Annual Financial Report and Interim Dividend
EP GLOBAL OPPORTUNITIES TRUST PLC
FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2009 AND DECLARATION OF AN INTERIM
DIVIDEND
The full Annual Report and Accounts can be accessed via the Company's website
at www.epgot.com or by contacting the Company Secretary on telephone 0131 270
3800.
HIGHLIGHTS
* The Company's net asset value per ordinary share increased by 17.0 per cent
to 175.9p.
* The Board has been concerned that, at times, the discount at which the
shares trade relative to the net asset value per share has been
unsatisfactory. The Board therefore implemented a stricter approach to
monitoring the level of the discount and to the buying back of shares with
a view to maintaining the share price at close to the net asset value per
share.
* During the year the Board exercised its powers to buy back 2,000,000
shares. As at 31 December 2009 the Company held 3,830,000 ordinary shares
in treasury and 28,824,180 ordinary shares were in circulation.
* The share price increased by 29.8 per cent to 172.0p, ending the year at a
discount to net asset value of 2.2 per cent, compared to 11.9 per cent at
the end of 2008.
* Edinburgh Partners Limited, our Investment Manager, switched the portfolio
away from the defensive policy adopted during 2008 towards a more growth
orientated strategy, with an increased emphasis on investment in Asia and
in technology shares. The recovery in Japanese shares had been more subdued
and this led us to increase our investment in Japan in the second half of
the year, funding the purchases by taking profits in other Asian markets
after their strong performance.
* At the end of 2009, shares were no longer cheap but nor did they look
expensive and hence at the year end, we remained effectively fully invested
in equities. The period of rapid price gains has probably passed but this
does not mean that there is no further upside potential.
* Our revenue per share declined by 30.8 per cent from the level of the
previous year to 2.7p per share. The lower level of income is a consequence
of the changes made to our portfolio, moving from defensive shares with
high yields to more growth orientated companies with correspondingly lower
yields. It has always been our policy that the shares we hold are selected
based on where our Investment Manager perceives the best value to be. As we
have previously stated, we would rather reduce our dividend payout than
compromise this investment policy. This policy, we believe, will result in
superior returns over the longer term.
* The Annual General Meeting of the Company will be held on 28 April 2010.
* The Board is declaring an interim dividend of 2.4p per ordinary share
instead of a final dividend. This dividend will be payable on 31 March 2010
to shareholders on the register as at 12 March 2010. The ex-dividend date
will be 10 March 2010.
CHAIRMAN'S STATEMENT
Results
At the year end our net asset value per share was 175.9p, giving a total return
for the twelve months to 31 December 2009 of 19.4 per cent. After the good
performance relative to equity markets in the 2008 bear market, a very
different emphasis was required to perform well last year. Edinburgh Partners,
our Investment Manager, switched the portfolio away from the defensive policy
adopted during 2008 towards a more growth orientated strategy. As a result,
instead of being left behind by the recovery, our performance was only slightly
behind that of the FTSE All-World Index. The total return for the World Index
was 21.2 per cent and for the FTSE All-Share Index was 30.1 per cent.
The stock market indices give a guide as to how share prices have been
performing but we do not use them as a benchmark for our Investment Manager to
be measured against. Indeed, we specifically do not have a benchmark so that
our Investment Manager is not under any pressure to invest in what may appear
to be an overvalued share just because it is part of an index. The choice of
company we invest in is based on the shares that our Investment Manager
considers to be undervalued. We believe this will result in a better long-term
performance. Since it was launched six years ago, your Company has achieved a
net asset value per share total return of 85.5 per cent while the FTSE
All-World Index and the FTSE All-Share Index have produced total returns of
59.5 per cent and 58.8 per cent respectively.
The share price closed the year at 172p, an increase of 29.8 per cent over the
price at the end of 2008. The increase was greater than the gain in the net
asset value per share as a result of the discount to net asset value narrowing
from 11.9 per cent to 2.2 per cent. As stated in the half-yearly report, your
Board has been concerned that, at times, the discount at which the shares trade
relative to the net asset value per share has been unsatisfactory. We,
therefore, implemented a stricter approach to monitoring the level of the
discount and to the buying back of shares with a view to maintaining the share
price at close to the net asset value per share. During 2009, we bought back
2,000,000 shares.
Stock market performance
The decline in share prices, which had persisted throughout 2008, continued
into the early part of 2009. Sentiment towards equities was extremely negative
by the end of 2008. There was a real concern that a full scale economic
depression was on the horizon. The banking crisis forced governments to take
extreme action to prop up the banks. Had they failed to do so, a depression
would likely have developed. Short-term interest rates were slashed to
virtually zero and large emergency spending packages were introduced. In a
final act of desperation, some western countries, in particular the USA and the
UK, resorted to the printing presses. They introduced a policy of "quantitative
easing", buying government debt and printing the money to do it.
With stock markets priced for disaster, share prices finally bottomed out in
March as the massive reflationary action finally began to have a positive
effect on asset prices. After an initial sharp rally, markets levelled off
through May and June as doubts lingered about the reality of an economic
recovery. From July onwards sentiment steadily improved again and markets
resumed their recovery. However, despite the strong recovery from March 2009,
virtually all equity markets ended the year below the levels they had reached
in 2007.
The largest recovery was seen in those markets that had been weakest in 2008.
Asian markets were particularly strong, with a total return for the FTSE
All-World Asia Pacific ex Japan Index of 55.5 per cent in sterling terms. One
of the features of the bear market had been the strength of the US dollar. As
equity markets recovered last year so the dollar weakened once again. Over the
twelve months to the end of 2009, sterling gained over 12 per cent versus the
dollar. This reduced a 26.5 per cent total return in the S&P Composite Index to
12.6 per cent when converted into sterling. Similarly, the 32.5 per cent total
return in the FTSE All-World European ex UK Index in euros was converted into a
21.8 per cent return in sterling terms. The poorest major market, by a wide
margin, was Japan. The yen had been even stronger than the US dollar in 2008,
making the Japanese stock market by far the best major market to be invested in
that year. Fortunes were reversed in 2009. The Japanese Topix Index produced a
negative total return of 6.7 per cent in sterling terms.
Investment performance
Our investment emphasis in 2009 was significantly different from the defensive
policy adopted in 2008. As stock markets fell sharply in 2008, attractive
valuations began to appear in sectors that had previously been overrated. At
the same time, the shares of defensive companies, such as pharmaceuticals and
telecommunications, held up, reducing their relative attractiveness. In the
second half of 2008, we began to take advantage of the opportunities being
created and by the start of 2009 our level of investment in Asia and in
technology shares had been markedly increased. This process continued into
early 2009.
After markets started rising in March 2009, the valuation differential between
different sectors quickly narrowed. By mid-year, valuations appeared to be much
more in balance. While shares, generally, did not seem to be overvalued, areas
of undervaluation had become less obvious. One major exception to this was
Japanese equities. The recovery in Japanese shares had been more subdued and
the market drifted lower in early September. This led us to increase our
investment in Japan in the second half of the year, funding the purchases by
taking profits in other Asian markets after their strong performance.
Revenue account and dividend
Our revenue per share declined by 30.8 per cent from the level of the previous
year to 2.7p per share. The Board has declared an interim dividend of 2.4p per
share, instead of a final dividend, compared to a final dividend of 3.1p per
share last year. It has always been our policy that the shares we hold are
selected based on where our Investment Manager perceives the best value to be.
As we have previously stated, we would rather reduce our dividend payout than
compromise this investment policy. This policy, we believe, will result in
superior returns over the longer term. With tax rates due to increase from 5
April 2010, your Board has considered it financially sensible to declare an
interim dividend payable on 31 March 2010 instead of the final dividend that in
the past has been paid in May.
