Annual Financial Report
The Edinburgh Investment Trust plc
Annual Financial Report Announcement
for the Year Ended 31 March 2013
FINANCIAL INFORMATION AND PERFORMANCE STATISTICS
Performance Statistics
(1) Source: Thomson Reuters Datastream
FOR THE YEAR TO 31 MARCH 2013 2012
% %
CHANGE CHANGE
Total Return (capital growth with income
reinvested)
Net asset value (NAV) total return:
  - debt at par +21.1 +15.2
  - debt at market value +22.4 +15.8
FTSE All-Share Index total return(1) +16.8 +1.4
Share price total return(1) +20.1 +17.6
AT AT
31 March 31 March %
2013 2012 CHANGE
Capital Return
NAV:
  - debt at par 581.89p 502.03p +15.9
  - debt at market value 559.01p 478.30p +16.9
FTSE All-Share Index(1) 3380.64 3002.78 +12.6
Share price(1) 572.0p 497.6p +15.0
Discount/(premium):
  - debt at par 1.7% 0.9%
  - debt at market value (2.3)% (4.0)%
Gearing (at par):
  - gross gearing 17.6% 20.4%
  - net gearing 17.6% 20.3%
%
FOR THE YEAR TO 31 MARCH 2013 2012 CHANGE
Revenue Return
Revenue return per share 22.0p 22.1p -0.5
Dividends:
  - first interim 5.0p 5.0p
  - second interim 5.0p 5.0p
  - third interim 5.0p 5.0p
  - final proposed 7.8p 7.0p
  - total dividends 22.8p 22.0p +3.6
Retail Price Index(1) 3.3% 3.6%
FOR THE YEAR TO 31 MARCH 2013 2012
% %
CHANGE CHANGE
Ongoing Charges Ratio:
  Excluding performance fee 0.71 0.72
  Performance fee(2) 1.21 0.41
(2) The ongoing charges ratio (OC ratio) is calculated in accordance with
recent guidance issued by the AIC of: total ongoing expenses ÷ average NAV
(debt at market value). Note that since the Company's performance fee is based
on average NAV (debt at par) of up to 1% of period end net assets, the OC ratio
can result in a figure that is higher or lower than 1% of period end net assets
which is the basis used in these accounts.
.
CHAIRMAN'S STATEMENT
Dear Shareholder,
Notwithstanding the cautious tone of my last letter to shareholders, the last
year has seen a major recovery in global equity markets, although against a
backdrop of continuing uncertainty around economic recovery in many western
economies and ongoing challenges around public debt levels, particularly in
Europe.
At the same time there has been no change in the investment strategy which has
been in place since the appointment of Invesco as Manager in September 2008,
and which has delivered strong investment out-performance against benchmark in
the 12 month period to 31 March 2013. More detail on performance is given
below.
The income generation of the portfolio remains good and the Board is proposing
a final dividend of 7.8 pence per share for the three months to 31 March 2013
which would result in a full year dividend of 22.8 pence per share, an increase
of 3.6% year-on-year.
UK Equity Market
Since June 2012 the UK equity market has performed very strongly, in part due
to continuing monetary stimuli, but also as a consequence of a low interest
rate environment reducing the attractiveness of many other investment assets.
Some fundamental challenges remain in place for financial markets in general,
including concerns over austerity measures and the lack of economic growth
stimuli in many western economies, oil price worries around political
instability in the Middle East, and the ongoing Eurozone debt and banking
crisis.
A more detailed discussion on the UK equity market and the Company's portfolio
is contained in the Manager's Report.
Investment Strategy
Since the 2008 financial crisis, the Board and the Manager have been consistent
in their view that the recovery of the global economy was likely to be slower
than the markets had anticipated, with a longer period of lower growth rates in
the developed world being a distinct possibility.
The central theme behind the construction of the Company's investment portfolio
is the selection of individual stocks based upon fundamental value. This
approach is designed to be resilient in the continuing difficult economic
environment, whilst at the same time providing opportunity to participate in
long term growth by offering fundamental value through earnings and dividend
growth. This investment approach has remained in place for nearly five years,
including the current year.
Performance for the Year
The Company's produced an NAV total return for the year to 31 March 2013 of
21.1% (debt at par) and of 22.4% (debt at market value), which compares with a
total return of 16.8% for the FTSE All-Share Index (`the Index'), the Company's
benchmark. The portfolio is concentrated in a relatively small number of
sectors and its overweight position in the pharmaceutical sector and the
underweight position in the mining sector have been material drivers of the
Company's investment out-performance in the year.
The Company produced a share price total return (share price with dividends
reinvested) of 20.1%, which compares to the Index's total return of 16.8%. The
discount of the share price to NAV (debt at par) increased from 0.9% at 31
March 2012 to 1.7% at 31 March 2013; valuing debt at market, the shares traded
at a premium of 2.3%, a decrease from 4.0% at 31 March 2012.
