Preliminary Announcement of Audited Annual Results
NEWS RELEASE
To: City Editors For immediate release
1 June 2011
Worldwide Healthcare Trust PLC today announces audited preliminary results for
the year ended 31 March 2011.
Year ended Year ended
31 31
March 2011 March 2010
Share price (total return)* -0.9% +28.7%
Net asset value per share (total +4.0% +25.9%
return)*
Benchmark index (total return)** +2.5% +24.6%
Year ended Year ended %
31 March 201 31 March change
1 2010
Shareholders' funds £344.8m £346.2m -0.4
Net asset value per share 773.5p 752.7p +2.8
(diluted) (diluted for
subscription shares)
Net asset value per share 799.2p 780.8p +2.4
(basic)
Share price 686.0p 701.5p -2.2
Discount of share price to 11.3% 6.8% N/A
diluted net asset value at the
year end
Average month end discount of 7.6% 7.1% N/A
share price to diluted net asset
value per share
Gearing^ 13.3% 10.4% N/A
Total expense ratio (excl. 1.0% 1.0% N/A
performance fees)
Total expense ratio (incl. 1.0% 1.9% N/A
Performance fees accrued in the
period)
* Source - Morningstar. Net asset value diluted for subscription shares and
treasury shares.
** With effect from 1 October 2010, the performance of the Company is measured
against the MSCI World Health Care Index on a total return, sterling adjusted
basis. Prior to this date, performance was measured against the Datastream
World Pharmaceutical & Biotechnology Index (total return, sterling adjusted).
Historical data, therefore, consists of a blended figure containing both
indices.
^ Calculated using the Association of Investment Companies definition (prior
charges as a percentage of net assets).
The following are attached:
* Chairman's Statement
* Review of Investments
* Income Statement
* Reconciliation of Movements in Shareholders' Funds
* Balance Sheet
* Cash Flow Statement
* Notes to the Financial Statements
For further information please contact:
Alastair Smith Frostrow Capital LLP 020 3 008 4911
Jo Stonier Quill Communications 020 7758 2230
Martin Smith Chairman (care of the 020 3 008 4913
Company Secretary)
Chairman's Statement
Review of the Year and Performance
The year ended 31 March 2011 was a relatively difficult one for the healthcare
sector against a background of stronger returns for the market as a whole. This
was reflected in the performance of the Company's "blended" benchmark which
rose 2.5% during the year. As I reported at the interim stage, with effect from
1 October 2010, the Company's performance has been measured against the MSCI
World Health Care Index on a total return sterling adjusted basis. Prior to
this date, performance was measured against the Datastream World Pharmaceutical
& Biotechnology Index on a total return sterling adjusted basis. The Company's
net asset value total return outperformed the "blended" benchmark during the
year returning 4.0%. The Company benefitted from merger & acquisition activity,
the release of important positive product data and a positive contribution from
healthcare providers during the year. However, the contribution from large
capitalisation pharmaceutical stocks was mixed with delays and non approvals by
the regulators adversely affecting some of our holdings. Since the Company's
inception in 1995, the total return of the Company's net asset value per share
is 738.9%, equivalent to a compound annual return of 14.3%. This compares to a
cumulative "blended" benchmark return of 365.7%, equivalent to a compound
annual return of 10.1% over the same period.
During the year, the Company's share price total return was -0.9%. The average
discount of the share price to the diluted net asset value per share during the
year was 7.6%, this compares to 7.1% during the previous year.
Further information on the Company's investments can be found in the Review of
Investments.
Capital
In implementing our policy of actively managing the share price discount we
repurchased a total of 1,996,340 shares at a cost of £13.4m (including
expenses) during the year. As mentioned above, the average discount during the
year of the Company's share price to the diluted net asset value per share was
7.6%, wider than the stated target of 6%. It remains possible for the discount
to be greater than 6% at times as the share price reflects the overall balance
between supply and demand for the Company's shares in the secondary market. The
volatility of the net asset value per share in an asset class such as
healthcare is another factor over which we have no control. The execution and
timing of any share buy-back will continue to be at the absolute discretion of
the Board. Shareholder approval to renew the authority to buy-back shares will
be sought at the Annual General Meeting.
I would like to remind shareholders that the Board has resolved that any shares
held in treasury will be cancelled on the date of the Annual General Meeting
each year and consequently all shares held in treasury on 7 July 2011 will be
cancelled.
The next exercise date for the Company's subscription shares is 1 August 2011
and the exercise price is 638p. During the year a total of 801,195 new shares
were issued, raising £4.9m of additional funds for the Company, as a result of
holders of subscription shares exercising their subscription rights.
