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Murray Inc Trust PLC (MUT)

  Print      Mail a friend       Annual reports

Wednesday 15 September, 2010

Murray Inc Trust PLC

Annual Financial Report

RNS Number : 7701S
Murray Income Trust PLC
15 September 2010






-     Total Dividend increased by 0.9% to 28.00p

-     Net Asset Value Total Return +26.4%

-     Share Price Total Return + 27.2%





The capital performance of your Company has been good over the year, despite a fall in the second half of the year. The Net Asset Value total return was 26.4%, which compares well with the return on the benchmark FTSE All-Share Index of 21.1%. In the second half of the year, these returns were -3.8% and -6.2% respectively. There is some consolation in the fact that relative performance actually improved in the more difficult later period, and that the share price actually rose by 3.6% on a total return basis as the discount narrowed. The income account, which is discussed in more detail below, showed a fall of 9.6% in earnings per share. Your managers have been careful not to chase high income at the expense of capital because growth of the capital base is the only secure way by which we can ultimately maintain and grow our dividends over time.


The decline in the second half seems to have been due to the realisation that, although the apocalyptic concerns of early 2009 had largely been dealt with, there were still some serious problems to address, stemming from the fact that, although the debt burden had mostly been moved into stronger hands, it was still causing significant strains, whether at the corporate level, as with Dubai World, or the national level, as with Greece.


The last year has seen a gradual return towards normality in both the world and the UK economy. By no means has a stable environment yet been reached, but there has been a return to growth and significant progress in dealing with the major imbalances which lie behind the dislocations of 2007-9. From its low point in the winter of 2008-9, in nominal terms, the world economy is estimated to have grown by around 6% and stands at a new peak. In contrast, the UK economy has performed less well and, according to the latest data, despite recovering from its low point, is still approximately 4.5% below its previous high. Unsurprisingly, growth has been strongest in those countries for whom over-indebtedness was not a problem and weakest in those where this problem was most acute and has required most effort to rectify. The UK, unfortunately, is in the latter category. The policy response has been largely sensible, so that exceptionally low real and nominal interest rates have enabled household and corporate borrowers to improve their balance sheets, while demand has been sustained by a weak currency and government expenditure, at least until now. Meantime the financial sector, which was at the centre of the storm has, however controversially, returned closer to health and should be in a position to finance growth if required to do so. Over the last year, it has been unclear whether the contraction in private-sector lending that has taken place has been because of weakness of supply or demand. Both have probably had an effect, but this state of affairs should gradually reverse.


The quoted corporate sector has performed well over the year. Earnings have risen by 14% and balance sheets are generally healthy. Some of this is due to recovery, some to continued cost-cutting and some to the strength of international end-markets of most major quoted companies in the UK. A similar situation exists in other countries, so that the pain of the recession has primarily been felt at the household level.



Your Board is very conscious that one of the most important features of Murray Income Trust is its ability to deliver a relatively high and rising dividend income to shareholders. The last year has seen the impact of the 2008-9 recession in dividends declared by UK companies in full force so that dividend income on the FTSE All-Share Index fell by 8% over the year, compared to a fall in the prior year, which encompassed the recession in real time, of 6%. We have taken advantage of attractive option pricing due to high volatility to earn more income from the sale of options and the VAT rebate has also been beneficial. Nevertheless, we have used part of our substantial revenue reserves to propose a final dividend of 11.50 pence which will imply a small increase in the dividend for the year of 0.9%. The trading experience of the companies in our portfolio has improved and we are now seeing dividend increases again. On present projections, we believe that, given stable economic conditions, we will be able steadily to rebuild dividend cover while at least maintaining the current level of dividend.


The importance of maintaining reserves has been highlighted by the experience of the last two years and we are concerned that one aspect of the government's proposals for the updating of the tax rules for investment trusts, which we broadly welcome, might restrict our ability to retain income for use in circumstances like the present. We and the Association of Investment Companies are making representations on this subject.


VAT on Management Fees


Board changes

As shareholders will be aware from the Interim Board Report in the last Half-Yearly Report, David Woods was elected a Director at the last Annual General Meeting of the Company, held on 27 October 2009. Adrian Coats retired from the Board at the conclusion of the AGM, and was succeeded in his roles as Senior Independent Director and Chairman of the Audit Committee by Humphrey van der Klugt.


Annual General Meeting

The Annual General Meeting will be held at the Capital Suite, The Chamber of Commerce, 33 Queen Street, London EC4R 1AP on Tuesday, 26 October 2010 at 12.30 p.m. It is the Board's intention to hold the 2011 Annual General Meeting in Glasgow.


As at previous AGMs, there will be a presentation by the Managers and an opportunity to meet the Directors over lunch following the AGM.



It is clear from even a cursory glance at the media that there is a great deal of uncertainty about the economic outlook, both worldwide and, more specifically, in the UK. The over-indebtedness of the US and a number of European countries, including the UK, continues to act as a drag on economic growth. We now have a government that is keener than its predecessor on ideological grounds to cut back government debt. The problem it faces is the risk that this ideology may cause it to cut back spending faster than is pragmatically desirable, and therefore risk a slip back into a recession. Even if this happens, it is unlikely to be as severe as the experience of 2008-9 because there has not been the build up of debt or enthusiastic spending. Longer term, for the government's policy to work, it needs to engineer a shift from taxation as a source of funding for investment towards a higher rate of saving. It is not clear whether society is yet prepared for this.


