Interim Results
The Edinburgh Investment Trust plc
Preliminary Announcement of Unaudited Results
for the six months ended 30 September 2002
The Edinburgh Investment Trust plc is the UK's largest investment trust
focussed entirely on the UK. The objectives of The Edinburgh Investment Trust
plc are the achievement of capital growth at a higher rate than the FTSE
All-Share Index and dividend growth above the rate of UK inflation.
Highlights
* Performance adversely affected by:
- weak share prices and very volatile trading conditions
- impact of gearing
- non-recurring costs associated with transition to the new
manager.
* Net asset value per share fell on a capital only basis by 37.3%
compared to a fall in the FTSE All-Share Index of 29.6%.
* Interim dividend up 2.4% to 4.2p per share.
* New Manager The board has been impressed with Fidelity's
investment process and also the way in which they have handled the
overall management of the Company.
For further information, please contact:
The Edinburgh Investment Trust plc
Lord Eglinton 01250 883222
Fidelity Investments International
Anne Read 020 7961 4409
Jo Roddan 01737 837848
Chairman's Review
Investment Manager & Secretary
As shareholders know, Fidelity Investments International (Fidelity) succeeded
Edinburgh Fund Managers (EFM) as investment manager and secretary of the
Company with effect from 1 August 2002. This change will not affect
theinvestment objectives of the Company, which will retain its status as the
largest investment trust focussed entirely on the UK. It will also remain a
Scottish registered company and the Annual General Meeting and most of the
board meetings will continue to be held in Edinburgh.
The change in manager necessitated a significant reorganisation of the
Company's investments during August and September and the transition was
largely complete by the end of September. The fund is now structured using four
managers, each running a separate portfolio benchmarked against the FTSE
All-Share Index, and reporting to Simon Fraser, Chief Investment Officer of
Fidelity International Limited.The four individual managers have a successful
UK equity track record with varying degrees of style and risk and the combined
result is a low risk portfolio consisting of around 200 stocks. An analysis of
risk carried in the new portfolio shows that there is no material difference in
terms of the overall risk from the portfolio that Fidelity inherited on
1 August 2002. The multi-manager process has the merit of evening out the
returns between managers without reducing their discretion and accountability.
It also avoids reliance on a single manager. A senior investment director,
Peter Yarrow, is responsible for the overall management of the portfolio in
terms of compliance with investment guidelines, risk control and performance
reviews. He also represents Fidelity to the board.
On 22 July 2002 I wrote to shareholders informing them that the board had
decided to appoint Fidelity as the Company's managers and I explained why we
had been impressed by the range of their qualities. Their long-term approach to
investing and theirclear record of out-performance complement the Company's
objectives to provide a low cost, low risk exposure to the UK market. Fidelity
is also an acknowledged industry leader in the provision of ISAs, PEPs and
other savings products. I can now report that, on the evidence to date, those
impressions have been borne out. As detailed belowthey have carried out a
complicated transition process in extremely difficult market conditions within
an acceptable level of cost, and on time.
Fidelity has also begun the process of increasing demand for shares in the
Company. The Edinburgh Investment Trust has now been added to its ISA/PEP range
and to its Share Plan. The board remains confident that the provision of these
services should attract a wider range of shareholders and should be an
effective means, over time, of reducing both the size and volatility of the
Company's discount to net asset value per share.
Performance
During the six months to 30 September 2002 the Company's net asset value per
share fell on a capital only basis by 37.3% compared to a fall in the FTSE
All-Share Index of 29.6%. The share price fell by 40.2%.
These figures are disappointing but the period under review was notable for
extreme weakness in share prices along with very volatile trading conditions.
The accounting scandals emerging from the US, ongoing disappointing company
results, growing fears over the possibility of a "double-dip" recession in the
US impacting other major economies and the possibility of further conflict in
the Middle East all provided a difficult backdrop for equity investors.
The analysis of the Company's performance for the whole of the six months to
30 September 2002 is set out below. However, this period is made up of two
distinct parts, the first being the four months to 31 July 2002 on which date
the investment management contract with EFM came to an end and the second being
August and September when Fidelity, having assumed responsibility for
performance, was engaged in restructuring the portfolio. The explanation of
performance in this section relates to the contribution made by each manager in
their discrete periods of management.
A feature which was common to both of the parts was the level of the Company's
gearing, which exaggerated the underperformance during this period of sharply
falling markets. Gearing can be profitable as markets rise but is painful as
they fall. Over the six months as a whole net gearing accounted for around 3.7%
of the underperformance.
During the period from 1 April to 31 July 2002, the portfolio was not
defensively positioned for a falling market and underperformed the FTSE
All-Share Index by 2.2% on a capital return basis (excluding gearing and
charges to capital). For part of this period EFM was operating under the burden
of having been given notice of termination of the management contract and
competing to be retained as manager.