Revenue and Dividend
During the year, the Company benefitted from a higher yield from a number of
stocks within the portfolio and the net revenue return for the year was £7.2
million (2010: £4.2 million). In order to maintain investment trust status the
Board has declared an interim dividend of 15.0p per share, compared to last
year's interim dividend of 8.5p per share, an increase of 76.5%. Based on the
current share price of 752.5p the interim dividend represents a yield of 2.0%.
The interim dividend will be payable on 30 June 2011 to ordinary shareholders
on the register of members on 10 June 2011. The associated ex-dividend date
will be 8 June 2011.
Gearing
The Company's borrowing requirements are met through a loan facility,
negotiated on competitive terms, which is repayable on demand, provided by the
custodian Goldman Sachs & Co New York. At the time of writing a total of £63.7m
of this facility was drawn down, representing 17.7% of the Company's net
assets. Your Company has used a modest level of gearing over a number of years
and the Board believes that the availability of a meaningful gearing facility
is very useful for a closed end investment company such as ours.
The Board
Paul Gaunt, who has been a Director of the Company since its launch in 1995,
will be retiring from the Board at the conclusion of the Annual General
Meeting. Paul was instrumental in ensuring the launch of the Company and I
would like to thank Paul for his hard work during his time on the Board. His
experience and wise counsel will be greatly missed.
In May 2010 the Financial Reporting Council published the UK Corporate
Governance Code which replaced the Combined Code on Corporate Governance. The
Association of Investment Companies subsequently amended its Code of Corporate
Governance and Corporate Governance Guide to bring it into line with the UK
Corporate Governance Code. One of the main changes is that all directors of
FTSE 350 companies are now recommended to stand for annual re-election. Your
Company's Directors have agreed, despite not being a FTSE 350 company, to adopt
this provision as they believe it will enhance the Board's accountability to
shareholders. Accordingly, all Directors of the Company will stand for
re-election annually with effect from the forthcoming Annual General Meeting.
The Board recommends the re-election of all Directors to shareholders.
Developments In The Investment Trust Sector
HM Treasury's review of the tax and company law rules affecting investment
trusts set out in its consultation document last summer has now resulted in
sensible and beneficial amendments which should be advantageous to the whole
industry. Our trade association, the Association of Investment Companies (AIC),
played a leading role in reaching this satisfactory conclusion of the review.
The Alternative Investment Fund Managers Directive was passed into law by the
European Parliament last summer, but there is much detail still to emerge
before this Directive takes effect in 2013. It is, however, clear that much of
the over-bureaucratic regulation first proposed has been abandoned in favour of
more pragmatic measures and the AIC again played a major role in achieving this
result.
Outlook
In general, the outlook for markets has improved over the last two years due,
in part, to the actions taken by many central banks. Such helpful policies will
continue to be needed to overcome problematic government finances - especially
in parts of Europe and also in the United States. The danger of inflation in
emerging markets in particular is a source of concern.
OrbiMed, our Investment Manager, remains confident on the prospects for
healthcare. With the sector's recent underperformance leaving valuations at
historically attractive levels they believe that the sector is well positioned
to provide strong performance in the years ahead. In addition, strong earnings
growth potential, continued merger and acquisition activity and a number of
anticipated high profile product approvals are all positive indicators for the
future. Despite the disappointing performance in the year under review your
Board believes that the Company is well positioned to take advantage of this
encouraging picture. The Board would like to thank shareholders for their
continued support. I would also like to thank our Investment Manager and our
Manager for their hard work during the year.
Martin Smith
Chairman
1 June 2011
Review of Investments
Performance Review
The year ended 31 March, 2011 was one of solid returns for the broader market
as the rebound off March 2009 lows continued through 2010 and early 2011.
However, during this same period, healthcare was one of the worst performing
subsectors, as investor rotation into other industries was significant. The
Company's returns during the year reflect this difficult environment for
healthcare.
The total return of the Company's net asset value per share was 4.0% during the
year. This figure compares to a "blended" benchmark return of 2.5%.
Shareholders will be aware that with effect from 1 October 2010, the Company's
performance has been measured against the MSCI World Health Care Index on a
total return sterling adjusted basis. Prior to this date, performance was
measured against the Datastream World Pharmaceutical & Biotechnology Index on a
total return sterling adjusted basis. Since the Company's inception in 1995,
the total return of the Company's net asset value per share is 738.9%,
equivalent to a compound annual return of 14.3%, this compares to a cumulative
"blended" benchmark return of 365.7%, equivalent to a compound annual return of
10.1% over the same period.
Over the past three years, volatility in major currencies has been significant,
sometimes to the benefit and other times to the detriment of the Company.
Unfortunately in 2010, the U.S. dollar weakened against sterling by 5.6%. A
significant majority of the portfolio holdings are denominated in U.S. dollars,
thus the falling U.S. dollar had a negative impact on the Company's absolute
return during the year.
