Half-yearly Report
Keystone Investment Trust
Interim Results
Six Months to 31 March 2007
Chairman's Statement
Performance
The Company's shares gave a total return to shareholders of 8.3% over the six
months from 30 September 2006 to 31 March 2007. During the same period, the
total return of the net asset value per ordinary share was 9.0%, while the
total return of the Company's benchmark for performance measurement purposes,
the FTSE All-Share Index, was 9.2%. (All these figures are with income
reinvested.) On 31 March 2007, the discount of the share price relative to net
asset value (debt at par) was 11.9%.
Borrowings
Equity exposure increased from 117% of net assets at 30 September 2006 to 118%
at 31 March 2007. The gearing limits set by the Board are that the Manager must
make no net purchases if equity exposure is more than 120% of net assets, and
must make sales if (as a result of market movements) equity exposure rises to
more than 122.5% of net assets.
Dividends
The interim dividend will be 15.0p per share, compared with an interim dividend
of 14.0p last year. The dividend will be paid on 25 June 2007 to shareholders
on the Register on 25 May 2007.
Richard Oldfield
Chairman
21 May 2007
Manager's Report
Market and Economic Review
UK equities made steady progress during the six months to 31 March 2007, with
the FTSE All Share index rising 9.2% in total return terms.
Merger and acquisition (M&A) activity remained a supportive feature throughout
the period, driven primarily by interest from private equity funds. Much of
this activity, both actual and rumoured, has been focused on mid and small cap
stocks which has, in turn, driven out-performance from these areas compared to
a more pedestrian performance from large caps.
The market environment has also been characterised by consistent steady gains
with very low levels of volatility. However, this benign picture was punctuated
by a pronounced correction towards the end of the period. As with the
volatility experienced last summer, the sell-off was characterised by a sudden
risk aversion amongst investors, followed by an equally swift recovery. The
event has left few scars, but perhaps suggests that market confidence is not as
deep-seated as it first appears.
On the economic front, UK interest rates rose twice during the period from
4.75% to 5.25%, as the Bank of England became increasingly concerned by a
resumption in house price inflation, and the build-up of other inflationary
pressures elsewhere in the economy. Consumer spending has continued to grow at
a moderate pace, keeping GDP growth in positive territory and defying
expectations of a slowdown as higher interest rates failed to have the desired
effect of slowing down the rate of consumption growth and the housing market.
In this environment, cyclical parts of the market performed very well,
providing another source of momentum for UK mid caps.
Portfolio Strategy and Review
Over the six month review period, the net assets of the Company rose by 9.0%,
slightly behind the return achieved by the FTSE All Share Index, which
increased by 9.2% (all figures with income reinvested). The slight relative
underperformance can be attributed to the defensive bias of the portfolio and
the increasingly speculative tone to the market.
As mentioned above, the strong performance in mid caps has been a feature of
the market in recent years. The Company has been a beneficiary of this trend.
More recently, however, many mid cap stocks have started to look expensive, and
the Manager has been reducing the portfolio's mid cap exposure and moving up
the market capitalisation scale to find more attractive investment
opportunities. Several years of under-performance have left the largest
companies in the UK market trading at increasingly attractive valuations. In
the period under review, the Manager has commenced a new position in BP and
added to existing holdings in Vodafone and Royal Dutch Shell. Since these
changes have taken place, performance from the "mega-caps" has continued to
disappoint. This has held back performance somewhat during the last few months,
but the Manager is confident that the strategy will prove beneficial to
performance going forward.
Elsewhere, the Manager has reduced exposure to the utilities sector, which has
been subject to a great deal of M&A interest in the last couple of years, with
private equity and infrastructure investors in particular, being attracted to
the sector's stable and predictable cash flows. Indeed, water company AWG was
acquired during the review period, by a consortium of private investors,
realising a substantial profit for the Company. The widespread bid interest has
lifted valuations across the sector, and provided the opportunity to sell
shares where they have started to look more fully valued. Water companies
Kelda, Northumbrian Water, Pennon and Severn Trent were also sold, as was
United Utilities. The Manager still retains an overweight position to the
utility sector, however, through positions such as Drax, National Grid and
Scottish & Southern Energy.
Outlook
The Manager continues to believe that the UK economy will start to slow this
year, despite the resilience shown in 2007 to date. The two key drivers of
economic growth in recent years, namely consumer and government spending, do
not appear to be as favourably positioned going forward.
The market does already appear to be expecting economic growth rates to
moderate over the next 12 months, but the risk is that it may be
under-estimating the extent of the slowdown. Furthermore, inflation appears to
be more of a problem now than for many years, and the persistence of
inflationary pressures suggests that the next move in rates should be upwards.
