Half-year Report
Keystone Investment Trust plc
Half-Yearly Financial Report for the Six Months to 31 March 2016
Keystone Investment Trust plc is a public listed investment company whose shares are traded on the London Stock Exchange. The Company is managed by Invesco Fund Managers Limited.
OBJECTIVE OF THE COMPANY
The objective of Keystone Investment Trust plc is to provide shareholders with long-term growth of capital, mainly from UK investments.
Full details of the Company’s investment policy, risk and limits can be found in the annual financial report for the year ended 30 September 2015.
PERFORMANCE STATISTICS
| SIX MONTHS ENDED 31 MARCH | 2016 | 2015 |
| Total Return Statistics(1) (capital growth with income reinvested) |
||
| Net asset value (NAV) per share: | ||
| – debt at par | +0.9% | +8.2% |
| – debt at fair value | +1.2% | +7.8% |
| Share price | –3.6% | +7.2% |
| FTSE All-Share Index | +3.5% | +5.3% |
| Capital Statistics | ||
| NAV per share: | ||
| – debt at par | –2.2% | +5.3% |
| – debt at fair value | –2.1% | +4.8% |
| Share price(1) | –6.0% | +4.8% |
| FTSE All-Share Index(1) | +1.8% | +3.7% |
| (1) Source: Thomson Reuters Datastream. | ||
SIX MONTHS ENDED 31 MARCH |
2016 |
2015 |
| Revenue Statistics | ||
| Revenue return per ordinary share | 30.6p | 30.2p |
| Interim dividend per ordinary share | 18.0p | 18.0p |
| 31 MARCH 2016 |
30 SEPTEMBER 2015 |
|
| AT PERIOD END | ||
| NAV per share: | ||
| – debt at par | 1878.0p | 1920.5p |
| – debt at fair value | 1827.5p | 1867.1p |
| Share price | 1669.0p | 1776.0p |
| Discount of share price to net | ||
| asset value per share: | ||
| – debt at par | 11.1% | 7.5% |
| – debt at fair value | 8.7% | 4.9% |
| Gearing from borrowings: | ||
| – gross | 12.6% | 12.3% |
| – net | 4.4% | 4.4% |
.
INTERIM MANAGEMENT REPORT INCORPORATING THE CHAIRMAN’S STATEMENT
Chairman’s Statement
Performance
In the six months from 30 September 2015 to 31 March 2016 the Company’s shares gave a total return of –3.6%. The underlying net asset value (NAV) per ordinary share (with debt at fair value) gave a total return of +1.2%. These compare with a total return by the Company’s benchmark for performance measuring purposes, the FTSE All-Share Index, of +3.5% (all these figures are with income reinvested).
The Company’s under-performance relative to the benchmark in this period is explained in the Manager’s Report. However, the Company’s long term performance continues to be strong with three, five and ten year share price total returns of 23.5%, 73.1% and 134.1% respectively, compared with total returns of 11.4%, 31.9% and 58.3% for the benchmark.
During the six months under review the discount of the share price relative to NAV (debt at fair value) increased from 4.9% to 8.7%. The discount widened, in common with most of the Company’s AIC peer group, following the decision by Aviva to liquidate a large investment trust portfolio that had been held by Friends Life, which Aviva recently acquired. We believe this effect will be temporary.
Gearing and Investment Guidelines
The Board takes responsibility for the Company’s gearing strategy and sets parameters within which the Manager operates. The Board requires that the Manager must make no net purchases which would take equity exposure above 107.5% of net assets, and must make sales if, as a result of market movements, equity exposure goes higher than 115% of net assets. The former limit was modestly increased in January 2016 from 105%, although to date the additional latitude has not been used. Gearing parameters and levels continue to be reviewed on a regular basis.
Dividend
The Board has declared a first interim dividend of 18p per ordinary share, which will be paid on 10 June 2016 to shareholders on the register on 20 May 2016. The shares will be marked ex-dividend on 19 May 2016.
