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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