In terms of UK equities, overall valuations appear reasonable in the context of
history, but the overall figures do mask a significant disparity between the
valuations of the largest companies in the UK and their smaller counterparts.
Valuations look most stretched in the mid cap part of the market, and this area
therefore appears most exposed to an economic slowdown. In general, the Manager
does not believe that he will be sufficiently rewarded for taking the risk of
investing in such areas.
Instead, the Manager continues to focus on companies that he believes will be
able to continue to grow earnings and dividends, even in a more challenging
economic environment. 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
21 May 2007
Income Statement
Six Months ended
31 March 2007
(Unaudited)
Note Revenue Capital Total
£'000 £'000 £'000
Loss on investments - unrealised - (3,901) (3,901)
Gains on investments - realised - 16,793 16,793
Loss on certificates of deposit - 15 15
Foreign exchange gains/(losses) 2 - 649 649
Income:
UK dividends 2,506 - 2,506
Overseas dividends 3 304 - 304
STIC interest 38 - 38
UK interest income 177 - 177
Deposit interest 1 - 1
Underwriting commission 1 - 1
Investment management fee (181) (543) (724)
Performance fee 4 - 7 7
Other expenses (147) - (147)
Net return before finance costs and taxation 2,699 13,020 15,719
Finance costs:
Interest payable (381) (1,135) (1,516)
Distributions in respect of non-equity (6) - (6)
shares
Return on ordinary activities before taxation 2,312 11,885 14,197
Tax on ordinary activities (43) - (43)
Return on ordinary activities
after taxation and transfer to reserves 2,269 11,885 14,154
Return per ordinary share
Basic 5 17.0p 88.9p 105.9p
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 period.
Income Statement
Six Months ended Year ended
31 March 2006 30 September
(Unaudited) (Audited)
Note Revenue Capital Total Total
£'000 £'000 £'000 £'000
Gains on investments - unrealised - 12,856 12,856 12,546
Gains on investments - realised - 8,773 8,773 13,809
Loss on certificates of deposit - - - (27)
Foreign exchange gains/(losses) 2 - (272) (272) 753
Income:
UK dividends 2,180 - 2,180 5,049
Overseas dividends 346 - 346 672
STIC interest 3 212 - 212 274
UK interest income 135 - 135 121
Deposit interest 94 - 94 361
Underwriting commission - - - -
Investment management fee (161) (484) (645) (1,379)
Performance fee 4 - (1,348) (1,348) (1,068)
Other expenses (157) - (157) (295)
Net return before finance costs and 2,649 19,525 22,174 30,816
taxation
Finance costs:
Interest payable (380) (1,138) (1,518) (3,037)
Distributions in respect of (6) - (6) (12)
non-equity shares
Return on ordinary activities before 2,263 18,387 20,650 27,767
taxation
Tax on ordinary activities (49) - (49) (98)
Return on ordinary activities
after taxation and transfer to reserves 2,214 18,387 20,601 27,669
Return per ordinary share
Basic 5 16.7p 138.0p 154.7p 207.0p
Reconciliation of Movements in Shareholders' Funds
Called Share Capital Capital Capital
up
Share Premium Redemption Reserve- Reserve- Revenue
Capital Account Reserve Realised Unrealised Reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Balance at 6,685 1,258 466 96,164 32,791 6,051 143,415
1 October
2005
Final - - - - - (2,473) (2,473)
dividend paid
for 2005
Net return on - - - 14,762 7,923 4,984 27,669
ordinary
activities
Interim - - - - - (1,872) (1,872)
dividend paid
for 2006
Balance at 30 6,685 1,258 466 110,926 40,714 6,690 166,739
September
2006
(Audited)
Final - - - - - (2,807) (2,807)
dividend paid
for 2006
Net return on - - - 14,745 (2,860) 2,269 14,154
ordinary
activities
Balance as at 6,685 1,258 466 125,671 37,854 6,152 178,086
31 March 2007
(Unaudited)
Balance at 1 6,685 1,258 466 96,164 32,791 6,051 143,415
October 2005
Final - - - - - (2,473) (2,473)
dividend
paid for 2005
Net return on - - - 5,645 12,742 2,214 20,601
ordinary
activities
Balance at 31 6,685 1,258 466 101,809 45,533 5,792 161,543
March 2006
(Unaudited)
Balance Sheet
At At At
31 March 30 31 March
September
2007 2006 2006
Note (Unaudited) (Audited) (Unaudited)
£'000 £'000 £'000
Fixed assets
Investments at fair value
through profit or loss 209,747 195,162 187,152
Current assets
Certificates of deposit 4,997 9,970 14,997
Amounts due from brokers 168 2,526 1,177
Tax recoverable 19 17 17
Unrealised profit on forward contracts 2 165 - -
Prepayments and accrued income 977 839 1,102
Cash at bank 3,761 1,950 106
10,087 15,302 17,399
Creditors: amounts falling due within one
year
Amounts due to brokers (842) (1,960) (1,080)
Unrealised loss on forward contracts 2 - (35) (11)
Accruals and deferred income (1,115) (1,131) (1,109)