Beatrice Hollond
Chairman
10 May 2016
.
Manager’s Report
Market Review
The UK equity market was extremely volatile over the period under review, with sentiment largely driven by the actions of central banks and by movements in commodity prices. After a strong year-end rally, following the first increase in US interest rates for seven years, the FTSE All-Share Index fell sharply in the first quarter of 2016, to its lowest level since 2012. The oil price hit a 10 year low, fears grew over the risk of a global recession and oil and mining companies cut profit guidance and, in some cases, dividends. Confirmation of the Brexit referendum date had little impact on the market, but did lead to weakness in sterling. The turbulence moderated as oil and mining prices showed some recovery and the ECB surprised financial markets by cutting interest rates in the eurozone to zero and stepping up the pace of quantitative easing. Towards the period end, Janet Yellen, Chairman of the US Federal Reserve, provided a boost to equities by stating that the US central bank should proceed cautiously with interest rate rises.
Market moves over the last six months were characterised by some particularly volatile days, with a low volume of shares traded.
Portfolio Strategy & Review
The Company’s net asset value, with debt at fair value and including reinvested dividends, rose by 1.2% during the 6 months to the end of March 2016, compared to a rise of 3.5% from the FTSE All-Share index (total returns).
Against such a volatile stock market backdrop, the portfolio delivered a positive return over the period, but lagged the rise of the market. The performance benefited from its zero weighting in the banks sector, but its underweight position in the oil & gas sector, notably the absence of a holding in Royal Dutch Shell or BG Group, detracted from performance. The zero weighting in the mining sector, where share prices demonstrated exceptional swings, was on balance a positive.
Performance again benefited from the holdings in the tobacco sector. Notable amongst these was Reynolds American, which confirmed that it expects double-digit earnings growth this year and increased its dividend by 16.7%, while also planning to pay down debt sharply. The company is beginning to see the benefits of last year’s acquisition of Lorillard – with cost and revenue synergies emerging from the process of integration.
Against a market backdrop of dividend cuts, Provident Financial was another holding to announce a significant increase in its pay-out. A 23% full year increase represented a sixth consecutive year of double-digit percentage increases. A meeting with the company, now a FTSE 100 index constituent, further reassured us of the positive long term outlook for this business.
Within the fixed line telecoms sector, BT announced its strongest revenue growth in over seven years and continued its expansion into mobile telephony, with its acquisition of EE gaining approval from the Competition and Markets Authority. Shareholders received further good news as it was confirmed that the company would not have to de-merge or sell the Openreach fixed line infrastructure, as had been feared. KCOM, meanwhile, saw its shares rise on the sale of its national infrastructure (outside of Hull and East Yorkshire) to CityFibre for £90 million. TalkTalk Telecom, however, announced that it had been the victim of a cyber-attack. The shares were marked down in the weeks following the news, but stabilised towards the end of the period as it was confirmed that the impact of the attack had been less than originally suspected.
BAE Systems released a positive trading update, with a robust order backlog underpinning confidence in the future prospects for the business. The company also highlighted continuing strength in its adjacent commercial markets including cyber security and electronics, reiterating that defence and security remained the first priority of governments in all of its markets.
London Stock Exchange (LSE) announced a “merger of equals†with Deutsche Boerse. Its shares rose to a record high as New York Stock Exchange owner ICE said it may make a counter offer for LSE.
GAME Digital, however, saw its shares fall sharply after an update on pre-Christmas trading, which confirmed that UK sales had fallen off sharply at the most critical time of year for the company. Sales in old format content have declined much faster than expected and, while sales of new generation content have remained strong, these were not enough to offset the fall. The company’s sales in the Spanish market have remained strong.
The holding in Capita fell over the period. The company’s full year results led to a lowering of forecasts for organic growth and a higher interest charge. Most significantly in terms of the share price fall, the shares have been significantly de-rated by the stock market. The portfolio manager believes the share price reaction has been unduly harsh, with the company well positioned to deliver growth from its bid pipeline in a challenging macro-economic environment.