The transition process effectively began when Fidelity took up office as
investment manager on 1 August. At that date around 60% of the portfolio which
Fidelity inherited from EFM matched their target portfolio. During August and
September in difficult market conditions, marked by low volume and extreme
volatility, Fidelity concentrated on moving the inherited portfolio gradually
towards the required position, and this was substantially complete by the end
of September. However, some of the portfolio inherited by Fidelity proved to be
exceptionally illiquid and continuing to hold certain positions had a
detrimental impact, estimated at 1.5%, on performance. This was offset in part
by 0.4% out-performance of the remainder of the portfolio during the two month
period ended 30 September.
The need to align the two portfolios led to additional costs in selling the
securities which Fidelity did not want to hold and in buying those which it
did. The board engaged Inalytics, a professional organisation which specialises
in analysing transition costs, and Gordon Bagot FFA, an investment and
actuarial consultant, to monitor whether Fidelity had conducted this transition
process effectively and specifically to judge whether the overall cost of the
exercise was in line with industry best practice. The consultants have reported
that the cost of buying and selling securities (to include market spread,
commission, stamp duty, other expenses and the difference between the prices of
the relevant securities on 1 August and on the actual date on which these
securities were bought or sold) in constructing the Fidelity portfolio was
around £9.3m (1% of the portfolio). They consider that this cost is highly
acceptable given the market conditions which prevailed in the two month period
during which it was conducted. Gordon Bagot also confirmed that had the
Fidelity target portfolio been in place throughout August and September it
would have marginally outperformed the FTSE All-Share Index on an ungeared
basis.
Portfolio Strategy
The positioning of the portfolio at the end of September was moderately
defensive, with an overweight exposure to food producers and processors and
tobacco stocks. However there was also an overweight exposure to the more
cyclical support services and media and photography sectors. The portfolio is
currently underweight general retailers, beverages, mining stocks and
telecommunications services.
The portfolio is around 10% underweight FTSE 100 stocks and around 10%
overweight FTSE Mid-250 stocks.
Having suffered the fall in the market earlier in the year Fidelity decided to
maintain the inherited level of gearing, which had increased slightly by the
end of September, largely as a result of the continuing market falls. Having
added to the underperformance in the six-month period, Fidelity and the board
agreed that it was not the time materially to reduce gearing.
Interim Dividend
An interim dividend of 4.2p per share, 2.4% higher than last year, will be paid
on 2 December 2002 to shareholders on the register at 1 November 2002. It is
still too early to make any forecast of the level of final dividend but as
previously the board, in making its recommendation, will have regard to the
substantial revenue reserve carried forward.
Share Plan and ISA/PEP
The Company's shares are now available to savers through both the Fidelity ISA/
PEP and the Fidelity Share Plan (a low cost investment trust savings scheme).
Both wrapper products are available for lump sum and monthly savings and in
addition Fidelity offers a phasing option for the ISA/PEP which enables lump
sum investments to be `drip fed' with the aim of minimising the impact of
market volatility. The ISA/PEP is also available for transfers and Fidelity
will cover the exit fee for any investors transferring across from Edinburgh
Fund Managers.
Prospects
The consensus of informed opinion is that while lowinterest rates and increased
government spending should help underpin the position domestically,the UK stock
market will remain sensitive to news on corporate earnings and developments in
the global economy. The health of the US economy is likely to remain uppermost
in investors' minds. Recent data has pointed to a slowdown in consumer spending
and a rise in unemployment, supporting the view that US interest rates may need
to fall further. Europe has also shown weakening confidence amongst businesses
and consumers and eurozone interest rates, which have fallen less than the US,
could be lowered to bolster the economy should conditions deteriorate.
Whilst the economic background remains unclear, market falls have exposed good
fundamental value which will be reflected in rising share prices when investor
confidence returns.
Conclusion
The last six months have been difficult for your Company and it was unfortunate
that the severe falls in equity markets should have coincided with the
inevitable uncertainty engendered by the change of manager and the accompanying
need to rearrange a substantial proportion of the portfolio.
However, that rearrangement is now virtually complete and there should be few
more costs, if any, associated with it to be met. As to the uncertainty, I am
sure that the picture will have become much clearer by the time I report to
shareholders at the end of the Company's current financial year.
Meanwhile I must repeat that the board has been impressed not only with
Fidelity's investment process, which is operated by a large and highly
professional team, but also with the way in which they have handled the overall
management of the Company. We are confident that their appointment will be of
great benefit to all our shareholders.
The Earl of Eglinton & Winton
Chairman
22 October 2002
Analysis of Performance six months to 30 September 2002
Decrease in Net Asset Value 37.3%
Decrease in FTSE All-Share Index 29.6%
Underperformance 7.7%
Analysis of underperformance:
UK Equities -3.5%
Borrowings (including interest)* -3.7%
Charges to capital -0.5%
* Excludes the attributable effect of stock selection and sector allocation.
This attribution is estimated from the Company's records covering the period
from 31 March 2002 to 31 July 2002 and from Fidelity's records for the period
31 July 2002 to 30 September 2002. The results from the two periods have been
consolidated to produce a result for the entire six-month period. The
consolidation means that the analysis provided in the above table cannot be
reconciled to the performance figures for the discrete periods referred to in
the Chairman's Review.