(1,957) (3,126) (2,200)
Net current assets 8,130 12,176 15,199
Total assets less current liabilities 217,877 207,338 202,351
Creditors: amounts falling due after more
than one year
Debenture stock (39,541) (39,534) (39,527)
Cumulative preference shares (250) (250) (250)
Provisions for liabilities and charges 4 - (815) (1,031)
Net Assets 178,086 166,739 161,543
Capital and reserves
Called up share capital 6,685 6,685 6,685
Share premium account 1,258 1,258 1,258
Capital redemption reserve 466 466 466
Other reserves:
Capital reserve - realised 125,671 110,926 101,809
Capital reserve - unrealised 37,854 40,714 45,533
Revenue reserve 6,152 6,690 5,792
Equity Shareholders funds 178,086 166,739 161,543
Net asset value per share
Basic 6 1,332.1p 1,247.2p 1,208.4p
Cash Flow Statement
Six Months Year to Six Months
to to
31 March 30 September 31 March
2007 2006 2006
(Unaudited) (Audited) (Unaudited)
£'000 £'000 £'000
Cash flow from operating activities 1,152 2,694 (241)
Servicing of finance (1,517) (3,033) (1,516)
Capital expenditure and financial
investments
Purchase of investments (52,613) (115,989) (37,652)
Proceeds from sale of investments 57,148 98,248 33,660
Equity dividends paid (2,807) (4,345) (2,473)
Net cash inflow/(outflow) before
management of
liquid resources and financing 1,363 (22,425) (8,222)
Management of liquid resources (1,800) 21,717 8,569
(Decrease)/increase in cash in the period (437) (708) 347
Cash inflow/(outflow) from increase/
(decrease)
in liquid resources 1,800 (21,717) (8,569)
Debenture stock non-cash movement (7) (14) (8)
Exchange movements 449 757 (292)
Movement in net debt in the period 1,805 (21,682) (8,522)
Net debt at beginning of period (37,835) (16,152) (16,152)
Net debt at end of period (36,030) (37,834) (24,674)
Notes
1. Accounting Policies
The accounts have been prepared in accordance with applicable United Kingdom
Accounting Standards and with Statement of Recommended Practice ("SORP")
"Financial Statements of Investment Trust Companies", issued by the Association
of Investment Companies in 2005. The same accounting policies used for the year
ended 30 September 2006 have been applied.
2. The equity portfolio includes £8,772,000 (30 September 2006: £18,141,000; 31
March 2006:
£14,575,000) of equities denominated in currencies other than pounds sterling.
In order to manage the currency risk, the Manager has hedged their currency
exposure into sterling through the use of forward foreign exchange contracts.
The gains and losses to date on these contracts are more or less exactly offset
by the changes in value of the equity investments due to currency movements.
These foreign exchange contracts are designated as fair value hedges through
profit or loss.
3. STIC interest comprises income from investments in Short-Term Investments
Company (Global Series) PLC. UK interest income includes interest income from
Certificates of Deposit.
4. The performance fee is based on a calendar year and there is no performance
fee due for the six months ended 31 March 2007.
31 March 30 September 31 March
2007 2006 2006
£'000 £'000 £'000
Performance fee relating to
31 December 2005 - 317 317
31 December 2006 (7) - -
Provision for performance fee relating
to
31 December 2006 - 815 1,031
Total (7) 1,132 1,348
The performance fee provision as at 30 September 2007 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).
5. The returns per ordinary share are based on the net revenue return
attributable to equity shareholders and on 13,368,799 (30 September 2006 and
March 2006: 13,368,799) ordinary shares, being the number of ordinary shares in
issue in the period.
6. The basic net asset value per ordinary share is calculated on net assets
attributable to equity shareholders of £178,086,000 (30 September 2006: £
166,739,000; 31 March 2006: £161,543,000 and on 13,368,799 (30 September 2006
and 31 March 2006: 13,368,799) ordinary shares in issue.
7. The Directors have declared an interim dividend of 15.0p (2006: 14.0p) per
ordinary share in respect of the six months ended 31 March 2007. This will be
paid on 25 June 2007 to ordinary shareholders registered on 25 May 2007.
8. 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
set out in section 842 of the Income and Corporation Taxes Act 1988.
9. The foregoing information at 30 September 2006 is an abridged version of the
Company's full accounts which carry an unqualified Auditor's report and have
been filed with the Registrar of Companies.
By Order of the Board
INVESCO Asset Management Limited
Secretary
21 May 2007
Friday, 22nd November 2024
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