Contribution to Performance
Not unexpectedly, mergers and acquisition activity ("M&A") led to the single
largest positive contributor to performance during the year. Specifically, the
global biotechnology company, Genzyme Corporation, was acquired by French drug
conglomerate, Sanofi-Aventis, for $20 billion. This underscores our long-held
investment strategy of proactively investing in companies which are likely
targets for M&A, in particular biotechnology companies that we view as
attractive assets for other biopharmaceutical companies.
The next top contributor to performance was an emerging biotechnology stock,
NPS Pharmaceuticals ("NPS"). Strong stock price performance for NPS was driven
by positive phase III data for Gattex, a drug for a rare disease called short
bowel syndrome. We believe the data supports the case for approval from
regulatory agencies, which is expected in early 2012.
Another strong performer, Illumina, has been able to execute flawlessly the
commercial launch of its new next-generation sequencing platform, HiSeq 2000,
across various academic and research markets. The growth in the overall
market for sequencing has helped Illumina post revenue growth throughout 2010
despite continued sluggishness in the U.S. economy. Management has delivered
top-line growth through innovative new product development coupled with strong
demand for existing products, leading to notable outperformance among its peer
group.
Not to be overlooked was the positive contribution of Health Maintenance
Organizations ("HMOs"). We believe these companies were oversold in 2008 and
early 2009. The fear and uncertainty about pending healthcare reform caused
investors to flee this subsector. We became bullish after the sell-off,
premised on four factors: the positive commercial underwriting cycle, improving
employment trends, the removal of healthcare reform overhang to investor
sentiment, and attractive valuations. We believe that the commercial premium
pricing cycle is on the upswing after bottoming in 2009. The HMO subsector
performed well and was a key positive for the Company in 2010.
Notably, the contribution from large capitalisation pharmaceutical stocks was
largely mixed in the year. Pfizer, in particular, experienced the most profound
rebound catalysed by a low valuation and a shift in sentiment that was
punctuated by a CEO change in December. Pfizer was a top contributor in the
period.
For Johnson & Johnson ("JNJ"), our positive view stemmed from two points: (1)
the early exit from their "patent cliff" when compared to their large
capitalisation pharmaceutical peer group and (2) a new product cycle to drive
revenues and earnings post-cliff. However, management missteps in the
consumer business (including product recalls), recessionary reduction in demand
in their device businesses, greater than expected financial hits from the new
US healthcare reform, and a deteriorating pricing environment in Europe all
conspired to sap the earnings recovery story. Additionally, JNJ's new product
cycle was muted. Finally, a lack of management urgency to alter the course
did not materialise.
Roche was a negative contributor in the period, largely due to a pipeline
failure and a disappointing U.S. Food and Drug Administration ("FDA") decision,
two risks that are unfortunately embedded in healthcare investing. For the
pipeline, Roche was forced to stop development of new injectable diabetes drug,
called taspoglutide, due to unexpected hypersensitivity reactions seen in some
patients despite the fact clinical trials were almost complete. On the
regulatory front, the FDA asked Roche to withdraw the marketing of Avastin for
the treatment of metastatic breast cancer, given Agency concerns over data in
this patient population.
Merck was also a victim of an unexpected pipeline failure. Specifically, a
novel anti-platelet drug called vorapaxar was stopped in late stage development
due to concerns over a bleeding side effect. This compound was a high-profile
opportunity for the company. Additionally, Merck's stock, unlike Pfizer, failed
to respond positively to the appointment of a new CEO.
The emerging biotechnology company, Allos Therapeutics, was a negative
contributor in the year. The share price weakened over the period as the launch
of their drug Folotyn, for peripheral T-cell lymphoma, came in below
expectations. Furthermore, they reported underwhelming data for Folotyn for
lung cancer, a key expansion indication. We continue to hold the shares as we
believe that the reset expectations for Folotyn in 2011 are achievable.
An unexpected regulatory disappointment in the year came from InterMune, a
California-based emerging biotechnology company. Despite an earlier favourable
Advisory Committee meeting, the FDA failed to approve the company's novel
treatment, pirfenidone, for the treatment of a devastating disease known as
idiopathic pulmonary fibrosis. In response, the stock declined more than 75%
following the FDA's negative decision.
Finally, a word on Japan. Despite the staggering earthquake and tsunami that
devastated the country in March 2011, the contribution from exposure to
Japanese equities was collectively a net positive during the year. The largest
driver to performance in Japan continues to be our secular investment in local
generic drug manufacturers. In particular, Sawai Pharmaceutical was a top five
contributor to performance during the year.
