Final Results
Keystone Investment Trust plc
Unaudited Preliminary Announcement of Final Results
for the Year ended 30 September 2007
Chairman's Statement
In the year to 30 September 2007, the Company's share price provided a total
return of 11.1%. The total return of the net asset value per share was 10.0%.
In the same period, the total return of the Company's benchmark for the purpose
of performance measurement, the FTSE All-Share Total Return Index, was 12.2%.
All these figures are with income reinvested. The discount of the share price
relative to net asset value per share narrowed slightly from 11.6% at the end
of September 2006 to 11.2% at 30 September 2007.
Performance 6 months One Year Since appointment
of current
Manager on
1 January 2003
Share Price Total Return 2.6% 11.1% 173.6%
NAV Total Return per share 0.8% 10.0% 144.9%
FTSE All-Share Total Return 2.7% 12.2% 105.4%
Index
Source: Fundamental Data
Gearing and investment guidelines
The Company's borrowings, in the form of long-term debentures, amount to £40
million. At the year end £15.7 million was held in cash and certificates of
deposit in order to keep the effective gearing to a level which the Board
regards as sufficiently cautious. Equity exposure decreased during the year
from 117% of net assets to 114%.
The Board sets limits for this exposure and regularly reviews them. The present
position is that the Manager must make no net purchases if equity exposure is
more than 110% of net assets, and has to make sales if, as a result of market
movements, equity exposure goes higher than 115% of net assets. It is up to the
investment manager to decide on exposure subject to those limits.
Up to £4 million may also be held in corporate bonds. During the year under
review, no such bonds were held.
Dividends
The Company's objective is long-term growth of capital. The level of the
Company's dividends is also important to many shareholders. The Board has
declared a final dividend of 25p per share (2006: 21p), giving a total dividend
for the year of 40p per share, compared with 35p last year. Earnings per share
in this year were 41.6p (2006: 37.3p). The dividend will be paid on 21 December
2007 to shareholders on the Register on 23 November 2007.
Expenses
The Company's total management expenses were 1.0% of average net assets in the
year ended 30 September 2007 (2006:1.0%, excluding performance fees in that
year).
The Manager
During the year the Board again reviewed all aspects of the service provided by
the Manager and the terms of the Manager's appointment. We remain satisfied
with the service and the current terms of appointment.
VAT on Management Fees
In November this year, HM Revenue & Customs accepted the European Court of
Justice ruling in a test case that investment trusts should not be charged VAT
on management fees. This paves the way for the start of the process to recover
VAT paid in the past on your Company's management fees. As you can appreciate,
these fees span a number of years and the Board is holding discussions with the
Manager concerning the amounts recoverable, and will advise shareholders of the
results of these discussions in due course.
Outlook
After several years with returns in double figures, it is not all that
surprising that for this reason alone markets have become more difficult, and
there are plenty of economic and financial issues to worry about. We cannot
expect double-figure returns in every year; nor can we expect the investment
manager always to outperform the benchmark, the FTSE All-Share Index. We are,
however, as confident as we were when we appointed Invesco Asset Management
that we have in Mark Barnett an investment manager who, in the long term, will
fulfil the Company's objectives: to provide, for the investor with the
appropriate long-term outlook, strong returns from its portfolio of equities.
Special Business at the Annual General Meeting (AGM)
As special business of the AGM, the Board will ask shareholders to renew the
Board's authority to allot up to an aggregate nominal amount of £334,219 new
ordinary shares, this being 5% of the Company's issued ordinary share capital,
whilst disapplying pre-emption rights. This authority, set out in Special
Resolution 10, will expire at the AGM in 2008.
Special Resolution 11 seeks the renewal the Board's authority to purchase up to
2,000,000 of the Company's own shares, this being 14.99% of the issued ordinary
share capital. Again, this authority will expire at the AGM in 2008.
Special Resolution 12 seeks to adopt revised Articles of Association for the
Company. The Resolution concerns amendments to the Articles of Association of
the Company, following the introduction of certain provisions of the Companies
Act 2006, which came into force on 1 January, 20 January, 6 April and 1 October
2007, as well as the introduction of the Transparency Directive on 20 January
2007. Broadly, the proposed changes to the Articles of Association allow the
Company to communicate with shareholders electronically via its website if it
so chooses, unless a shareholder wishes to continue receiving information in
hard copy; to remove the maximum age for Directors; and to change a number of
references to statutory provisions in the Companies Act 1985 which have now
been replaced by corresponding provisions in the Companies Act 2006. Further
details are given in the Report of the Directors.
