Further re Final Results
26 June 2008
THE EDINBURGH INVESTMENT TRUST plc
ADDITIONAL DISCLOSURES
TO THE PRELIMINARY RESULTS FOR THE YEAR TO 31 MARCH 2008
Further to the voluntary disclosure of the Company's annual results for the
year ended 31 March 2008 by way of a preliminary announcement dated 29 May
2008, in accordance with the Disclosure and Transparency Rules ("the Rules")
4.1.3 and 6.3.5(2) this announcement contains the text of the preliminary
announcement dated 29 May 2008 together with the additional text in compliance
with the Rules.
The Company's annual report and financial statements for the year ended 31
March 2008 have been filed with the UK Listing Authority Document Disclosure
team and are available on the Company's website at www.itseit.co.uk
The Edinburgh Investment Trust plc is one of the UK's largest investment trusts
focussed entirely on the UK. The long term objectives of The Edinburgh
Investment Trust plc are the achievement of capital growth at a higher rate
than the FTSE All-Share Index (`Index') and dividend growth above the rate of
UK inflation.
The Chairman, Scott Dobbie, commenting on the results, said:
"Although your Company in common with most funds with an income bias did not
this year meet its capital objective, it has, over the last three years as a
whole, achieved a total return of dividends received and share price growth of
38.8% - this compares to 31.3% for the benchmark index and is greater than any
other of its AIC UK Growth and Income peer group."
Please note that past performance is not a guide to future returns. The value
of investments and the income from them can go down as well as up.
For further information, please contact:
Fidelity Investments International
Simon Ellis 020 7074 5205
Richard Miles 020 7961 4921
Issued by Fidelity Investments International, authorised and regulated in the
UK by the Financial Services Authority.
CB34047/1108
CHAIRMAN'S STATEMENT
The UK Equity Market
The UK equity market has been highly volatile in the 12 months to 31 March 2008
as it reacted to the national and international effects of the credit crunch.
Over the year as a whole, the FTSE All-Share Index ("the Index") fell by 10.8%,
with particular weakness in banking, building and consumer stocks as investor
concerns spread from financial sectors to the broader economy. On the other
hand, the mining and oil exploration sectors continued to perform well in
response to the continued strong growth in commodity prices.
Capital and Share Price Performance
This was a difficult year for income funds and the Company's net asset value
("NAV") fell by 14.8% (debt at par) or 15.5% (debt at market), significantly
more than the 10.8% fall in the benchmark Index. The Company's portfolio was
overweight banks which underperformed strongly but pay substantial dividends,
and underweight mining groups which yield little. Full details of the portfolio
performance are contained in the Business Review in the annual report. It is
noteworthy that although failing to meet its first objective - that NAV growth
should exceed that of the Index - the Company's NAV performance has been no
worse than average (rank 7th) in the peer group of 12 trusts in the AIC UK
Growth and Income sector. (Source Fund Data 12 months to 31 March 2008).
The Company's share price declined by 16.2% - this fall was greater than the
benchmark Index and more than the fall in NAV, reflecting an increase over the
year in the discount to NAV. The relative fall in share price over the year was
disappointing, particularly given the Company's strong price performance in the
previous two years. Despite the recent setback, shareholder returns over the
past three years have been good. Total return - the sum of growth in share
price and dividends received in the three years - is 38.8% of the base price at
1 April 2005. This compares to 31.3% for the benchmark Index, and is greater
than any of the 11 other trusts in the peer group already defined.
During the year, the Company bought back 17.2m shares, enhancing the NAV for
remaining holders. The Board believes it to be essential to have power to
continue the programme in appropriate circumstances, and will seek authority
from shareholders at the Annual General Meeting.
Income Performance
Shareholders will recall that dividends increased by a total of 43% over the
two years ending 31 March 2007. The increase was due both to increasing payouts
by underlying investments and to a change in portfolio emphasis towards higher
yielding securities. In my statement last year, I counselled that holders could
expect a much lower rate of growth in future, since the portfolio change was
one-off, and dividend growth generally was expected to slow. Both trends have
been apparent in the year under review. Shareholders have received three
interim dividends each of 4.75p per share: a final dividend of 5.65p per share
is recommended. Total dividends, 19.9p per share, are therefore 5.6% higher
than in the previous year: this increase is greater than the increase in RPI in
the equivalent period and the Company's second objective - to grow dividends/
share by more than UK inflation - has therefore been achieved.
Subject to shareholder approval at the 2008 Annual General Meeting the proposed
final dividend of 5.65 pence per share will be paid on 22 July 2008 to
shareholders on the Company's register on 6 June 2008 (ex-dividend date 4 June
2008).
