Annual Financial Report
Keystone Investment Trust plc
Annual Financial Report Announcement
for the Year Ended 30 September 2013
FINANCIAL INFORMATION AND PERFORMANCE STATISTICS
Performance Statistics
AT AT
30 SEPTEMBER 30 SEPTEMBER %
2013 2012 CHANGE
Assets
Net assets attributable to ordinary 231,480 182,803 +26.6
shareholders (£'000)
2013 2012
% CHANGE % CHANGE
Total Return (capital growth with income
reinvested)
Net asset value (NAV) per share:
  - debt at par +29.4 +15.8
  - debt at fair value +31.1 +14.0
Share price (mid-market) +29.3 +21.0
FTSE All-Share Index +18.9 +17.2
Source: Thomson Reuters Datastream and Morningstar
AT AT
30 SEPTEMBER 30 SEPTEMBER %
2013 2012 CHANGE
Capital Return
NAV per share:
  - debt at par 1712.3p 1367.4p +25.2
  - debt at fair value 1660.1p 1310.3p +26.7
Share price 1646.0p 1318.0p +24.9
FTSE All-Share Index 3443.9 2998.9 +14.8
Discount/(premium) of share price to net
asset value per share:
  - debt at par 3.9% 3.6%
  - debt at fair value 0.8% (0.6)%
Gearing from borrowings
                    - gross 13.8% 17.4%
                    - net 9.5% 8.5%
FOR THE YEAR TO 30
SEPTEMBER
2013 2012
Revenue
Net revenue available for ordinary 7,728 6,566
shareholders (£'000)
Revenue return per ordinary share 57.4p 49.1p +16.9
Dividends per ordinary share-first interim 18.0p 18.0p
                        -second interim 32.0p 30.5p
50.0p 48.5p +3.1
                        -special 7.0p -
                        -total 57.0p 48.5p
Ongoing charges:
  Excluding performance fee 0.96% 0.95%
  Performance fee 0.47% 0.19%
CHAIRMAN'S STATEMENT
In the year to 30 September 2013, the total return to the holders of the
Company's ordinary shares was +29.3%, based on the share price with dividends
reinvested. The total return on the underlying net asset value per share was
+29.4% with debt at par value and +31.1% with debt at fair value. In
comparison, the total return of the Company's benchmark, the FTSE All-Share
Total Return Index, was +18.9%.
The Company's long term performance also continues to be very strong with 3
year and 5 year net asset value per share (with debt at par value) total
returns of +57.4% and +94.3%, respectively, compared with +33.4% and +66.2% for
the FTSE All-Share Total Return Index. As I remarked in the Company's
half-yearly report, 1 January 2013 represented the 10th anniversary of Mark
Barnett taking over the management of the Company's portfolio. The Company's
NAV total return over the period since he took over to 30 September 2013 was
296.1% compared with 165.4% for the benchmark FTSE All-Share Index. The share
price total return was 387.7% (all figures sourced from Thomson Reuters
Datastream). We are very grateful to Mark, on behalf of shareholders, for this
excellent performance, which he has produced through his careful and diligent
long term view approach to investment. We believe the recent recognition by
Invesco of Mark's talent in naming him as successor to Neil Woodford is well
deserved. We are confident that Mark will have the capacity to continue to
manage the Company's portfolio to his high standard alongside his anticipated
new responsibilities.
Our investment management agreement with Invesco provides that a performance
related fee is payable when the annualised 3-year return exceeds by more than
2% that of the benchmark, so in light of the performance achieved to 30
September 2013 a performance fee of £957,000 is payable in respect of the year.
In previous years the performance fee provided in the annual report was
estimated, with the actual amount payable subsequently determined by returns
for the 3 years to 31 December. During the year your Board agreed with our
Manager to revise the calculation period to be coterminous with the Company's
financial year end. As a consequence, for this year only, the performance fee
is based on a shorter period of two years and nine months to 30 September 2013.
Going forward, the performance fee will revert to a three year calculation
period as before, but to 30 September each year.
The Company's ordinary shares traded close to net asset value (with debt at
fair value) throughout the year and demand pushed them to a premium on numerous
occasions. The price stood at a discount of 0.8% relative to the net asset
value (with debt at fair value) at the year end, compared with a premium of
0.6% at the end of September 2012.
Revenue and Dividends
Gross income in the year increased to £9,218,000, from £7,901,000 last year,
giving a revenue return, after tax, of 57.4p per ordinary share (2012: 49.1p).
This year the Company has benefited from a substantial amount of special
dividends of a non-recurring nature paid by companies in which it was invested.
The Board has decided that it would be appropriate to pass on this additional
income to shareholders as a special dividend.
The Board has declared a second interim dividend, in lieu of a final, of 32p
per share (2012: 30.5p), giving a total ordinary dividend for the year of 50p
per share (2012: 48.5p). The dividend will be paid on 13 December 2013 to
shareholders on the register on 22 November 2013. The Board has also declared a
special dividend of 7p per share to be paid at the same time as the second
interim dividend.
Share Issues
On three occasions during the year we were able to issue new shares to satisfy
demand, with 150,000 shares issued in all. These shares were issued at a
premium to net asset value with debt at fair value, but at a discount to net
asset value with debt at par value. Your Board has deliberated on the pricing
of new share issues and concluded that the fair value measure is the
appropriate reference to use. This is the value ascribed to the Company's
shares allowing for the market valuation of the Company's fixed debt on a daily
basis, and for present day interest rates. The Company's size is increasingly
important to ensure liquidity of the shares and their rating in the market.
Issuance also dilutes operating costs and the dilution of net asset value with
debt at par value is very small indeed when looked at in the context of the
overall size of the Company. We will be seeking to renew our powers to issue
new shares on this basis at the forthcoming Annual General Meeting.