On 23 February 2010 the Board announced that it had amended the Company's
dividend policy to allow the Company to pay such interim dividends as appear to
the Board to be justified by the financial position of the Company at the
relevant time. The Company's previous dividend policy did not refer to the
payment of interim dividends.
The lower level of income is a consequence of the changes made to our
portfolio, moving from defensive shares with high yields to more growth
orientated companies with correspondingly lower yields. We also reinvested the
holdings of cash and fixed interest, which had been held in 2008, into
equities. The revenue account did benefit from a refund of VAT previously paid
on investment management and administration fees. Payment of such VAT has been
successfully challenged in court, as some competing investment products are not
subject to the tax. We received a refund of £126,000 plus interest.
Holding in Edinburgh Partners
We have increased the valuation of our equity stake in Edinburgh Partners, our
Investment Manager, by £100,000 to £1.2 million. We had not lowered the
valuation at the end of the previous year despite the decline in the valuation
of quoted investment management companies during the year. Edinburgh Partners
had continued to make progress in 2008 and their excellent relative investment
performance during that difficult year put them in a good position to win new
business last year. This they duly did, with funds under management increasing
from £4.1 billion at the end of 2008 to £6.7 billion at the end of 2009. We
received a dividend on our holding last year amounting to £71,000.
Outlook
The world did not slide into a depression in 2009 but it took a huge level of
monetary and fiscal stimulus to turn the world economy round. One of the
consequences is that many western countries now have excessively large budget
deficits. The outlook would seem to depend on when countries start to remove
this stimulus and how economies and stock markets react to this withdrawal.
Some countries, including potentially the UK, will be forced to take early
action to reduce their budget deficits. This could well cause continued
uncertainty about the durability of the economic activity. In such an
environment it would not be surprising to see a greater number of volatile
moves both up and down in financial markets.
After the recovery in equity markets, by the end of 2009 shares were no longer
cheap but nor did they look expensive and hence at the year end, we remained
effectively fully invested in equities. The period of rapid price gains has
probably passed but this does not mean that there is no further upside
potential.
Teddy Tulloch
Chairman
3 March 2010
MANAGER'S REPORT AND PORTFOLIO ANALYSIS
Two years ago the signs were readily available that equity valuations were
based on an overly optimistic view of the global economy and as such a degree
of caution was required. One year ago the converse was true and we were able to
say that we were finding more companies on highly attractive valuations than we
had for the previous five years.
It is relatively rare to be in a position where the valuation metrics have
reached such an extreme level that pronouncements can be made with any degree
of certainty. That we have had two of these occasions in as many years is very
unusual. Perhaps, then, it is not surprising that it is now difficult to make
any very strong statement. From our analytical work, the most that can be said
is equities no longer look cheap nor do they look expensive. Hence, whilst
potential returns still look reasonable, they are likely to be below those
historically recorded. This is consistent with a view of the world facing an
extended period of fiscal tightening and restoration of savings balances. That
is, the world will be characterised by higher taxation and slower growth.
It will also be a world where legislation and regulation will follow the
financial sector debacle. Throughout history, financial crashes have been
followed by government action to address the causes. In some cases, the reform
has been sensible and provided a better springboard for future economic
stability and growth. The common denominator of successful reform has been that
it has addressed the causes rather than the symptoms of the underlying issues.
The other critical element has been that the ensuing reforms were based on
ensuring transparency of actions. So long as reform follows these basic
principles, investors should welcome prospective changes as helping to underpin
the foundations of the financial system.
So far as 2009 was concerned, it was almost a mirror image of 2008. Such had
been the violence of share price movements that by the last quarter of 2008 we
found that the most expensive stocks in the portfolio were, not surprisingly,
those that had performed best during the year. The telecoms and pharmaceutical
companies, whose main characteristic is visible but slow growth, were no longer
particularly cheap on an absolute basis. More importantly, given the collapse
of share prices in other areas, on a relative basis their valuation was
eclipsed by a large number of companies.
As we noted in the Manager's Report for 2008, the portfolio structure was
undergoing a marked shift with the sale of many telecom and pharmaceutical
holdings and purchases of new investments in technology and emerging markets.
To give an idea of the magnitude of what we have seen, we would like to
highlight one of the purchases we made during 2008. When we invested in
Baidu.com, the Chinese internet search company, the share price had fallen by
over 70 per cent. In the space of a year the share price had recovered its
previous highs, rising over 300 per cent in the process. As a consequence of
the rising share price, the valuation was no longer attractive and the
investment has been sold. What this emphasises is the need to be ready to act
when valuations fall into the right range.
Baidu.com is an extreme example but it is not isolated; we have reduced or sold
a number of technology and emerging markets holdings in response to the
recovery in their share prices. We would normally expect to hold securities for
much longer periods, but this has not been a normal period and we have seen
many companies go from being expensive to cheap and back to expensive again in
an unnaturally short period.
Obviously not all investments proved to be successful. LDK Solar was sold,
reflecting the deteriorating condition of its balance sheet as customers
cancelled orders in response to the combined effect of the removal of subsidies
prompted by deteriorating fiscal conditions and falling energy prices. We also
made a number of changes to our holdings in banks as the various risk profiles
shifted in response to regulatory changes and capital raising requirements. For
example, we felt that Bank of America offered a much better risk reward profile
than Citigroup and hence switched over our investment to favour the former.
The most recent investments have largely been in Japan. There are many
companies in Japan which are trading at prices below the underlying cost of
their assets. They do so because few people believe that they will ever be able
to earn a meaningful return on these assets. We do not share this level of
pessimism. Many Japanese companies have made strides in reducing costs and
increasing efficiency. This has not yet shown through in profitability terms,
largely because of the condition of the domestic economy and the constantly
rising yen. If either of these factors were to become less significant, the
increase in profitability would be both meaningful and unexpected. Companies we
have invested in include the electronics companies Sony and Fujitsu as well as
the trading company Mitsubishi Corporation.
Since it is our view that there are reasonable returns to be made from
equities, we anticipate retaining a fully invested position. The expected
returns may be below historic norms but they look to us to be substantially
ahead of what can be earned from bonds and cash. With a stock market that is
not obviously cheap, and given the number of economic obstacles to be overcome
or avoided, it is entirely likely that we will see periodic setbacks. We
anticipate that this will create attractive opportunities for long-term
investors such as ourselves.
Dr Sandy Nairn
Edinburgh Partners Limited
3 March 2010
FINANCIAL SUMMARY
Results for year 31 December 31 December Change
2009 2008
Shareholders' funds £50,712,000 £46,353,000 9.4%
Net asset value per ordinary share 175.9p 150.4p 17.0%
("NAV")
Share price per ordinary share 172.0p 132.5p 29.8%
Share price discount to NAV 2.2% 11.9%
Revenue return per ordinary share* 2.7p 3.9p (30.8)%
Dividend per ordinary share** 2.4p 3.1p (22.6)%
* Based on the weighted average number of shares in issue during the year.
** Declared dividend for the year.
Ordinary share Ordinary share
Year's high/low
Share price - high 173.0p 158.0p
- low 113.0p 112.5p
NAV - high 177.3p 174.0p
- low 116.8p 124.4p
Share price premium /(discount) to NAV
- high 0.4% (1.3)%
- low (13.5)% (18.5)%
Cost of running the Company
Total expense ratio* 1.0% 1.1%
*Based on total expenses for the year and average monthly net asset value.
Performance record
Net asset Share Share Revenue Dividend
price
value per price per discount return per per
Shareholders' ordinary ordinary to net ordinary ordinary
asset
funds share share value share share
Year ended 31
December
2004* £26.1m 116.4p 110.5p 5.1% 0.6p 0.4p
2005 £52.2m 156.2p 154.5p 1.1% 1.1p 0.8p
2006 £58.8m 172.8p 170.0p 1.6% 2.1p 1.8p
2007 £57.7m 177.2p 160.0p 9.7% 2.7p 2.3p
2008 £46.4m 150.4p 132.5p 11.9% 3.9p 3.1p
2009 £50.7m 175.9p 172.0p 2.2% 2.7p 2.4p**
* Period 13 November 2003 to 31 December 2004. The Company commenced operations
on the admission of its shares to listing on the London Stock Exchange on 15
December 2003.