Also weighing on portfolio performance were the holdings in the travel & leisure sector, where sentiment has been overshadowed by terrorist events. Thomas Cook confirmed a challenging trading backdrop for 2016, although it has moved much of its summer capacity to the Western Mediterranean. EasyJet reported a reduction in revenue per seat – with French air traffic control strikes an additional headwind for the company.
In terms of portfolio activity, new investments were made in Diurnal and Marwyn Value Investors. The holding in Amlin was disposed of on acceptance of the previously agreed cash takeover by Mitsui and the holdings in Ladbrokes and Rolls-Royce were sold.
Outlook
The near term outlook for the UK stock market is likely to remain clouded by a muted macro-economic backdrop in the global economy and increased pressure on profitability in the corporate sector. The multiyear monetary policy of setting interest rates at close to zero has not stimulated capital investment. Rather, companies have contained costs, particularly wages, and have used low financing costs to buy back their own stock. Whilst good for profit margins and shareholder returns in the short term, the result has been a level of economic growth in the developed world which is below historic averages. Another side effect has been to widen income inequality in many developed market economies, prompting incumbent governments, increasingly wary of more populist movements, to redress the balance – measures have included increasing minimum wages and tackling corporate tax arbitrage. Combined with some natural wage pressure from tighter labour markets in the US, this is beginning to threaten corporate profit margins.
The collapse in energy prices and the relentless drive of digital technology have entrenched low inflation expectations such that, combined with the factors outlined above, the global economy faces an ongoing lack of pricing power. This in turn has restrained the level of turnover growth in many industries, while any rebound in energy prices or pick up in employment costs may not easily be passed on.
The overall implications for the UK stock market, which is highly global in its make-up, are that earnings growth in many sectors may disappoint. Given that valuations are not obviously cheap, overall returns from equities may be expected to be subdued for the time being. The volatility witnessed since the start of 2016, partly caused by nervousness over financial stability in China, is also likely to remain a feature of the investment landscape for the remainder of the year. The Company’s portfolio has changed relatively little in recent months, as the current investments continue to demonstrate the ability to grow earnings and dividends in this challenging environment.
Mark Barnett
Portfolio Manager
10 May 2016
.
Related Party Transactions and Transactions with the Manager
The Company has identified the Directors as related parties. Transactions with Directors are limited to their emoluments. Transactions with the Manager comprise management and any performance fees. The basis of these has not changed from that reported in the last annual report.
Principal Risks and Uncertainties
The principal risk factors relating to the Company can be summarised as:
– Investment Objective – the Company may not achieve its published objective.
– Market Risk – a fall in the stock market as a whole will affect the performance of the portfolio and individual investments.
– Investment Risk – the active fund management approach employed can result in a portfolio that looks and behaves differently to the benchmark index.
– Shares – share price is affected by market sentiment, supply and demand, and dividends declared as well as portfolio performance.
– Gearing – borrowing will amplify the effect on shareholders’ funds of portfolio gains and losses.
– Reliance on the Manager and Other Service Providers – failure by any service provider to carry out its obligations to the Company could have a materially detrimental impact on the operations of the Company and affect the ability of the Company to successfully pursue its investment policy.
– Regulatory – whilst compliance with rules and regulations is closely monitored, breaches could affect returns to shareholders.
A detailed explanation of these principal risks and uncertainties can be found on pages 8 to 10 of the 2015 annual financial report, which is available on the Company’s section of the Manager’s website.
In the view of the Board, these principal risks and uncertainties are equally applicable to the remaining six months of the financial year as they were to the six months under review.