Portfolio Structure
The portfolio can be geared by investing all or part of the two long term
debenture stocks, of £200m book value, in equities. I reported at the interim
stage that about 60% of the debenture stocks were invested in the equity market
- equivalent to an actual gearing ratio of 9.7%. Having reduced gearing earlier
in the financial year, it was increased in January when it was felt that market
fundamentals had improved. At the year end, the actual gearing ratio was 12.9%,
this compared with 14.3% at 31 March 2007. The performance attribution shown in
the annual report demonstrates that gearing in a falling market was detrimental
to the year's capital performance.
I described in my statement last year that the Company's funds are allocated by
Fidelity to two portfolio managers - one biased to holdings expected to
increase dividends by more than the market average and the other with a
stronger current income orientation . The first has continued to perform well
and has offset some of the weakness in the funds allocated to the higher income
portfolio. The latter, even allowing for the difficult market conditions,
already described, has not met expectations and the Board and Fidelity are
working to improve the capital performance of this part of the portfolio whilst
continuing to meet the Company's income objective.
VAT on Management Fees
I reported at the Interim stage the ruling by the European Court of Justice
that Her Majesty's Revenue and Customs had been wrong in levying VAT on
management fees borne by investment trusts. Initially it was believed that
recovery could be made of some at least of the tax paid since 2001. A
subsequent legal decision means that this potential repayment will be extended
to a period of about five years from 1990. The Company is no longer paying VAT
on management fees and is currently negotiating recovery of VAT paid since 2002
to its Manager, Fidelity Investments International, and to Aberdeen Asset
Managers, successors to its previous manager, Edinburgh Fund Managers. It is
not yet possible to estimate the scale of funds to be rebated and no provision
for their receipt has been made in these financial statements. Shareholders
should be aware that any funds received will be allocated to income and capital
in the proportions in which the original charges were applied.
Outlook
The liquidity crisis which first became apparent in the US sub-prime loans
business about nine months ago continued to erode confidence in financial
markets. There are now strong signs of increasing inflation, a reduction in the
rate of growth of the global economy, and reduced expectations of growth in
corporate earnings. Against this background, fixed interest securities,
particularly corporate bonds, have fallen sharply in value, whilst equity
markets, although volatile, have reacted to a much lesser extent. The
resilience of equity markets can be justified, in good part, by ratings which
are undemanding relative to historic norms, or to alternative asset classes.
Your Board believes that whilst there is some risk of decline in equity values,
there is good potential for upward movement when the market sees a return to
confidence. The current cautious approach is to remain only partly geared.
A reduction in market earnings is likely to be followed by caution in dividend
payments by the corporate sector, and your Board foresees a fall in the rate of
growth in the dividends paid on the Company's own investments. We are
nevertheless at this stage confident that the Company can next year increase
its own dividends by at least the rate of inflation and hence continue to meet
its income objective.
Scott Dobbie
Chairman
29 May 2008
BUSINESS REVIEW
Introduction
The Board has required the Manager to prepare this Business Review in
accordance with the requirements of Section 234ZZB of the Companies Act 1985
and it forms part of the Directors' Report. Its function is to provide a
balanced and comprehensive review of the Company's performance and development
during the year and its position at the year end. The review also covers the
principal risks and uncertainties faced by the Company and sets out key
performance indicators used to measure, monitor and manage the Company's
business. The law requires the Company's Auditors to report on whether the
information given in the Directors' Report and Business Review is consistent
with the financial statements. The Auditors' opinion is included in their
report on page 29 of the annual report.
Market Background
The UK stockmarket declined over the review period, mainly due to the fallout
of the turmoil in the subprime mortgage market and the resultant credit crunch.
Additionally, there were increasing fears about an economic slowdown,
especially over the latter half of the review period, as the housing market and
consumer-related sectors witnessed further signs of deceleration. Nevertheless,
takeover activity and strong commodity prices provided some support. At the end
of the review period to 31 March 2008 the FTSE All-Share Index returned -7.7%
(on a total return basis).
At the sector level, investors stayed away from financial stocks amid a severe
liquidity squeeze in the banking system, which led to the nationalisation of
Northern Rock. Despite measures by the government to ease the credit market
conditions, banking stocks fell on concerns of further write-downs and the
consequent stress on their capital structures. Consumer firms such as Marks &
Spencer and Next also suffered from the weakening in personal spending. The
cuts in the Bank of England base rate were not passed on by the banks, leading
to relatively higher borrowing costs. This also had an impact on property
stocks, as generally tighter lending conditions led to lower demand for homes.