The companies in which we invest are typically high-quality with strong balance sheets, relatively less cyclical businesses and a high level of international diversification. Although such companies are not immune to economic cycles, their characteristics should provide protection. Our access to them has been helped by the changes to the investment policy that now allows some investment in overseas companies. The above characeristics of these companies in the UK and overseas should enable them to perform relatively well in what seems most likely to be a dull period for economic growth. It is also some comfort that they are not expensive on an average P/E multiple of 11.5x with an average dividend yield of 4.1%, which compares very well with insignificant interest rates on cash, a redemption yield of 3.3% on ten-year gilts and a real yield of just over 1% on index-linked gilts. We are therefore optimistic that our portfolio will give good real returns against comparable assets, even in these uncertain times.      



15 September 2010






The UK equity market performed very strongly during the year to the end of June 2010, despite a still fragile domestic economic climate. The FTSE All-Share Index rose by 21.1%, largely recouping the fall of 20.5% experienced in the prior year. The first half of the period was characterised by particularly high returns as improving global economic conditions, robust company results and easing credit markets buoyed the market against a backdrop of low expectations. Some of these gains were relinquished in the second half, as investors' attention shifted to the strength and stability of governments' balance sheets and the recognition that the hurdles facing the global economy still remained significant.


From an economic growth perspective, the financial year started poorly for the UK as the recession extended into a sixth quarter; a disappointing performance bearing in mind the weakness of sterling and improving external demand. The UK emerged, but only just, from recession during the final quarter of 2009. However, the underlying pace of growth has subsequently improved with initial estimates of second quarter 2010 real GDP growth of 1.1%. Inflation, having fallen to 1.1% in September, reached a high point of 3.7% in April, as measured by the CPI, before gradually falling back over the final months of the year. The high levels of spare capacity in the economy have assuaged the MPC's immediate concerns and, as a result, interest rates remained unchanged throughout the year at 0.5%. The MPC extended the asset purchase programme just once in November, to £200bn. Over the longer term, inflation prospects in the UK (and hence the movement of interest rates) remain delicately balanced between, on the one hand, the requirement for fiscal consolidation and the elevated level of spare capacity, and, on the other hand, the effect of monetary stimulus coupled with weak sterling.


Although lending to households and companies has generally remained weak, the improving economic environment has shown up in higher house prices and greater consumer confidence. This is partly because unemployment has risen less than expected, compared to previous recessions. The new coalition government has been quick to demonstrate its willingness to focus on the deficit, with an emergency budget shortly after the election. To the extent that this is likely to herald a more painful period of adjustment, it is also necessary to place the economy on a more stable longer-term footing.


Economic growth outside the UK, although uneven, was generally stronger than expected, particularly over the second half of 2009, and this provided positive momentum to equity markets. Despite some concerns about the sustainability of growth towards the end of the year, both the United States and Chinese economies have performed strongly, aided by government stimulus and the reversal of the stock cycle. In the euro area, with the notable exception of Germany, evidence of a durable recovery has been weaker. Concerns over Greece resulted in a comprehensive package of support by the EU, IMF and ECB, but not before the market had taken fright at the potential for sovereign debt risk to extend to Spain and Portugal as well. These worries provided the catalyst for an acceleration of fiscal consolidation and additional measures to reduce government deficits. That suggests, in the shorter term, a deteriorating economic picture in those states most affected.


Two noteworthy aspects of the year have been the strengthening of company balance sheets and the return of corporate activity. Following the transfer of debt from the private sector to the public sector, indebted governments may well now look enviously at the healthy balance sheets of the corporate sector. The temptation to create taxes or regulations to transfer part of that economic benefit to the state may be difficult to resist. Corporate activity has returned as managements become confident enough in the outlook to start buying other businesses. The Company benefited from the approach by Deutsche Bahn for Arriva and, while the Prudential offer for AIA was rejected by its own shareholders, our holdings of Weir Group, Unilever and Pearson have all acquired new businesses.



The Company generated a positive net asset value per share total return of 26.4% in the year to 30 June 2010, compared to a rise in the FTSE All-Share Index of 21.1%, an encouraging result on an absolute and relative basis. On a total return basis, the Company's share price increased by 27.2%, which reflected a narrowing of the discount to Net Asset Value at which the shares traded over the year.


On a gross assets basis, the portfolio outperformed the benchmark, with the gearing effect adding to this outperformance on a net assets basis. During the year, the Company maintained its borrowings at £35m, although the level of actual gearing tended to be lower, given the policy of holding cash to cover potential put option assignments.


As the economic environment improved, investors' appetite for risk increased commensurately, with those companies which are exposed to higher rates of global growth performing particularly strongly. As a consequence, across the market, the Engineering, Mining and General Industrials sectors outperformed significantly. In contrast, the majority of the more defensive areas, such as Pharmaceuticals, Food Retailers and Utilities, underperformed. The Oil & Gas sector performed very poorly, generating a negative total return, due mostly to the widely-reported fall in the share price of BP during the final quarter of the year.


From a size perspective, both the Small and Mid Cap Indices outperformed the FTSE 100 Index, a function of increasing risk appetite as the prospects for recovery improved, and also the underperformance of BP towards the end of the year.