** Declared dividend for the year.
PORTFOLIO OF INVESTMENTS
as at 31 December 2009
Company Sector Country Valuation % of
Net
Assets
£'000
Equity investments
Sanofi-aventis Health Care France 2,055 4.1
Cisco Systems Technology United States 2,046 4.0
Gazprom Oil & Gas Russia 1,784 3.5
Nokia Technology Finland 1,744 3.4
Vodafone Telecommunications United 1,653 3.3
Kingdom
Sony Consumer Goods Japan 1,618 3.2
HSBC Financials United 1,566 3.1
Kingdom
Petrobras Oil & Gas Brazil 1,545 3.0
Swedbank Financials Sweden 1,532 3.0
Yara International Basic Materials Norway 1,499 3.0
Deutsche Post Industrials Germany 1,487 2.9
Belgacom Telecommunications Belgium 1,485 2.9
ENI Oil & Gas Italy 1,467 2.9
Novartis Health Care Switzerland 1,420 2.8
E.ON Utilities Germany 1,395 2.8
Time Warner Cable Media United States 1,384 2.7
Franklin Resources Financials United States 1,380 2.7
Samsung Electronics Technology South Korea 1,347 2.7
Fujitsu Technology Japan 1,334 2.6
Bank of America Financials United States 1,314 2.6
Total - 20 largest equity 31,055 61.2
investments
Other equity investments
Mitsubishi Industrials Japan 1,303 2.6
GlaxoSmithKline Health Care United 1,278 2.5
Kingdom
Aviva Financials United 1,266 2.5
Kingdom
Intesa Sanpaolo Financials Italy 1,247 2.5
Yamaha Motor Company Consumer Goods Japan 1,246 2.5
D.R. Horton Consumer Goods United States 1,218 2.4
Edinburgh Partners Financials (unlisted) United 1,200 2.4
Limited Kingdom
Intel Technology United States 1,175 2.3
Applied Materials Technology United States 1,166 2.3
Carlsberg Consumer Goods Denmark 1,119 2.2
Symantec Technology United States 1,075 2.1
China Mobile Telecommunications China 1,035 2.0
UBS Financials Switzerland 1,003 2.0
General Electric Industrials United States 972 1.9
SK Telecom Telecommunications South Korea 956 1.9
Mizuho Financials Japan 940 1.8
Total - 36 investments 49,254 97.1
Cash and other net assets 1,458 2.9
Net assets 50,712 100.0
The geographical distribution is based on each investment's principal stock
exchange listing, except in instances where this would not give a proper
indication of where its activities predominate.
Of the ten largest portfolio investments as at 31 December 2009, the valuations
at the previous year end, 31 December 2008, were Sanofi-aventis £1,843,000;
Cisco Systems £1,778,000; Gazprom £1,108,000; Nokia £1,459,000; and Vodafone £
1,599,000. The remaining five investments Sony, HSBC, Petrobras, Swedbank and
Yara International were new purchases made during the year ended 31 December
2009.
DISTRIBUTION OF INVESTMENTS
as at 31 December 2009 (% of net assets)
Sector distribution as at 31 December 2009 % of net a
ssets
Financials 20.2
Technology 19.4
Consumer Goods 10.3
Telecommunications 10.1
Health Care 9.4
Oil & Gas 9.4
Industrials 7.4
Basic Materials 3.0
Utilities 2.8
Media 2.7
Financials (unlisted) 2.4
Cash and other net assets 2.9
100.0
Geographical distribution as at 31 December 2009 % of net
assets
Europe 38.0
United States 23.0
United Kingdom 13.8
Japan 12.7
Asia Pacific 6.6
Latin America 3.0
Cash and other net assets* 2.9
100.0
*Cash and other net assets includes foreign currency balances of £394,000 (0.8
%).
The figures detailed in the geographical distribution above represent the
Company's equity exposure to these countries or regional areas.
BUSINESS REVIEW
Status of Company
The Company is registered as a public limited company and is an investment
company within the terms of Section 833 of the Companies Act 2006. The Company
has received approval from HM Revenue & Customs as an authorised investment
trust under Section 842 of the Income and Corporation Taxes Act 1988 for the
period from inception to 31 December 2008. This approval is subject to there
being no subsequent enquiry under corporation tax self-assessment. In the
opinion of the Directors, the Company has subsequently directed its affairs so
as to enable it to continue to qualify for such approval and the Company will
continue to seek approval under Section 842 each year.
Activities
The principal activity of the Company is to carry on business as an investment
trust.
A review of the Company's activities during the year is given in the Chairman's
Statement and in the Manager's Report and Portfolio Analysis.
Net asset valuation
The net asset value per ordinary share ("NAV") at 31 December 2009 was 175.9p
(2008: 150.4p).
Results
The results for the year are set out in the Income Statement and the
Reconciliation of Movements in Shareholders' Funds.
Dividends
The Directors have declared the payment of an interim dividend, instead of a
final dividend, of 2.4p per ordinary share (2008: final dividend of 3.1p). This
dividend will be payable on 31 March 2010 to Shareholders on the register at
the close of business on 12 March 2010. The ex-dividend date will be 10 March
2010.
On 23 February 2010 the Board announced that it had amended the Company's
dividend policy to allow the Company to pay such interim dividends as appear tothe Board to be justified by the financial position of the Company at the
relevant time. The Company's previous dividend policy did not refer to the
payment of interim dividends.
Objective
The investment objective of the Company is to provide Shareholders with an
attractive real long-term total return by investing globally in undervalued
securities. The portfolio is managed without reference to the composition of
any stock market index.
Investment policy
The Company invests in a focused portfolio of approximately 30 to 40 securities
of issuers throughout the world, predominantly in quoted equities. The Company
may also invest in unquoted securities, which are not anticipated to exceed 10
per cent of the Company's total assets at the time of investment (excluding
shares held in Edinburgh Partners).
The Company has no present intention to invest in other investment companies or
funds but retains the ability to invest no more than 15 per cent of its gross
assets in other listed investment companies (including investment trusts).
The Company may also invest a substantial portion of its assets in debt
instruments, cash or cash equivalents when the Investment Manager believes
market or economic conditions make equity investment unattractive or while
seeking appropriate investment opportunities for the portfolio or to maintain
liquidity. In addition, the Company may purchase derivatives for the purposes
of efficient portfolio management.
It is intended that, from time to time, when deemed appropriate, the Company
will borrow for investment purposes up to the equivalent of 25 per cent of its
total assets. By contrast, the Company's portfolio may from time to time have
substantial holdings of debt instruments, cash or short-term deposits.
The investment objective and policy are intended to distinguish the Company
from other investment vehicles which have relatively narrow investment
objectives and which are thus constrained in their decision making and asset
allocation. The objective and policy allow the Company to be constrained in its
investment selection only by valuation and to be pragmatic in portfolio
construction by only investing in securities which the Investment Manager
considers to be undervalued on an absolute basis.
Investment strategy
The Company's portfolio is managed without reference to any stock market index.
Investments are selected for the portfolio only after extensive research by the
Investment Manager. The process through which an equity must pass in order to
be included in the portfolio is rigorous. Only a security where the Investment
Manager believes that the price will be significantly higher in the future will
pass the selection process. The key to successful stock selection is to
identify the long-term value of a company's shares and to have the patience to
hold the shares until that value is appreciated by other investors. Identifying
long-term value involves detailed analysis of a company's earning prospects
over a five year time horizon. Further details of the investment strategy can
be found in the Chairman's Statement and the Manager's Report and Portfolio
Analysis.