On a positive note, energy shares benefited from rising oil prices amid
projections for increased demand for oil. Metal prices also remained high on
continued Asian demand and takeover activity further supported mining shares.
Corporate mergers and acquisitions continued, with Rio Tinto buying the US
company Alcan and BHP Billiton making an offer for Rio Tinto. However, funding
for deals largely dried up by the
first quarter of 2008 and a potential bid for Xstrata did not materialise.
Overall, in view of the higher market volatility, investors preferred defensive
stocks and this was reflected in the outperformance of large companies over
their small and mid-sized counterparts.
In 2007, UK GDP grew at a rate of 3.0% compared to 2.9% in 2006. However, in
light of the credit market crisis economic growth projections weakened and
prompted the Bank of England to cut interest rates twice during the period to
the current level of 5.25%. These decisions reversed two previous rate
increases, when policy makers were more concerned by the level of inflation,
which stood at an above-target level of 2.5% in March.
The outlook for stock prices remains uncertain in view of the weak projections
for global GDP growth, particularly in the US. Takeover activity continues to
be supportive while the recent downturn in markets has opened up selective
buying opportunities. The FTSE All-Share Index is currently trading at a twelve
month forward price-to-earnings ratio, which is below its historical average.
However, stock valuations will depend on earnings growth remaining resilient.
Portfolio Review
For the twelve months to the end of March 2008, on a total return basis, the
net asset value per share declined by 11.7%, the return on the FTSE All-Share
Index being a 7.7% negative. Over a three year period the Company's net asset
value has underperformed the Index, rising by 26.7% against a benchmark return
of 31.3% (on a total return basis). However, over the last three years as a
whole the Company has achieved a total return of dividends received and share
price growth of 38.8% - greater than any other of its AIC UK Growth and Income
peer group. While stocks with higher dividend yield have generally performed
well over many decades, the last few years have witnessed a period where stocks
with lower yields, such as in the mining sector, have done well. Conversely,
stocks such as banks and telecoms, which generate good dividends, have
underperformed the benchmark. In meeting our objective to provide growth in the
dividends the Company pays, we have had to forego some of the capital
appreciation seen in the market. We believe that this approach will achieve the
best results in the long term.
The portfolio was managed during the year using a multi-manager approach, with
the Company's assets split between two Fidelity portfolio managers. The two
portfolio managers were selected because of their complementary investment
styles. Fidelity is a stock-picking investment house and each portfolio manager
constructs his portfolio using a bottom-up approach, where attractive companies
are identified first and the portfolio is constructed to reflect these choices.
As at 31 March 2008, the Company's key overweight sector positions resulting
from stock selection were in support services, tobacco and oil & gas producers.
At 31 March 2008
Portfolio Index
% %
FTSE 100 77.2 83.9
FTSE 250 19.7 13.2
FTSE Small Cap 2.5 2.9
Other 0.6 0.0
100.0 100.0
Size analysis of the UK equity portfolio
Index is the FTSE All-Share Index
The Company's key underweight positions were in mining, beverages and food
producers. The underweight position in the mining sector was the most
significant detractor from portfolio returns, as takeover talks buoyed stocks
such as Rio Tinto and Xstrata, while higher metal prices provided further
support. Meanwhile, our full weighting in the banking sector proved
detrimental, due to concerns about substantial write-downs on their investments
and slower lending growth.
The overweight position in building materials supplier Wolseley also proved
detrimental, as the outlook for earnings suffered due to a weak US dollar and
the downturn in the US housing market.
Among media stocks, the holding in Yell Group, a publisher of directories, also
detracted from performance; there are concerns that reduced advertising
revenues could inhibit its future cash flows.
On a positive note, the overweight position in mobile telecommunications
leader, Vodafone, contributed to portfolio returns. The company's cost-cutting
initiatives and market share gains in high-growth emerging economies have
offset revenue erosion in Europe. Investors also welcomed its decision to keep
the stake in its US joint venture, Verizone Wireless, considered to be an
attractive asset.
The tobacco sector was again a major contributor to returns, as its defensive
qualities were rewarded in an uncertain market environment. Within the sector,
Imperial Tobacco announced robust growth in profits for the fiscal year 2007,
underpinned by an improving market share. Aerospace & defence companies also
provided good returns, with BAE Systems benefiting from strong earnings growth
in the first half of 2007.
Purchases
The holdings in Royal Dutch Shell were increased as the company has good long
term oil reserves and is benefiting from the continued strength in the oil
price. The portfolio managers also added to BAE Systems, as the company
continues to win major long term
government contracts in the aerospace sector. Other key purchases included
Anglo American, the mining company, and AstraZeneca, in the pharmaceutical
sector.