Gearing
When used successfully, gearing should enhance the returns to shareholders. The
Board takes responsibility for the Company's gearing strategy and sets
parameters within which the Manager operates. These are set out in the
Strategic Report. The Company's borrowings, in the form of long-term
debentures, amount to almost £32 million. The net gearing of the Company is
determined by the extent to which these borrowings are invested.
Foreign Exchange
The Company has some non-Sterling denominated investments and is therefore
subject to foreign exchange risk. The Board monitors foreign currency exposure
and takes a view, from time to time, on whether foreign currency exposure
should be hedged. For the present the Board has given the Manager discretion
not to hedge US dollar and Swiss frank exposure and has prescribed that all
other currency exposure should be hedged. At the year end £13.6 million was
exposed to US dollars, £21.3 million to Swiss francs and £175,000 was hedged in
relation to Swedish krona.
AIFMD
The Alternative Investment Fund Managers Directive (AIFMD) requires the Company
to appoint an Alternative Investment Fund Manager (AIFM) by July 2014. The
Board is taking independent legal advice in relation to the Directive and has
decided in principle to appoint Invesco Fund Managers Limited (IFML) as the
Company's AIFM, pending IFML's approval as such by the Financial Conduct
Authority. IFML is an associated company of Invesco Asset Management Limited
(IAML), the current Manager, and it is expected that IAML will continue to
manage the Company's investments under delegated authority from IFML.
Outlook
The figures above illustrate the success of our Manager's investment approach
in the year under review and over the last decade, which is reflected in the
evident demand for the Company's shares. Although a measure of growth has
returned to the UK the economic environment remains challenging and uncertain.
In these circumstances we remain fully confident in our Manager's approach and
ability to generate worthwhile returns for shareholders and to enable the
Company to continue to fulfil its investment objective to provide shareholders
with long-term growth of capital.
Annual General Meeting
The Notice of the Annual General Meeting of the Company, which is to be held on
23 January 2014, is on pages 57 to 60 and a summary of the resolutions is set
out in the Directors' Report. The Directors recommend that shareholders vote in
favour of all the resolutions, as they intend to do.
Beatrice Hollond
Chairman
20 November 2013
.
STRATEGIC REPORT
FOR THE YEAR ENDED 30 SEPTEMBER 2013
BUSINESS REVIEW
Keystone Investment Trust plc is an investment company holding investments with
a market value in excess of £250 million and its investment objective is set
out below. The strategy the Board follows to achieve that objective is to set
investment policy and risk guidelines, together with investment limits, and to
monitor how they are applied. These are also set out below and have been
approved by shareholders.
The business model the Company has adopted to achieve its objective has been to
contract the services of Invesco Asset Management Limited (the `Manager') to
manage the portfolio in accordance with the Board's strategy and under its
oversight. Successful implementation of the business model is achieved by
buying well and selling at the right point in an investee company's business
cycle, together with the prudent use of gearing, in order to crystallise
financial returns in excess of the Company's benchmark index, the FTSE
All-Share Index.
The Manager also provides company secretarial, marketing and general
administration services. The portfolio manager responsible for the day to day
management of the portfolio is Mark Barnett.
Investment Objective and Policy
Investment Objective
The Company's objective is to provide shareholders with long-term growth of
capital, mainly from UK investments.
Investment Policy and Risk
The portfolio is invested by the Manager so as to maximise exposure to the most
attractive sectors and stocks within the UK stock market and, within the limits
set out below, internationally. The Manager does not set out to manage the risk
characteristics of the portfolio relative to the benchmark index and the
investment process will result in potentially very significant over or
underweight positions in individual sectors versus the benchmark.
The Manager controls stock-specific and sector risk by ensuring that the
portfolio is always appropriately diversified. In depth, continual analysis of
the fundamentals of investee companies allows the portfolio manager to assess
the financial risks associated with any particular stock. The portfolio is
typically made up of 50 to 80 stocks. If a stock is not considered to be a good
investment, then the Company will not own it, irrespective of its weight in the
index.
Investment limits
The Board has prescribed the following limits on the investment policy, all of
which are at time of investment unless otherwise stated:
- no single equity investment in a UK listed company may exceed 12.5% of gross
assets;
- the Company will not invest more than 15% of its assets in other listed
investment companies;
- the Company will not invest more than £12 million in bonds, with a maximum of
£1.5 million in any issue;
- the Company will normally not invest more than £5 million in unquoted
investments, at the time of investment, and £10 million at market value;
- the Company will not normally invest more than 15% of its equity investments
in companies that are not UK listed and incorporated; and
- borrowing may be used by the Company to create gearing within limits
determined by the Board.
Gearing Policy
The Board carefully considers the Company's policy in respect of the level of
equity exposure. The Board takes responsibility for the Company's gearing
strategy and sets guidelines to control it, which it may change from time to
time. At the year end these guidelines required that the Manager must make no
net purchases if equity exposure was more than 110% of net assets, and must
make sales if (as a result of market movements) equity exposure exceeds 115% of
net assets. The Board has since revised the first parameter and the percentage
at which the net purchases restriction currently applies is 105%. When held,
corporate bonds are not treated as equity exposure for the purposes of the
gearing limits.
Performance
Delivery of shareholder value is achieved through outperformance of the
relevant benchmark.
The Board reviews performance by reference to a number of Key Performance
Indicators that include the following:
- net asset value (NAV) and share price total return compared with benchmark
and peer group performance;
- share price premium/discount relative to the net asset value;
- ongoing charges; and
- dividends.
The Company achieved a strong performance in the year reflecting successful
implementation of the business strategy by the Manager.