The Company's Investment Manager is Edinburgh Partners which is an independent
specialist investment manager focusing exclusively on achieving returns for
investors based on global investment analysis of the highest quality. The
founders of Edinburgh Partners include experienced investment professionals
with strong investment performance records who believe rigorous fundamental
research allied to patience is the basis of long-term investment success. Each
of the investment professionals has specific responsibilities for sector and
regional research in addition to their fund management role. Details of the
Investment Management Agreement are set out below.
Principal risks
The Board considers that the following are the principal risks associated with
investing in the Company: investment and strategy, discount volatility, market
risk, liquidity risk, credit risk, interest rate risk, foreign currency risk,
gearing, regulatory risk, operational risk and financial risk. An explanation
of these risks and how they are managed and the policy and practice with
regards to financial instruments are contained in note 18.
Key performance indicators
At each Board meeting, the Directors consider a number of performance measures
to assess the Company's success in achieving its objective. The Key Performance
Indicators used to measure progress and performance of the Company over time
are established industry measures and are as follows:
- Net asset value per ordinary share.
- Share price per ordinary share.
- Share price discount/premium to net asset value per ordinary share.
- Revenue return per ordinary share.
- Total expense ratio.
The Financial Summary provides information for the year ended 31 December 2009
on the Key Performance Indicators noted above.
Current and future developments
A review of the main features of the year ended 31 December 2009 and the
outlook for the coming year is to be found in the Chairman's Statement and the
Manager's Report and Portfolio Analysis. The Board's main focus is on the
investment return and approach. Attention is paid to the integrity and success
of the investment approach and on factors which may have an impact on this
approach. Due regard is paid to the promotion of the Company including
communication with Shareholders and other external parties. The Board is
regularly updated on wider investment trust industry issues. Detailed papers
are presented to the Board which lead to extensive discussion on development
and strategy.
Social, environmental and ethical policy
EP Global Opportunities Trust plc seeks to invest in companies that are well
managed, with high standards of corporate governance. The Directors believe
this creates the proper conditions to enhance long-term value for Shareholders.
In aiming to achieve a high level of corporate performance the Company adopts a
positive approach to corporate governance and engagement with companies.
In pursuit of the above objective , the Directors believe that proxy voting is
an important part of the corporate governance process and considers seriously
its obligation to manage the voting rights of companies in which it is
invested, for which it has delegated responsibility to its Investment Manager.
It is the policy of the Company to vote, as far as it is practicable, at all
shareholder meetings of investee companies. The Company follows the relevant
applicable regulatory and legislative requirements in the UK, with the guiding
principles being to make proxy voting decisions which favour proposals that
will lead to maximising Shareholder value while avoiding any conflicts of
interest. Voting decisions are taken on a case by case basis, with the key
issue on which the Investment Manager focuses being corporate governance,
including disclosure and transparency, board composition and independence,
control structures, remuneration and social and environmental issues.
The Company itself has no employees and all the Directors are non-executive.
The day-to-day management of the Company's business has been delegated to the
Company's Investment Manager, Edinburgh Partners.
Purchase of own shares
During the year ended 31 December 2009 the Company purchased 1,218,000 ordinary
shares (with a nominal value of £12,180) for cancellation, representing 3.73
per cent of the issued share capital at 31 December 2009, for an aggregate
amount of £1,667,000. Also during the year ended 31 December 2009 the Company
purchased 782,000 ordinary shares (with a nominal value of £7,820) for
treasury, representing 2.39 per cent of the issued share capital at 31 December
2009, for an aggregated amount of £1,223,000.
The Company also cancelled 126,000 shares (with a nominal value of £1,260) from
treasury during the year ended 31 December 2009, which represented 0.39 per
cent of the issued share capital at that date. The shares were cancelled from
treasury in order to ensure that the number of own shares held in treasury at
any one time did not exceed the limit prescribed by the Companies (Acquisition
of Own Shares) (Treasury Shares) Regulations 2003 (the "Regulations"), being 10
per cent of the issued share capital at any one time. From 1 October 2009, in
accordance with the Companies (Share Capital and Acquisition by Company of its
Own Shares) Regulations 2009, there is no longer a limit on the number of
shares that a company can hold in treasury at any one time. The Board has set
no limit on the number of shares that can be held in treasury at any one time.
The maximum number of own shares held in treasury during the year ended 31
December 2009 was 3,830,000 ordinary shares (with a nominal value of £38,300)
representing 11.73 per cent of the issued share capital of 32,654,180 ordinary
shares at the time they were held in treasury.
The total number of own shares held in treasury as at 31 December 2009,
including those shares bought back in prior accounting periods, totalled
3,830,000 ordinary shares.
Subsequent to the year end and up to the date of this report, a further 440,000
ordinary shares (with a nominal value of £4,400) have been purchased for
treasury representing 1.35 per cent of the issued share capital at the date of
this report, for an aggregate amount of £765,000.
EXTRACTS FROM THE DIRECTORS' REPORT
Management Agreement
The Company's investments are managed by Edinburgh Partners under an Investment
Management Agreement dated 21 November 2003. The Investment Manager receives a
management fee of 0.75 per cent per annum of the market capitalisation of the
issued ordinary shares (excluding treasury shares), payable quarterly in
arrears, plus an administration fee (£70,000 for the year ended 31 December
2009), payable quarterly in arrears and adjusted annually in line with changes
in the Retail Price Index. The Investment Management Agreement may be
terminated by either party giving 12 months' written notice. No additional
compensation is payable to Edinburgh Partners on the termination of this
agreement other than the fees payable during the 12 month notice period.
Continuing appointment of the Investment Manager
The Board keeps the performance of the Investment Manager under review. It is
the opinion of the Directors that the continuing appointment of Edinburgh
Partners on the terms agreed is in the interests of Shareholders as a whole.
The reasons for this view are that the investment performance of the Company is
satisfactory relative to that of the markets in which the Company invests and
because the remuneration of the Investment Manager is reasonable both in
absolute terms and compared to that of managers of comparable investment
companies. The Directors believe that by paying the investment management fee
calculated on a market capitalisation basis, rather than a percentage of assets
basis, the interests of the Investment Manager are more closely aligned with
those of Shareholders.
MANAGEMENT REPORT AND STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RELATION TO
THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS
Management report
Listed companies are required by the FSA's Disclosure and Transparency Rules
(the "Rules") to include a management report within their annual report and
financial statements.
The information required to be included in the management report for the
purpose of these Rules is included in the Chairman's Statement, the Manager's
Report and Portfolio Analysis and the Business Review contained in the
Directors' Report. Therefore no separate management report has been included.
The financial statements have been reviewed by the Company's Auditors.
Statement of Directors' responsibilities in relation to the Annual Report and
Financial Statements
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 period. Under that law they have elected to prepare the financial
statements in accordance with UK Accounting Standards.
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 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, to the best of their knowledge, state that;
- the financial statements, prepared in accordance with UK Accounting
Standards, give a true and fair view of the assets, liabilities, financial
position and profit of the Company; and
- the Chairman's Statement, Manager's Report and Portfolio Analysis and the
Directors' Report include 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.
The Directors confirm that, so far as they are each aware, there is no relevant
audit information of which the Company's Auditors are unaware; and each
Director has taken all the steps that ought to have been taken as a Director to
make himself aware of any relevant audit information and to establish that the
Company's Auditors are aware of that information.
The Directors are responsible for keeping proper accounting records that
disclose with reasonable accuracy at any time the financial position of the
Company and enable them to ensure that its 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, Directors' Remuneration Report and 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.