Going Concern
This half-yearly financial report has been prepared on a going concern basis. The Directors consider this is the appropriate basis as they have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future, being taken as 12 months after the date of approval of these half year financial statements. In considering this, the Directors took into account the diversified portfolio of readily realisable securities which can be used to meet short-term funding commitments, and the ability of the Company to meet all of its liabilities, including the debentures, and ongoing expenses. The Directors also considered the revenue forecasts for the year and future dividend payments in concluding on the going concern basis.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
in respect of the preparation of the half-yearly financial report.
The Directors are responsible for preparing the half-yearly financial report using accounting policies consistent with applicable law and UK Accounting Standards.
The Directors confirm that to the best of their knowledge:
– the condensed set of financial statements contained within this half-yearly financial report have been prepared in accordance with the FRC’s FRS 104 Interim Financial Reporting;
– the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R of the FCA’s Disclosure and Transparency Rules; and
– the interim management report includes a fair review of the information required on related party transactions.
The half-yearly financial report has not been audited or reviewed by the Company’s auditors.
Signed on behalf of the Board of Directors.
Beatrice Hollond
10 May 2016
Chairman
INVESTMENTS IN ORDER OF VALUATION AT 31 MARCH 2016
UK listed ordinary shares unless otherwise stated
Equity investments ISSUER |
SECTOR |
MARKET VALUE £’000 |
% OF PORTFOLIO | |
| Reynolds American US common stock – |
Tobacco | 15,124 | 5.7 | |
| British American Tobacco | Tobacco | 13,389 | 5.0 | |
| Imperial Brands (formerly Imperial Tobacco) |
Tobacco | 11,227 | 4.2 | |
| BT Group | Fixed Line Telecommunications | 10,642 | 4.0 | |
| AstraZeneca | Pharmaceuticals & Biotechnology | 9,630 | 3.6 | |
| BAE Systems | Aerospace & Defence | 8,983 | 3.4 | |
| Roche – Swiss common stock |
Pharmaceuticals & Biotechnology | 8,354 | 3.1 | |
| Provident Financial | Financial Services | 8,283 | 3.1 | |
| BP | Oil & Gas Producers | 8,258 | 3.1 | |
| Legal & General | Life Insurance | 6,462 | 2.4 | |
| Top Ten Investments | 100,352 | 37.6 | ||
| London Stock Exchange | Financial Services | 6,415 | 2.4 | |
| RELX | Media | 6,408 | 2.4 | |
| Beazley | Non-life Insurance | 6,059 | 2.3 | |
| Rentokil Initial | Support Services | 6,035 | 2.3 | |
| Capita | Support Services | 5,977 | 2.2 | |
| Babcock International | Support Services | 5,601 | 2.2 | |
| Bunzl | Support Services | 5,502 | 2.1 | |
| Compass | Travel & Leisure | 5,473 | 2.1 | |
| Hiscox | Non-life Insurance | 5,113 | 1.9 | |
| Shaftesbury | Real Estate Investment Trusts | 5,000 | 1.9 | |
| Top Twenty Investments | 157,935 | 59.4 | ||
| BTG | Pharmaceuticals & Biotechnology | 4,976 | 1.9 | |
| NewRiver Retail | Real Estate Investment Trusts | 4,894 | 1.8 | |
| SSE | Electricity | 4,662 | 1.8 | |
| Centrica | Gas, Water & Multiutilities | 4,521 | 1.7 | |
| Derwent London | Real Estate Investment Trusts | 4,489 | 1.7 | |
| KCOM | Fixed Line Telecommunications | 3,942 | 1.5 | |
| easyJet | Travel & Leisure | 3,931 | 1.5 | |