Performance Fee
A performance fee is payable in respect of each three year rolling period in
which the Company outperforms its benchmark index plus a hurdle of 1.25% pa.
This fee is capped at 1% of the period end net assets, before deduction of any
performance fee.
As a result of the Company's very strong performance over three years producing
a total return of 56.7% against the Index total return of 28.7%, a capped
performance fee of £11.5 million is due.
Gearing
The Company continues to have long-term debt amounting to £200 million in the
form of two £100 million debentures. This debt is fully deployed for investment
purposes. As a result of the appreciation in NAV over the year, at 31 March
2013 the gross gearing level was 17.6% compared to 20.4% at 31 March 2012.
One of the debentures, the 11.5% £100m debenture, matures in June 2014. The
Board continues to keep this position under review, both in terms of whether
and how best to replace the financing represented by that debenture.
Dividend
Income from the portfolio during the year was £52.9m (2012 £52.9m).
The Board is recommending a final dividend of 7.8 pence per share which, if
approved at the AGM, will be paid on 31 July 2013 to shareholders on the
Company's register on 14 June 2013. This would result in a total dividend for
the year to 31 March 2013 of 22.8 pence compared to 22.0 pence in the prior
year, an increase of 3.6% compared to a rise in the Retail Prices Index of
3.3%, and demonstrates the Company's commitment to its long term objective of
providing income growth which exceeds the rate of inflation.
Retail Distribution Review (RDR)
RDR came into effect on 31 December 2012 and has significant implications for
the way financial advice is provided, retail fund platforms operate and
financial products are distributed. It remains too early to draw final
conclusions about how RDR will play out for Investment Trusts. Many
commentators continue to suggest that the abolition of commission under RDR
should result in more demand by individual investors for Investment Trusts,
with the likely beneficiaries of this demand being the larger Investment Trusts
- such as The Edinburgh Investment Trust - which have good levels of liquidity
in their own shares and can demonstrate a strong investment track record, a
clear investment strategy and a compelling brand.
The Board is continuing to monitor external developments in the market for
financial investments as they evolve to ensure that the Company is positioned
appropriately to benefit in the new environment.
Board
Following Will Samuel's retirement from the Board in December 2012 and Nicola
Ralston's forthcoming retirement after the AGM in July, I am pleased to be able
to announce two new appointments to the Board; Vicky Hastings and Glen Suarez.
Vicky has nearly 25 years' experience in the investment management industry and
is a non-executive director of Henderson Global Trust plc and Impax
Environmental Markets plc. Her roles have included investment director at JO
Hambro Capital Management; chief investment officer, private clients at Merrill
Lynch Investment Managers (London); a fund manager in the Merrill Lynch
European Equity team; and non-executive director of Charter European Trust.
Glen is Deputy CEO of Knight Vinke Asset Management. Prior to joining Knight
Vinke, he was a Partner in Soditic Limited and before that he was Head of
European Utilities at Morgan Stanley. He is a specialist in the banking and
energy sectors and is a Fellow of the Institute of Chartered Accountants in
England and Wales and a Fellow of the Royal Society of Arts.
I should like to take this opportunity of thanking Will and Nicola for their
very valuable contribution to the Board over many years. We wish them well for
the future.
Outlook
With markets having risen against a cautious backdrop, there is always the
potential for a disconnect between the equity markets and economic
fundamentals. Against this background, the Board and the Manager see no reason
to change the Company's current investment approach of focussing on stock
selection based on fundamental value. As has been the case in recent years, the
relatively concentrated nature of the portfolio may from time to time result in
material short term performance deviations from benchmark. However, the Board
and the Manager continue to believe that in the present market environment our
current investment approach should give some resilience whilst still providing
the opportunity for creating growth in shareholder value over the longer term.
Jim Pettigrew
Chairman
28 May 2013
.
MANAGER'S REPORT
Market Review
After a nervous start to the period, UK equities shrugged off concerns over the
outlook for global economic growth and the on-going Eurozone crisis. The
statement last June by Mario Draghi, President of the European Central Bank,
that he would do "whatever it takes" to save the euro marked the turning point
as, fuelled by ever increasing amounts of monetary stimulus, both the FTSE 100
and FTSE All-Share indices delivered positive returns for 10 straight months -
the first time this had been witnessed in over 50 years. This occurred despite
some very mixed news from the global economy, further bail outs of Eurozone
banking systems, profit downgrades from companies and further reductions in
forecasts for UK economic growth.
Portfolio Strategy and Review
The Company produced a net asset value total return (with debt at market value)
of 22.4% during the year, compared to total return from the FTSE All-Share
Index of 16.8%.
A strong performance was delivered by the pharmaceutical sector, where over a
quarter of the Company's assets are invested. The holding in Roche again
delivered exceptional returns, as the company confirmed its ability to lead the
industry in terms of drug discovery and innovation. The holding in AstraZeneca,
which had delivered a relatively disappointing performance the previous year,
also contributed strongly as the appointment of a new chief executive, Pascal
Soriot, and his subsequent outline of a strategy to return the company to
growth, has been very well received. The Manager remains convinced that, over
the longer term, a significant exposure to this sector will continue to prove
rewarding.