Finally, pursuant to changes in UK Listing Rules, listed investment companies
are now subject to additional requirements in respect of their published
investment policies. To comply with the new standards, the Directors are
proposing a restated investment policy to be formally adopted, subject to
shareholders' approval of Ordinary Resolution 13 at the Annual General Meeting.
The new, restated policy is set out in the Report of the Directors in the
Annual Report and Accounts. This will not give rise to changes in the way the
Company's assets are managed.
The Directors have carefully considered all the resolutions proposed in the
Notice to the Annual General Meeting and consider them all to be in the best
interest of the Company and its shareholders. The Directors therefore recommend
that shareholders vote in favour of each resolution.
My fellow Directors and I look forward to seeing investors at the AGM of the
Company on 20 December 2007, where there will be an opportunity to meet and
question the investment manager.
Richard Oldfield
Chairman
19 November 2007
Manager's Report
Market Review
The UK equity market achieved a total return of +12.2% during the twelve months
to 30 September 2007, as measured by the FTSE All Share Index. The overall
return from UK equities is again very impressive, and marks the fifth
successive year of double-digit gains. However, this year witnessed a
substantial increase in volatility, which was particularly evident in the last
3 months of the period.
Having started the period robustly with the FTSE All Share Index reaching new
all-time highs in June, the market was hit by a serious bout of risk aversion
towards the end of the period. This was caused by problems emanating from the
US sub-prime mortgage market which severely undermined investor confidence. The
potential for rising defaults on these assets was growing in the first half of
the year but events this summer highlighted that the problems were much wider
than the market had previously anticipated.
In previous financial cycles, banks have been hit hardest by non-performing
loans, but the recent appetite for innovative new financial instruments has
allowed banks to package up these mortgage assets in new investment structures
such as Collateralised Debt Obligations (CDOs), and sell them on to other
investors, attracted by the high yield that these investments are able to
generate. This has spread the risk of defaults across a very wide base of
investors, many of whom it appears, were not fully aware of the risks
associated with these new instruments.
For some time, CDOs and other new financial structures had been viewed by the
market as a positive development because of the risk diversification that they
provided. Once defaults on the sub-prime mortgages held within these
investments started to rise, the lack of transparency in the financial system
led to a widespread risk aversion that affected all asset classes. Liquidity in
credit markets dried up overnight, as investors quickly reappraised the risks
of sub-prime loans and banks became reluctant to lend to each other. This
so-called credit crunch was a very serious financial event, which ultimately
led to the well-publicised downfall of Northern Rock. Unsurprisingly, the UK
equity market suffered significant losses in July and August.
Concerns that the financial crisis would spread to the wider economy prompted
action from the Federal Reserve and European Central Bank, both of whom
injected large amounts of money into the financial system. A further lifeline
was thrown to the markets in mid-September in the form of a 0.5% cut in US
interest rates from the Federal Reserve. Since that time, global equity markets
have recovered all the mid-summer losses, with most major indices moving back
up to new highs for the year.
Portfolio Performance
The Company's net asset value, including dividends, increased by +10.0% during
the twelve months to the end of September 2007, compared to a total return of
+12.2% from the FTSE All Share Index. The under-performance can be attributed
largely to the defensive bias of the portfolio and a lack of exposure to both
emerging market growth and merger & acquisition (M&A) speculation. In the first
half, M&A activity, driven primarily by interest from private equity funds, was
the source of a great deal of market speculation. Much of this activity, both
rumoured and actual, has been focused on mid and small cap stocks which, in
turn, drove out-performance from these areas compared to a more pedestrian
performance from large caps. This trend worked against the Company in the first
half of the year, as the portfolio has been increasingly focused towards the
largest stocks in the market.
The second half of the period under review has seen the first signs of a
reversal of recent trends, in that large caps have enjoyed a spell of relative
out-performance for the first time in many years. The portfolio's increased
exposure to this part of the market was particularly rewarding in terms of
performance during the summer volatility.
Portfolio Strategy & Review
The most important evolution to the strategy adopted for the portfolio over the
last 18 months, has been a gradual move up the market cap scale to take
advantage of opportunities amongst the very largest UK companies. Several years
of underperformance have left many of these "mega-cap" stocks, as they are
collectively known, trading at very attractive valuations. During the year, the
Manager commenced positions in AstraZeneca and BP, and added to existing
holdings in Vodafone, GlaxoSmithKline and Royal Dutch Shell.