The Company benefited, in asset allocation terms, from its underweight position in Oil & Gas and overweight positions in Consumer Goods and Industrials. Stock selection in Consumer Services was noteworthy, with the performances of Whitbread, Arriva, Millennium & Copthorne and Daily Mail particularly strong. Over the year, Arriva provided the largest contribution to relative return due to the takeover approach from Deutsche Bahn.


Although our underweight position in BP has benefited relative performance, the events in the Gulf of Mexico have destroyed significant value in the company. We have monitored events extremely closely and, although our central thesis is that the market had over-reacted, we have taken no action; we have been unwilling to commit fresh capital to the company given the potential uncertainty over future dividend payments.


There were a number of holdings that detracted from relative performance. Most notably, National Grid's rights issue, coupled with concerns over its operations in the US, resulted in relative weakness over the year.


In the Financials sector, we benefited from being underweight in banks given our concerns regarding the opacity of regulation, capital requirements and asset quality, coupled with the miserly dividends available. However, this benefit was only partly able to offset poor performances from Aviva and Resolution in the life insurance area. Aviva performed poorly due to concerns over its exposure to sovereign debt, as did Resolution, due to its business model. Furthermore, our underweight position in Mining was the most significant detractor from performance from an asset allocation viewpoint. We remain underweight for three key reasons: we have concerns about the quality of various companies within the sector; the dividend yields available are comparatively poor; and, finally, we believe that many of the companies do not at present represent attractive value.


Performance Attribution for the year to 30 June 2010


Sources : Aberdeen Asset Management, The Bank of New York Mellon & Factset

Notes:  Stock Selection - measures the effect of equity selection relative to the benchmark. Asset Allocation - measures the impact of over or underweighting each industry basket in the equity portfolio, relative to the benchmark weights. Non-equity Investments & Options effect - measures the impact on relative returns of the two asset categories. Gearing / cash effect - measures the impact on relative returns of net borrowings. Management fees & other expenses - these reduce total assets and therefore reduce performance. The effect is calculated by dividing expenses incurred during the year by average total assets less current liabilities. Residual effect - this arises as a result of the different methodologies for calculating performance between the NAV total return, the benchmark provider Factset and the performance attribution system.


Portfolio Activity and Structure

Over the year, the most significant activity within the portfolio has been with the dual aims of, firstly, adding to high-quality holdings, which we believe will be able to prosper in an environment where economic growth may be muted and the prospect of future shocks remain a possibility and, secondly, where possible, of improving the income-generating capability of the portfolio.


We sold five holdings over the year: BT; Ladbrokes; Tomkins; Resolution; and Arriva.  BT had disappointed the market due to the poor performance of its global services division and concerns over the scale of the company's pension deficit. As management executed their turnaround strategy in global services, and, with the recovery in markets assuaging fears over the pension deficit, we took advantage of a recovery in the share price to sell our holding.


Ladbrokes had been beset by concerns over the cyclicality of the business, internet competition and the company's stretched balance sheet. Although it was a painful decision to sell, it turned out to be well-timed, with the company announcing a rights issue and dividend cut shortly after our sale of the shares.


Tomkins' end markets over the past couple of years have been very difficult with exposure to both the global auto industry and US construction. In response, the management team had undertaken a significant restructuring of the business. As the share price recovered and, mindful that the company had reduced its dividend payout, we sold our holding. We also sold our holding in Resolution, having reappraised the company from a quality perspective. We were concerned about the long payback periods in the industry, and the necessity for the company to buy other life assurance businesses in order to fulfil its consolidation strategy. In addition, we believed that future dividend payments were a secondary priority for the company. One of our core holdings, Arriva, was the subject of a takeover bid from Deutsche Bahn. Following shareholder acceptance of the bid, we disposed of our holding. However, as there is still significant scope for the company to continue to grow in Europe, we felt a little disappointed to be giving up our exposure, given the attractive longer-term potential.


Over the course of the year we introduced four new companies: Wood Group; Sage; ENI; and Roche. Wood Group is an attractively-valued oil services company with exposure to high-growth areas. The exposure that the company provides dovetails with our thesis that services companies are an attractive means of benefiting from the increased expenditure that oil companies will be required to lay out as the exploration, development and production of oil becomes more complicated and difficult.


Sage, the accountancy software company, offers an attractive mix of defensive earnings growth, underpinned by high levels of recurring revenues and high-touch customer relationships. Given its strong cashflow characteristics, we believe it has the scope to increase its dividend payments significantly.


The widening of the investment policy allowed us to introduce our first two non-UK companies. Both were chosen for their ability to diversify risk in concentrated sectors and improve the quality of the portfolio, as well as enhance the revenue account. ENI, the Italian oil company, has attractive upstream growth characteristics, a low valuation and a generous yield. Roche offers pharmaceutical exposure with a strong early stage pipeline, and without the significant 'patent cliff' that characterises many other pharmaceutical companies.


As in previous years, we continued to add to high-quality holdings, including Centrica, Tesco and Pearson. In contrast, following significant outperformance, we reduced the holdings in Daily Mail, Millennium & Copthorne, GKN and Mothercare.