Legislation in the UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
On behalf of the Board
Teddy Tulloch
Chairman
3 March 2010
INDEPENDENT AUDITORS' REPORT
The Company's financial statements for the year ended 31 December 2009 have
been audited by Ernst & Young LLP. The text of the Auditors' report can be
found in the Company's Annual Report and Accounts at www.epgot.com.
INCOME STATEMENT
for the year ended 31 December 2009
2009 2008
Revenue Capital Total Revenue Capital Total
Note £'000 £'000 £'000 £'000 £'000 £'000
Gains/(losses) on 8 - 7,616 7,616 - (10,444) (10,444)
investments at
fair value
Foreign exchange - (226) (226) - 1,027 1,027
(losses)/gains on
capital items
Income 2 1,382 - 1,382 2,067 - 2,067
Investment 3 (323) - (323) (325) - (325)
management fee
Refund of VAT 3 126 - 126 - - -
paid on
investment
management and
administration
fees
Other expenses 4 (248) - (248) (239) - (239)
Net return before 937 7,390 8,327 1,503 (9,417) (7,914)
finance costs and
taxation
Finance costs
Interest payable (1) - (1) (3) - (3)
and similar
charges
Net return before 936 7,390 8,326 1,500 (9,417) (7,917)
taxation
Taxation 5 (131) - (131) (275) - (275)
Net return after 805 7,390 8,195 1,225 (9,417) (8,192)
taxation
pence pence pence pence pence pence
Return per 7 2.7 24.7 27.4 3.9 (29.7) (25.8)
ordinary share
All revenue and capital items in the above statement derive from continuing
operations.
The total column of this statement is the profit and loss account of the
Company. The revenue and capital return columns are prepared under guidance
published by the Association of Investment Companies ("AIC").
A separate Statement of Total Recognised Gains and Losses has not been prepared
as all such gains and losses are included in the Income Statement.
Dividend Information
An interim dividend, instead of a final dividend, for the year of 2.4p per
ordinary share (2008: final dividend of 3.1p) has been declared. This dividend
will be payable on 31 March 2010 to Shareholders on the register at the close
of business on 12 March 2010. The ex-dividend date will be 10 March 2010. Based
on 28,384,180 ordinary shares, being the number of ordinary shares in issue
(excluding shares held in treasury) at the date of this report, the total
dividend payment will amount to £681,000. In accordance with FRS 21, dividends
are accounted for in the period in which they are paid. Further information on
dividend distributions can be found in note 6.
The notes form part of these financial statements.
BALANCE SHEET
as at 31 December 2009
2009 2008
Note £'000 £'000
Fixed asset investments:
Investments at fair value through 8 49,254 43,935
profit or loss
Current assets:
Debtors 10 1,340 251
Cash at bank and short-term deposits 1,186 2,734
2,526 2,985
Creditors - amounts falling due within 11 1,068 567
one year
Net current assets 1,458 2,418
Net assets 50,712 46,353
Capital and reserves:
Called-up share capital 12 327 340
Capital redemption reserve 14 1
Share premium account 17,991 17,991
Special reserve 12,905 15,795
Capital reserve 18,091 10,701
Revenue reserve 1,384 1,525
Total Shareholders' funds 50,712 46,353
pence pence
Net asset value per ordinary share 14 175.9 150.4
These financial statements were approved and authorised for issue by the Board
of Directors on 3 March 2010 and were signed on its behalf by:
Teddy Tulloch
Chairman
The notes form part of these financial statements.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
for the year ended 31 December 2009
Share Capital Share Special Capital Revenue Total
capital redemption premium reserve reserve reserve
reserve account
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Year ended
31 December
2009
At 31 December 340 1 17,991 15,795 10,701 1,525 46,353
2008
Net return - - - - 7,390 805 8,195
after taxation
for the year
Dividends paid - - - - - (946) (946)
Share purchases (13) 13 - (1,667) - - (1,667)
for
cancellation
Share purchases - - - (1,223) - - (1,223)
for treasury
At 31 December 327 14 17,991 12,905 18,091 1,384 50,712
2009
Year ended
31 December
2008
At 31 December 340 1 17,991 18,212 20,118 1,043 57,705
2007
Net return - - - - (9,417) 1,225 (8,192)
after taxation
for the year
Dividends paid - - - - - (743) (743)
Share purchases - - - (2,417) - - (2,417)
for treasury
At 31 December 340 1 17,991 15,795 10,701 1,525 46,353
2008
The notes form part of these financial statements
STATEMENT OF CASH FLOW
for the year ended 31 December 2009
2009 2008
Note £'000 £'000
Operating activities:
Investment income received 1,388 2,111
Bank deposit interest received 1 1
Investment management fees paid (307) (350)
Secretarial fees paid (70) (69)
Other cash payments (199) (308)
Net cash inflow from operating activities 15 813 1,385
Servicing of finance (1) (3)
Taxation
Corporation tax paid (188) (249)
Capital expenditure and financial
investment:
Purchases of investments (18,371) (20,864)
Sales of investments 20,349 20,664
Exchange (losses)/gains on settlement (100) 157
Net cash inflow/(outflow) from investing 1,878 (43)
activities
Net cash inflow before equity dividend 2,502 1,090
and financing
Equity dividend paid 6 (946) (743)
Financing:
Ordinary shares purchased and held in (1,223) (2,498)
treasury
Ordinary shares purchased and cancelled (1,667) -
Net cash outflow from financing (2,890) (2,498)
Decrease in cash 16 (1,334) (2,151)
The notes form part of these financial statements.
NOTES TO THE FINANCIAL STATEMENTS
at 31 December 2009
1. Accounting policies
Accounting convention
The financial statements are prepared in accordance with UK Generally Accepted
Accounting Practice ("UK GAAP") and with the AIC Statement of Recommended
Practice issued in January 2009 relating to the Financial Statements of
Investment Trust Companies and Venture Capital Trusts.
Income recognition
Dividend and other investment income is included as revenue when the
investments concerned are quoted `ex-dividend'. Income arising on holdings of
fixed income securities is recognised on a time apportionment basis so as to
reflect the effective interest rate on that security. Deposit interest and
underwriting commission receivable is included on an accruals basis.
Management expenses and finance costs
All expenses are accounted for on an accruals basis. All operating expenses are
charged through the revenue account in the Income Statement except costs that
are incidental to the acquisition or disposal of investments, which are charged
to the capital account in the Income Statement.
Investments
All investments held by the Company are classified as `fair value through
profit or loss'. Investments are initially recognised at cost, being the fair
value of the consideration given. Interest accrued on fixed interest rate
securities at the date of purchase or sale is accounted for separately as
accrued income, so that the value or purchase price or sale proceeds is shown
net of such items.
After initial recognition, investments are measured at fair value, with
unrealised gains and losses on investments and impairment of investments
recognised in the Income Statement and allocated to capital. Realised gains and
losses on investments sold are calculated as the difference between sales
proceeds and cost.
For investments actively traded in organised financial markets, fair value is
generally determined by reference to Stock Exchange quoted market bid prices at
the close of business on the Balance Sheet date, without adjustment for
transaction costs necessary to realise the asset. Unlisted investments will be
valued by the Directors at fair value, using the guidelines on valuation
published by the International Private Equity and Venture Capital Association.
This represents the Directors' view of the amount for which an asset could be
exchanged between knowledgeable willing parties in an arm's length transaction.
This does not assume that the underlying business is saleable at the reporting
date or that its current shareholders have an intention to sell their holding
in the near future.
Foreign currency
Transactions denominated in foreign currencies are converted to sterling at the
actual exchange rate as at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies at the year end are reported at
the rate of exchange at the Balance Sheet date. Any gain or loss arising from a
change in exchange rate subsequent to the date of the transaction is included
as an exchange gain or loss in the capital reserve or the revenue account
depending on whether the gain or loss is of a capital or revenue nature.