Sales
Holdings in Vodafone were trimmed after a period of strong share price
performance, although it remains a core holding. Similarly, the portfolio
managers sold shares in BT, as the company faces a competitive environment that
will require higher capital spending. Other holdings that were decreased
included National Grid, BHP Billiton, HSBC and Royal Bank of Scotland.
Portfolio as at 31 March 2008
The full portfolio as at 31 March 2008 is detailed on pages 48 and 49 of the
annual report and the distribution of assets as at 31 March 2008 may be found
on pages 17 and 18 of the annual report.
Growth/Income Split
The investment management fee and relevant finance costs are allocated between
revenue and capital in line with the Board's expectation of returns from the
Company's investments over the long term in the form of revenue and capital
respectively. Since April 2000, the Company has allocated 70% of management fee
and debenture interest to capital and 30% to revenue costs. The Board keeps
this policy under annual review and, having examined consensus forecasts of
capital return and dividend payments, sees no need to change the existing
policy at this time.
Principal Risks and Uncertainties
The Board is ultimately responsible for control systems risk 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 objectives and the
means of attaining them are reviewed annually. The Company's portfolio consists
of a mix of assets and securities that may display high levels of volatility
from time to time in response to economic and other market forces. The Board
receives the Manager's performance report against this background on a monthly
basis and reviews it at each Board meeting.
Performance risk
The Board sets risk parameters and performance objectives and it 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. Strategy, asset allocation and stock selection
decisions by the Manager might lead to underperformance of the benchmark Index
and income targets.
Investment selection is delegated to the Manager. The Manager manages the
portfolio and the Board sets overall risk parameters, without specifying asset
allocation, monitoring performance in that context.
Performance information is provided to the Board on a monthly basis as part of
the Board papers. Specific information provided includes benchmark and
performance objectives, performance attribution, rolling three year
performance, contributors and detractors, major overweights and underweights,
largest holdings, size and sector analysis, active money and active holdings.
The Manager is responsible for actively monitoring the portfolio selected in
accordance with the asset allocation parameters and seeks to ensure that
individual stocks meet an acceptable risk-reward profile. A review of
performance risk and how it relates to the Company's objectives is undertaken
annually.
Gearing risk
The Company has the ability to invest up to £200 million of 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 length of gearing is appropriate.
Information related to gearing is provided to the Board on a monthly basis as
part of the Board papers. In order to manage the level of gearing the Board
regularly considers this item and sets gearing parameters or limits from time
to time. The Manager follows these and can invest part of the debenture funds
in Fidelity Institutional Cash Fund plc ("ICF") and short term cash deposits to
control the level of net gearing. Additionally, the Board regularly reviews the
cost of buying back debt against the outlook for equity markets.
Income/dividend risk
The Company is subject to the risk that income generation from its investments
fails to meet the level of income required to meet its objectives.
The Board monitors this risk through the receipt of detailed monthly income
forecasts and comparison of receipts against forecast. 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 in the
last year repurchased shares within parameters set by the Board and subject to
shareholder authority.
Control systems risk
In addition to delegating internal controls, the Board also delegates a number
of specific activities to the Manager including:
- Custody and security of the Company's assets
- Financial controls
- Best practice standards in fund management operations
- Meeting regulatory requirements
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 and managed 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 performed in a satisfactory manner.
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.
Other risks
The Company may be exposed to other business and strategic risks in the future,
including fiscal, legal or regulatory changes.
The Board also periodically reviews the investment of the Company's cash
positions in the ICF, to ensure liquidity and concentration risks are
adequately managed and that the ICF is assessed for suitability against other
similar investment options.
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.
Key Performance Indicators
The key performance indicators ("KPIs") used to determine the progress and
performance of the Company over time and which are comparable to those reported
by other investment trusts are set out below.
Year to 31 March 2008 2007
Net asset value (debt at par) (1) -11.7% +12.0%
Net asset value (debt at market) (1) -12.3% +13.8%
Share price (2) -12.6% +17.4%
FTSE All-Share Index (3) -7.7% +11.1%
Discount to NAV (debt at par) (1) 15.1% 13.7%
Discount to NAV (debt at market) (1) 10.1% 9.4%
Revenue return per share 21.41p 18.13p
Actual gearing ratio 12.9% 14.3%
Total expense ratio 0.40% 0.42%
All figures are calculated on a total return basis
Past performance is not a guide to future returns
1 Calculated in accordance with AIC guidelines
2 Calculated on a mid to mid basis
3 Source: Datastream
Notwithstanding that some KPIs are beyond its control they are measures of the
Company's absolute and relative performance and the Board monitors them at each
meeting. Indices and ratios as referred to in the KPI table which assist in
managing performance and compliance are regularly reviewed. Expenses are
reviewed at each Board meeting enabling the Board, amongst other things, to
review costs and consider any expenditure outside that of its normal
operations. Apart from the KPIs set out above the Board also regularly reviews
the performance of the Company against its peer group of eleven investment
trusts with investment objectives, policies and benchmarks similar to the
Company's.