In terms of share price performance, the oil majors have not participated fully
in the oil price rises we have seen in recent years. The last twelve months
have been very disappointing in particular for BP, with problems at its Prudhoe
Bay oilfield in Alaska and Texas City refinery weighing on sentiment. But the
shares have also been overlooked by many investors simply because of the
company's size - it is too big to benefit from M&A speculation and has
therefore been easy for investors to ignore, or even to short, whilst in
pursuit of the next bid target. The shares have looked increasingly attractive
on valuation grounds and, with a new CEO in charge, the Manager believes the
company will benefit from new thinking, with a strong emphasis towards
shareholder returns. Royal Dutch Shell looks similarly attractive on most
valuation measures and the Manager is confident that both stocks will
contribute well to the portfolio going forward.
Another area that has been broadly out of favour with the market for several
years is the Pharmaceuticals sector. The Manager has held GlaxoSmithKline in
the portfolio for some time and it continues to look significantly undervalued
in his view. Indeed, he has added to the holding this year at times when the
share price has been weak. The Manager has also bought AstraZeneca, whose share
price has fallen substantially in recent months on concern about the company's
lack of new drug candidates in the pipeline and the risk of patent expiries on
key drugs. The recent acquisition of MedImmune in the US has not helped
sentiment, being viewed by the market as over-priced. However, the Manager
believes there is very sound long-term strategic sense in the MedImmune
acquisition. The deal significantly expands the product pipeline and enhances
the group's overall future growth prospects. Furthermore, the business fits
well alongside last year's acquisition of Cambridge Antibody Technology and
provides a strong exposure to a new area of potential drug development, namely
biologicals, which is the use of more complex and effective drugs based on the
human body's natural chemistry. The shares look significantly undervalued, with
a considerably lower valuation now than at any stage in the company's history.
At times, the M&A activity has been beneficial to the Company. Several stocks
received bid approaches during the review period. Water company AWG was
acquired by a consortium of private investors, realising a substantial profit
for the portfolio. Lloyds insurer Wellington Underwriting was acquired by its
larger rival Catlin, and ICI is in the process of being acquired by Akzo Nobel.
As well as increasing the portfolio's exposure to the UK "mega-caps", the
Manager added several other new holdings to the portfolio, including Marks &
Spencer. Retailers have generally performed poorly in recent months as the
market has started to discount the prospect of a significant consumer slowdown
in the UK as we move into 2008. Whilst the Manager shares the market's concern
regarding prospects for the UK consumer, he thinks Marks & Spencer offers some
very attractive characteristics that will allow it to remain more resilient to
a consumer slowdown than its peers. Over half of its sales are in food, an area
of spend that is less cyclical and also currently benefiting from inflation.
Meanwhile, Marks & Spencer's key customer group is the over-45's, where
finances are generally in a better condition than amongst younger consumers.
Marks & Spencer also displays "self-help" characteristics, with an ongoing
store modernisation programme that is having an immediate and lasting impact on
sales. The Manager believes these characteristics are not fully appreciated by
the market and consequently the shares look very attractive for long-term
returns.
Rolls-Royce is another new holding for the portfolio. It is a very well-managed
company, operating in markets that offer very attractive growth rates. The
company has traditionally been viewed by the market as a cyclical manufacturer
but, with over half of its revenues currently coming from long-term servicing
contracts, it is not as cyclically vulnerable as it used to be. In the
Manager's view, the valuation looks very attractive given the strength,
stability and sustainability of the cashflows that the business is able to
generate.
Outlook
The Manager's view of the economic outlook continues to be cautious. The
Manager has felt for some time that the rate of consumer spending growth in the
UK would have to moderate as a result of a very highly leveraged household
balance sheet, and as the negative impact of higher interest rates filtered
through to consumers' disposable income. The events of this summer in the
credit markets are likely to leave a lasting impression in the form of higher
borrowing costs and a more prudent approach from the banking sector towards
risk across all forms of lending. This can only serve to exacerbate the
slowdown in consumer activity.
There are similar dynamics in the US, where ongoing problems in the US
sub-prime mortgage market have already had a substantial impact on activity in
the housing market, and caused the overall economy to slow. The situation in
the UK differs in one important respect, however: the Bank of England will not
cut interest rates until it has more confidence that medium-term inflation is
under control.