Taxation
The charge for taxation is based on the net revenue for the year. In accordance
with Financial Reporting Standard No.16: Current Tax, franked investment income
is shown net of the associated tax credit, therefore no tax credits are
included within the charge for taxation.
The charge for taxation takes into account taxation deferred or accelerated
because of timing differences between the treatment of certain items for
accounting and taxation purposes. Full provision for deferred taxation is made
under the liability method, without discounting, on all timing differences that
have arisen but not been reversed by the Balance Sheet date, unless such
provision is not permitted by Financial Reporting Standard No. 19: Deferred
Tax. This is subject to deferred tax assets only being recognised if it is
considered more likely than not that there will be suitable profits from which
the future reversal of the underlying timing differences can be deducted.
Timing differences are differences arising between the Company's taxable
profits and its results as stated in the financial statements which are capable
of reversal in one or more subsequent periods.
Dividends payable to Shareholders
Dividends to Shareholders are recognised as a liability in the period in which
they have been declared and paid.
2. Income
2009 2008
£'000 £'000
Income frominvestments:
UK net dividend income 322 317
Overseas dividends 1,041 1,528
Fixed interest - 132
Deposit funds 7 89
1,370 2,066
Other income:
Bank interest - 1
Interest on VAT refund on investment 12 -
management and administration fees
1,382 2,067
Total income comprises:
Dividends 1,370 1,934
Interest 12 133
1,382 2,067
3. Investment management fee
2009 2008
Total Total
£'000 £'000
Investment management fee 323 325
The investment management fee is paid quarterly in arrears, at the rate of 0.75
per cent per annum of the market capitalisation of the issued ordinary shares
(excluding treasury shares) of the Company. At 31 December 2009 there was £
89,000 outstanding (2008: £73,000).
In addition, the Investment Manager received an administrative fee of £70,000
as detailed in note 4 (2008: £69,000). At 31 December 2009 there was £17,000
outstanding (2008: £17,000).
Following the AIC/Claverhouse judgement in 2007 regarding the charging of VAT
on investment management and administration fees, provision for the payment of
£126,000 has been recognised in these financial statements, as detailed in the
Income Statement. This amount was received subsequent to the year end, in
February 2010.
4. Other expenses
2009 2008
£'000 £'000
Administration and secretarial fees 70 69
Auditors' remuneration for:
Audit 18 16
Directors' remuneration 56 56
Other 104 98
248 239
The Auditors' remuneration comprises audit fees of £16,000 (2008: £16,000) and
expenses of £2,000 (2008: £nil).
5. Taxation
a) Analysis of charge 2009 2008
in year
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Current tax:
UK Corporation Tax 108 - 108 275 - 275
Overseas tax suffered 118 - 118 171 - 171
Double taxation relief (95) - (95) (171) - (171)
131 - 131 275 - 275
Deferred tax:
Timing differences - - - 4 - 4
Double taxation relief - - - (4) - (4)
131 - 131 275 - 275
b) The current taxation charge for the year ended 31 December 2009 is lower
than the standard rate of Corporation Tax in the UK of 28 per cent (2008: 30
per cent to 31 March 2008 and 28 per cent from 1 April 2008). The differences
are explained below:
2009 2008
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Net return before 936 7,390 8,326 1,500 (9,417) (7,917)
taxation
Theoretical tax at UK 262 2,069 2,331 427 (2,683) (2,256)
Corporation Tax rate of
28% (2008: 28.5%)
Effects of:
- UK dividends that are (90) - (90) (91) - (91)
not taxable
- Foreign dividends (70) - (70) - - -
that are not taxable
- Accrued income now 11 - 11 - - -
taxable
- Non-taxable - (2,069) (2,069) - 2,683 2,683
investment (gains)/
losses
- Brought forward - - - (61) - (61)
eligible unrelieved
foreign tax utilised
- Marginal relief (3) - (3) - - -
adjustment
- Overseas tax suffered 118 - 118 171 - 171
- Overcharge relating (2) - (2) - - -
to prior period
- Double taxation (95) - (95) (171) - (171)
relief
131 - 131 275 - 275
Due to the Company's status as an investment trust and the intention to
continue meeting the conditions required to obtain approval as an investment
trust in the foreseeable future, the Company has not provided deferred tax on
any capital gains and losses arising on the revaluation or disposal of
investments.
6. Dividends
2009 2008
Declared and paid £'000 £'000
2008 final dividend of 3.1p per ordinary share paid
in May 2009
(2007: final dividend of 2.3p paid in May 2008) 946 743
946 743
Net revenue return after taxation 805 1,225
Declared
2009 interim dividend of 2.4p (2008: final dividend 681 956
of 3.1p) per ordinary share
681 956
An interim dividend, instead of a final dividend, for the year of 2.4p per
ordinary share (2008: final dividend of 3.1p) has been declared. This dividend
will be payable on 31 March 2010 to Shareholders on the register at the close
of business on 12 March 2010. The ex-dividend date will be 10 March 2010. Based
on 28,384,180 ordinary shares, being the number of ordinary shares in issue
(excluding shares held in treasury) at the date of this report, the total
dividend payment will amount to £681,000.
7. Return per ordinary share
2009 2008
Net Ordinary Per Net Ordinary Per
return shares* share return shares* share
£'000 pence £'000 pence
Revenue return after 805 29,872,821 2.7 1,225 31,758,186 3.9
taxation
Capital return after 7,390 29,872,821 24.7 (9,417) 31,758,186 (29.7)
taxation
Total return 8,195 29,872,821 27.4 (8,192) 31,758,186 (25.8)
* Weighted average number of ordinary shares, excluding shares held in
treasury, in issue during the year.
8. Investments
2009 2008
£'000 £'000
Listed investments 48,054 42,835
Unlisted investments 1,200 1,100
49,254 43,935
2009 2008
Unlisted Listed Total Total
£'000 £'000 £'000 £'000
Analysis of investment portfolio
movements
Opening book cost 214 50,563 50,777 52,966
Opening unrealised appreciation/ 886 (7,728) (6,842) 986
(depreciation)
Opening valuation 1,100 42,835 43,935 53,952
Movements in the year:
Purchases at cost - 19,045 19,045 21,091
Sales - proceeds - (21,342) (21,342) (20,664)
- realised losses on sales - (2,231) (2,231) (2,616)
Changes in fair value of investments 100 9,747 9,847 (7,828)
Closing valuation 1,200 48,054 49,254 43,935
Closing book cost 214 46,035 46,249 50,777
Closing unrealised appreciation/ 986 2,019 3,005 (6,842)
(depreciation)
1,200 48,054 49,254 43,935
2009 2008
Unlisted Listed Total Total
£'000 £'000 £'000 £'000
Analysis of capital gains and losses
Realised losses on sales - (2,231) (2,231) (2,616)
Changes in fair value of investments 100 9,747 9,847 (7,828)
Gains/(losses) on investments 100 7,516 7,616 (10,444)
The unlisted investment is in relation to the 71,294 shares in Edinburgh
Partners as disclosed in the Chairman's Statement.
Fair value hierarchy
In accordance with Financial Reporting Standard No. 29: `Financial Instruments:
Disclosures', the Company must disclose the fair value hierarchy of financial
instruments.
All of the Company's financial instruments fall into level 1, being valued at
quoted prices in active markets, except its investment in Edinburgh Partners
which falls in to level 3 and is valued using an unquoted price. A
reconciliation of the fair value movements of level 3 investments is shown in
the unlisted column of the table above.
Transaction costs
During the year the Company incurred transaction costs of £35,000 (2008: £
36,000) and £36,000 (2008: £22,000) on purchases and sales of investments
respectively. These amounts are included in gains/(losses) on investments at
fair value, as disclosed in the Income Statement.
9. Significant holdings
The Company had no holdings of 3 per cent or more of the share capital of any
portfolio companies.