A chart showing the NAV and share price total return performance compared to
the benchmark index, the FTSE All-Share Index, can be found on page 3. The
Manager's Report that comprises the second part of this Strategic Report
provides a commentary on how this performance was achieved. Peer group
performance is monitored by comparing the Company with the 15 investment trust
companies making up the UK Growth sector of the 300 investment companies in the
UK. As at 30 September 2013, in NAV total return terms the Company was ranked
8th in its sector over one year, and ranked 5th and 8th over three and five
years respectively (source: JPMorgan Cazenove).
During the year the Company's shares traded at a premium and discount relative
to NAV (with debt at fair value) in a range of 2.8% premium to 4.2% discount
and an average discount of 0.2%. At the year end the discount (with debt at
fair value) was 0.8% (2012: 0.6% premium). Although there is no specific target
discount range a small discount or premium would imply that there was strong
demand for the shares. In order to ensure that the demand for and supply of the
Company's shares are roughly in balance, the Board asks shareholders to approve
resolutions every year which allow for the repurchase of shares (for
cancellation or to be held as treasury shares) and also their issuance. This
may assist in the management of the discount. The Company issued 150,000
ordinary shares in the year at an average price of 1524.3p, excluding issue
costs. No shares were repurchased.
Ongoing charges is the industry measure of costs as a percentage of net asset
value. The expenses of the Company are reviewed at every board meeting, with
the aim of managing costs incurred and their impact on performance. The ongoing
charges figure, which excludes the performance fee, at the year end was 0.96%,
almost the same as the previous year's 0.95%. This ratio is sensitive to the
size of the Company as well as the level of costs.
Dividends form a key component of the total return to shareholders, and the
level of potential dividend payable and income from the portfolio is reviewed
at every board meeting. For the year ended 30 September 2013, a first interim
dividend was paid in June 2013 and a second interim dividend has been declared
of 32p (2012 final: 30.5p) per share, which will be payable on 13 December 2013
to shareholders on the register at 22 November 2013. Added to the first interim
dividend of 18p (2012: 18p), this will give a total dividend for the year of
50p compared with 48.5p for the previous year. This year the Board has also
declared a special dividend of 7p per ordinary share to be paid at the same
time as the second interim dividend.
Financial Position
At 30 September 2013, the Company's net assets were valued at £231 million
(2012: £183 million). These comprised a portfolio of mainly equity investments
and net current assets. The Company has an uncommitted short-term overdraft
facility with the custodian for settlement and liquidity purposes.
Due to the readily realisable nature of the Company's assets, cash flow does
not have the same significance as for an industrial or commercial company. The
Company's principal cash flows arise from the purchase and sales of investments
and the income from investments against which must be set the costs of
borrowing and management expenses.
At 30 September 2013, the Company's ordinary shares were geared by borrowings
in the form of two issues of long-term debentures, totalling almost £32 million
nominal (2012: £32 million). The weighted average interest rate was 6.77%
(2012: 6.77%). The Company also has £0.25 million of 5% cumulative preference
shares in issue (2012: £0.25 million).
Outlook and Future Trends
The main trends and factors likely to affect the future development,
performance and position of the Company's business can be found in the
following Manager's Report section of this Strategic Report. Further details as
to the risks affecting the Company are set out below under `Principal Risks and
Uncertainties'.
Principal Risks and Uncertainties
The following are considered to be the most significant risks to shareholders
in relation to their investment in the Company. Further details of risks and
risk management policies as they relate to the financial assets and liabilities
of the Company are detailed in note 19 to the financial statements.
Investment Objective
There is no guarantee that the Company's strategy and business model will be
successful in achieving its investment objective.
The Board monitors the performance of the Company and has established
guidelines to ensure that the investment policy that has been approved is
pursued by the Manager.
Market Risk
The majority of the Company's investments are traded on the London Stock
Exchange. The principal risk for investors in the Company is of a significant
fall in stock markets and/or a prolonged period of decline in the markets
relative to other forms of investment. The value of investments held within the
portfolio is influenced by many factors including the general health of the
economy in the UK, interest rates, inflation, government policies, industry
conditions, political events, tax laws, environmental laws, and by changing
investor demand. In addition, there is the risk that the European policy makers
fail to maintain the current fragile market confidence by not implementing an
effective and lasting solution to the ongoing Eurozone crisis. Such factors are
out of the control of the Board and the Manager and may give rise to high
levels of volatility in the prices of investments held by the Company, although
the use or elimination of gearing may modify the impact on shareholder return.
Investment Risk
An inherent risk of investment is that the stocks selected for the portfolio do
not perform.
The investment process employed by the Manager combines top down assessment of
economic and market conditions with stock selection. Fundamental analysis forms
the basis of the Company's stock selection process, with an emphasis on sound
balance sheets, good cash flows, the ability to pay and sustain dividends, good
asset bases and market conditions. The process is complemented by constant
assessment of market valuations. It is important to have a sense of a company's
realistic valuation which, to some extent, will be independent of the price at
which the company currently trades in the market. Overall, the investment
process is aiming to achieve absolute returns through a genuinely active fund
management approach. This can therefore result in a portfolio which looks
substantially different from the benchmark index.
Risk management is an integral part of the investment management process. The
Manager effectively controls risk by ensuring that the Company's portfolio is
always appropriately diversified. In depth and continual analysis of the
fundamentals of all holdings gives the Manager a full understanding of
financial risks associated with any particular security.
Past performance of the Company is not necessarily indicative of future
performance.
A fuller discussion of economic and market conditions and prospects for future
performance of the Portfolio are included in the Manager's Report section of
this Strategic Report.
Shares
Shareholders are exposed to certain risks in addition to risks applying to the
Company itself.
The ordinary shares of the Company may trade at a discount to its NAV. The
Board monitors the price of the Company's shares in relation to their NAV and
the premium/discount at which they trade.
The value of an investment in the Company and the income derived from that
investment may go down as well as up and an investor may not get back the
amount invested.