The principal risks and uncertainties section above includes descriptions of
performance indicators and their monitoring and management which are key to the
business of the Company. Long term performance is also monitored and the Long
Term Record charts on pages 19 and 20 of the annual report show this
information.
Attribution Analysis
The attribution analysis below enables the contributions from various sources
of income and cost to be determined.
Year to 31 March 2008
%
Change in NAV -11.7
Change in FTSE All-Share Index -7.7
Relative Return -4.0
Contribution to Relative Return Year to 31 March 2008
UK Equities -2.7
Debenture Borrowings:
- Net gearing -1.0
- Debenture interest -0.5
Share Buybacks +0.9
Futures & options -0.3
Charges -0.4
Total -4.0
All figures are calculated on a total return basis
Sources: Fidelity and Datastream
Past performance is not a guide to future returns
Investments were valued at £1,064,645,000 as at 31 March 2008. Shareholders'
funds amounted to £945,038,000 resulting in a net asset value per share of
474.74p. Changes to investments are shown in Note 9 to the financial statements
on pages 38 and 39 of the annual report.
Socially Responsible Investment
The Manager's primary objective is to produce superior financial returns to
investors. It believes that high standards of corporate social responsibility
("CSR") make good business sense and have the potential to protect and enhance
investment returns. Consequently, its investment process takes social,
environmental and ethical issues into account when, in its view, these have a
material impact on either investment risk or return. The Manager recognises and
supports the view that social, environmental and ethical best practice should
be encouraged as long as the potential for financial return is not reduced. It
favours companies committed to high standards of CSR and to the principles of
sustainable development.
The Manager does not set out to manage an "ethical investment portfolio" and
does not screen out companies from its investment universe purely on the
grounds of poor social, environmental or subjective ethical performance.
Instead it adopts a positive engagement approach whereby it discusses social,
environmental and ethical matters with the management with the aim of improving
procedures and attitudes. The Manager believes that this is the most effective
way to improve the attitude of business towards CSR and the Board endorses this
approach.
RELATED PARTY TRANSACTIONS
No contract or arrangement existed during the year in which any of the
Directors had a material interest. No Director had a service contract with the
Company. There have been no related party transactions requiring disclosure
under Financial Reporting Standard ("FRS") 8.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the annual report and the financial
statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law they have elected to prepare the financial
statements in accordance with UK Generally Accepted Accounting Practice.
The financial statements are required by law to give a true and fair view of
the state of affairs of the Company and of the profit or loss 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 proper accounting records which
disclose with reasonable accuracy at any time the financial position of the
Company and to enable them to ensure that its financial statements comply with
the Companies Act 1985. 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 including a Business Review, a Directors'
Remuneration Report and a Corporate Governance Statement that comply with that
law and those regulations.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website
www.itseit.co.uk. Legislation in the UK governing the preparation and
dissemination of financial statements may differ from legislation in other
jurisdictions.
We confirm that to the best of our knowledge: 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 or
loss of the Company; and the Directors' Report includes a fair review of the
development and performance of the business and the position of the Company
together with a description of the principal risks and uncertainties it faces.
Approved by the Board on 29 May 2008 and signed on its behalf by Scott Dobbie,
Chairman
INDEPENDENT AUDITORS' REPORT TO THE MEMBERS OF THE EDINBURGH INVESTMENT TRUST
PLC
We have audited the financial statements of The Edinburgh Investment Trust plc
for the year ended 31 March 2008 which comprise the Income Statement, the
Reconciliation of Movements in Shareholders' Funds, the Balance Sheet, the Cash
Flow Statement and the related notes. These financial statements have been
prepared under the accounting policies set out therein. We have also audited
the information in the Directors' Remuneration Report that is described as
having been audited.
This report is made solely to the Company's members, as a body, in accordance
with Section 235 of the Companies Act 1985. Our audit work has been undertaken
so that we might state to the Company's members those matters we are required
to state to them in an auditors' report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company's members as a body, for our
audit work, for this report, or for the opinions we have formed.