From an income-oriented perspective, we purchased reverse convertibles in both Unilever and GlaxoSmithKline, while rolling forward our BP reverse convertible for another year. We also increased the rate of put and call writing, taking advantage of attractive option pricing, with the aim of smoothing the contours of the holdings and increasing the income generated. This was done with the objective of reducing those companies that had performed particularly well, while adding to holdings that further improved the quality of the portfolio.


The actions above have marginally altered the sector positioning of the Company. The weighting in the Oil & Gas sector has reduced slightly over the year, as the addition of Wood Group and ENI failed to offset the fall in BP. The exposure to the Healthcare sector has reduced given the weak relative performance of the sector despite the addition of Roche. Following the sale of Arriva and profit-taking in the sector, the weight in Consumer Services has decreased. The weight in Telecoms has fallen due to the sale of BT.



For the financial year ended 30 June 2010, the Company has witnessed a fall in the level of income generated, with the revenue return per share declining from 28.1p to 25.4p, or by 9.6%. The increase in option income, together with the depreciation of Sterling over the year, has helped to cushion the impact of lower income compared to the previous year. We continue to keep a very close watch on the revenue account, but we remain relatively comfortable with the income characteristics of the underlying portfolio and the capability to rebuild dividend cover over time.


Aside from the issues at BP, the outlook for income has generally improved over the year as the operational backdrop has changed for the better and interest rates remain low. It is worth noting that market dividends, in aggregate, are expected to increase by 10% and 15% in the financial years 2011 and 2012 respectively. Of our holdings, at the year end, only Persimmon, GKN and BP did not pay dividends. Subsequently, Persimmon and GKN have returned to the dividend list, and BP is likely to recommence paying dividends in 2011.



At the time of writing, the market has recovered from the lows at the end of June 2010. We take comfort that equity market valuations are neither expensive relatively nor absolutely, but, on a fundamental basis, we still believe that the path to sustainable economic growth remains challenging, and the outlook uncertain. Many risks still exist; de-leveraging in the West is likely to be a painful process, there are still significant imbalances in the global economy, central banks have only just started to unwind monetary support mechanisms, unemployment provides an incentive for protectionism and unrest, and the regulatory change agenda may result in unintended consequences. However, although growth is weaker than we might like, the portfolio retains exposure to good-quality companies. It seems likely that markets will remain volatile as investors over-react to both good and bad news, and, where valuation opportunities present themselves, we will add to our holdings which we believe have robust financial characteristics and strong business models. We continue to believe that these company attributes are the best way to ensure good long-term performance and dividend growth.



Aberdeen Asset Managers Limited

Investment Manager

15 September 2010




A review of the Company's activities is given in the Chairman's Statement and the Manager's Review. This includes a review of the business of the Company and its principal activities, and likely future developments of the business.


Investment Objective


Capital Structure


Total Assets and Net Asset Value








Oversight and Review of Performance








Management of Risk









Results and Dividends

The total return attributable to equity shareholders for the year amounted to £77,785,000.


A third interim dividend of 5.5p per Ordinary share was paid on 17 July 2009, and the final dividend for the year ended 30 June 2009 of 11.25p per Ordinary share was paid on 28 October 2009. The first and second interim dividends for the year ended 30 June 2010 of 5.5p per Ordinary share each were paid on 15 January 2010 and 1 April 2010 respectively, making a total distribution to Ordinary shareholders of £17,930,000 as shown in note 6. The sum of £1,506,000 has been deducted from the Company's revenue reserve. The third interim dividend of 5.5p per Ordinary share was paid on 16 July 2010.


The Directors now recommend a final dividend of 11.50p per Ordinary share payable on 27 October 2010 to holders of Ordinary shares on the register on 24 September 2010. The relevant ex-dividend date is 22 September 2010. A resolution in respect of the final dividend will be proposed at the forthcoming Annual General Meeting.


Dividends are paid by means of three interim dividends, normally in January, April, July, and a final, after the Annual General Meeting in October or November. Further information on dividends is contained in the Chairman's Statement.




The Directors are responsible for preparing the Annual Report and the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (UK Accounting Standards and applicable law).


The Directors are required to prepare financial statements for each financial year which present fairly the financial position of the Company and the financial performance and cash flows of the Company for that period. In preparing those financial statements, the Directors are required to:


-      select suitable accounting policies and then apply them consistently;

-      make judgements and estimates that are reasonable and prudent; and


The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements 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.


Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.


The financial statements are published on, which is a website maintained by the Company's Manager. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.


Each of the Directors confirms that to the best of their knowledge:



For and on behalf of the Board of Murray Income Trust PLC

Chairman of the Audit Committee

15 September 2010







Year end 30 June











Total revenue (£'000)











Per Ordinary share (p)

Net revenue return
































Net asset value per Ordinary / B Ordinary share{A}





















Shareholders' funds (£'000)





















{A} All B Ordinary shares were converted to Ordinary shares during the year ended 30 June 2002.

Total revenue returns per Ordinary share have been based on the average number of Ordinary shares in issue during each year (see note 8).

Net asset values per Ordinary and B Ordinary share have been calculated after deducting prior capital at nominal values and have been adjusted for the annual B Ordinary scrip issues.

The Net Asset Value figure for 2005 has been restated to reflect the changes in accounting policies (FRS 26 - 'Financial Instruments: Recognition and Measurement'; FRS 21 - 'Events after the Balance Sheet Date').