There were positive performances from a range of the Company's other major
holdings. Shares in BAE Systems had performed strongly in the months before the
company confirmed that it was in early stage talks with EADS regarding a
merger. The deal did not look particularly beneficial to shareholders and the
two companies subsequently confirmed that merger negotiations had been
terminated. Waning concerns over the possible impact of US defence spending
cuts saw BAE Systems shares continue to outperform through to the end of the
period.
Reckitt Benckiser pleased the stock market with a very good operational
performance and news that it had trumped Bayer to the purchase of Schiff
Nutrition, a deal which gives it access to the $30 billion vitamins and
nutrition supplements market. Reckitt Benckiser has an excellent track record
of creating value through acquisitions and this is a highly fragmented but well
regulated market, with scope for growth in both emerging and developed markets.
BT continued to deliver very strong share price performance. Results from the
company underlined why the Manager expects this stock to continue to deliver
good profit and dividend growth. While headline profits came in just slightly
ahead of expectations, the stock market warmed to the prospect of further
cost-savings. The current management team has very effectively reduced the
cost-base in recent years and the announcement of a new group-wide
restructuring in February opens a path for the next wave of efficiencies.
The Company's zero weighting in the mining sector provided another positive
impact on performance. This is a sector which has tended to do well in previous
market rallies, but the Manager is increasingly seeing evidence that the
"risk-on" crowd is slowly falling out of love with it. News from Rio Tinto
highlighted the scale of the value destroyed by the sector's acquisition spree
of recent years. Rio announced a further write down of assets - since acquiring
Alcan for $38 billion in 2007, the company is estimated to have written down
$25 billion of the price paid.
Imperial Tobacco fell during the year following confirmation of tough trading
conditions in southern Europe and growing concerns that the UK may follow
Australia in introducing plain packaging for cigarettes. The Manager believes
the low valuation of the shares of Imperial Tobacco compared with its peers
more than discounts these concerns and that the tobacco sector as a whole
continues to offer attractive and dependable growth opportunities.
BG saw its shares fall sharply on the news last October that it had reduced
production growth forecasts. The Manager had reduced the position earlier in
the year at higher share price levels but the remaining holding weighed on
performance over the year. There was also disappointing news from Chemring.
Carlyle called off its discussions about a possible takeover of the company
while Chemring also issued a significant profit warning and a decline in its
order book. With a new management team now in place, the Manager is confident
that long-term value can be realised from the high quality businesses within
the company.
There was disappointing news from Vodafone as the company reduced its forecasts
for revenue growth on the back of on-going weakness in its core southern
European markets and announced a share buy-back rather than the hoped for
special dividend with its dividend from Verizon. The Manager has reservations
about the company's ability to generate profits from data services while the
cash flow cover of the dividend has fallen to what he views as uncomfortably
low levels, and hence has disposed of the Company's holdings in the shares.
In terms of portfolio activity, as outlined above the holding in Vodafone was
sold and the holding in BG was reduced. The holding in International Power was
sold following a bid for the company while the holdings in Hibu (formerly Yell)
and Tate & Lyle were also disposed of. The holdings in Capita, Centrica,
Rentokil, Serco and Smith & Nephew were added to while new investments were
made in Elan, G4S, Lancashire Holdings, Revolymer and Smiths.
Outlook
The UK stock market's rise of the past year, fuelled by monetary stimulus and
central bank policy initiatives, has occurred despite cuts in forecasts to
economic growth and associated reductions in the forecasts of company earnings
- most notably in the mining sector but also across the a range of companies
most exposed to the economic cycle. Equity valuations on the whole, therefore,
are no longer as compellingly cheap as they were a year ago.
At a time when the UK market appears more relaxed about the risks facing the
world economy and financial markets, the Manager has become a bit more
cautious. The environment is still very challenging in a real sense, but
financial markets have been propped up by symptomatic treatment rather than by
a cure of the world's economic problems
However, while the Manager has concerns over the economic environment and
believes the stock market may be vulnerable to some near term volatility, he
has very strong levels of conviction in the attractiveness of the businesses in
which the Company is invested. The overall market is no longer as cheap as it
was, but some high quality, dependable growth companies remain significantly
undervalued. The Manager remains convinced by their potential to deliver
attractive positive returns over the medium/long term, regardless of the
economic headwinds we expect to prevail.
Neil Woodford
Investment Manager
28 May 2013
.