While it is the intention of the Directors to pay dividends to ordinary
shareholders twice a year, the ability to do so will depend upon the level of
income received from securities and the timing of receipt of such income by the
Company. Accordingly, the amount of the dividends paid to ordinary shareholders
may fluctuate. Any change in the tax or accounting treatment of dividends or
other investment income received by the Company may also affect the level of
dividend paid.
Gearing
Gearing levels may change from time to time in accordance with the Manager's
and the Board's assessment of risk and reward. Whilst the use of borrowings by
the Company should enhance total return where the return on the Company's
underlying securities is rising and exceeds the cost of borrowing, it will have
the opposite effect where the underlying return is falling. As at 30 September
2013, net gearing from borrowings stood at 9.5%. The Board and the Manager
regularly review gearing and will continue to monitor the level closely over
the year ahead.
Reliance on the Manager and Other Service Providers
The Company has no employees and the Directors have all been appointed on a
non-executive basis. The Company is reliant upon the performance of third party
service providers for its executive function. In particular, the Manager
performs services which are integral to the operation of the Company. Failure
by any service provider to carry out its obligations to the Company in
accordance with the terms of its appointment could have a materially
detrimental impact on the operation of the Company and could affect the ability
of the Company to successfully pursue its investment policy.
The Manager may be exposed to reputational risks. In particular, the Manager
may be exposed to the risk that litigation, misconduct, operational failures,
negative publicity and press speculation, whether or not it is valid, will harm
its reputation. Any damage to the reputation of the Manager could result in
potential counterparties and third parties being unwilling to deal with the
Manager and by extension the Company. This could have an adverse impact on the
ability of the Company to pursue its investment policy successfully.
Regulatory
The Company is subject to various laws and regulations by virtue of its status
as a public limited company and as an investment company. A loss of investment
trust status could lead to the Company being subject to capital gains tax on
the profits arising from the sale of its investments. A serious breach of other
regulatory rules might lead to suspension from the Stock Exchange. Other
control failures, either by the Manager or any other of the Company's service
providers, might result in operational or reputational problems, erroneous
disclosures or loss of assets through fraud, as well as breaches of
regulations.
The Manager reviews the level of compliance with tax and other financial
regulatory requirements on a daily basis. All transactions, income and
expenditure are reported to the Board. The Board regularly considers all risks,
the measures in place to control them and the possibility of any other risks
that could arise. The Board ensures that satisfactory assurances are received
from service providers. The Manager's Compliance Officer produces regular
reports for review by the Company's Audit Committee.
The most significant regulatory change in the year has been the coming into
force of the Alternative Investment Fund Managers Directive, which imposes
certain obligations on the Company and the Manager. These will increase
compliance and regulatory costs going forward, but the impact is not expected
to be material.
Board Diversity
The Board has noted the recommendations of Lord Davies' Review issued in 2011
relating to Board diversity. The Company's policy on diversity is set out on
page 50. The Nomination Committee considers diversity, including the balance of
skills, knowledge, diversity (including gender) and experience, amongst other
factors when reviewing the composition of the Board and appointing new
directors but does not consider it appropriate to establish targets or quotas
in this regard. The Board comprises five non-executive directors of whom one,
the Chairman, is a woman thereby constituting 20% female representation.
Summary biographical details of the Directors are set out on page 17. The
Company has no employees.
Social and Environmental Matters
As an investment trust company with no employees, property or activities
outside investment, environmental policy has limited application. The Manager
considers various factors when evaluating potential investments. While a
company's policy towards the environment and social responsibility, including
with regard to human rights, is considered as part of the overall assessment of
risk and suitability for the portfolio, the Manager does not necessarily decide
to, or not to, make an investment on environmental and social grounds alone.
The Manager applies the United Nations Principles for Responsible Investment.
.
MANAGER'S REPORT
Market Review
The UK stock market continued to perform strongly during the year under review,
fuelled by on-going monetary stimulus. Both the FTSE 100 and the FTSE All-Share
indices delivered 12 consecutive months of positive returns, before a sell-off
in June provided proof that the continued positive sentiment towards equities
had mainly been driven by loose monetary policy. The weakness occurred after
comments from the US Federal Reserve chairman, Ben Bernanke, in respect of
quantitative easing (QE) that "it would be appropriate to moderate the pace of
purchases later this year". Stock market volatility remained high over the
summer months, especially against a backdrop of rising government bond yields
and adverse economic and political newsflow, such as the Syrian crisis and
concerns over slowing economic growth in China. The period concluded with a
stalemate over the US spending bill - although the market remained fairly
relaxed about the likelihood of a deal. Post the year end a deal was finalised,
temporarily resolving the on-going issues of budget reform and the debt
ceiling.
The rise in the market was noteworthy for its breadth. While previous rallies
had been driven by a relatively small number of sectors, notably mining and
banks, this year saw strong performances from a wide spread of sectors, which
is a positive sign of widespread demand for the asset class.
The commencement of Mark Carney's tenure as Governor of the Bank of England in
the summer coincided with confirmation that GDP growth for the second quarter
of 2013 was 0.7%, its fastest rate for three years, and an upward revision to
the IMF's forecasts for UK economic growth to 1.4% this year and 1.9% next.
Portfolio Strategy & Review
The Company's net asset value, including reinvested dividends, rose by 29.4%
during the 12 months to the end of September 2013, compared to a rise of 18.9%
from the FTSE All-Share Index (total returns).
The portfolio's performance over the 12 months benefited from strong
performances across a broad spread of the portfolio's investments. Amongst
these, the most significant individual positive impact came from the holding in
Thomas Cook. The stock market has become persuaded by the strategy that new
management have announced to turn around this previously ailing business, which
retains a strong brand and market position, customer loyalty and pan European
distribution. The company announced a fund raising via a rights issue during
the second half of the year, which was well received by the market and puts the
company on a sounder financial footing.