U.S. Healthcare Reform - An Update
In March 2010, U.S. President Barack Obama signed into law "The Patient
Protection and Affordable Care Act", a new law that intends to increase the
amount of healthcare coverage provided to Americans, primarily the uninsured.
After one year, we have been better able to assess its impact, and thus far we
believe the legislation will be neutral for the healthcare industry.
The way the new law was structured, tax increases to help pay for expanded
coverage took effect as early as 1 January, 2010. These offsets included an
increase in Medicaid rebates, an increase in drug coverage for Medicare "Part
D" (a drug coverage programme for the elderly), and an annual fee on branded
pharmaceutical sales. An excise tax was also placed on medical device
companies. However, expansion of the population eligible for Medicaid will not
occur until 2014 (up to 30 million additional lives will go under coverage).
Thus to date, the new law has been a net negative for the majority of the
industry, since the cost saving offsets preceded the volume increases from new
patients. But the net impact has been modest and we expect that by 2014 the
patient volume increases will more than offset the cost savings provisions.
Importantly, the law contained no provisions that would impose price controls
or install the federal government as a major buyer of drugs. So the worst case
scenario from industry's perspective was entirely avoided.
Our Strategyfor 2011 and Beyond
Overall, we remain confident for the prospects of performance in the coming
year. With healthcare underperforming in 2010 and valuations now at
historically attractive levels, we believe the sector is poised for strong
absolute and relative performance in the years ahead.
Healthcare Reform - Winners & Losers
In our view, branded drug makers and the profitable biotechnology companies
emerged as winners due to the absence of any draconian cost control measures in
the new law. Generic drug makers are clear winners. The commercial HMOs are
winners as early reform mandates are manageable, and the new law will mandate
the private sector to cover new lives. Losers in this sector come primarily in
the services areas, like imaging, home health, dialysis, and hospitals (in
which the Company has no exposure). However, beginning in 2014, Medicaid HMOs
should benefit from the expansion of Medicaid, and hospitals will get
reimbursement for previously uncompensated care.
Pharmaceuticals
We remain cautious on large capitalisation pharmaceutical stocks, given chronic
industry burdens that are not shared equally among the players. Thus, we are
selective in this area, preferring contrarian plays and/or companies with late
stage pipeline assets that will drive future growth. Dividends and potential M&
A are also considered.
The peak of the "patent cliff" is almost fully upon us, with three
mega-blockbusters set to lose patent expiration before the end of 2011 (Plavix
from Bristol-Myers Squibb, Zyprexa from Eli Lilly, and Lipitor from Pfizer).
Nevertheless, several companies with healthy new product pipelines will manage
to generate attractive growth to manage through this "cliff".
Biotechnology
The largest subset of catalyst-driven investment opportunities that we are
finding continues to be in the biotechnology sector, in which we see a
combination of high growth rates, attractive valuations, clinical catalysts,
product pipelines, new product launches, and M&A activity. Most importantly,
identifying innovative therapies and the next product cycle is critical. The
most compelling innovation is often occurring among small-to-mid-capitalisation
companies. Several blockbuster drugs are currently being developed by
biotechnology companies and are due to be introduced in the year ahead. As
these products are launched by smaller biotechnology companies the larger
industry players will be actively considering these new product stories as
acquisition candidates.
Specialty Pharmaceutical Companies
Whereas large pharmaceutical companies are facing known headwinds, many smaller
and more focused pharmaceutical companies possess unique opportunities for
growth. Within this subsector we focus on high quality companies that have
stable and enduring franchises, are catalyst laden, and are themselves
potential acquisition targets. Other opportunities in this sector are
contrarian plays with very attractive valuations that are often misunderstood
by the generalist investor.
Generics
The macro environment for generic drug manufactures is positive on a global
basis. The first half of this decade will see over U.S. $100 billion in branded
sales go generic. In the U.S., pricing has largely stabilised and the new
healthcare reform laws should drive volume increases. Pathways for biosilimars
and/or follow-on-biologics are emerging, creating a new opportunity for these
companies. In Japan, the growth of generics is at record highs and market
penetration remains in its infancy. Nonetheless, we remain selective in the
generics sector overall as the European pricing environment remains unstable,
some companies have dependency on branded drugs with future patent expiry
ahead, and the reimbursement changes have created some uncertainty.
Medical Devices
Industry headwinds have been building as innovation in the medical device
subsector has been incremental at best, preventing the ability to command price
increases and drive increased demand. Pricing pressure, coupled with an
extended approval process and a new excise tax creates headwinds for the
sector. But opportunity remains: as recessionary concerns ease, utilisation
will pick up, driving new volume growth in selected medical device categories.