INVESTMENTS IN ORDER OF VALUATION
at 31 MARCH 2013
UK listed and ordinary shares unless stated otherwise
AIM Investments quoted on AIM (formerly Alternative Investment Market)
MARKET
VALUE % OF
INVESTMENT SECTOR £'000 PORTFOLIO
AstraZeneca Pharmaceuticals & 123,603 9.2
Biotechnology
GlaxoSmithKline Pharmaceuticals & 121,637 9.1
Biotechnology
British American Tobacco Tobacco 93,412 7.0
BT Fixed Line 87,923 6.6
Telecommunications
Roche - Swiss Common Stock Pharmaceuticals & 79,615 5.9
Biotechnology
Reckitt Benckiser Household Goods & Home 66,211 4.9
Construction
Imperial Tobacco Tobacco 64,083 4.8
BAE Systems Aerospace & Defence 63,444 4.7
Reynolds American - US Common Tobacco 60,024 4.5
Stock
Rolls-Royce Aerospace & Defence 54,332 4.1
Ten Largest Holdings 814,284 60.8
Capita Support Services 51,262 3.8
Centrica Gas, Water & 47,559 3.6
Multiutilities
Novartis - Swiss Common Stock Pharmaceuticals & 42,708 3.2
Biotechnology
Altria - US Common Stock Tobacco 40,862 3.1
BG Oil & Gas Producers 28,097 2.1
Drax Electricity 27,442 2.0
SSE Electricity 26,947 2.0
Sanofi - French Common Stock Pharmaceuticals & 25,532 1.9
Biotechnology
Smith & Nephew Health Care Equipment & 24,233 1.8
Services
G4S Support Services 22,807 1.7
Twenty Largest Holdings 1,151,733 86.0
Provident Financial Financial Services 20,920 1.6
Wm Morrison Supermarkets Food & Drug Retailers 19,247 1.4
Raven Russia - Preference Real Estate Investment & 8,573
Services
Raven Russia - Ordinary 6,961
15,534 1.1
Serco Support Services 15,142 1.1
Hiscox Non-life Insurance 13,925 1.0
Amlin Non-life Insurance 13,603 1.0
Rentokil Initial Support Services 13,562 1.0
BTG Pharmaceuticals & 12,819 1.0
Biotechnology
Catlin Non-life Insurance 10,391 0.8
PayPoint Support Services 7,727 0.6
Thirty Largest Holdings 1,294,603 96.6
IP Group Financial Services 7,416 0.6
Elan ADR Pharmaceuticals & 7,049 0.5
Biotechnology
HomeServe Support Services 6,789 0.5
Chemring Aerospace & Defence 4,300 0.3
Burford CapitalAIM Equity Investment 4,247 0.3
Instruments
Barclays Bank - Nuclear Power Electricity 3,851 0.3
Notes 28 Feb 2019(1)
Stobart Industrial Transportation 3,810 0.3
Lancashire Non-life Insurance 2,985 0.2
Smiths General Industrials 2,503 0.2
Oxford PharmascienceAIM Pharmaceuticals & 1,481 0.1
Biotechnology
Forty Largest Holdings 1,339,034 99.9
Proximagen - Rights - Pharmaceuticals & 815 0.1
Unquoted Biotechnology
RevolymerAIM Chemicals 414 -
Helphire Financial Services 349 -
Eurovestech - Unquoted Financial Services 241 -
Prothena - US Common Stock Pharmaceuticals & 95 -
Biotechnology
Total Holdings (45) 1,340,948 100.0
(1) Contingent Value Rights (CVRs) referred to as Nuclear Power Notes (NPNs)
were offered by EDF as a partial alternative to cash in its bid for British
Energy (BE). The NPNs were issued by Barclays Bank. The CVRs participate in
BE's existing business.
.
Report of the Directors
Principal Risks and Uncertainties
The Company's key long-term investment objectives are an increase in the
capital net asset value per share by more than the growth in the FTSE All-Share
Index (the `benchmark' or `index') and an increase in dividends by more than
the growth of RPI. The principal risks and uncertainties facing the Company are
an integral consideration when assessing the operations in place to monitor
these objectives, including the performance of the portfolio, share price and
dividends. The Board is ultimately responsible for the risk control systems but
the day-to-day operation and monitoring is delegated to the Manager.
Market Risk
The uncertainty over future equity market price movements is an inherent part
of the rationale for the Company's existence. The Company's assets principally
consist of quoted securities. The prices of these securities and the income
derived from them are influenced by many factors such as general economic
conditions, interest rates, inflation, political events, and government
policies as well as by supply and demand reflecting investor sentiment. In
addition, there continues to be a risk that European policy makers fail to
implement an effective and lasting solution to the Eurozone crisis. Such
factors are outside the control of the Board and Manager and may give rise to
high levels of volatility in the prices of investments held by the Company. The
asset value and price of the Company's shares and its earnings and dividends
may consequently also experience volatility and may decline.
