third party providers are reviewed by the Managers on behalf of the Board.

Discount Volatility

The discount at which the Company's shares trade can widen. The Board monitors the level of discount and the Company has authority to buy back its own shares.

Gearing Risk

The Company may borrow money for investment purposes (sometimes known as 'gearing'). If the investments fall in value, any borrowings will magnify the extent of this loss. If borrowing facilities are not renewed, the Company may have to sell investments to repay borrowings.

All borrowings require the prior approval of the Board and gearing levels are discussed by the Board and Managers at every meeting. The majority of the Company's investments are in quoted securities that are readily realisable.

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual Report, the Directors' Remuneration Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice). Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

·    select suitable accounting policies and then apply them consistently;

·    make judgements and accounting estimates that are reasonable and prudent;

·    state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements respectively; and

·    prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors have delegated responsibility to the Managers for the maintenance and integrity of the Company's page on the Managers' website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the Directors, whose names and functions are listed within the Directors and Management section on page 6 of the Annual Report, confirm that, to the best of their knowledge:

•     the financial statements, which have been prepared in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice), give a true and fair view of the assets, liabilities, financial position and net return of the Company; and

•     the Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that it faces.

By order of the Board

SIR BRIAN IVORY

18 February 2011

 

 

INCOME STATEMENT

	For the year ended 31 December 2010				For the year ended 31 December 2009
	Revenue £'000	Capital £'000		Total £'000	Revenue £'000	Capital £'000	Total £'000
Net gains on investments - securities	-	58,182		58,182	-	72,678	72,678
Currency (losses)/gains	-	(699)		(699)	-	3,171	3,171
Income (note 2)	16,379	-		16,379	17,194	-	17,194
Management fees	(618)	(1,147)		(1,765)	(508)	(944)	(1,452)
Recovered VAT (note 3)	-	-		-	945	17	962
Other administrative expenses	(901)	-		(901)	(859)	-	(859)
Net return before finance costs and taxation	14,860	56,336		71,196	16,772	74,922	91,694
Finance costs of borrowings	(2,084)	(3,870)		(5,954)	(2,093)	(3,887)	(5,980)
Net return on ordinary activities before taxation	12,776	52,466		65,242	14,679	71,035	85,714
Tax on ordinary activities	(1,505)	977		(528)	(2,690)	2,232	(458)
Net return on ordinary activities after taxation	11,271	53,443		64,714	11,989	73,267	85,256
Net return per ordinary share       (note 4)	8.51p		40.34p	48.85p	9.05p	55.30p	64.35p

STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES

	For the year ended 31 December 2010			For the year ended 31 December 2009
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net return on ordinary activities after taxation	11,271	53,443	64,714	11,989	73,267	85,256
Net gains on investments - property	-	1,122	1,122	-	3,068	3,068
Total recognised gains and losses for the year	11,271	54,565	65,836	11,989	76,335	88,324
Total recognised gains and losses  per ordinary share (note 4)	8.51p	41.18p	49.69p	9.05p	57.62p	66.67p

 The total column of the Income Statement is the profit and loss account of the Company.

All revenue and capital items in these statements derive from continuing operations.

BALANCE SHEET

	At 31 December 2010		At 31 December 2009
	£'000	£'000	£'000	£'000
Fixed Assets
Investments - securities	381,239		323,949
Investments - property	31,950		31,000
		413,189		354,949
Current Assets
Debtors	1,542		2,086
Cash and deposits	6,154		10,683
	7,696		12,769
Creditors
Amounts falling due within one year	(2,616)		(2,651)
Net Current Assets		5,080		10,118
Total Assets Less Current Liabilities		418,269		365,067
Creditors
Amounts falling due after more than one year (note 6)		(87,446)		(87,892)
Total Net Assets		330,823		277,175
Share Capital and Reserves
Called-up share capital		33,121		33,121
Capital redemption reserve		22,781		22,781
Capital reserve		258,671		204,106
Revenue reserve		16,250		17,167
Shareholders' funds		330,823		277,175
Net Asset Value Per Ordinary Share:
(Debenture at fair value)		242.5p		206.0p
Net Asset Value Per Ordinary Share:
(Debenture at book value)		249.7p		209.2p
Ordinary Shares In Issue (note 7)		132,485,943		132,485,943

 

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 31 December 2010

	Share capital £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 January 2010	33,121	22,781	204,106	17,167	277,175
Total recognised gains and losses for the year	-	-	54,565	11,271	65,836
Dividends paid in the year (note 5)	-	-	-	(12,188)	(12,188)
Shareholders' funds at 31 December 2010	33,121	22,781	258,671	16,250	330,823

For the year ended 31 December 2009

	Share capital £'000	Capital redemption reserve £'000	Capital reserve   £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 January 2009	33,121	22,781	127,771	17,102	200,775
Total recognised gains and losses for the year	-	-	76,335	11,989	88,324
Dividends paid in the year (note 5)	-	-	-	(11,924)	(11,924)
Shareholders' funds at 31 December 2009	33,121	22,781	204,106	17,167	277,175