The Edinburgh Investment Trust plc
Statement of Total Return (incorporating the revenue account)
For the six months ended 30 September 2002
for the six months for the six months for year ended
ended ended
30.09.02 30.09.01 31.03.02
unaudited unaudited audited
revenue capital total revenue capital total revenue capital total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Realised - (121,208) (121,208) - (1,917) (1,917) - (30,040) (30,040)
losses on
investments
Decrease in - (320,457) (320,457) - (246,924) (246,924) - (96,227) (96,227)
unrealised
appreciation
Income from 17,828 - 17,828 19,158 - 19,158 36,324 - 36,324
investments
Interest 1,137 - 1,137 1,852 - 1,852 3,457 - 3,457
receivable on
short term
deposits
Underwriting 43 - 43 2 - 2 4 - 4
commissions
Investment (755) (1,762) (2,517) (817) (1,905) (2,722) (1,531) (3,573) (5,104)
management fee
Other expenses (752) - (752) (506) - (506) (1,260) - (1,260)
Exchange gains - (2) (2) - (3) (3) - (2) (2)
Net return/ 17,501 (443,429) (425,928) 19,689 (250,749) (231,060) 36,994 (129,842) (92,848)
(loss) before
finance costs
and taxation
Interest (2,944) (6,870) (9,814) (2,944) (6,870) (9,814) (5,850) (13,651) (19,501)
payable
Return/(loss) 14,557 (450,299) (435,742) 16,745 (257,619) (240,874) 31,144 (143,493) (112,349)
on ordinary
activities
before
taxation
Tax on - - - (1) - (1) (1) - (1)
ordinary
activities
Return/(loss) 14,557 (450,299) (435,742) 16,744 (257,619) (240,875) 31,143 (143,493) (112,350)
on ordinary
activities
after taxation
Dividend (10,286) - (10,286) (9,880) - (9,880) (31,230) - (31,230)
Transfer to/ 4,271 (450,299) (446,028) 6,864 (257,619) (250,755) (87) (143,493) (143,580)
(from)
reserves
Return/(loss) 5.91p (182.82p) (176.91p) 6.69p (102.96p) (96.27p) 12.50p (57.59p) (45.09p)
per ordinary
share
Interim 4.20p 4.10p 12.79p
Dividend per
ordinary share
These financial statements have been prepared in accordance with the AITC
Statement of Recommended Practice (SORP) issued in December 1995.
The Edinburgh Investment Trust PLC
Balance Sheet
As at 30 September 2002
30.09.02 31.03.02 30.09.01
uaudited audited unaudited
£'000 £'000 £'000
Fixed assets
Investments 895,658 1,329,615 1,262,985
Current assets
Debtors 19,365 12,878 16,169
Fidelity Institutional 20,131 - -
Cash Fund
UK Treasury Bills - 24,831 14,890
AAA Money Market Funds - 73,000 -
Cash and other short term 45,643 2,797 15,489
deposits
85,139 113,506 46,548
Creditors - amounts (32,828) (46,693) (14,419)
falling due within one
year
Net current assets 52,311 66,813 32,129
Total assets less current 947,969 1,396,428 1,295,114
liabilities
Creditors - amounts (194,977) (194,850) (194,725)
falling due after more
than one year
Total net assets 752,992 1,202,578 1,100,389
Capital and reserves
Called up share capital 61,549 61,705 62,062
equity
Other reserves 691,443 1,139,873 1,038,327
Total equity shareholders' 752,992 1,201,578 1,100,389
funds
Net asset value per 303.81p 484.73p 441.14p
ordinary share:
The balance sheet as at 31 March 2002 has been extracted from the accounts for
the year ended 31 March 2002 which have been delivered to the Registrar of
Companies and on which the auditors gave an unqualified report.
The statement of total return and the balance sheet do not represent full
accounts in accordance with Section 240 of the Companies Act 1985.
The Edinburgh Investment Trust plc
Cash Flow Statement
For the six months ended 30 September 2002
30.09.02 31.03.02 30.09.01
unaudited audited unaudited
£'000 £'000 £'000
Net revenue before finance 17,501 36,994 19,689
costs and taxation
Decrease in accrued income 4,801 388 4,140
Increase/(decrease) in 690 (31) (38)
creditors
Expenses charged to (1,762) (3,573) (1,905)
capital
Net cash inflow from 21,230 33,778 21,886
operating activities
Net cash outflow from (9,625) (19,250) (9,625)
servicing of finance
Total Tax Paid - (769) (769)
Net cash (outflow)/inflow (22,605) 86,500 2,352
from financial investment
Equity dividends paid (21,296) (31,247) (21,069)
Net cash (outflow)/inflow (32,296) (69,012) (7,225)
before use of liquid
resources and financing
Net cash inflow/(outflow) 77,700 (43,226) 39,715
from management of liquid
resources
Net cash outflow from (2,558) (28,125) (22,139)
financing
Increase/(decrease) in 42,846 (2,339) 10,351
cash
Copies of the interim report will be posted to shareholders as soon as
practicable. Copies will also be available to the public at the Company's
registered office and from the Secretary at Beech Gate, Millfield Lane, Lower
Kingswood, Tadworth, Surrey KT20 6RP
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