Respective Responsibilities of Directors and Auditors
The Directors' responsibilities for preparing the Annual Report, the Directors'
Remuneration Report and the financial statements in accordance with applicable
law and UK Accounting Standards (UK Generally Accepted Accounting Practice) are
set out in the Statement of Directors' Responsibilities on page 26 of the
annual report.
Our responsibility is to audit the financial statements and the part of the
Directors' Remuneration Report to be audited in accordance with relevant legal
and regulatory requirements and International Standards on Auditing (UK and
Ireland).
We report to you our opinion as to whether the financial statements give a true
and fair view and whether the financial statements and the part of the
Directors' Remuneration Report to be audited have been properly prepared in
accordance with the Companies Act 1985. We also report to you whether in our
opinion the information given in the Directors' Report is consistent
with the financial statements. The information given in the Directors' Report
includes that specific information presented in the Business Review section of
the Directors' Report. We also report to you if, in our opinion, the Company
has not kept proper accounting records, if we have not received all the
information and explanations we require for our audit, or if information
specified by law regarding directors' remuneration and other transactions is
not disclosed.
We review whether the Corporate Governance Statement reflects the Company's
compliance with the nine provisions of the 2006 FRC Combined Code specified for
our review by the Listing Rules of the Financial Services Authority, and we
report if it does not. We are not required to consider whether the Board's
statements on internal controls cover all risks and controls, or form an
opinion on the effectiveness of the Company's corporate governance procedures
or its risk and control procedures.
We read the other information contained in the annual report and consider
whether it is consistent with the audited financial statements. We consider the
implications for our report if we become aware of any apparent misstatements or
material inconsistencies with the financial statements. Our responsibilities do
not extend to any other information.
Basis of Audit Opinion
We conducted our audit in accordance with International Standards on Auditing
(UK and Ireland) issued by the Auditing Practices Board. An audit includes
examination, on a test basis, of evidence relevant to the amounts and
disclosures in the financial statements and the part of the Directors'
Remuneration Report to be audited. It also includes an assessment of the
significant estimates and judgements made by the Directors in the preparation
of the financial statements, and of whether the accounting policies are
appropriate to the Company's circumstances, consistently applied and adequately
disclosed.
We planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
and the part of the Directors' Remuneration Report to be audited are free from
material misstatement, whether caused by fraud or other irregularity or error.
In forming our opinion we also evaluated the overall adequacy of the
presentation of information in the financial statements and the part of the
Directors' Remuneration Report to be audited.
Opinion
In our opinion:
- the financial statements give a true and fair view, in accordance with UK
Generally Accepted Accounting Practice, of the state of the Company's affairs
as at 31 March 2008 and of its loss for the year then ended;
- the financial statements and the part of the Directors' Remuneration Report
to be audited have been properly prepared in accordance with the Companies Act
1985; and
- the information given in the Directors' Report is consistent with the
financial statements.
KPMG Audit Plc
Chartered Accountants
Registered Auditor
Edinburgh
29 May 2008
Income Statement for the year ended 31 March
2008 2007
revenue capital total revenue capital total
£'000 £'000 £'000 £'000 £'000 £'000
(Losses)/gains on - (163,699) (163,699) - 91,751 91,751
investments
Income from financial
assets designated at fair
value through profit or
loss:
- franked investment income 45,108 - 45,108 45,237 - 45,237
- UK scrip dividends 23 - 23 - - -
- other investment income 742 - 742 425 - 425
- fixed interest - - - 137 - 137
- premium on call options 1,199 - 1,199 639 - 639
Other income from financial
assets not at fair value
through profit or loss:
- interest receivable on 1,980 - 1,980 1,338 - 1,338
short term deposits
- income from Fidelity 2,601 - 2,601 671 - 671
Institutional Cash Fund plc
- underwriting commission 46 - 46 - - -
- sundry income 24 - 24 118 - 118
Investment management fee (1,112) (2,596) (3,708) (1,241) (2,896) (4,137)
Other expenses (705) - (705) (751) - (751)
Exchange (losses)/gains (6) (3) (9) 5 (128) (123)
NET RETURN/(LOSS) BEFORE F 49,900 (166,298) (116,398) 46,578 88,727 135,305
INANCE COSTS AND TAXATION
Interest payable (5,850) (13,651) (19,501) (5,850) (13,651) (19,501)
NET RETURN/(LOSS) ON 44,050 (179,949) (135,899) 40,728 75,076 115,804
ORDINARY ACTIVITIES BEFORE
TAXATION
Taxation on return/(loss) (276) - (276) (14) - (14)
on ordinary activities *
RETURN/(LOSS) ON ORDINARY 43,774 (179,949) (136,175) 40,714 75,076 115,790
ACTIVITIES AFTER TAXATION
FOR THE YEAR
RETURN/(LOSS) PER ORDINARY 21.41p (88.01p) (66.60p) 18.13p 33.44p 51.57p
SHARE (1)
A Statement of Total Recognised Gains and Losses has not been prepared as there
are no gains and losses other than those reported in this Income Statement. The
total column of the Income Statement is the profit and loss account of the
Company. All revenue and capital items in the above statement derive from
continuing operations. No operations were acquired or discontinued in the year.