| Drax | Electricity | 3,606 | 1.3 | |
| A J Bell UQ | Financial Services | 3,600 | 1.3 | |
| BCA Marketplace | Financial Services | 3,168 | 1.2 | |
| Top Thirty Investments | 199,724 | 75.1 | ||
| HomeServe | Support Services | 3,035 | 1.1 | |
| Novartis – Swiss common stock |
Pharmaceuticals & Biotechnology | 3,035 | 1.1 | |
| TalkTalk Telecom | Fixed Line Telecommunications | 2,954 | 1.1 | |
| P2P Global Investments | Equity Investment Instruments | 2,868 | 1.1 | |
| Reckitt Benckiser | Household Goods & Home Construction | 2,867 | 1.1 | |
| Harworth | Real Estate Investment & Services | 2,816 | 1.1 | |
| IP Group | Financial Services | 2,816 | 1.1 | |
| Thomas Cook | Travel & Leisure | 2,803 | 1.1 | |
| G4S | Support Services | 2,698 | 1.0 | |
| Lancashire | Non-life Insurance | 2,570 | 1.0 | |
| Top Forty Investments | 228,186 | 85.9 | ||
| ISSUER | SECTOR | MARKET VALUE £’000 |
% OF PORTFOLIO |
|
| Imperial Innovations | Financial Services | 2,567 | 1.0 | |
| Oxford Sciences Innovation UQ | Financial Services | 2,535 | 1.0 | |
| N Brown | General Retailers | 2,329 | 0.9 | |
| Smith & Nephew | Health Care Equipment & Services | 2,149 | 0.8 | |
| Vectura | Pharmaceuticals & Biotechnology | 2,115 | 0.8 | |
| Marwyn Value Investors | Equity Investment Instruments | 2,008 | 0.7 | |
| Diurnal | Pharmaceuticals & Biotechnology | 1,982 | 0.7 | |
| GAME Digital | General Retailers | 1,919 | 0.7 | |
| Motif Bio | Pharmaceuticals & Biotechnology | 1,877 | 0.6 | |
| Horizon Discovery | Pharmaceuticals & Biotechnology | 1,670 | 0.6 | |
| Top Fifty Investments | 249,337 | 93.7 | ||
| Sherborne Investors Guernsey B – A Shares |
Financial Services | 1,554 | 0.6 | |
| CLS | Real Estate Investment & Services | 1,546 | 0.6 | |
| Doric Nimrod Air Two | Equity Investment Instruments | 1,378 | 0.5 | |
| Doric Nimrod Air Three | Equity Investment Instruments | 1,340 | 0.5 | |
| Macau Property Opportunities Fund |
Real Estate Investment & Services | 1,210 | 0.5 | |
| PureTech Health | Health Care Equipment & Services | 1,187 | 0.4 | |
| Napo Pharmaceuticals UQ | Pharmaceuticals & Biotechnology | 1,150 | 0.4 | |
| VPC Specialty Lending Investments |
Financial Services | 1,122 | 0.4 | |
| Silence Therapeutic | Pharmaceuticals & Biotechnology | 1,042 | 0.4 | |
| Nimrod Sea Assets | Equity Investment Instruments | 1,027 | 0.4 | |
| Top Sixty Investments | 261,893 | 98.4 | ||
| Nexeon – B Shares UQ – Preference C Shares UQ – Ordinary shares UQ |
Electronic & Electrical Equipment | 497 400 |
0.4 | |
| Damille Investments II | Equity Investment Instruments | 792 | 0.3 | |
| PuriCore | Health Care Equipment & Services | 680 | 0.3 | |
| MayAir | Industrial Engineering | 650 | 0.2 | |
| Funding Circle SME | Equity Investment Instruments | 466 | 0.2 | |
| Lombard Medical | Health Care Equipment & Services | 329 | 0.1 | |
| Real Estate Investors | Real Estate Investment & Services | 252 | 0.1 | |
| HaloSource | Chemicals | 69 | — | |
| Top Seventy Investments | 266,032 | 100.0 | ||
| XTL Biopharmaceuticals – ADR |
Pharmaceuticals & Biotechnology | 20 | — | |
| Mirada | Media | 1 | — | |
| Total Equity Investments (72) | 266,053 | 100.0 | ||
| Other investments ISSUER AND ISSUE |
SECTOR | MOODY/S&P RATING | MARKET VALUE £’000 |
% OF PORTFOLIO |
| Barclays Bank – Nuclear Power Notes 28 Feb 2019 |
Electricity | NR/NR | 8 | — |
| Total Investments (73) | 266,061 | 100.0 |
NR is non-rated.