Investment Performance Risk
The Board sets performance objectives and delegates the investment management
process to the Manager. The achievement of the Company's performance objectives
relative to the market requires active management of the portfolio of assets
and securities. The Manager's approach is to construct a portfolio which is
compatible with the Manager's view of future trends in the UK and global
economies. The Manager is a long term investor, prepared to take substantial
positions in securities and sectors which may well be out of fashion, but which
the Manager believes will have potential for material increases in earnings
and, in due course, dividends and share prices. Strategy, asset allocation and
stock selection decisions by the Manager can lead to underperformance of the
benchmark index and/or income targets. The Manager's style may result in a
concentrated portfolio with significant overweight or underweight positions in
individual stocks or sectors compared to the index and consequently the
Company's performance may deviate significantly, possibly for extended periods,
from that of the benchmark index. In a similar way, the Manager manages other
portfolios holding many of the same stocks as the Company which reflects the
Manager's high conviction style of investment management. This could
significantly increase the liquidity and price risk of certain stocks under
certain scenarios and market conditions. However the Board and Manager believe
that the investment process and policy outlined above should, over the long
term, meet the Company's objectives of capital growth in excess of the
benchmark index and real dividend growth.
Investment selection is delegated to the Manager. The Board does not specify
asset allocations. Information on the Company's performance against the
benchmark and peer group is provided to the Board on a quarterly basis. The
Board uses this to review the performance of the Company, taking into account
how performance relates to the Company's objectives. The Manager is responsible
for monitoring the portfolio selected and seeks to ensure that individual
stocks meet an acceptable risk-reward profile.
Gearing Risk
The Company has the ability to invest up to £200 million from its debenture
stocks in the equity market. The principal gearing risk is that the level of
gearing may have an adverse impact on performance. Secondary risks relate to
whether the cost of gearing is too high and whether the term of gearing is
appropriate. The Company also has a new secondary risk concerning its ability
to replace, if it so chooses, the £100 million debenture stock which matures in
June 2014 with a form of gearing that is acceptable, both in type and cost, to
the Company and the Manager. The Company's performance could be adversely
affected if the debenture stock were not replaced.
The Manager has full discretion over the amount of cash from the Company's
Debenture Stocks to be invested in the equity market whilst the issuance,
repurchase or restructuring of debt are for the Board to decide. Information
related to gearing is provided to the Directors as part of the Board papers.
The Board regularly reviews the level of gearing. Additionally, the Board keeps
under review the cost of buying back debt.
Income/Dividend Risk
The Company is subject to the risk that income generation from its investments
fails to reach the level of income required to meet its objectives.
The Board monitors this risk through the review of detailed income forecasts
and comparison against budget. These are contained within the Board papers. The
Board considers the level of income at each meeting.
Share Price Risk
There is a risk that the Company's prospects and NAV may not be fully reflected
in the share price from time to time.
The share price is monitored on a daily basis. The Board is empowered to
repurchase shares within agreed parameters. The discount at which the shares
trade to NAV can be influenced by share repurchases. The Company has not
repurchased shares in the last year.
Control Systems Risk
The Board delegates a number of specific risk control activities to the Manager
including:
• best practice standards in fund management operations;
• financial controls;
• meeting regulatory requirements;
• the management of the relationship with the Custodian in respect of the
custody and security of the Company's assets; and
• the management of the relationship with the Registrar.
Consequently in respect of these activities the Company is dependent on the
Manager's control systems and those of its Custodian and Registrars, both of
which are monitored by the Manager in the context of safeguarding the Company's
assets and interests. There is a risk that the Manager fails to ensure that
these controls are operated in a satisfactory manner. In addition, the Company
relies on the soundness and efficiency of the Custodian for good title and
timeliness of receipt and delivery of securities.
A risk-based programme of internal audits is carried out by the Manager
regularly to test the controls environment. An internal controls report
providing an assessment of these risks is prepared by the Manager and
considered by the Audit Committee, and is formally reported to and considered
by the Board.
Reliance on Third Party Providers
The Company has no employees and the Directors are all appointed on a
non-executive basis. The Company is reliant upon the performance of third party
providers for its executive function. The Company's most significant contract
is with the Manager, to whom responsibility both for the Company's portfolio
and for the provision of company secretarial and administrative services are
delegated. The Company has other contractual arrangements with third parties to
act as Auditor, Registrar, Custodian and Broker. Failure by any service
provider to carry out its obligations to the Company in accordance with the
terms of its appointment could have a materially detrimental impact on the
operation of the Company and could affect the ability of the Company to pursue
successfully its investment policy and expose the Company to risk of loss or to
reputational risk.
In particular, the Manager performs services which are integral to the
operation of the Company. The Manager may be exposed to the risk that
litigation, misconduct, operational failures, negative publicity and press
speculation, whether or not it is valid, will harm its reputation. Any damage
to the reputation of the Manager could result in counterparties and third
parties being unwilling to deal with the Manager and by extension the Company.
This could have an adverse impact on the ability of the Company to pursue its
investment policy.