BT Group continued to deliver impressive share price performance - despite
announcing that Ian Livingston is stepping down from his role as Chief
Executive to take up the role of Minister of State for Trade. The stock market
continued to focus on the company's scope for cost cutting and on its potential
for rolling out its broadband and fibre optic offering and its new TV Sports
Channel.
BAE Systems also provided a major positive impact on the portfolio's
performance. The company's operational performance since it halted the merger
talks with EADS has confirmed its ability to thrive as an independent entity.
This is a company whose stock market perception is shifting from negative
growth, exposed to a challenging US defence spending environment, towards a
combination of slow growth in mature markets and faster growth in the emerging
world.
The portfolio's holdings in Roche and Novartis provided a strongly positive
impact on performance. This came partly on the back of an improved stock market
appreciation of the Health Care sector's strengths, but also as Roche, in
particular, continues to lead the industry in terms of drug discovery and
innovation. Other notable positive contributions came from Drax Group, Brown
(N), Reckitt Benckiser, Reed Elsevier and TalkTalk Telecom.
There were relatively few detractors from performance. BG Group's shares fell
sharply on the news last October that it had reduced production growth
forecasts. The holding in the company has since been sold. Vodafone reduced its
forecasts for revenue growth on the back of ongoing weakness in its core
southern European markets and announced a share buyback rather than the hoped
for special dividend. The Manager has reservations about the company's ability
to generate pricing power from data services while the cash flow cover of the
dividend has fallen to uncomfortably low levels, and hence the Company's
holdings in the shares were sold.
The holdings in UK tobacco companies weighed on the portfolio's performance.
The UK government delayed the proposed introduction of plain packaging but the
European parliament was due to vote on new regulations to limit packaging
design and the packet sizes. More significantly, these higher yielding shares
were impacted by competition from rising bond yields on the expectation of a
tapering in QE.
The holding in Ladbrokes fell in value as the company saw a decline in first
half profits as it migrates its online business to the Playtech platform and
due to the lack of a major football tournament this summer. Furthermore, a
slowdown in betting machine growth was also worse than expected.
In terms of portfolio activity, the Manager disposed of the holdings in BG
Group and Vodafone, as mentioned above, as well as the investments in Filtrona,
Wm.Morrison, Regus and Tate & Lyle. New investments were made in Betfair,
Bunzl, Legal & General, London Stock Exchange, NewRiver Retail, Rolls-Royce and
Sherborne Investors.
Outlook
The main unanswered question that governs the short term outlook for the UK
stock market relates to the transition from a market driven by quantitative
easing to one driven by the strength of the underlying economy. The strong
performance of the market over the previous 12 months has created a sense of
optimism towards a self-sustaining economic recovery and a growing expectation
of a multi-year equity bull market.
However, this market rise has been notable for significant increases in
monetary stimulus and liquidity from the US and Japanese central banks and
broadly flat corporate profit growth. The principal driver of the market
performance has been a re-rating of the equity asset class to a level which now
anticipates upgrades to earnings expectations for 2014 and beyond. The market
rise has been accompanied by an underlying improvement in economic growth,
although the strength and momentum of the economic outlook remains uncertain.
Much of the improvement in the UK economic data has been driven by the housing
market, which has been the beneficiary of government measures and by a fall in
the savings rate. Bank lending remains subdued, with banks still reluctant to
lend to SMEs, and real wage growth remains stubbornly negative. The performance
of the US economy is also improving, but the underlying momentum is not
positive across all indicators.
Therefore it is anticipated that the market performance will remain volatile in
light of adjustments to expectations for the withdrawal of extraordinary
monetary stimulus in the United States. It is the Manager's view that the
withdrawal will be longer and slower than previously believed.
Despite these factors, equities remain attractive. The key to navigating the
near term is to remain highly vigilant about the strength of corporate
performance, given the economic backdrop, and to remain selective given the
increase in valuations in the market. It is unlikely that the performance of
the market over the past year will be repeated over the coming 12 months. The
portfolio strategy therefore remains largely unchanged from the recent past,
with a strong preference for companies that have proven ability to grow
revenues, profits and free cash flow in this low growth world, coupled with
management teams that are fully cognisant of the need to deliver sustainable,
long term, dividend growth. It is this type of investment opportunity that
forms the majority of the portfolio and is believed to offer the potential to
deliver good risk adjusted returns over the long term.
Mark Barnett, Investment Manager
The Strategic Report was approved by the Board of Directors on 20 November
2013.
Invesco Asset Management Limited
Company Secretary
.