UQ is unquoted.
CONDENSED RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ FUNDS
SHARE CAPITAL £’000 |
SHARE PREMIUM £’000 |
CAPITAL REDEMPTION RESERVE £’000 |
CAPITAL RESERVE £’000 |
REVENUE RESERVE £’000 |
TOTAL £’000 |
|
| For the six months ended 31 March 2016 | ||||||
| At 30 September 2015 | 6,760 | 3,449 | 466 | 238,150 | 10,800 | 259,625 |
| Dividends paid – note 8 | — | — | — | — | (6,124) | (6,124) |
| Net return on ordinary activities | — | — | — | (3,750) | 4,138 | 388 |
| At 31 March 2016 | 6,760 | 3,449 | 466 | 234,400 | 8,814 | 253,889 |
| For the six months ended 31 March 2015 | ||||||
| At 30 September 2014 | 6,760 | 3,449 | 466 | 229,558 | 10,034 | 250,267 |
| Dividends paid – note 8 | — | — | — | — | (5,459) | (5,459) |
| Net return on ordinary activities | — | — | — | 14,536 | 4,079 | 18,615 |
| At 31 March 2015 | 6,760 | 3,449 | 466 | 244,094 | 8,654 | 263,423 |
CONDENSED BALANCE SHEET
| Registered number 538179 | NOTE |
AT 31 MARCH 2016 £’000 |
AT 30 SEPTEMBER 2015 £’000 |
| Fixed assets | |||
| Investments held at fair value | 6 | 266,061 | 275,790 |
| Current assets | |||
| Prepayments and accrued income | 648 | 341 | |
| Tax recoverable | 479 | 301 | |
| Cash and cash equivalents | 20,717 | 20,398 | |
| 21,844 | 21,040 | ||
| Creditors: amounts falling due within one year | |||
| Amounts due to brokers | (258) | (1,567) | |
| Accruals and deferred income | (1,113) | (1,152) | |
| Performance-related fee | 4 | — | (2,544) |
| (1,371) | (5,263) | ||
| Net current assets | 20,473 | 15,777 | |
| Total assets less current liabilities | 286,534 | 291,567 | |
| Creditors: amounts falling due after more than one year | |||
| Debenture stock | 7 | (31,707) | (31,692) |
| Cumulative preference shares | (250) | (250) | |
| Provision Performance-related fee |
(688) |
— |
|
| Net assets | 253,889 | 259,625 | |
| Capital and reserves | |||
| Called up share capital | 6,760 | 6,760 | |
| Share premium | 3,449 | 3,449 | |
| Capital redemption reserve | 466 | 466 | |
| Capital reserve | 234,400 | 238,150 | |
| Revenue reserve | 8,814 | 10,800 | |
| Shareholders’ funds | 253,889 | 259,625 | |
| Net asset value per ordinary share – Basic | 1878.0p | 1920.5p | |
| Number of 50p ordinary shares in issue at the period end | 13,518,799 | 13,518,799 |
CONDENSED INCOME STATEMENT
| SIX MONTHS TO 31 MARCH 2016 | SIX MONTHS TO 31 MARCH 2015 | ||||||
NOTE |
REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
REVENUE £’000 |
CAPITAL £’000 |
TOTAL £’000 |
|
| (Losses)/gains on investments | — | (1,712) | (1,712) | — | 17,046 | 17,046 | |
| Foreign exchange (losses)/gains | 2 | — | (5) | (5) | — | 3 | 3 |
| Income | 3 | 4,867 | — | 4,867 | 4,824 | — | 4,824 |
| 4,867 | (1,717) | 3,150 | 4,824 | 17,049 | 21,873 | ||
| Investment management fee | 4 | (174) | (522) | (696) | (183) | (545) | (728) |
| Performance-related fee | 4 | — | (688) | (688) | — | (1,146) | (1,146) |
| Other expenses | (179) | — | (179) | (182) | — | (182) | |
| Net return before finance costs and taxation | 4,514 | (2,927) | 1,587 | 4,459 | 15,358 | 19,817 | |
| Finance costs | |||||||
| Interest payable | 4 | (274) | (823) | (1,097) | (274) | (822) | (1,096) |
| Distributions in respect of non- equity shares | 4 | (6) | — | (6) | (6) | — | (6) |
| Return on ordinary activities before taxation | 4,234 | (3,750) | 484 | 4,179 | 14,536 | 18,715 | |
| Tax on ordinary activities | 5 | (96) | — | (96) | (100) | — | (100) |
| Net return on ordinary activities after taxation | 4,138 | (3,750) | 388 | 4,079 | 14,536 | 18,615 | |
| Return per ordinary share – Basic | 30.6p | (27.7)p | 2.9p | 30.2p | 107.5p | 137.7p | |
| Number of ordinary shares in issue | 13,518,799 | 13,518,799 | |||||