The Board seeks to manage these risks in a number of ways:
• The Manager monitors the performance of all third party providers in relation
to agreed service standards on a regular basis, and any issues and concerns are
dealt with promptly and reported to the Board. The Manager formally reviews the
performance of all third party providers and reports to the Board on an annual
basis.
• The Board reviews the performance of the Manager at every board meeting and
otherwise as appropriate. The Board has the power to replace the Manager and
reviews the management contract formally once a year.
• The day-to-day management of the portfolio is the responsibility of Neil
Woodford, Head of Investment at Invesco Perpetual, who has worked in equity
markets since 1981 and has been the portfolio manager of the Company since
Invesco's appointment in September 2008. The Board has adopted guidelines
within which the portfolio manager is permitted wide discretion. Any proposed
variation outside these guidelines is referred to the Board and the guidelines
themselves are reviewed at every board meeting.
• The risk that the portfolio manager might be incapacitated or otherwise
unavailable is mitigated by the fact that he works within, and is supported by,
the wider Invesco Perpetual UK Equity team.
Other Risks
The Company may be exposed to other business and strategic risks in the future,
including fiscal, legal or regulatory changes, and the perceived impact of the
designated Investment Manager ceasing to be involved with the Company.
The instruments in which the Company's cash positions are invested are reviewed
by the Board to ensure liquidity and concentration risks are adequately
managed. Where an Invesco Group vehicle is utilised, it is assessed for
suitability against other similar investment options.
The Company is subject to laws and regulations by virtue of its status as an
investment trust and is required to comply with certain regulatory requirements
that are applicable to listed closed-ended investment companies. The Company is
subject to the continuing obligations imposed by the UK Listing Authority on
all companies whose shares are listed on the Official List. A breach of the
conditions for approval as an investment trust could lead to the Company being
subject to capital gains tax on the sale of the investments in the Company's
portfolio. A serious breach of other regulatory rules may lead to suspension
from listing on the Stock Exchange or a qualified Audit Report.
The Alternative Investment Fund Managers Directive will impose obligations on
the Company and the Manager which may have significant consequences for the
Company and may increase its compliance and regulatory costs. Failure to meet
these obligations may impair the Manager's ability to manage the investments of
the Company, which may materially adversely affect the Company's ability to
implement its investment strategy and achieve its investment objective.
The Manager reviews compliance with investment trust tax conditions and other
financial and regulatory requirements on a daily basis.
There is an ongoing process for the Board to consider these other risks. In
addition, the composition of the Board is regularly reviewed to ensure the
membership offers sufficient knowledge and experience to assess and anticipate
these risks, as far as possible.
.
DIRECTORS' RESPONSIBILITY STATEMENT
in respect of the preparation of the annual financial report
The Directors are responsible for preparing the annual financial report in
accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under the law the Directors have elected to prepare financial
statements in accordance with applicable law and UK Accounting Standards
(United Kingdom Generally Accepted Accounting Practice). Under company law, the
Directors must not approve the accounts 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 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;
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 which
enable them to ensure that the financial statements comply with the Companies
Act 2006. They have general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Company and to prevent
and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for
preparing a Directors' Report, a Directors' Remuneration Report and a Corporate
Governance Statement that comply with that law and those regulations.
In so far as each of the Directors is aware:
• there is no relevant audit information of which the Company's auditors are
unaware; and
• the Directors have taken all steps that they ought to have taken to make
themselves aware of any relevant audit information and to establish that the
auditors are aware of that information.
The Directors of the Company each confirm to the best of their knowledge, that:
• the financial statements, prepared in accordance with the applicable set of
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit of the Company; and
• this annual financial 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.
Jim Pettigrew
Chairman
Signed on behalf of the Board of Directors
28 May 2013
Electronic Publication
The annual financial report is published on www.invescoperpetual.co.uk/
investmenttrusts which is the Manager's website maintained by the Company's
Manager. The work carried out by the Auditors does not involve consideration of
the maintenance and integrity of this website and accordingly, the Auditors
accept no responsibility for any changes that have occurred to the financial
statements since they were initially presented on the website. Visitors to the
website need to be aware that legislation in the United Kingdom governing the
preparation and dissemination of the financial statements may differ from
legislation in other jurisdictions.
.
INCOME STATEMENT
FOR THE YEAR ENDED 31 MARCH
2013 2012
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments - 185,241 185,241 - 109,922 109,922
Foreign exchange - (377) (377) - 6 6
(losses)/profits
Income - note 2 52,887 - 52,887 52,857 398 53,255
Investment management (1,804) (15,699) (17,503) (1,662) (7,461) (9,123)
fee
- note 3
Other expenses (722) (2) (724) (776) (1) (777)
Net return before 50,361 169,163 219,524 50,419 102,864 153,283
finance costs and
taxation
Finance costs (5,850) (13,651) (19,501) (5,850) (13,653) (19,503)
Return on ordinary 44,511 155,512 200,023 44,569 89,211 133,780
activities before tax
Tax on ordinary (1,565) - (1,565) (1,490) - (1,490)
activities
Return on ordinary 42,946 155,512 198,458 43,079 89,211 132,290
activities after tax
for the financial year
Return per ordinary
share
Basic - note 4 22.0p 79.7p 101.7p 22.1p 45.7p 67.8p
The total column of this statement represents the Company's profit and loss
account, prepared in accordance with UK Accounting Standards. The supplementary
revenue and capital columns are presented for information purposes in
accordance with the Statement of Recommended Practice issued by the Association
of Investment Companies. All items in the above statement derive from
continuing operations and the Company has no other gains or losses therefore no
statement of recognised gains or losses is presented. No operations were
acquired or discontinued in the year.