INVESTMENTS BY SECTOR
AT 30 SEPTEMBER 2013
UK listed ordinary shares unless stated otherwise
MARKET
VALUE % OF
SECTOR/COMPANY £'000 PORTFOLIO
Basic Materials
HaloSource 430 0.2
Coalfield Resources 250 0.1
680 0.3
Consumer Goods
British American Tobacco 11,742 4.6
Imperial Tobacco 10,929 4.3
Reynolds American - US common stock 10,417 4.1
Reckitt Benckiser 5,939 2.3
39,027 15.3
Consumer Services
Thomas Cook 9,533 3.7
Reed Elsevier 5,556 2.2
Compass 4,945 1.9
Ladbrokes 3,823 1.5
Brown (N) 3,720 1.5
Carnival 1,903 0.8
Betfair 927 0.4
Mirada 3 -
30,410 12.0
Financials
Legal & General 6,086 2.4
Provident Financial 5,709 2.2
Hiscox 5,552 2.2
Beazley 5,029 2.0
Amlin 4,505 1.8
Workspace 4,287 1.7
A J Bell - Unquoted 4,080 1.6
Lancashire 3,596 1.4
London Stock Exchange 3,000 1.2
NewRiver Retail 2,703 1.1
Imperial Innovations 1,733 0.7
Doric Nimrod Air Two - Preference Shares 1,619 0.6
Doric Nimrod Air Three - Preference Shares 1,469 0.6
Fusion IP 1,451 0.6
Sherborne Investors Guernsey B - A Shares 1,428 0.6
Damille Investments II 1,187 0.4
Macau Property Opportunities Fund 582 0.2
Altus Resource Capital 256 0.1
W&G Investments 29 -
54,301 21.4
Health Care
AstraZeneca 11,151 4.4
Novartis - Swiss common stock 10,880 4.3
Roche - Swiss common stock 10,453 4.1
GlaxoSmithKline 8,472 3.3
BTG 4,234 1.7
Napo Pharmaceuticals - Unquoted US common stock 3,112 1.2
Lombard Medical Technologies 2,577 1.0
Vectura 1,494 0.6
PuriCore 952 0.4
XCounter - Unquoted Swedish common stock 175 0.1
XTL Biopharmaceuticals - ADR 86 -
53,586 21.1
Industrials
BAE Systems 8,907 3.5
Rentokil Initial 5,422 2.1
Capita 4,754 1.9
Babcock International 4,749 1.9
Bunzl 4,234 1.7
Serco 3,946 1.5
Rolls-Royce 2,894 1.1
HomeServe 2,183 0.9
Chemring 1,496 0.5
Nexeon - B shares - Unquoted 497
- Preference C shares - Unquoted 400 }0.3
- Ordinary shares - Unquoted 4
39,486 15.4
Telecommunications
BT 15,452 6.1
KCOM 4,753 1.9
TalkTalk Telecom 3,906 1.5
24,111 9.5
Utilities
Drax 5,013 2.0
Centrica 3,770 1.5
SSE 3,583 1.4
Barclays Bank - Nuclear Power Notes 28 Feb 2019(1) 312 0.1
12,678 5.0
Total Investments 254,279 100.0
(1) Contingent Value Rights (CVR) referred to as Nuclear Power Notes (NPN) were
offered by EDF as a partial alternative to cash in its bid for British Energy
(BE). The NPNs were issued by Barclays Bank. The CVRs participate in BE's
existing business.
.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
IN RESPECT OF THE PREPARATION OF FINANCIAL STATEMENTS
The Directors are responsible for ensuring that the annual financial report is
prepared in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law the Directors have elected to prepare financial
statements in accordance with United Kingdom Generally Accepted Accounting
Practice (United Kingdom Accounting Standards) and applicable law. Under
company law, the Directors must not approve the financial statements unless
they are satisfied that they give a true and fair view of the state of affairs
of the Company and of the net return 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 judgments and estimates that are reasonable and prudent;
- state whether applicable UK Accounting Standards have been followed, subject
to any material departures disclosed and explained in the financial statements;
and
- prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records which are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and which
enable them to ensure that the financial statements comply with company law.
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 Strategic Report, a Corporate Governance Statement, a Directors'
Remuneration Report and a Directors' Report that comply with that law and those
regulations.
The Directors of the Company, whose names are shown on page 17 of this Report,
each confirm to the best of their knowledge that:
- the financial statements, which have been prepared in accordance with
applicable accounting standards, give a true and fair view of the assets,
liabilities, financial position and net return of the Company;
- the annual financial report includes a fair review of the development and
performance of the business and the position of the Company, together with a
description of the principal risks and uncertainties that it faces; and
- they consider that the annual financial report, taken as a whole, is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the Company's performance, business model and strategy.
Beatrice Hollond
Chairman
Signed on behalf of the Board of Directors
20 November 2013
.
INCOME STATEMENT
FOR THE YEAR ENDED 30 SEPTEMBER
2013 2012
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
NOTES £'000 £'000 £'000 £'000 £'000 £'000
Gains on investments - 49,016 49,016 - 21,056 21,056
Gains on certificates of - - - - 11 11
deposit
Foreign exchange (losses) - (4) (4) - 84 84
/gains
Income 2 9,218 - 9,218 7,901 32 7,933
Investment management and 3 (405) (2,172) (2,577) (321) (1,285) (1,606)
performance-related fees
Other expenses (333) - (333) (316) - (316)
Net return before finance 8,480 46,840 55,320 7,264 19,898 27,162
costs and taxation
Finance costs (560) (1,649) (2,209) (560) (1,643) (2,203)
Return on ordinary 7,920 45,191 53,111 6,704 18,255 24,959
activities before
taxation
Tax on ordinary (192) - (192) (138) - (138)
activities
Net return on ordinary 7,728 45,191 52,919 6,566 18,255 24,821
activities after tax for
the financial year
Return per ordinary share
Basic 5 57.4p 335.7p 393.1p 49.1p 136.6p 185.7p
The total column of this statement represents the Company's profit and loss
account, prepared in accordance with the accounting policies detailed in note 1
to the financial statements. The supplementary revenue and capital columns are
presented for information purposes in accordance with the Statement of
Recommended Practice issued by the Association of Investment Companies. All
items in the above statement derive from continuing operations and the Company
has no other gains or losses. Therefore no statement of total recognised gains
or losses is presented. No operations were acquired or discontinued in the
year.
.
RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS
FOR THE YEAR ENDED 30 SEPTEMBER
CALLED
UP CAPITAL
SHARE SHARE REDEMPTION CAPITAL REVENUE
CAPITAL PREMIUM RESERVE RESERVE RESERVE TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Balance at 30 September 6,685 1,258 466 147,633 8,211 164,253
2011
Dividends paid - note 4 - - - - (6,271) (6,271)
Net return on ordinary - - - 18,255 6,566 24,821
activities
Balance at 30 September 6,685 1,258 466 165,888 8,506 182,803
2012
Dividends paid - note 4 - - - - (6,508) (6,508)
Issue of ordinary 75 2,191 - - - 2,266
shares
Net return on ordinary - - - 45,191 7,728 52,919
activities
Balance at 30 September 6,760 3,449 466 211,079 9,726 231,480
2013
The accompanying notes are an integral part of these statements.