* This relates to overseas taxation only.
Reconciliation of Movements in Shareholders' Funds for the year ended 31 March
called share capital capital capital revenue total
up premium redemption reserve reserve reserve equity
share account reserve realised unrealised
capital
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Opening 58,487 6,639 14,968 830,830 245,481 58,199 1,214,604
shareholders'
funds: 1 April 2006
Net recognised - - - 126,161 (34,538) - 91,623
gains/(losses) for
the year
Repurchase of (4,612) - 4,612 (80,571) - - (80,571)
ordinary shares
Management fee to - - - (2,896) - - (2,896)
capital
Debenture interest - - - (13,651) - - (13,651)
and amortised
expenses to capital
Revenue after - - - - - 40,714 40,714
taxation
Dividends paid - - - - - (44,596) (44,596)
Closing 53,875 6,639 19,580 859,873 210,943 54,317 1,205,227
shareholders'
funds:
31 March 2007
Transfer between - - - 211,728 (211,728) - -
reserves
Net recognised - - - (163,759) 57 - (163,702)
(losses)/gains for
the year
Repurchase of (4,301) 4,301 (83,492) - - (83,492)
ordinary shares
Management fee to - - - (2,596) - - (2,596)
capital
Debenture interest - - - (13,651) - - (13,651)
and amortised
expenses to capital
Revenue after - - - - - 43,774 43,774
taxation
Dividends paid - - - - - (40,522) (40,522)
Closing 49,574 6,639 23,881 808,103 (728) 57,569 945,038
shareholders'
funds:
31 March 2008
Balance Sheet as at 31 March
2008 2007
£'000 £'000
FIXED ASSETS
Investments at fair value through 1,064,645 1,374,218
profit or loss
CURRENT ASSETS
Debtors 10,733 14,008
Fidelity Institutional Cash Fund plc 52,601 -
Cash at bank 25,444 27,821
88,778 41,829
CREDITORS - AMOUNTS FALLING DUE (12,029) (14,715)
WITHIN ONE YEAR
NET CURRENT ASSETS 76,749 27,114
TOTAL ASSETS LESS CURRENT LIABILITIES 1,141,394 1,401,332
CREDITORS - AMOUNTS FALLING DUE AFTER (196,356) (196,105)
MORE THAN ONE YEAR
TOTAL NET ASSETS 945,038 1,205,227
CAPITAL AND RESERVES
Called up share capital 49,574 53,875
Share premium account 6,639 6,639
Capital redemption reserve 23,881 19,580
Capital reserve - realised 808,103 859,873
Capital reserve - unrealised (728) 210,943
Revenue reserve 57,569 54,317
TOTAL EQUITY SHAREHOLDERS' FUNDS 945,038 1,205,227
NET ASSET VALUE PER ORDINARY SHARE 474.74p 557.47p
Cash Flow Statement for the year ended 31 March
2008 2007
£'000 £'000
NET CASH INFLOW FROM OPERATING ACTIVITIES 46,438 43,755
RETURNS ON INVESTMENTS AND SERVICING OF FINANCE
Interest paid (19,250) (19,250)
NET CASH OUTFLOW FROM SERVICING OF FINANCE (19,250) (19,250)
FINANCIAL INVESTMENT
Purchase of investments (475,734) (664,058)
Exchange losses (60) -
Disposal of investments 624,890 713,493
Realised losses on long futures positions closed - (179)
NET CASH INFLOW FROM FINANCIAL INVESTMENT 149,096 49,256
EQUITY DIVIDENDS PAID (40,522) (44,596)
NET CASH INFLOW BEFORE USE OF LIQUID RESOURCES AND 135,762 29,165
FINANCING
NET CASH (OUTFLOW)/INFLOW FROM MANAGEMENT OF LIQUID (52,601) 47,451
RESOURCES
NET CASH INFLOW BEFORE FINANCING 83,161 76,616
FINANCING
Repurchase of ordinary shares (85,595) (77,225)
NET CASH OUTFLOW FROM FINANCING (85,595) (77,225)
DECREASE IN CASH (2,434) (609)
Notes
1. Returns/(losses) per ordinary share are based on the net revenue return on
ordinary activities after taxation of £43,774,000 (2007: £40,714,000), the net
capital loss in the year of £179,949,000 (2007: return £75,076,000) and the
total loss in the year of £136,175,000 (2007: return £115,790,000) and on
204,452,781 ordinary shares (2007: 224,522,324) being the weighted average
number of ordinary shares in issue during the year.