10. Debtors
2009 2008
£'000 £'000
Due from brokers 997 -
Dividends receivable 71 86
Prepayments and accrued income 21 9
Taxation recoverable 125 156
VAT refund on investment management and 126 -
administration fees
1,340 251
11. Creditors: amounts falling due within one year
2009 2008
£'000 £'000
Due to brokers 901 227
Other creditors and accruals 152 154
Bank overdraft - 84
Corporation Tax 15 102
1,068 567
The bank overdraft in the previous year arose as a result of timing differences
in the transfer of cash from the liquidity funds.
12. Share capital
2009 2008
Authorised: £'000 £'000
150,000,000 (2008: 150,000,000) ordinary shares of 1p each 1,500 1,500
Allotted, called up and fully paid:
32,654,180 (2008: 33,998,180) ordinary shares of 1p each
(includes 3,830,000 (2008: 3,174,000) shares held in 327 340
treasury. See notes 13 and 14)
Duration of the Company
The Company does not have a termination date or the requirement for any
periodic continuation votes.
13. Own shares held in treasury
From time to time the Company buys back shares and holds them in treasury for
re-issue at a later date. In accordance with Financial Reporting Standard No.
25, the consideration paid for these shares held in treasury is presented as a
deduction in Shareholders' funds and, in accordance with the AIC Statement of
Recommended Practice issued in January 2009, has been allocated to the special
reserve. Details of own shares held in treasury and the total cost deducted
from Shareholders' funds are shown below:
Number of 2009 Number of 2008
shares £'000 shares £'000
At 1 January 3,174,000 4,711 1,440,000 2,294
Shares purchased for treasury 782,000 1,223 1,734,000 2,417
Shares cancelled from treasury (126,000) - - -
At 31 December 3,830,000 5,934 3,174,000 4,711
Nominal value of own shares held in 38 32
treasury
14. Net asset value per share
The net asset value per share, calculated in accordance with the Articles of
Association, is as follows:
2009 2008
pence pence
Ordinary share 175.9 150.4
The net asset value per ordinary share is based on net assets of £50,712,000
(2008: £46,353,000) and on 28,824,180 (2008: 30,824,180) ordinary shares, being
the number of ordinary shares, excluding shares held in treasury, in issue at
the year end.
15. Reconciliation of net return before finance costs and taxation to net cash
inflow from operating activities
2009 2008
£'000 £'000
Net return before finance costs and taxation 8,327 (7,914)
Net (gains)/losses on capital items (7,390) 9,417
Decrease in creditors (2) (165)
(Increase)/decrease in debtors and accrued income (122) 47
Net cash inflow from operating activities 813 1,385
16. Reconciliation of net cash flow to movement in net funds
2009 2008
£'000 £'000
Decrease in cash for the year (1,334) (2,151)
Realised exchange (losses)/gains (130) 870
(1,464) (1,281)
Net funds at 1 January 2,650 3,931
Net funds at 31 December 1,186 2,650
At Cash Exchange At
1 January Flows Losses 31 December
2009 2009
£'000 £'000 £'000 £'000
Cash at bank 2,734 (1,418) (130) 1,186
Bank overdraft (84) (84) - -
2,650 (1,334) (130) 1,186
At Cash Exchange At
1 January Flows Gains 31 December
2008 2008
£'000 £'000 £'000 £'000
Cash at bank 3,931 (2,067) 870 2,734
Bank overdraft - (84) - (84)
3,931 (2,151) 870 2,650
17. Analysis of financial assets and liabilities
Interest rate and currency profile
The interest rate and currency profile of the Company's financial assets were:
2009 2008
Cash Cash
No flow No flow
interest interest interest interest
rate rate risk rate rate risk
Total exposure exposure Total exposure exposure
£'000 £'000 £'000 £'000 £'000 £'000
Equity shares
US dollar 16,015 16,015 - 13,765 13,765 -
Euro 10,880 10,880 - 13,097 13,097 -
Sterling 6,963 6,963 - 5,406 5,406 -
Japanese yen 6,441 6,441 - 2,908 2,908 -
Swiss franc 2,423 2,423 - 3,902 3,902 -
Swedish krona 1,532 1,532 - 2,069 2,069 -
Norwegian krone 1,499 1,499 - - - -
South Korean won 1,347 1,347 - 994 994 -
Danish krone 1,119 1,119 - - - -
Hong Kong dollar 1,035 1,035 - 1,110 1,110 -
Turkish lira - - - 684 684 -
Cash at bank and
short-term
deposits
Sterling 792 - 792 1,360 - 1,360
Japanese yen 318 - 318 1,374 - 1,374
US dollar 76 - 76 - - -
Debtors*
Hong Kong dollar 997 997 - - - -
Sterling 196 196 - 52 52 -
US dollar 57 57 - 90 90 -
Swiss franc 40 40 - 27 27 -
Euro 38 38 - 48 48 -
Danish krone 5 5 - 6 6 -
Japanese yen - - - 21 21 -
51,773 50,587 1,186 46,913 44,179 2,734
* Debtors exclude prepayments which under FRS 25 are not classed as financial
assets.
At 31 December 2009 the Company had no financial liabilities other than
short-term creditors (2008: £nil). All financial assets and liabilities of the
Company are held at fair value.
18. Risk analysis
Risks
The principal risks the Company faces are:
- Investment and strategy
- Discount volatility
- Market risk
- Liquidity risk
- Credit risk
- Interest rate risk
- Foreign currency risk
- Gearing
- Regulatory risk
- Operational risk
- Financial risk
The Investment Manager monitors the financial risks affecting the Company on an
ongoing basis within the policies and guidelines determined by the Board. The
Directors receive financial information, which is used to identify and monitor
risk, quarterly. The Company may enter into derivative contracts to manage risk
but has not done so to date. A description of the principal risks the Company
faces is detailed below.
Investment and strategy
There can be no guarantee that the objective of the Company will be achieved.
The Investment Manager meets regularly with the Board to discuss the portfolio
performance and strategy. The Board receives quarterly reports from the
Investment Manager detailing all portfolio transactions and any other
significant changes in the market or stock outlooks.
Discount volatility
The Board recognises that it is in the long-term interests of Shareholders to
reduce discount volatility and believes that the prime driver of discounts over
the longer term is investment performance. The Company is permitted to employ
gearing, a process whereby funds are borrowed principally for the purpose of
purchasing securities should the Board feel that it is appropriate to do so.
The use of gearing can magnify discount volatility.
The Board actively monitors the discount at which the Company's shares trade,
and is committed to using their powers to allot or repurchase the Company's
ordinary shares with a view to maintaining the middle market price at which the
shares trade at close to the net asset value most recently published by the
Company (taking into account the effect on the net asset value per share of any
rights to which the shares are trading ex-dividend).
The Board's commitment to allot or repurchase ordinary shares is subject to
them being satisfied that any offer to allot or purchase shares is in the best
interests of Shareholders of the Company as a whole, the Board having the
requisite authority pursuant to the Articles and relevant legislation to allot
or purchase shares, and all other applicable legislative and regulatory
provisions.
During the year ended 31 December 2009 the Company bought back 782,000 (2008:
1,734,000) ordinary shares into treasury, and 1,218,000 (2008: nil) ordinary
shares were bought back for cancellation. In addition 126,000 ordinary shares
previously held in treasury were cancelled.
During the year ended 31 December 2009 the Company issued nil (2008: nil)
ordinary shares and sold nil (2008: nil) ordinary shares from treasury.
Market risk
The Company is exposed to market risk due to fluctuations in the market prices
of its investments. Market price risk arises mainly from uncertainty about
future prices of financial instruments used in the Company's business. It
represents the potential loss the Company might suffer through holding market
positions in the face of price movements. The Investment Manager monitors the
prices of financial instruments held by the Company on an ongoing basis.