The figures for dividends reflect the dividends for the years in which they were earned.

Please note that past performance is not a guide to future performance.



Income Statement

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

The Company had no recognised gains or losses other than those recognised in the Income Statement.

No operations were acquired or discontinued in the year.

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

The accompanying notes are an integral part of the financial statements.

The above dividend information does not form part of the Income Statement.






The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.

The accompanying notes are an integral part of the financial statements.




Notes to the Financial Statements

Year Ended 30 June 2010


Accounting policies


Basis of preparation

The financial statements have been prepared in accordance with the applicable UK Accounting Standards and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts', issued in January 2009.

The Company adopted the extended disclosure requirements within FRS 29 for accounting periods beginning on or after 1 January 2009. The extended disclosure requirements introduced a fair value hierarchy and this is disclosed in note 18.

The financial statements have also been prepared on the assumption that approval as an investment trust will continue to be granted.



Dividends receivable on equity shares (other than special dividends) and convertibles are treated as revenue for the year on an ex-dividend basis.  Where no ex-dividend date is available dividends receivable on or before the year end are treated as revenue for the year. Provision is made for any dividends not expected to be received. Special dividends are credited to capital or revenue, according to the circumstances.

The fixed returns on debt securities are recognised on a time apportionment basis so as to reflect the effective yield on the debt securities and shares.

Interest receivable from cash and short-term deposits and interest payable is accrued to the end of the year.



All expenses are accounted for on an accruals basis.  All expenses are charged through the revenue column of the Income Statement except as follows:



Deferred taxation is recognised in respect of all timing differences that have originated but not reversed at the Balance Sheet date, where transactions or events that result in an obligation to pay more tax in the future or right to pay less tax in the future have occurred at the Balance Sheet date. This is subject to deferred tax assets only being recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted.  Timing differences are differences arising between the Company's taxable profits and its results as stated in the Financial Statements which are capable of reversal in one or more subsequent periods. Deferred tax is measured on a non-discounted basis at the tax rates that are expected to apply in the periods in which timing differences are expected to reverse, based on tax rates and laws enacted or substantively enacted at the Balance Sheet date.

Due to the Company's status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments. 

The tax effect of different items of income/gain and expenditure/loss is allocated between capital reserves and the revenue account on the same basis as the particular item to which it relates using the Company's effective rate of tax for the year.


Valuation of investments

Investments have been designated upon initial recognition at fair value through profit or loss. Investments are recognised and de-recognised at trade date where a purchase or sale is under a contract whose terms require delivery within the timeframe established by the market concerned, and are measured initially at fair value.  Subsequent to initial recognition, investments are valued at fair value through profit or loss. For listed investments, this is deemed to be bid market prices or closing prices for SETS (London Stock Exchange's electronic trading service) stocks sourced from the London Stock Exchange. Gains and losses arising from changes in fair value are included in the net return for the period as a capital item in the Income Statement and are ultimately recognised in the capital reserve. The valuation of reverse convertibles is carried out by the respective counterparty and is modelled on a long stock and short call basis taking account of implied volatility and including an accrual for yield.



Interest-bearing bank loans and overdrafts are initially recognised at cost, being the fair value of the consideration received, net of any issue expenses. Finance charges are accounted for on an accruals basis using the effective interest rate method and are charged 50% to revenue and 50% to the capital reserve to reflect the Company's investment policy and prospective income and capital growth.


Traded options

The Company may enter into certain derivatives (eg options) to gain exposure to the market. The option contracts are accounted for as separate derivative contracts and are therefore shown in other assets or other liabilities at their fair value ie market value adjusted for the amortisation of transaction expenses. The premium received and fair value changes in the open position are normally recognised in the revenue column of the Income Statement. However, where the option is written for the maintenance or enhancement of the Company's investments then the change in fair value is recognised in the capital column of the Income Statement.


Segmental reporting

The Directors are of the opinion that the Company is engaged in a single segment of business activity, being investment business. Consequently, no business segmental analysis is provided.

During the year, the Company received premiums totalling £1,234,000 (2009 - £117,000) in exchange for entering into derivative transactions. This includes a mark to market on derivative contracts. At the year end there were 24 open positions, valued at £352,000 (2009 - £82,000) and securities with a value of £2,232,000 (2009 - £3,345,000) were pledged as collateral against this.

{A} Includes registration, savings scheme and other wrapper administration and promotion expenses, of which £294,000 (2009 - £298,000) was paid to Aberdeen Asset Managers Limited (AAM) to cover marketing activities during the year. There were no sums due to AAM at the year end (2009 - £nil).

The third interim and proposed final dividends for 2010 have not been included as a liability in these financial statements. The proposed final dividend for 2010 is subject to approval by shareholders at the Annual General Meeting.

We 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 1158-1159 of the Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £16,424,000 (2009 - £18,150,000).

There is no taxation charge for the year. Approved investment trusts are exempt from tax on gains made by the Company. The tax assessed for the period is lower than the standard rate of corporation tax in the UK of 28% (2009 - 28%). The differences are explained below:

No provision for deferred tax has been made in the current or prior accounting period.

The Company has not provided for deferred tax on capital gains or losses arising on the revaluation or disposal of investments as it is exempt from tax on these items because of its status as an investment trust company.