The Manager's prognosis for the UK economy is therefore bleak. But the market
as a whole is aware of the challenges that the economy faces, and they are
largely reflected in valuations. Some parts of the market, however, are much
more vulnerable to the consumer slowdown, and the Manager continues to be wary
of cyclical sectors such as banks, retailers and house-builders.
Instead, the Manager continues to focus on companies that he believes will be
able to continue to grow earnings and dividends, even in the more challenging
economic environment that he foresees. In valuation terms, the UK "mega-caps"
look more attractive now than they have done for a long time, and now form an
important part of the portfolio. These are financially strong, highly liquid,
globally diversified businesses, which offer further defensive characteristics.
The Manager believes these characteristics are currently under-valued by the
market as a whole, and should stand the Company in good stead going forward.
Mark Barnett
Investment Manager
19 November 2007
Income Statement
For the year ended 30 September
2007 2006
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Gain on investments - 14,045 14,045 - 26,355 26,355
Gain/(loss) on
certificates of
deposit - 22 22 - (27) (27)
Foreign exchange gain/ - 1,011 1,011 - 753 753
(loss)
Income 7,099 - 7,099 6,477 - 6,477
Investment management (368) (1,095) (1,463) (329) (2,118) (2,447)
fees
Other expenses (314) - (314) (295) - (295)
Net return before
finance
costs and taxation 6,417 13,983 20,400 5,853 24,963 30,816
Finance costs (773) (2,279) (3,052) (771) (2,278) (3,049)
Return on ordinary
activities
before tax 5,644 11,704 17,348 5,082 22,685 27,767
Tax on ordinary (78) - (78) (98) - (98)
activities
Return on ordinary
activities
after tax for the 5,566 11,704 17,270 4,984 22,685 27,669
financial year
Return per ordinary
share
Basic 41.6p 8.8p 50.4p 37.3p 169.7p 207.0p
The total column of this statement represents the Company's profit and loss
account, prepared in accordance with UK Accounting Standards. The supplementary
revenue and capital columns are both prepared under guidance published 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 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
Share Capital Capital Capital
Share Premium Redemption Reserve- Reserve- Revenue
Capital Account Reserve Realised Unrealised Reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance as at
1 October 2005 6,685 1,258 466 96,164 32,791 6,051 143,415
Final dividend - - - - - (2,473) (2,473)
for 2005
Net return on
ordinary
activities - - - 14,762 7,923 4,984 27,699
Interim dividend - - - - - (1,872) (1,872)
paid in 2006
Balance as at
30 September 6,685 1,258 466 110,926 40,714 6,690 166,739
2006
Final dividend - - - - - (2,807) (2,807)
for 2006
Net return on
ordinary
activities - - - 24,878 (13,174) 5,566 17,270
Interim dividend - - - - - (2,005) (2,005)
paid 2007
Balance as at
30 September 6,685 1,258 466 135,804 27,540 7,444 179,197
2007
The accompanying notes are an integral part of those statements.
Balance Sheet
As at 30 September
2007 2006
£'000 £'000
Fixed assets
Investments held as fair value through profit or loss 203,889 195,162
Current assets
Certificates of deposit 5,004 9,970
Debtors 1,464 3,382
Cash and cash funds 10,713 1,950
17,181 15,302
Creditors: amounts falling due within one year (2,074) (3,126)
Net current assets 15,107 12,176
Total assets less current liabilities 218,996 207,338
Creditors: amounts falling due after
more than one year (39,799) (39,784)
Provisions - (815)
Net assets 179,197 166,739
Capital and reserves
Share capital 6,685 6,685
Share premium account 1,258 1,258
Capital redemption reserve 466 466
Other reserves:
Capital reserves - realised 135,804 110,926
Capital reserves - unrealised 27,540 40,714
Revenue reserve 7,444 6,690
Shareholders' funds 179,197 166,739
Net asset value per ordinary share
Basic 1340.4p 1247.2p
Cash flow statement
For the year ended 30 September
2007 2006
£'000 £'000
Cash inflow from operating activities 4,679 2,694
Servicing of finance (3,036) (3,033)
Capital expenditure and financial investment 11,008 (17,741)
Equity dividends paid (4,812) (4,345)
Net cash outflow before management of liquid resources
and financing 7,839 (22,425)
Management of liquid resources (8,750) 21,717
Decrease in cash (911) (708)
Reconciliation of net cash flow to movement in net debt
Decrease in cash (911) (708)
Cashflow from movement in liquid resources 8,750 (21,717)
Exchange movements 924 757
Debenture stock non-cash movement (15) (14)
Movement in net debt in the year 8,748 (21,682)
Net debt at beginning of year (37,834) (16,152)
Net debt at end of year (29,086) (37,834)
Notes to the Preliminary Announcement
1. Accounting policies
The accounting policies adopted at 30 September 2006 have been applied
consistently throughout the year.