The Investment Manager actively monitors market and economic data and reports
to the Board, which considers investment policy on a regular basis. The net
asset value per share of the Company is issued weekly to the London Stock
Exchange and is also available on the Company's website www.epgot.com.
Details of the Company's investment portfolio as at 31 December 2009 are
disclosed above.
If the investment portfolio valuation fell by 1 per cent from the amount
detailed in the financial statements as at 31 December 2009 it would have the
effect, with all other variables held constant, of reducing the net capital
return before taxation by £493,000 (2008: £439,000). An increase of 1 per cent
in the investment portfolio valuation would have an equal and opposite effect
on the net capital return before taxation.
Liquidity risk
The Company's policy with regard to liquidity is to ensure continuity of
funding. Short-term flexibility is achieved through cash management.
The Company's assets comprise mainly of readily realisable securities which can
be sold freely to meet funding requirements if necessary. Securities listed on
a recognised stock exchange have been valued at bid prices and exchange rates
ruling at the close of business on 31 December 2009. In certain circumstances,
the market prices at which investments are valued may not represent the
realisable value of those investments, taking into account both the size of the
Company's holding and the frequency with which such investments are traded.
Credit risk
Credit risk is the risk of financial loss to the Company if the contractual
party to a financial instrument fails to meet its contractual obligations.
The carrying amounts of financial assets best represent the maximum credit risk
exposure at the Balance Sheet date. The Company's listed investments are held
on its behalf by The Bank of New York Mellon acting as the Company's custodian.
Bankruptcy or insolvency of the custodian may cause the Company's rights with
respect to securities held by the custodian to be delayed. The Board monitors
the Company's risk by reviewing the custodian's internal controls reports.
Investment transactions are carried out with a large number of brokers whose
creditworthiness is reviewed by the Investment Manager. Transactions are
ordinarily undertaken on a delivery versus payment basis whereby the Company's
custodian bank ensures that the counterparty to any transaction entered into by
the Company has delivered in its obligations before any transfer of cash or
securities away from the Company is completed.
Cash is only held at banks and in money market funds that have been identified
by the Board as reputable and of high credit quality.
The maximum exposure to credit risk as at 31 December 2009 was £51,780,000
(2008: £46,920,000). The calculation is based on the Company's credit risk
exposure as at 31 December 2009 and this may not be representative of the year
as a whole.
None of the Company's assets are past due or impaired.
Interest rate risk
The Company's assets and liabilities, excluding short-term debtors and
creditors, may comprise financial instruments which include investments in
fixed interest securities.
Details of the Company's interest rate exposure as at 31 December 2009 are
disclosed in note 17 of these financial statements.
The majority of the Company's assets were non-interest bearing as at 31
December 2009. There was limited exposure to interest bearing liabilities
during the year ended 31 December 2009. Surplus cash is invested in liquidity
funds.
If interest rates had reduced by 0.25 per cent (2008: 1 per cent) from those
obtained as at 31 December 2009 it would have the effect, with all other
variables held constant, of reducing the net revenue return before taxation on
an annualised basis by £3,000 (2008: £27,000). If there had been an increase in
interest rates of 0.25 per cent (2008: 1 per cent) there would have been an
equal and opposite effect in the net revenue return before taxation. The
calculations are based on cash at bank and short-term deposits as at 31
December 2009 and these may not be representative of the year as a whole.
Foreign currency risk
The base currency of the Company is sterling. The international nature of the
Company's investment activities gives rise to a currency risk which is inherent
in the performance of its overseas investments. The Company's overseas income
is also subject to currency fluctuations.
It is not the Company's policy to hedge this risk on a continuing basis.
Details of the Company's foreign currency risk exposure as at 31 December 2009
are disclosed in note 17 above.
If sterling had strengthened by 1 per cent against all other currencies on 31
December 2009, with all other variables held constant, it would have the effect
of reducing the net capital return before taxation by £438,000 (2008: £
401,000). If sterling had weakened by 1 per cent against all other currencies
there would have been an equal and opposite effect on the net capital return
before taxation.
Gearing
Gearing is used to enhance long-term returns to Shareholders. The Company is
permitted to employ gearing should the Board feel it appropriate to do so up to
a maximum of 25 per cent of total assets. The use of gearing can cause both
gains and losses in the asset value of the Company to be magnified.
The Company did not have any gearing as at 31 December 2009.
Regulatory risk
Failure to qualify under the terms of Section 842 of the Income and Corporation
Taxes Act 1988 may lead to EP Global Opportunities Trust plc being subject to
capital gains tax. A breach of the rules of the London Stock Exchange may
result in censure by the Financial Services Authority ("FSA") and/or the
Company's suspension from listing.
The Board has agreed service levels with the Secretary and Investment Manager
which include active and regular review of compliance with these requirements.
These checks are reviewed at each Board Meeting.
Operational risk
There are a number of operational risks associated with the fact that third
parties undertake the Company's administration and custody. The main risk is
that third parties may fail to ensure that statutory requirements such as
Companies Act and London Stock Exchange requirements are met.
The Board regularly receives and reviews management information on third
parties which the Secretary compiles. In addition each of the third parties
provides a copy of its report on internal controls (SAS 70 or equivalent) to
the Board each year.
Financial risk
Inappropriate accounting policies or failure to comply with current or new
accounting standards may lead to a breach of regulations.
The Board employs independent administrators to prepare all financial
statements and meets with the independent auditors at least once a year to
discuss all financial matters including appropriate accounting polices.
The Company is a member of the Association of Investment Companies ("AIC"), a
trade body intended to promote investment trusts which also develops best
practice for all of its members.
The Board undertakes an annual assessment and review of all the risks stated
above together with a review of any new risks which may have arisen during the
year. This risk is formalised within the Company's risk assessment matrix.
19. Capital management policies
The Company's capital management objectives are to ensure that it will be able
to continue as a going concern and to provide Shareholders with an attractive
real long-term total return in accordance with its investment policy.
The Company's capital comprises:
2009 2008
£'000 £'000
Called-up share capital 327 340
Capital redemption reserve 14 1
Share premium account 17,991 17,991
Special reserve 12,905 15,795
Capital reserve 18,091 10,701
Revenue reserve 1,384 1,525
Total Shareholders' funds 50,712 46,353
The Company's objectives for managing capital are the same as the previous year
and have been complied with throughout the year.
20. Transactions with the Investment Manager
Information with respect to transactions with the Investment Manager is
provided in note 3 of these financial statements and in the Directors' Report.
ANNUAL GENERAL MEETING
The Company's Annual General Meeting will be held at The Bonham Hotel, 35
Drumsheugh Gardens, Edinburgh EH3 7RN on 28 April 2010, at 12.00 noon.
The notice of this meeting can be found in the Annual Report and Accounts at
www.epgot.com.
DIRECTORS
Teddy Tulloch
Richard Burns
David Hough
Ian McBean
INVESTMENT MANAGER
Edinburgh Partners Limited
12 Charlotte Square
Edinburgh EH2 4DJ
AMENDMENTS TO ARTICLES OF ASSOCIATION
At the Company's forthcoming AGM, a resolution will be put to shareholders to
amend the Company's Articles of Association. A summary of the proposed
amendments to the Articles of Association is set out in an appendix to the
Annual Report and Accounts for the year ended 31 December 2009, which have been
posted on the Company's website at www.epgot.com. A copy of the proposed new
Articles is being lodged with the UK Listing Authority and will shortly be
available for inspection at the Document Viewing Facility, which is situated at
Financial Services Authority, 25 The North Colonnade, Canary Wharf, London E14
5HS (Tel no: 020 7066 8224).
Enquiries:
Sandy Nairn / Kenneth Greig - Edinburgh Partners Limited, telephone: 0131 270
3800
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