The Company has not recognised a deferred tax asset of £13,703,000 (2009 - £13,961,000) arising as a result of unutilised management expenses and loan relationship deficits. Any excess management expenses will be utilised against any taxable income that may arise.

As at 30 June 2010, the Company had pledged collateral greater than the market value of the traded options in accordance with standard commercial practice. The carrying amount of financial assets pledged equated to £2,232,000, all in the form of securities. The collateral position is monitored on a daily basis, which then determines if further assets are required to be pledged over and above those already pledged.

Transaction costs

During the year expenses were incurred in acquiring or disposing of investments classified at fair value through profit or loss. These have been expensed through capital and are included within gains/(losses) on investments in the Income Statement. The total costs were as follows:

Accruals include £161,000 (2009 - £135,000 plus VAT) of management fees and secretarial fees due to Aberdeen Asset Managers Limited, the Investment Manager.

At 30 June 2010 the Company had drawn down £35,000,000 (30 June 2009 - £35,000,000) of a £45,000,000 revolving bank credit facility with Lloyds Banking Group. Under the terms of the agreement, advances from the facility may be made for periods of up to six months or for such longer periods agreed by the lender. Interest is charged at a variable rate based on LIBOR plus a margin of 1.56% for the relevant period of the advance. As at 30 June 2010 this rate was 2.21184% (30 June 2009 - 0.9988%) and the loan matured on 6 July 2010.

On 6 July 2010 the £35,000,000 loan was rolled forward at an all-in interest rate of 2.29493%, until maturity on 6 October 2010.

Of the above shares in issue the movements in the Ordinary shares held in treasury are as follows:  

No Ordinary shares were repurchased by the Company during the year.  During the year to 30 June 2009, 28,000 Ordinary shares of 25p each were repurchased by the Company at a total cost, including transaction costs, of £154,000 of which £nil is brokers' fees. All of these shares were placed in treasury and 100,000 shares were sold from its treasury account for proceeds of £417,000 during that year.

Derivatives and other financial instruments

The Company's financial instruments, other than derivatives, comprise securities and other investments, cash balances, liquid resources, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income. The Company also has the ability to enter into derivative transactions in the form of forward foreign currency contracts, futures and options, subject to Board approval, for the purpose of managing currency and market risk arising from the Company's activities. During the year the Company entered into three yield-enhanced securities (reverse convertibles), details of which are provided in the Investment Portfolio table.

The main risks the Company faces from these financial instruments are (i) market risk (comprising interest rate and other price risk), (ii) liquidity risk and (iii) credit risk. The Company has minimal exposure to foreign currency risk as it holds only a small amount of foreign currency assets and has no exposure to any foreign currency risk liabilities.

In order to mitigate risk, the investment strategy is to select investments for their fundamental value. Stock selection is therefore based on disciplined accounting, market and sector analysis. It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular sector. The Attribution Analysis, detailing the allocation of assets and the stock selection, is shown in the Sector Allocations table. The Investment Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to consider investment strategy. Current strategy is detailed in the Chairman's Statement (in the sections headed "Performance", "Dividends" and "Outlook") and in the Investment Manager's Review (in the sections headed "Background", "Performance", "Portfolio Activity", "Structure", "Income" and "Outlook").

The Board has agreed the level of gearing, which was 9.9% of net assets as at 30 June 2010 (2009 - 11.9%). The Manager's policies for managing these risks are summarised below and have been applied throughout the current and previous year. The numerical disclosures in the table listed below exclude short-term debtors and creditors.

Market price risk

The Company's investment portfolio is exposed to market price fluctuations, which are monitored by the Manager in pursuance of the investment objective as set out in the Review of Business. Adherence to investment guidelines and to investment and borrowing powers set out in the management agreement mitigates the risk of exposure to any particular type of security or issuer. Further information on the investment portfolio is set out in the Investment Manager's Review.

Market price risk arises mainly from uncertainty about future prices of financial instruments used in the Company's operations. It represents the potential loss the Company might suffer through holding market positions as a consequence of price movements. It is the Board's policy to hold equity investments in the portfolio in a broad spread of sectors in order to reduce the risk arising from factors specific to a particular sector. A summary of investment changes during the year under review and an analysis of the equity portfolio by industrial classification appears in the Annual Report (the twenty largest portfolio holdings are shown below).

Interest rate risk

Interest rate movements may affect:


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


the level of income receivable on cash deposits;


interest payable on the Company's variable rate borrowings.

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 and borrowing decisions.

Financial assets

The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. Interest rate risk is the risk of movements in the value of financial instruments as a result of fluctuations in interest rates.

The interest rate risk of the portfolio of financial assets at the Balance Sheet date was as follows:


The floating rate assets consist of cash deposits on call earning interest at prevailing market rates.

The interest bearing assets represent the equity linked notes and corporate bonds, amounting to £12,366,000 (2009 - £13,470,000). Their weighted average interest rate, based on current yield of the underlying equity, plus a fixed rate of interest on the nominal amount notes held, was 8.92% (2009 - 14.86%).

The non-interest bearing assets represent the equity element of the portfolio.

Financial liabilities

The Company has borrowings by way of a loan facility, details of which are in note 11. The fair value of this loan has been calculated at £35,000,000 as at 30 June 2010 (2009 - £35,000,000). The fair value of the loan equates to the cost as the loans are rolled on a regular basis. All other financial assets and liabilities of the Company are included in the Balance Sheet at their book value which in the opinion of the Directors is not materially different from their fair value.