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 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 and therefore no additional statement of comprehensive income is presented. No operations were acquired or discontinued in the period.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
1. Accounting Policies
The condensed financial statements have been prepared in accordance with applicable United Kingdom Accounting Standards and applicable law (UK Generally Accepted Accounting Practice) and with the Statement of Recommended Practice Financial Statements of Investment Trust Companies and Venture Capital Trusts, issued by the Association of Investment Companies in November 2014. Accordingly, FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland applies for the year ending 30 September 2016 and these condensed financial statements. In addition, FRS 104 Interim Financial Reporting, issued by the Financial Reporting Council in March 2015 has been applied for the first time. The financial statements are issued on a going concern basis.
As a result of the first time adoption of FRS 102 and the revised SORP, comparative figures and presentation have been revised where required. The net return attributable to ordinary shareholders and shareholders’ funds remain unchanged. As an investment fund the Company has the option, which it has taken, not to present a cash flow statement. A cash flow statement is not required when an investment fund meets all the following conditions: substantially all investments are highly liquid and are carried at market value, and where a statement of changes in equity (in these financial statements it is called the Reconciliation of Movements in Shareholders’ Funds) is provided.
The accounting policies applied to these condensed financial statements are consistent with those applied in the financial statements for the year ended 30 September 2015, with the following exception and revision:
Cash and cash equivalents may comprise cash (including short term deposits which are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value) as well as cash equivalents, including money market funds. Investments are regarded as cash equivalents if they meet all of the following criteria; highly liquid investments held in the Company’s base currency that are readily convertible to a known amount of cash, are subject to an insignificant risk of change in value and provide a return no greater than the rate of a three-month high quality government bond.
Amendments to FRS 102 – Fair value hierarchy disclosures (March 16) amends paragraphs 34.22 and 34.42 of FRS 102, revising the disclosure requirements for financial instruments held at fair value to align these with the disclosure requirements of EU-adopted IFRS. These amendments become effective for accounting periods beginning on or after 1 January 2017. The Company has chosen to early adopt these paragraphs. There are no accounting policy or disclosure changes as a result of this adoption.
No other accounting policies have changed as a result of the application of FRS 102, amendments to FRS 102 and the revised SORP.
2. Foreign Currency and Forward Currency Contracts
The equity portfolio includes £29,039,000 (30 September 2015: £31,556,000; 31 March 2015: £33,805,000) of equities denominated in currencies other than pounds sterling. In order to manage the currency risk, the Manager may hedge part of the currency exposure into sterling through the use of forward foreign exchange contracts. If used, foreign exchange contracts are designated as fair value hedges through profit or loss. At the period end no forward foreign exchange contracts were held.