.
reconciliation of movements in shareholders' funds
FOR THE YEAR ENDED 31 MARCH
Capital
Share SHARE redemption CAPITAL REVENUE
Capital PREMIUM RESERVE RESERVE RESERVE TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 31 48,779 6,639 24,676 752,448 61,364 893,906
March 2011
Dividends paid - - - - - (44,018) (44,018)
note 5
Net return on - - - 89,211 43,079 132,290
ordinary
activities
Balance at 31 48,779 6,639 24,676 841,659 60,425 982,178
March 2012
Dividends paid - - - - - (42,890) (42,890)
note 5
Net return on - - - 155,512 42,946 198,458
ordinary
activities
Balance at 31 48,779 6,639 24,676 997,171 60,481 1,137,746
March 2013
.
BALANCE SHEET
FOR THE YEAR ENDED 31 MARCH
2013 2012
£'000 £'000
Fixed assets
  Investments held at fair value through 1,340,948 1,175,075
profit or loss
Current assets
  Debtors 9,410 11,399
  Cash and cash funds 87 207
9,497 11,606
Creditors: amounts falling due within one (15,084) (7,139)
year
Net current (liabilities)/assets (5,587) 4,467
Total assets less current liabilities 1,335,361 1,179,542
Creditors: amounts falling due after more (197,615) (197,364)
than one year
Net assets 1,137,746 982,178
Capital and reserves
Share capital - note 6 48,779 48,779
Share premium 6,639 6,639
Capital redemption reserve 24,676 24,676
Capital reserve 997,171 841,659
Revenue reserve 60,481 60,425
Shareholders' funds 1,137,746 982,178
Net asset value per ordinary share
Basic note 7 581.89p 502.03p
These financial statements were approved and authorised for issue by the Board
of Directors on 28 May 2013.
Signed on behalf of the Board of Directors
Jim Pettigrew
Chairman
.
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MARCH
2013 2012
£'000 £'000
Cash inflow from operating activities 38,965 42,082
Servicing of finance (19,250) (19,251)
Capital expenditure and financial 23,055 21,204
investment
Equity dividends paid - note 5 (42,890) (44,018)
Net cash (outflow)/inflow before (120) 17
management of liquid resources and
financing
Management of liquid resources 160 (160)
Increase/(decrease) in cash 40 (143)
Reconciliation of net cash flow to
movement in net debt
Increase/(decrease) in cash 40 (143)
Cashflow from movement in liquid (160) 160
resources
Exchange movements - 6
Debenture stock non-cash movement (251) (252)
Movement in net debt in the year (371) (229)
Net debt at beginning of year (197,157) (196,928)
Net debt at end of year (197,528) (197,157)
.
NOTES TO THE FINANCIAL STATEMENTS
1. PRINCIPAL ACCOUNTING POLICIES
The principal accounting policies adopted in the preparation of these financial
statements are set out below. These policies have been consistently applied
during the year and the preceding year, unless otherwise stated.
(a) Basis of preparation
Accounting Standards Applied
The financial statements have been prepared in accordance with applicable
United Kingdom Accounting Standards and with the Statement of Recommended
Practice (SORP) `Financial Statements of Investment Trust Companies and Venture
Capital Trusts', issued by the Association of Investment Companies in January
2009. The financial statements are also prepared on a going concern basis.
2. INCOME
2013 2012
£'000 £'000
Income from listed investments
UK dividends 41,071 41,547
Scrip dividends 823 743
Overseas dividends 10,986 10,527
Income from money market funds 7 9
52,887 52,826
Other income
Interest on VAT recovered on management fees (note - 18
3)
Underwriting commission - 13
Total income 52,887 52,857
Dividends include special dividends of £462,000 (2012: none) recognised in
revenue. No special dividends were recognised in capital during the year (2012:
£398,000).
3. INVESTMENT MANAGEMENT FEES
2013 2012
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management fee 1,804 4,207 6,011 1,662 3,877 5,539
Performance fee - 11,492 11,492 - 3,584 3,584
1,804 15,699 17,503 1,662 7,461 9,123
Details of the investment management agreement are disclosed in the Report of
the Directors contained in the Annual Financial Report. At 31 March 2013
investment management fees of £558,000 (2012: £485,000) and a performance fee
of £11,492,000 (2012: £3,584,000) were accrued.