Healthcare Services
We remain bullish on HMOs. The impact of healthcare reform is becoming more
visible and better understood by the investment community. The companies are
cutting broker commissions to offset rebates, thus profitability remains
stable. Pricing cycles remain on an upswing as HMOs have raised premiums
assuming an increase in utilisation in the future. Current utilisation trends
remain sluggish, which is positive for this group. Most importantly, despite
the rebound seen in these stocks, valuations remain very attractive and thus we
still see considerable upside opportunities here.
Emerging Markets
We are finding significant opportunities to invest in healthcare companies in
several emerging markets as a result of their high overall growth rates coupled
with the fact that the healthcare sector is a growing share of GDP in countries
such as China and India. As a result, we have positioned the portfolio with a
small yet increasing exposure to emerging markets at present. In support of
this effort we now have a designated public equity analyst in each of our
Shanghai and Mumbai offices.
Our geographic exposure continues to place significant emphasis on our holdings
in North America, with 63% of the portfolio in that region. The balance of our
exposure resides in Europe 22%, with Asia and Israel representing 15% of the
portfolio.
Samuel D Isaly
OrbiMed Capital LLC
Investment Manager
1 June 2011
Income Statement
for the year ended 31 March 2011
Revenue Capital Total Revenue Capital Total
2011 2011 2011 2010 2010 2010
£'000 £'000 £'000 £'000 £'000 £'000
Gains on investments held - 5,477 5,477 - 76,180 76,180
at fair value through
profit or loss
Exchange gains on currency - 710 710 - 3,946 3,946
balances
Income from investments 9,125 - 9,125 5,825 - 5,825
held at fair value through
profit or loss (note 2)
Investment management, (147) (2,658) (2,805) (133) (5,025) (5,158)
management and performance
fees (note 3)
Other expenses (586) - (586) (506) - (506)
Net return before finance 8,392 3,529 11,921 5,186 75,101 80,287
charges and taxation
Finance costs (13) (247) (260) (11) (212) (223)
Net return before taxation 8,379 3,282 11,661 5,175 74,889 80,064
Taxation on net return on (1,224) 239 (985) (965) 303 (662)
ordinary activities
Net returnafter taxation 7,155 3,521 10,676 4,210 75,192 79,402
Return per share - basic 16.5p 8.1p 24.6p 9.5p 170.5p 180.0p
(note 4)
Return per share - diluted 16.3p 8.1p 24.4p 9.5p 170.5p 180.0p
(note 4)
The "Total" column of this statement is the Income Statement of the Company.
The "Revenue" and "Capital" columns are supplementary to this and are prepared
under guidance by the Association of Investment Companies.
All revenue and capital items in the above statement derive from continuing
operations.
The Company has no recognised gains and losses other than those disclosed in
the Income Statement and Reconciliation of Movements in Shareholders' Funds.
Accordingly, no separate Statement of Total Recognised Gains and Losses has
been presented.
No operations were acquired or discontinued in the year.
Reconciliation of Movements in Shareholders' Funds
For the year ended 31 March 2011
Ordinary Subscription Share Capital
share share premium Capital redemption Revenue
capital capital account reserve reserve reserve Total £
£'000 £'000 £'000 £'000 £'000 '000
£'000
At 31 March 12,644 90 176,648 145,160 5,009 6,630 346,181
2010
Net return from - - - 3,521 - 7,155 10,676
ordinary
activities
after taxation
Dividend paid - - - - - (3,653) (3,653)
in respect of
year ended 31
March 2010
Subscription 200 (8) 4,747 8 - - 4,947
shares
exercised for
ordinary shares
Shares (1,969) - - (13,370) 1,969 - (13,370)
purchased to be
held in
treasury and
treasury shares
cancelled
At 31 March 10,875 82 181,395 135,319 6,978 10,132 344,781
2011
For the year ended 31 March 2010
Ordinary Subscription Share Warrant Capital Capital Revenue Total
share share premium reserve reserve redemption reserve £'000
capital capital account £'000 £'000 reserve £'000
£'000 £'000 £'000 £'000
At 31 March 11,105 - 117,706 7,417 118,709 3,678 4,402 263,017
2009
Net return from - - - - 75,192 - 4,210 79,402
ordinary
activities
after taxation
Dividend paid - - - - - - (1,982) (1,982)
in respect of
year ended 31
March 2009
Proceeds from 2,686 - 47,174 - - - - 49,860
warrant
exercise
Transfer from - - 7,417 (7,417) - - - -
warrant reserve
following
exercise of
warrants
Subscription - 97 - - (295) - - (198)
shares issued
less issue
costs
Subscription 184 (7) 4,351 - 7 - - 4,535
shares
exercised for
ordinary shares
Shares (1,331) - - - (48,453) 1,331 - (48,453)
purchased to be
held in
treasury and
ordinary shares
cancelled
At 31 March 12,644 90 176,648 - 145,160 5,009 6,630 346,181
2010
Balance Sheet
as at 31 March 2011
2011 2010
£'000 £'000
Fixed Assets
Investments held at fair value through 385,869 383,599
profit or loss
385,869 383,599
Current assets
Debtors 6,138 1,757
Derivative - financial instruments 2,223 628
8,361 2,385
Current liabilities
Creditors: amounts falling due within one (49,449) (39,803)
year
(49,449) (39,803)
Net current liabilities (41,088) (37,418)
Total net assets 344,781 346,181
Capital and reserves