3. Income
| SIX MONTHS TO 31 MARCH | |||
| 2016 £’000 |
2015 £’000 |
||
| Income from investments | |||
| UK dividends | – ordinary | 2,889 | 2,628 |
| – special | 305 | 532 | |
| Overseas dividends | – ordinary | 1,110 | 1,061 |
| – special | 416 | 547 | |
| Unfranked investment income | 98 | — | |
| Scrip dividends | 39 | 50 | |
| 4,857 | 4,818 | ||
| Other Income | |||
| Deposit interest | 10 | 6 | |
| 4,867 | 4,824 | ||
4. Base Management Fee, Performance-related Fee and Finance Costs
The base management fee is allocated 75% to capital and 25% to revenue and is calculated at a rate of 0.15% of the 10 day average mid-market capital of the Company at each quarter end date.
The performance-related fee is allocated wholly to capital. The performance-related fee is due when the Company’s annualised total return over the previous three years exceeds the annualised return of the benchmark over the same period plus the hurdle of 1.25%. A performance-related fee provision of £688,000 is provided for the six months ended 31 March 2016 (31 March 2015: £1,146,000).
The finance costs of debt are allocated 75% to capital and 25% to revenue. The distributions in respect of non-equity shares are charged to revenue.
5. Tax
The tax effect of expenditure is allocated between capital and revenue on the same basis as the particular item to which it relates, using the Company’s effective rate of tax for the accounting period.
6. Classification under Fair Value Hierarchy
The fair value hierarchy analysis for investments at fair value at the period end is as follows:
| AT 31 MARCH 2016 £’000 |
AT 30 SEPTEMBER 2015 £’000 |
|
| Level 1 – Quoted prices for identical | ||
| instruments in active markets | 257,867 | 266,974 |
| Level 2 – Valuation techniques using | ||
| observable inputs – Barclays Nuclear Power Notes | 8 | 145 |
| Level 3 – Valuation techniques using unobservable inputs – unquoted securities | 8,186 |
8,671 |
| 266,061 | 275,790 |
7. Debenture Stock
The Company’s structured debt at the period end is as follows:
| AT 31 MARCH 2016 £’000 |
AT 30 SEPTEMBER 2015 £’000 |
|
| 7.75% debenture stock 2020 | 7,000 | 7,000 |
| 6.5% debenture stock 2023 | 24,968 | 24,968 |
| Total | 31,968 | 31,968 |
| Discount and issue expenses on debenture stock | (261) | (276) |
| 31,707 | 31,692 |
8. Dividends Paid
| SIX MONTHS TO 31 MARCH | ||
| 2016 £’000 |
2015 £’000 |
|
| Second interim 33p (2014: 32.5p) | 4,461 | 4,393 |
| Special dividend 12.3p (2014: 8p) | 1,663 | 1,082 |
| Return of unclaimed dividends from previous years | — | (16) |
| Total paid | 6,124 | 5,459 |
The Company pays two interim dividends a year, the second interim being in lieu of a final dividend. The first interim dividend of 18p will be paid on 10 June 2016 to shareholders on the register on 20 May 2016.
9. Investment Trust Status
It is the intention of the Directors to conduct the affairs of the Company so that it satisfies the conditions for approval as an investment trust company within the meaning of section 1159 of the Corporation Tax Act 2010.
10. Status of Half-Yearly Financial Report
The financial information contained in this half-yearly financial report, which has not been reviewed or audited by the independent auditors, does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The financial information for the half-years ended 31 March 2015 and 31 March 2016 has not been audited. The figures and financial information for the year ended 30 September 2015 are extracted and abridged from the latest published accounts and do not constitute the statutory accounts for that year. Those accounts have been delivered to the Registrar of Companies and include the Independent Auditor’s Report, which was unqualified and did not include a statement under section 498 of the Companies Act 2006.
By order of the Board
10 May 2016
Invesco Asset Management Limited
Company Secretary
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