CASH FLOW STATEMENT
	For the year ended 31 December 2010			For the year ended 31 December 2009
	£'000	£'000		£'000	£'000
Net cash inflow from operating activities		13,616			17,097
Servicing of finance
Interest paid	(6,400)			(6,400)
Net cash outflow from servicing of finance		(6,400)			(6,400)
Taxation
Overseas tax	(522)			(476)
Total tax paid		(522)			(476)
Financial investment
Acquisitions of investments	(46,889)			(103,214)
Disposals of investments	48,700			111,217
Forward currency contracts	(840)			1,526
Net cash inflow from financial investment		971			9,529
Equity dividends paid		(12,188)			(11,924)
(Decrease)/increase in cash		(4,523)			7,826
Reconciliation of net cash flow to movement in net debt
(Decrease)/increase in cash		(4,523)			7,826
Translation difference		(6)			(71)
Other non-cash changes		446			420
Movement in net debt in the year		(4,083)			8,175
Net debt at 1 January		(77,209)			(85,384)
Net debt at 31 December		(81,292)			(77,209)
Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities
Net return before finance costs and taxation		71,196			91,694
Gains on investments - securities		(58,182)			(72,678)
Currency losses/(gains)		699			(3,171)
Decrease in accrued income		63			1,447
Increase in other debtors		(109)			(16)
Increase in creditors and prepaid income		17			278
Other non-cash changes		(68)			(457)
Net cash inflow from operating activities		13,616			17,097

 

NOTES

1.	The financial statements for the year to 31 December 2010 have been prepared on the basis of the accounting policies set out in the Company's Annual Financial Statements to 31 December 2009.
2.	Income
				2010						2009
				£'000						£'000
	Income from investments
	Franked investment income			3,652						2,983
	UK unfranked investment income			2,305						1,601
	Overseas dividends			5,751						4,664
	Overseas interest			2,104						4,610
				13,812						13,858
	Other income
	Deposit interest			26						19
	Interest on VAT recovered			-						687
	Rental income			2,287						2,037
	Other income			254						593
				2,567						3,336
	Total income			16,379						17,194
3.	Recovered VAT
	In 2007 the European Court of Justice ruled that investment trust management fees should be exempt from VAT. In 2009 the Company received VAT refunds from HMRC of £962,000 (2008 - £807,000) together with interest received on these refunds £687,000. In accordance with guidance from the AIC, the VAT recovered has been allocated between revenue and capital on the same basis as the VAT expense was originally charged and the interest received has been allocated wholly to revenue. The Board considers it unlikely that further refunds will be received.
4.	Returns per ordinary share
		2010						2009
		Revenue	Capital			Total		Revenue			Capital		Total
	Net return per ordinary share (Income Statement)	8.51p	40.34p			48.85p		9.05p			55.30p		64.35p
	Total recognised gains and losses per ordinary share	8.51p	41.18p			49.69p		9.05p			57.62p		66.67p
	Net return per ordinary share is based on the return on ordinary activities after taxation figures in the Income Statement and on 132,485,943 ordinary shares of 25p, being the number of ordinary shares in issue during each year. Total recognised gains and losses per ordinary share is based on the total recognised gains and losses for the year in the Statement of Total Recognised Gains and Losses and on 132,485,943 ordinary shares of 25p, being the number of ordinary shares in issue during each year. There are no dilutive or potentially dilutive shares in issue.

5.	Ordinary dividends
						2010		2009
		2010		2009		£'000		£'000
	Amounts recognised as distributions in the year:
	Previous year's final (paid 12 April 2010)	2.30p		2.25p		3,047		2,981
	First interim (paid 30 June 2010)	2.30p		2.25p		3,047		2,981
	Second interim (paid 30 September 2010)	2.30p		2.25p		3,047		2,981
	Third interim (paid 31 December 2010)	2.30p		2.25p		3,047		2,981
		9.20p		9.00p		12,188		11,924
	We also set out below the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of section 1159 of the Corporation Taxes Act 2010 (formerly section 842 of the Income and Corporation Taxes Act 1988) are considered. The revenue available for distribution out of current year profits by way of dividend for the year is £11,271,000 (2009 - £11,989,000).
		2010		2009		2010 £'000		2009 £'000
	Dividends paid and payable in respect of the year:
	First interim (paid 30 June 2010)	2.30p		2.25p		3,047		2,981
	Second interim (paid 30 September 2010)	2.30p		2.25p		3,047		2,981
	Third interim (paid 31 December 2010)	2.30p		2.25p		3,047		2,981
	Current year's proposed final dividend (payable 11 April 2011)	2.35p		2.30p		3,113		3,047
		9.25p		9.05p		12,254		11,990
	If approved the final dividend of 2.35p will be paid on 11 April 2011 to all shareholders on the register at the close of business on 11 March 2011. The ex-dividend date is 9 March 2011. The Company's Registrar offers a Dividend Reinvestment Plan and the final date for elections for reinvestment of this dividend is 21 March 2011.
6.	The fair value of the 8% Debenture Stock 2022 at 31 December 2010 was £97.0m  (2009 - £92.2m).
7.	At 31 December 2010, the Company had the authority to buy back 19,859,642 of its own shares. No shares were bought back during the year under review.
8.	The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2010.  The financial information for 2009 is derived from the financial statements for 2009 which have been delivered to the Registrar of Companies.  The Auditors have reported on the 2009 and 2010 accounts; their reports for both years were unqualified and did not contain a statement under sections 495 to 497 of the Companies Act 2006.  The statutory accounts for 2010 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.

- ends -

 

END

 

 

FR UBRURAWAORAR