.
BALANCE SHEET
AT 30 SEPTEMBER
2013 2012
NOTES £'000 £'000
Fixed assets
  Investments held at fair value through profit or 254,279 199,259
loss
Current assets
  Debtors 1,553 985
  Cash and cash funds 9,809 15,934
11,362 16,919
Creditors: amounts falling due within one year (2,272) (1,158)
Net current assets 9,090 15,761
Total assets less current liabilities 263,369 215,020
Creditors: amounts falling due after more than one (31,889) (31,895)
year
Provisions - (322)
Net assets 231,480 182,803
Capital and reserves
Called up share capital 6 6,760 6,685
Share premium 3,449 1,258
Capital redemption reserve 466 466
Capital reserve 211,079 165,888
Revenue reserve 9,726 8,506
Shareholders' funds 231,480 182,803
Net asset value per ordinary share
Basic 7 1712.3p 1367.4p
These financial statements were approved and authorised for issue by the Board
of Directors on 20 November 2013.
Signed on behalf of the Board of Directors
Beatrice Hollond
Chairman
The accompanying notes are an integral part of this statement.
.
CASH FLOW STATEMENT
FOR THE YEAR ENDED 30 SEPTEMBER
2013 2012
NOTES £'000 £'000
Cash inflow from operating activities 8(a) 6,942 6,421
Servicing of finance 8(b) (2,179) (2,180)
Capital expenditure and financial investment 8(b) (6,609) 14,523
Net equity dividends paid 4 (6,508) (6,271)
Net cash (outflow)/inflow before management of (8,354) 12,493
liquid resources and financing
Management of liquid resources 8(b) 5,720 (15,000)
Financing 8(b) 2,229 -
Decrease in cash (405) (2,507)
Reconciliation of net cash flow to movement in net
debt
Decrease in cash (405) (2,507)
Cashflow from movement in liquid resources (5,720) 15,000
Debenture stock non-cash movement (26) (23)
Reduction in debenture stock 32 -
Movement in net debt in the year (6,119) 12,470
Net debt at beginning of the year (15,961) (28,431)
Net debt at end of the year 8(c) (22,080) (15,961)
.
NOTES TO THE FINANCIAL STATEMENTS
1. Accounting Policies
Accounting policies describe the Company's approach to recognising and
measuring transactions during the year and the position of the Company at the
year end.
A summary of the principal accounting policies adopted by the Company, all of
which have been applied consistently throughout the year and the preceding
year, is set out below.
Basis of Preparation
(i) Accounting Standards applied
The financial statements have been prepared in accordance with applicable
United Kingdom Accounting Standards and with the Statement of Recommended
Practice (`SORP') `Financial Statements of Investment Trust Companies and
Venture Capital Trusts', issued by the Association of Investment Companies in
January 2009. The financial statements are also prepared on a going concern
basis.
(ii) Functional and presentation currency
The financial statements are presented in sterling, which is the Company's
functional and presentation currency and the currency in which the Company's
share capital and expenses, as well as a majority of its assets and
liabilities, are denominated.
2. Income
This note shows the income generated from the portfolio (investment assets) of
the Company and income received from any other source.
2013 2012
£'000 £'000
Income from investments
UK dividends
- Ordinary dividends 6,707 6,571
- Special dividends 765 189
Overseas dividends
- Ordinary dividends 1,521 982
- Special dividends 189 -
UK unfranked investment income - interest - 128
Scrip dividends 34 23
9,216 7,893
Other income
Deposit interest 2 8
Total income 9,218 7,901
A special dividend of £nil (2012: £32,000) has been recognised in capital.
3. Investment Management and Performance-related Fees
This note shows the fees paid to the Manager. These are made up of the
management fee payable per annum and a performance-related fee calculated
annually. The latter is only payable when the portfolio outperforms the
benchmark index plus 2%.
2013 2012
REVENUE CAPITAL TOTAL REVENUE CAPITAL TOTAL
£'000 £'000 £'000 £'000 £'000 £'000
Investment management fee 405 1,215 1,620 321 963 1,284
Performance-related fee:
- accrued for the period
- 1 January-30 September 2013 - 1,002 1,002 - - -
- reversal of prior year - (45) (45) - 322 322
provision
405 2,172 2,577 321 1,285 1,606
Up to 31 December 2012, a performance-related fee was due after the end of the
calendar year if the Company's annualised total return over the previous three
years was greater than the annualised return of the FTSE All-Share (Total
Return) Index over the same period, plus 2%. During the year to 30 September
2013, the period element of the performance fee has been revised so that
current and future performance fee calculation periods are coterminous with the
Company's September year end. As a consequence, for this year only, the
performance fee is based on a shorter period of two years and nine months to 30
September 2013 with a pro-rated fee for the period 1 January to 30 September
2013. Thereafter, the performance fee will revert to a three year calculation
period, on the historical basis, but to 30 September each year.
Details of the management agreement are disclosed in the Directors' Report. At
30 September 2013, investment management fees of £452,000 (2012: £347,000) were
accrued and a performance-related fee of £1,002,000 has been accrued (2012:
£322,000 provided, with £277,000 subsequently crystallised).
4. Dividends
Dividends represent the return of income less expenses to shareholders.
Dividends are paid as an amount per ordinary share held.
2013 2012
£'000 £'000
Dividends on equity shares paid and recognised in the year:
Second interim dividend for 2012 of 30.5p (2011: 29p) 4,100 3,877
First interim dividend for 2013 of 18p (2012: 18p) 2,420 2,406
Return of unclaimed dividends from previous years (12) (12)
6,508 6,271
2013 2012
£'000 £'000
Dividends on equity shares payable in respect of the year:
First interim paid 18p per ordinary share (2012: 18p) 2,420 2,406
Second interim dividend of 32p per ordinary share (2012: 4,326 4,100
30.5p)
6,746 6,506
Special dividend of 7p per ordinary share (2012: nil) 946 -
7,692 6,506
Investment trusts must ensure that no more than 15% of total income is retained
each year after providing for dividends payable.