In the year ended 31 March 2012, £18,000 of interest in respect of VAT
recovered in previous periods was received. This was credited to revenue. No
such amounts were received in the current year.
4. RETURN PER ORDINARY SHARE
The basic, capital and total returns per ordinary share are based on each
return on ordinary shares after tax and on 195,116,734 (2012: 195,116,734)
ordinary shares, being the weighted average number of shares in issue during
the year.
5. DIVIDENDS
2013 2012
pence £'000 pence £'000
Dividends paid and recognised in the
year:
Third interim paid in respect of previous 5.00 9,756 4.75 9,268
year
Special paid in respect of previous year - - 1.26 2,458
Final paid in respect of previous year 7.00 13,658 6.55 12,780
First interim paid 5.00 9,756 5.00 9,756
Second interim paid 5.00 9,756 5.00 9,756
Unclaimed dividends - (36) - -
22.00 42,890 22.56 44,018
Dividends on shares payable in respect of
the year:
First interim 5.00 9,756 5.00 9,756
Second interim 5.00 9,756 5.00 9,756
Third interim 5.00 9,756 5.00 9,756
Proposed final 7.80 15,219 7.00 13,658
22.80 44,487 22.00 42,926
The proposed final dividend is subject to approval by Ordinary Shareholders at
the AGM.
6. SHARE CAPITAL
2013 2012
NUMBER £'000 NUMBER £'000
Allotted, called-up and fully paid
Ordinary shares of 25p each 195,116,734 48,779 195,116,734 48,779
7. NET ASSET VALUE (NAV) PER ORDINARY SHARE
(a) NAV - debt at par
The shareholders' funds in the balance sheet are accounted for in accordance
with accounting standards; however, this does not reflect the rights of
shareholders on a return of assets under the Articles of Association. These
rights are reflected in the net assets with debt at par and the corresponding
NAV per share. A reconciliation between the two sets of figures follows:
2013 2012
NAV Shareholders' NAV Shareholders'
per Funds Per Funds
share share
PENCE £'000 PENCE £'000
Shareholders' funds 583.11 1,137,746 503.38 982,178
Less: Unamortised discount
and
Less: expenses arising
from debenture
Less: issue (1.22) (2,385) (1.35) (2,636)
NAV - debt at par 581.89 1,135,361 502.03 979,542
(b) NAV - debt at market value
The market value of the debenture stocks is determined by reference to the
daily closing price, and is subject to review against various data providers to
ensure consistency between data providers and against the reference gilts.
The net asset value per share adjusted to include the debenture stocks at
market value rather than at par is as follows:
2013 2012
NAV Shareholders' NAV Shareholders'
per Funds Per Funds
share share
PENCE £'000 PENCE £'000
NAV - debt at par 581.89 1,135,361 502.03 979,542
Debt at par 102.50 200,000 102.50 200,000
Debt at market value
- 111â„2% Debenture Stock (57.64) (112,469) (61.67) (120,341)
2014
- 73â„4% Debenture Stock (67.74) (132,162) (64.56) (125,965)
2022
NAV - debt at market value 559.01 1,090,730 478.30 933,236
The number of ordinary shares in issue at the year end was 195,116,734 (2012:
195,116,734).
8. RELATED PARTY TRANSACTIONS AND TRANSACTIONS WITH THE MANAGER
Invesco Asset Management Limited (IAML), a wholly owned subsidiary of Invesco
Limited, is Manager, Company Secretary and Administrator to the Company.
Details of IAML's services and fees are disclosed in the Report of the
Directors.
Fees paid to Directors are disclosed in the Annual Financial Report. Full
details of Directors' interests are set out in the Report of the Directors in
the Annual Financial Report.
9. This Annual Financial Report announcement is not the Company's statutory
accounts. The statutory accounts for the year ended 31 March 2012 have been
delivered to the Registrar of Companies. The statutory accounts for the year
ended 31 March 2012 received an audit report which was unqualified, did not
include a reference to any matters to which the auditors drew attention by way
of emphasis without qualifying the report, and did not include a statement
under either section 498(2) or 498(3) of the Companies Act 2006. The statutory
accounts for the financial year ended 31 March 2013 have been approved and
audited but have not yet been filed.
10. The Audited Annual Financial Report will be posted to shareholders shortly.
Copies may be obtained during normal business hours from the Company's
registered office, Quartermile One, 15 Lauriston Place, Edinburgh EH3 9EP. A
copy of the Annual Financial Report will be available from Invesco Perpetual on
the following website:
www.invescoperpetual.co.uk/investmenttrusts
11. The Annual General Meeting of the Company will be held at 11.00 am on 19
July 2013 at the Weston Link, National Galleries of Scotland, Princes Street,
Edinburgh.
By order of the Board
Invesco Asset Management Limited - Company Secretary
28 May 2013
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