Ordinary share capital 10,875 12,644
Subscription share capital 82 90
Share premium account 181,395 176,648
Capital reserve 135,319 145,160
Capital redemption reserve 6,978 5,009
Revenue reserve 10,132 6,630
Total shareholders' funds 344,781 346,181
Net asset value per share - basic (note 6) 799.2p 780.8p
Net asset value per share -dilutedfor 773.5p 752.7p
subscription shares
(note 6)
Cash Flow Statement
for the year ended 31 March 2011
2011 2010
£'000 £'000
Net cash inflow fromoperating 3,268 2,108
activities
Servicing of finance
Interest paid (260) (223)
Taxation
Taxation (suffered)/ recovered (202) 93
Financial investments
Purchases of investments and (274,348) (265,795)
derivatives
Sales of investments and derivatives 273,089 250,859
Net cash outflow from financial (1,259) (14,936)
investment
Equity dividends paid (3,653) (1,982)
Net cash outflow before financing (2,106) (14,940)
Financing
Proceeds from exercise of warrants - 49,860
Subscription share issue costs - (198)
Purchase of own shares (13,374) (49,061)
Subscription shares exercised for 4,947 4,535
ordinary shares
Net cash (outflow)/inflowfrom financing (8,427) 5,136
Decreasein cash (10,533) (9,804)
Notes to the Financial Statements:
1 Accounting Policies
The principal accounting policies, all of which have been applied consistently
throughout the year in the preparation of these preliminary results, are on the
same basis as the statutory accounts of the Company, and are set out below:
(a) Basis of Preparation
The financial statements have been prepared in accordance with United Kingdom
generally accepted accounting standards (UK GAAP) and with the Statement of
Recommended Practice `Financial Statements of Investment Trust Companies' dated
January 2009 (the `SORP').
The Company's financial statements are presented in sterling. All values are
rounded to the nearest thousand pounds (£'000) except where otherwise
indicated.
(b) Investments held at fair value through profit or loss
Listed investments have been designated by the Board as held at fair value
through profit or loss and accordingly are valued at fair value, deemed to be
bid market prices.
Unquoted investments have also been designated by the Board as held at fair
value through profit or loss, and are valued by the Directors using primary
valuation techniques such as earnings multiples, option pricing models,
discounted cash flow analysis and recent transactions.
Changes in the fair value of investments held at fair value through profit or
loss and gains and losses on disposal are recognised in the Income Statement as
`gains or losses on investments held at fair value through profit or loss'.
Also included within this caption are transaction costs in relation to the
purchase or sale of investments, including the difference between the purchase
price of an investment and its bid price at the date of purchase. All purchases
and sales are accounted for on a trade date basis.
The Company has classified its financial assets designated at fair value
through profit or loss and the fair value of derivative financial instruments
using fair value hierarchy that reflects the significance of the inputs used in
making the fair value measurements. The hierarchy has the following levels:
Level 1 - quoted prices (unadjusted) in active markets for identical assets or
liabilities:
Level 2 - inputs other than quoted prices included with Level 1 that are
observable for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices); and
Level 3 - inputs for the asset or liability that are not based on observable
market data (unobservable inputs).
(c) Investment Income
Dividends receivable on equity shares are recognised on the ex-dividend date.
Where no ex-dividend date is quoted, dividends are recognised when the
Company's right to receive payment is established. UK dividends are shown net
of tax credits and foreign dividends are grossed up at the appropriate rate of
withholding tax.
Income from fixed interest securities is recognised on a time apportionment
basis so as to reflect the effective interest rate.
Deposit interest is accounted for on an accruals basis.
(d) Expenses
All expenses are accounted for on an accruals basis. Expenses are charged
through the revenue column of the Income Statement except as follows:
(i) expenses which are incidental to the acquisition or disposal of an
investment are categorised as fixed assets at fair value through profit or loss
and are charged to the capital column of the Income Statement; and
Notes to the Financial Statements (continued)
Accounting Policies (continued)
ii. expenses are charged to the capital column of the Income Statement where a
connection with the maintenance or enhancement of the value of the
investments can be demonstrated. In this respect the investment management
and management fees, have been charged to the Income Statement in line with
the Board's expected long-term split of returns, in the form of capital
gains and income, from the Company's portfolio. As a result 5% of the
investment management and management fees are charged to the revenue column
of the Income Statement and 95% are charged to the capital column of the
Income Statement.