Maturity profile

The maturity profile of the Company's financial assets and liabilities at 30 June was as follows:


Fixed rate

Equity linked notes

Floating rate



Fixed rate

Corporate Bonds


Floating rate

Revolving bank credit facility

All the other financial assets and liabilities do not have a maturity date.

Interest rate sensitivity

The sensitivity analyses below have been determined based on the exposure to interest rates for both derivative and non-derivative instruments at the Balance Sheet date and the stipulated change taking place at the beginning of the financial year and held constant in the case of instruments that have floating rates.

If interest rates had been 100 basis points higher or lower and all other variables were held constant, the Company's :


profit before tax for the year ended 30 June 2010 would increase/decrease by £350,000 (2009 -  increase/decrease by £135,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances.


equity reserves would not be materially affected as the fixed interest holdings held are linked to an underlying equity, and therefore covered under the other price risk section.

Other price risk

Other price risks (ie changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments.

It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular country or sector. The allocation of assets to international markets and the stock selection process, as detailed in the "Investment Policy" section in the Annual Report, both act to reduce market risk. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy.

Other price risk sensitivity

If market prices at the Balance Sheet date had been 10% higher or lower while all other variables remained constant, the return attributable to Ordinary shareholders and equity for the year ended 30 June 2010 would have increased/decreased by £35,229,000 (2009 - £31,338,000).

Liquidity risk

The Company's assets comprise readily realisable securities which can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the use of committed loan and overdraft facilities.

As at 30 June 2010 the Company utilised £35,000,000 of a £45,000,000 revolving bank credit facility. Interest is charged at a variable rate based on LIBOR plus a margin of 1.56% for the relevant period of the advance. As at 30 June 2010 this rate was 2.21184% and the loan matured on 6 July 2010. The aggregate of all future interest payments at the rate ruling at 30 June 2010 and the redemption of the loan amounts to £35,193,000.

Credit risk

Credit risk is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. This is mitigated by the Investment Manager reviewing the credit ratings of broker counterparties. The risk attached to dividend flows is mitigated by the Investment Manager's research of potential investee companies.  The Company's custodian bank is responsible for the collection of income on behalf of the Company and their performance is reviewed by the Board on a regular basis and reports its finding to the Manager's Risk Management Committee. It is the Manager's policy to trade only with A- and above (Long Term rated) and A-1/P-1 (Short Term rated) counterparties. The maximum credit risk at 30 June 2010 is £50,073,000 (30 June 2009 - £29,865,000) consisting of £10,387,000 (2009 - £11,654,000) equity linked notes, £1,979,000 (2009 - £1,816,000) corporate bonds, £2,670,000 (2009 - £2,867,000) of dividends receivable from equity shares and £35,037,000 in cash held (2009 - £13,528,000).

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

Capital management policies and procedures

The investment objective of the Company is to achieve a high and growing income combined with capital growth through investment in a portfolio of UK equities.

The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance.

The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes:


the planned level of gearing which takes into account the Investment Manager's views on the market;


the level of equity shares in issue;


the extent to which revenue in excess of that which is required to be distributed should be retained.

The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period.

At the year end financial covenants contained within the loan agreements provide, inter alia, that borrowings shall at no time exceed 25% of net assets and that the net assets must exceed £225 million. At 30 June 2010 net gearing was 9.9% (2009 - 11.9%) and the net assets were £354.4 million (2009 - £294.5 million).

Fair value hierarchy

The Company adopted the amendments to FRS 29 'Financial Instruments: Disclosures' effective from 1 January 2009. These amendments require an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the following levels:

 - Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

 - Level 2: inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly (ie as prices) or indirectly (ie derived from prices); and

 - Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The financial assets and liabilities measured at fair value in the Balance Sheet are grouped into the fair value hierarchy at 30 June 2010 as follows:


Financial assets at fair value through profit or loss

Quoted equities


Reverse convertibles



Financial liabilities at fair value through profit or loss



Net fair value


Quoted equities

The fair value of the Company's investments in quoted equities have been determined by reference to their quoted bid prices at the reporting date. Quoted equities included in Fair Value Level 1 are actively traded on recognised stock exchanges.


Quoted Bonds

The fair value of the Company's investments in corporate quoted bonds have been determined by reference to their quoted bid prices at the reporting date. 



The fair value of the Company's investments in exchange traded options has been determined using quoted prices on an exchange traded basis and therefore have been classed as Level 1.

The fair value of the Company's investments in over-the-counter options has been determined using observable market inputs other than quoted prices and are therefore included within Level 2.

On 5 November 2007, the European Court of Justice ruled that management fees on investment trusts should be exempt from VAT.

The Company has accepted the Manager's offer to refund £818,000 to the Company, representing an estimate of VAT charged on investment management fees for the period 1 January 2001 to 31 December 2003 which will be recoverable from HMRC; this has been received in the year and has been allocated to revenue and capital respectively, in accordance with the accounting policy of the Company for the periods in which the VAT was charged. The sum of £1,556,000 in respect of VAT charged on investment management fees for the period 1 January 2004 to 31 August 2007 was both received and reflected in the previous accounting period. The reclaim for previous periods along with interest due and the timescale for receipt are at present uncertain and the Company has therefore taken no account in these financial statements of any such repayment.