2. The third interim dividend of 4.75 pence per share amounting in total to £
9,441,000 was paid on 22 May 2008 for the year ended 31 March 2008 (2007: 4.40
pence) and has not been included as a liability in these financial statements.
The Directors have proposed a final dividend of 5.65 pence per share, amounting
to £11,085,000, which is subject to approval by the shareholders at the Annual
General Meeting and has not been included as a liability in these financial
statements.
3. Net asset value per share
Total shareholders' funds have been calculated in accordance with the
provisions of FRS 26. The analysis of total shareholders' funds on the face of
the balance sheet does not reflect the rights, under the Articles of
Association, of the ordinary shareholders on a return of assets. These rights
are reflected in the net asset value and the asset value per share attributable
to ordinary shareholders at the year end, adjusted to reflect the deduction of
the debenture stocks at par. A reconciliation between the two sets of figures
follows:-
2008 2007
Total shareholders' funds (£) 945,038,000 1,205,227,000
Less: Debenture stocks discount (£) (54,000) (57,000)
Less: Debenture stocks issue expenses (£) (3,590,000) (3,838,000)
Net assets - debt at par (£) 941,394,000 1,201,332,000
Number of ordinary shares in issue at year 198,294,748 215,496,748
end
Total shareholders' funds per share (pence) 476.58 559.28
Less: Unamortised debenture stocks discount (1.84) (1.81)
and issue expenses (pence)
Net asset value per share - debt at par 474.74 557.47
(pence)
2008 2007
£'000 £'000
The movements during the year of the assets
attributable to the ordinary shares were as
follows:-
Net assets - debt at par - at 31 March 2007 1,201,332 1,210,458
Total recognised capital (loss)/gain for the (179,949) 75,076
year
Revenue return for the year 43,774 40,714
Dividend appropriated in the year (40,522) (44,596)
Movement in unamortised debenture stocks 251 251
discount and issue expenses
Repurchase of ordinary shares (83,492) (80,571)
Net assets - debt at par - at 31 March 2008 941,394 1,201,332
The net asset value per share adjusted to include the debenture stocks at
market value rather than at par is as follows:
2008 2007
£'000 £'000
Net assets - debt at par - at 31 March 2008 941,394 1,201,332
(from above)
Adjust for debt at market value:
Debt at par 200,000 200,000
Debt at market value (251,974) (257,248)
Adjusted capital net assets - debt at 889,420 1,144,084
market value - 31 March 2008
Number of ordinary shares in issue at year 198,294,748 215,496,748
end
Adjusted capital net asset value per share 448.53 530.90
- debt at market value (pence)
4. The above statements have been prepared on the basis of the accounting
policies as set out in the annual financial statements to 31 March 2008. The
financial statements have been prepared in accordance with United Kingdom
Generally Accepted Accounting Practice ("UKGAAP") and the AIC Statement of
Recommended Practice ("SORP") for Investment Trusts dated January 2003 and
revised in December 2005. The figures for the year to 31 March 2007 have been
extracted from the financial statements for the year ended 31 March 2007 which
have been delivered to the Registrar of Companies and on which the Auditors
gave an unqualified report.
The statutory financial statements for the year ended 31 March 2008 which
contain an unqualified audit report will be delivered to the Registrar of
Companies following the Company's Annual General Meeting which will be held at
The Weston Link, National Galleries of Scotland, Princes Street, Edinburgh on
Monday 21 July 2008 at 2.30 pm.
The income statement, reconciliation of movements in shareholders' funds,
balance sheet and cash flow set out above do not represent full accounts in
accordance with Section 240 of the Companies Act 1985.
5. The annual report will be posted to shareholders on or before 18 June 2008
and copies will be available from the Secretary - Fidelity Investments
International, Oakhill House, 130 Tonbridge Road, Hildenborough, Tonbridge,
Kent, TN11 9DZ.
Fidelity only gives information about its own products and services and does
not provide investment advice based on individual circumstances. Fidelity
Investment Trusts are managed by Fidelity Investments International. Issued by
Fidelity Investments International, authorised and regulated in the UK by the
Financial Services Authority.
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