Any performance fee accrued or paid is charged in full to the capital column of
the Income Statement.
(e) Finance costs
Finance costs are accounted for on an accruals basis. Finance costs are charged
to the Income Statement in line with the Board's expected long-term split of
returns, in the form of capital gains and income, from the Company's portfolio.
As a result 5% of the finance costs are charged to the revenue column of the
Income Statement and 95% are charged to the capital column of the Income
Statement. Finance charges, if applicable, including interest payable and
premiums on settlement or redemption, are accounted for on an accruals basis in
the Income Statement using the effective interest rate method and are added to
the carrying amount of the instrument to the extent that they are not settled
in the period in which they arise.
(f) Taxation
The tax effect of different items of expenditure is allocated between capital
and revenue using the marginal basis.
Deferred taxation is provided for on all timing differences that have
originated but not reversed by the Balance Sheet date other than those
differences regarded as permanent. This is subject to deferred tax assets only
being recognised if it is considered more likely than not that there will be
suitable profits from which the reversal of timing differences can be deducted.
Any liability to deferred tax is provided for at the average rate of tax
expected to apply. Deferred tax assets and liabilities are not discounted to
reflect the time value of money.
(g) Foreign currency
The results and financial position of the Company are expressed in sterling,
which is the functional and presentational currency of the Company. Sterling is
the functional currency because it is the currency of the primary economic
environment in which the Company operates.
Transactions recorded in overseas currencies during the year are translated
into sterling at the appropriate daily exchange rates. Assets and liabilities
denominated in overseas currencies at the Balance Sheet date are translated
into sterling at the exchange rates ruling at the date.
Any gains or losses on the translation of foreign currency balances, whether
realised or unrealised, are taken to the capital or the revenue column of the
Income Statement, depending on whether the gain or loss is of a capital or
revenue nature.
(h) Functional and presentational currency
The financial information is shown in sterling, being the Company's
presemtational currency. In arriving at the functional currency the Directors
have considered the following:
i. the primary economic environment of the Company:
ii. the currency in which the original capital was raised;
iii. the currency in which distributions are made;
iv. the currency in which performance is evaluated; and
v. the currency in which the capital would be returned to shareholders on a
break up basis.
The Directors are of the opinion that sterling best represents the Company's
functional currency.Notes to the Financial Statements (continued):
Accounting Policies (continued)
(i) Derivative Financial instruments
The Company uses derivative financial instruments (namely put and call
options). The merits and rationale behind such strategies are to enhance the
capital return of the portfolio, facilitate management of the portfolio
volatility and improve the risk-return profile of the Company relative to its
benchmark.
All derivative instruments are valued at fair value in the Balance Sheet in
accordance with FRS 26: `Financial Instruments: measurement.'
Each investment in options is reviewed on a case-by-case basis and are all
deemed to be capital in nature. As such, all gains and losses on the above
strategies have been debited or credited to the capital column of the Income
Statement.
All gains and losses on the over-the counter (OTC) equity swap during the swap
term are accounted for as investment holding gains or losses on investments.
Where there has been a re-positioning of the swap, gains and losses are
accounted for on a realised basis. All such gains and losses have been debited
and credited to the capital column of the Income Statement.
(j) Capital Reserves
The following are transferred to this reserve:
* gains and losses on the realisation of investments;
* realised and unrealised exchange differences of a capital nature;
* expenses, together with the related taxation effect, in accordance with the
above policies;
* increases and decreases in the valuation of investments held at the year
end; and
* unrealised exchange differences of a capital nature.
2 Income from investments held at fair value through profit or loss
2011 2010
£'000 £'000
Income from investments
UK listed dividends 343 -
Overseas dividends 7,226 4,612
Fixed interest income 1,549 1,151
9,118 5,763
Other income 7 5
Deposit interest
Interest received from VAT - 57
recovery
Total income from investments 9,125 5,825
held at fair value through
profit or loss
Total income comprises
Dividends 7,569 4,612
Interest 1,556 1,213
9,125 5,825
Notes to the Financial Statements (continued):
3 Investment management, management and performance fees
Revenue Capital Total Revenue Capital Total
2011 2011 2011 2010 2010 2010
£'000 £'000 £'000 £'000 £'000 £'000
Investment management 107 2,030 2,137 96 1,828 1,924
fee
Management fee 40 763 803 37 693 730
Refund of VAT previously - - - - (255) (255)
paid on management fees
Performance fee - (135) (135) - 2,759 2,759
147 2,658 2,805 133 5,025 5,158
In accordance with the performance fee arrangements currently in place a
performance fee of £224,000 accrued in respect of the year ended 31 March 2010
was paid during the year ended 31 March 2011(2010: nil).