5. Return per Ordinary Share
Basic return per share is the amount of gain generated for the financial year
divided by the number of ordinary shares in issue. The calculation is based on
the weighted average number of shares in issue during the year.
Basic revenue, capital and total returns per ordinary share are based on each
of the respective returns on ordinary activities after taxation and on
13,458,388 (2012: 13,368,799) shares being the weighted average number of
ordinary shares in issue throughout the year.
6. Called up share capital
Ordinary share capital represents the total number of shares in issue, for
which dividends accrue.
2013 2012
NUMBER £'000 NUMBER £'000
Allotted, called-up and fully paid:
Ordinary shares of 50p each 13,518,799 6,760 13,368,799 6,685
The ordinary shares are fully participating and on a poll carry one vote per £1
nominal held.
During the year, 150,000 ordinary shares of 50p each were issued at an average
price of 1,524.33p, excluding issue costs. No shares have been issued since the
year end.
7. Net Asset Value per Ordinary Share
The Company's total net assets (total assets less total liabilities) are often
termed shareholders' funds and are converted into net asset value per share by
dividing by the number of shares in issue.
The net asset value per ordinary share and the net assets attributable at the
year end were as follows:
NET ASSET VALUE NET ASSETS
PER SHARE ATTRIBUTABLE
2013 2012 2013 2012
PENCE PENCE £'000 £'000
Ordinary shares
- Basic 1712.3 1367.4 231,480 182,803
Net asset value per ordinary share is based on net assets at the year end and
on 13,518,799 (2012: 13,368,799) ordinary shares, being the number of ordinary
shares in issue at the year end.
8. Notes to the Cash Flow Statement
The cash flow statement shows the cash flows of the Company from its operating,
investing and financing activities. The main cash flows arise from the purchase
and sale of investments, with other main flows being any amounts borrowed or
repayment of borrowings in the year.
(a) Reconciliation of Operating Profit to Operating Cash Flows
2013 2012
£'000 £'000
Total return before finance costs and taxation 55,320 27,162
Adjustment for gains on investments and certificates of (49,016) (21,067)
deposit
Cash (outflow)/inflow from forward currency contracts (4) 86
Scrip dividends (34) (23)
Decrease in debtors 77 13
Increase in creditors and provisions 791 388
Tax on overseas dividends (192) (138)
Net cash inflow from operating activities 6,942 6,421
(b) Analysis of Cash Flow for Headings Netted in the Cash Flow Statement
2013 2012
£'000 £'000
Servicing of finance
Preference dividends paid (12) (12)
Interest paid on debenture stocks (2,167) (2,168)
Net cash outflow from servicing of finance (2,179) (2,180)
Capital expenditure and financial investment
Purchase of investments* (48,638) (40,333)
Sale of investments 42,029 41,845
Purchase of certificates of deposit - (83,000)
Sale of certificates of deposit - 96,011
Net cash (outflow)/inflow from capital expenditure and (6,609) 14,523
financial investment
Management of liquid resources
Cash movement on cash funds and short term deposits 5,720 (15,000)
Net cash inflow/(outflow) from management of liquid 5,720 (15,000)
resources
Buyback of debenture stock (37) -
Net proceeds from share issues 2,266 -
Net cash inflow from financing 2,229 -
*Excludes scrip dividends received as income.
(c) Analysis of changes in net debt
DEBENTURE
STOCK 30
1 OCTOBER CASH NON-CASH SEPTEMBER
2012 FLOW MOVEMENT 2013
£'000 £'000 £'000 £'000
Cash 934 (405) - 529
Cash funds and short term deposits 15,000 (5,720) - 9,280
Debentures (31,645) 32 (26) (31,639)
5% Cumulative preference shares (250) - - (250)
Net debt (15,961) (6,093) (26) (22,080)
9. Related Party Transactions and Transactions with the Manager
A related party is a company or individual who has direct or indirect control
or influence over the Company.
Invesco Asset Management Limited (IAML), a wholly owned subsidiary of Invesco
Limited, is the Manager, Company Secretary and Administrator to the Company.
Details of IAML's services and fees are disclosed in the Directors' Report and
management fees payable to IAML are shown in note 3.
Fees paid to the Directors are disclosed in the Directors' Remuneration Report.
Full details of Directors' interests are set out in the Directors' Remuneration
Report.
The financial information set out above does not constitute the Company's
statutory accounts for the year ended 30 September 2013. The financial
information for 2012 is derived from the statutory accounts for 2012, which
have been delivered to the Registrar of Companies. The auditors have reported
on the 2012 accounts; their report was unqualified, did not include a reference
to any matters to which the auditors drew attention by way of emphasis without
qualifying the report and did not contain a statement under section 498 of the
Companies Act 2006. The statutory accounts for the year ended 30 September 2013
have been finalised and audited but have not yet been delivered to the
Registrar of Companies. The statutory accounts for the year ended 30 September
2013 have been finalised on the basis of the information presented by the
directors in this Annual Financial Report announcement and will be delivered to
the Registrar of Companies shortly.
The audited annual financial report will be available to shareholders shortly.
Copies may be obtained during normal business hours from the Company's
Registered Office, 30 Finsbury Square, London, EC2A 1AG and are available via
the Manager's website at www.invescoperpetual.co.uk/investmenttrusts .
The Annual General Meeting will be held on 23 January 2014 at 11.00am at 43-45
Portman Square, London, W1H 6LY.
By order of the Board
Invesco Asset Management Limited
20 November 2013
Contacts:
Paul Griggs 020 7065 4000
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