(a) Basis of Preparation
The financial statements have been prepared in accordance with United Kingdom
Generally Accepted Accounting Practice ("UK GAAP") and with the Statement of
Recommended Practice ("SORP") "Financial Statements of Investment Trust
Companies", issued by the Association of Investment Companies in December 2005.
2. Income
2007 2006
£'000 £'000
Income from investments
UK dividends 6,111 5,049
Overseas dividends 723 946
UK unfranked investment income - interest 263 386
7,097 6,381
Other income
Deposit interest 1 96
Underwriting commission 1 -
2 96
Total income 7,099 6,477
3. Investment management fees
2007 2006
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management fee 313 940 1,253 280 839 1,119
Performance related fee
relating to:
31 December 2005 - - - - 270 270
31 December 2006 - (7) (7) - - -
Provision for performance
related fee relating to:
31 December 2006 - - - - 693 693
31 December 2007 - - - - - -
Irrecoverable VAT thereon 55 162 217 49 316 365
368 1,095 1,463 329 2,118 2,447
Details of the management agreement are disclosed in the Report of the
Directors in the Annual Report and Accounts. Performance- related fees are
based on a calendar year. No performance fee has been provided for the year
ended 31 December 2007. The performance fee provision as at 30 September 2006
was £815,000 and the actual amount paid was £808,000 for the calendar year
ended 31 December 2006 (31 December 2005: £1,214,000).
4. Return per ordinary share
Basic revenue, capital and total return per ordinary share is based on each of
the returns on ordinary activities after taxation and on 13,368,799 (2006:
13,368,799) shares being the number of shares in issue throughout the year.
5. Net asset value per ordinary share
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
2007 2006 2007 2006
pence pence £'000 £'000
Ordinary shares
- Basic 1340.4p 1247.2p 179,197 166,739
Net asset value per ordinary share is based on net assets at the year end and
on 13,368,799 (2006: 13,368,799) ordinary shares, being the number of ordinary
shares in issue at the year end.
6. Notes to the cash flow statement
(a) Reconciliation of operating profit to operating cash flows
2007 2006
£'000 £'000
Total return before finance costs and 20,400 30,816
taxation
Adjustment for gains on investments and (14,067) (26,328)
certificates of deposit
Adjustment for exchange gains/losses (1,011) (753)
Decrease/(increase) in debtors 200 (261)
Decrease in creditors and provisions (765) (682)
Tax on unfranked investment income (78) (98)
Net cash inflow from operating activities 4,679 2,694
(b) Analysis of changes in net debt
Debenture
Stock
1 Cash Exchange Non-cash 30
October September
2006 Flow Movements Movement 2007
£'000 £'000 £'000 £'000 £'000
(Overdraft)/cash - (911) 924 - 13
Cash funds and 1,950 8,750 - - 10,700
short-term deposits
Debentures (39,534) - - (15) (39,549)
5% Cumulative (250) - - - (250)
preference shares
Net debt (37,834) 7,839 924 (15) (29,086)
The financial information set out above does not constitute the Company's
statutory accounts for the year ended 30 September 2007 or 2006. The financial
information for 2006 is derived from the statutory accounts for 2006 which have
been delivered to the Registrar of Companies. The auditors have reported on the
2006 statutory accounts and their report was unqualified and did not contain a
statement under s237(2) or (3) of the Companies Act 1985. The statutory
accounts for 2007 will be finalised on the basis of the information presented
by the Directors in this preliminary announcement and will be delivered to the
Registrar of Companies following the Company's Annual General Meeting.
The audited Annual Report and Accounts will be posted to shareholders shortly.
Copies may be obtained during normal business hours from the Company's
Registered Office, 30 Finsbury Square, London EC2A 1AG.
A final dividend of 25p per share is recommended for payment on 21 December
2007 to shareholders on the register of members on 23 November 2007.
The Annual General Meeting will be held at the Company's Registered Office on
Thursday, 20 December 2007 at 11.00am.
By order of the Board
Invesco Asset Management Limited
19 November 2007
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