At the year end a performance fee of £2,624,000 crystalised. Of the £2,624,000,
£2,385,000 is payable is payable to the Investment Manager and £239,000 to the
Manager.
4 Return per share
2011 2010
£'000 £'000
The return per share is based on
the following figures:
Revenue return 7,155 4,210
Capital return 3,521 75,192
Total return 10,676 79,402
Weighted average number of 43,342,727 44,122,846
ordinary shares in issue during
the year - basic
Revenue return per share 16.5p 9.5p
Capital return per share 8.1p 170.5p
Total return per share - basic 24.6p 180.0p
Weighted average number of 43,776,264 44,122,846
ordinary shares in issue during
the year - diluted
Revenue return per share 16.3p 9.5p*
Capital return per share 8.1p 170.5p*
Total return per share - diluted 24.4p 180.0p*
* dilution not applicable
5 Interim dividend
Under UK GAAP, final dividends are not recognised until they are approved by
shareholders and interim dividends are not recognised until they are paid. They
are also debited directly from reserves. Amounts recognised as distributable to
ordinary shareholders for the year ended 31 March 2011 were as follows:
2011 2010
£'000 £'000
Interim dividend in respect of the year 3,653 -
ended 31 March 2010
Interim dividend in respect of the year - 1,982
ended 31 March 2009
3,653 1,982
Notes the Financial Statements (continued):
In respect of the year ended 31 March 2011, an interim dividend of 15.0p per
share (2010: interim dividend of 8.5p per share) has been declared. The
aggregate cost of this dividend based on the number of shares in issue at 1
June 2011 is estimated to be £6,474,000. In accordance with FRS 21 this
dividend will be reflected in the interim accounts as at 30 September 2011.
Total dividends payable in respect of the financial year, which is the basis on
which the requirements of s1158 of the Corporation Tax Act 2010 are considered,
are set out below:
2011 2010
£'000 £'000
Revenue available for distribution by way 7,155 4,210
of dividend for the year
Dividends for the year ended 31 March (6,474) (3,653)
681 557
* based on 43,157,210 shares in issue as at 1 June 2011.
6 Net asset value per share
2011 2010
Net asset value per share - basic 799.2p 780.8p
Net asset value per share - diluted for 773.5p 752.7p
subscription shares
Net asset value per share - fully diluted 772.8p 747.3p
for subscription shares and treasury shares
The net asset value per share is based on the assets attributable to equity
shareholders of £344,781,000 (2010: £346,181,000) and on the number of shares
in issue at the year end of 43,141,611 (excluding shares held in treasury)
(2010: 44,336,756). As at 31 March 2011, there were 8,191,112 subscription
shares in issue (2010: 8,992,307).
The net asset value per share diluted assumes all outstanding subscription
shares were exercised at 638p resulting in assets attributable to equity
shareholders of £397,040,000 and on 51,332,723 shares (2010: assumed all
outstanding subscription shares were exercised at 614p resulting in assets
attributable to shareholders of £401,394,000 and on 53,329,063 shares).
The net asset value per share fully diluted for subscription shares and
treasury shares assumes all outstanding subscription shares were exercised at
638p and the treasury shares were sold back to the market at 686p resulting in
assets attributable to equity shareholders of £399,482,000 (2010: £445,164,000)
and on 51,691,330 shares (2010: 59,568,479).
As the share price at 31 March 2011 (686p) stood at a discount greater than 5%
to the net asset value per share, the treasury shares are not dilutive (2010:
not dilutive).
7 Financial Information
This preliminary statement is not the Company's statutory accounts. The above
results for 2011 have been agreed with the Auditors and are an abridged version
of the Company's full draft accounts which have not yet been filed with the
Registrar of Companies. The 2011 accounts received an audit report which was
unqualified did not include a reference to any matter to which the auditors
drew attention without qualifying the report, and did not contain statements
under Section 498 of the Companies Act 2006.
The statutory accounts for the year end 31 March 2010 have been delivered to
the Registrar of Companies and those for 31 March 2011 will be despatched to
shareholders shortly. The 2011 accounts received an audit report which was
unqualified, did not include a reference to any matter to which the auditors
drew attention without qualifying the report, and did not contain statements
under Section 498 of the Companies Act 2006.
This preliminary announcement of the Company has been prepared in accordance
with United Kingdom Generally Accepted Accounting Practice (UK GAAP) and using
the same accounting policies as those in the last published annual accounts,
being those to 31 March 2010.
Frostrow Capital LLP
Company Secretary
1 June 2011
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