By Order of the Board





15 September 2010


Copies of this announcement will be available to the public from the Company Secretary, Aberdeen Asset Management PLC, 40 Princes Street, Edinburgh EH2 2BY.






Summary of Net Assets





1 (8) Centrica

Centrica provides gas, electricity and energy-related products and services to business and residential customers in the UK and USA. It also provides central heating and gas appliance installation and maintenance services. The company enjoys a strong competitive position in the UK market, which provides a solid platform from which to generate long-term value.

2 (2) Royal Dutch Shell

Royal Dutch Shell is engaged in all phases of the petroleum industry, from exploration to processing and distribution. It has strong positions in oil products marketing and LNG, globally. The group operates in over 130 countries.

3 (4) HSBC Holdings {C}

HSBC group is one of the world's largest banking and financial services institutions. Its international network comprises more than 5,000 offices in 80 countries and territories, operating in the Asia Pacific region, Europe, the Americas, the Middle East and Africa. The diversity of HSBC's business and exposure to faster growing regions of the world should enable it to deliver superior long-term growth.

4 (5) British American Tobacco{C}

British American Tobacco manufactures and markets cigarettes and other tobacco products, including cigars and roll-your-own tobacco. The group sells over 200 brands in approximately 180 countries. Key brands include: Dunhill, Kent, Pall Mall and Lucky Strike. Strong cashflow is an attractive characteristic of the tobacco industry.

5 (6) Vodafone Group

Vodafone is one of the world's largest mobile phone companies, with a significant position in major economies including Germany, Italy, France, the UK and the US, as well as many emerging markets. The group generates a significant amount of free cashflow.

6 (3) AstraZeneca

AstraZeneca researches, develops, produces and markets pharmaceutical products.  The company's operations are focused on six therapeutic areas: cardiovascular, oncology, respiratory, neuroscience, inflammation and infection. The company's product pipeline offers a number of interesting opportunities.

6 (7) GlaxoSmithKline {A}

GlaxoSmithKline is a research-based pharmaceutical group that also develops, manufactures and markets vaccines, prescription and over-the-counter medicines, as well as health-related consumer products. The group specialises in treatments for respiratory, central nervous system, gastro-intestinal and genetic disorders.

7 (1) BP  {B}

BP is one of the world's largest petroleum and petrochemicals groups. Its main activities are: exploration and production of crude oil and natural gas; refining, marketing, supply and transportation of petroleum products.

8 (9) National Grid

National Grid owns and operates electricity and gas networks throughout the UK and in the US. It will benefit from the requirement to increase energy infrastructure spend over the long term. The company offers a generous dividend yield.

9 (10) Tesco

Tesco is one of the world's largest food retailers, with operations around the world. Its international operations provide a platform for growth, coupled with non-food sales and financial services. The company benefits from significant property asset-backing.

10 (11) Unilever {A}

Unilever is a global consumer goods company supplying food, home and personal care products. The company has a portfolio of strong brands including: Dove, Knorr, Axe and Persil. Over half of the company's sales are to developing and emerging markets.

Top ten investments

11 (19) Aviva

Aviva is an international insurance company which provides a broad variety of classes of general and life assurance, including fire, motor, marine, aviation and transport insurance.

12 (14) Morrison (Wm) Supermarkets

Morrisons is one of the UK's largest supermarket chains. With an emphasis on good value, the company's vertically-integrated model means that it manages most of its operations in-house. There remains substantial opportunity for the company to expand its footprint in the UK through smaller stores.

13 (-) Provident Financial

Provident Financial is a financial services company specialising in the provision of personal credit products for consumers in the United Kingdom and Ireland. The company offers a generous yield.

14 (17) Whitbread

Whitbread is the UK's largest hotel company focusing on the budget sector with its Premier Inn brand. The company also runs pub restaurants and owns the Costa Coffee chain. Both Costa Coffee and Premier Inn have attractive international growth opportunities.

15 (15) AMEC

AMEC is a leading supplier of high-value consultancy, engineering and project management services to the world's energy, power and process industries. The company employs over 20,000 people in more than 30 countries.

16 (-) Standard Chartered

Standard Chartered is an international banking group operating principally in Asia, Africa and the Middle East providing attractive access to growing markets.

17 (-) BHP Billiton

BHP Billiton is the world's largest diversified resources group with a global portfolio of high quality assets. Core activities comprise of production and distribution of minerals, mineral products and petroleum.

18 (-) Close Brothers

Close Brothers is a financial services company with three principal divisions; corporate finance, securities and banking. It is very well capitalised and offers an attractive dividend yield.

19 (13) Associated British Foods

Associated British Foods is a global diversified business which is divided into four segments: Grocery; Sugar & Agriculture; Ingredients and Retail. It should benefit from a more benign sugar environment and the continued growth of Primark.

20 (-) Aberforth Smaller Companies Trust

Aberforth Smaller Companies is an investment trust with a diversified portfolio of small UK quoted companies. The trust has a generous yield and benefits from substantial revenue reserves.

Top twenty investments


The figures in brackets denote the position at the previous year end. (-) not previously in 20 largest investments.

This information is provided by RNS
The company news service from the London Stock Exchange

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