Annual Financial Report

RNS Number : 0433S

British Assets Trust PLC

27 November 2012

 



BRITISH ASSETS TRUST PLC

Date:  27 November 2012

Results for the year ended 30 September 2012

Highlights

·      Net asset value total return of 17.3 per cent, equal to the total return from the benchmark index

·      Maintained dividend of 6.112p per share, resulting in a dividend yield of 5.1 per cent at the year end

Chairman's Statement

The Company's net asset value total return for the year ended 30 September 2012 was 17.3 per cent, matching the return from the composite benchmark index of 80 per cent FTSE All-Share Index and 20 per cent FTSE World (ex UK) Index.

As highlighted in last year's Annual Report, some minor changes were made to the portfolio following the change of benchmark on 1 October 2011 to 80 per cent FTSE All-Share Index (previously 75 per cent) and 20 per cent FTSE World (ex UK) Index (previously 25 per cent). The Company also re-aligned the Global (ex UK) portfolio to generate a higher level of income. These changes have enabled the Company to maintain a meaningful international equity exposure whilst increasing the level of dividend income.

Notwithstanding a challenging backdrop, stockmarkets made good progress during the year. Company balances sheets generally remain in good shape and those investors who have been prepared to enter the market have been attracted by the dividend yields available from equities relative to the low returns available from cash and fixed interest securities.

A key area of investor focus was on the continuing developments in the Eurozone relating to its sovereign debt and banking crisis. The European Central Bank has provided significant liquidity assistance by a variety of means to ensure its low interest rates can feed through to the wider economy thus alleviating many of the shorter term concerns, although the situation remains volatile and the outcome is uncertain.

Many governments have continued with austerity programmes to cut their deficits but economic growth forecasts throughout Europe and in the UK have trended downwards as they struggle to stimulate their economies. Growth has also been slowing in the major emerging markets, including China which is being impacted by slowing demand from Europe. The US economy performed more strongly during the year, benefiting from stimulus packages and more robust domestic demand.  

The table below provides a breakdown of the estimated contributions to the net asset value total return for the year.

Market/benchmark return	17.3%
Stock selection
UK equities	-0.2
Global High Yield (ex UK) equities	-1.6
Emerging Markets equities	0.3
Asset allocation	-0.2
Corporate bonds	0.0
Gearing	2.4
Expenses	-0.7
British Assets Trust net asset value total return	17.3%

The largest impact on performance was the benefit of gearing in a rising market. The UK portfolio modestly underperformed the FTSE All-Share Index as the out-performance of the core portfolio was more than offset by disappointing returns from the UK satellite portfolio. The emerging markets portfolio continued to perform well, producing a total return of nearly 19 per cent, but the contribution was partially offset at the asset allocation level by the overweight position to this asset class, which underperformed developed markets. The Global High Yield (ex UK) portfolio met its objective of generating a higher level of income but produced a disappointing total return, as explained in more detail in the Managers' Review. 

Earnings and Dividends

Revenue earnings per share for the year were 6.6p (2011: 5.7p). The Company benefited from dividend growth within the portfolio, some of which is non-recurring, as well as the effect of the portfolio re-alignment described above. 

Three interim dividends of 1.442p per share were paid during the year and the Board recommends payment of a final dividend of 1.786p per share, payable on 31 January 2013 to shareholders on the register on 28 December 2012. This brings the total dividend for the year to 6.112p per share, unchanged from the previous year.

Allocation of Expenses between Revenue and Capital

In accordance with the Statement of Recommended Practice for the preparation of financial statements of investment trust companies, the Company allocates its management fees and finance costs to revenue and capital in accordance with the Board's view of the expected long-term split of returns, in the form of income and capital gains respectively, from the Company's investment portfolio. For a number of years such expenses have been allocated 25 per cent to revenue and 75 per cent to capital. However, following a review by the Board during the year it was decided that, on the basis of expected returns, these expenses should be allocated 35 per cent to revenue and 65 per cent to capital. This will take effect from 1 October 2012.

Gearing

As at 30 September 2012, the Company's level of gearing, net of cash, was 16.4 per cent. This was represented by 2.9 per cent of equity gearing and 13.5 per cent in corporate bonds.

The Company's borrowings comprise £60 million 6.25 per cent Bonds which are due for redemption in 2031, and a £60 million bank facility which matures in March 2013. £20 million of the bank facility was drawn down at the year end. It is the current intention of the Board to seek to put in place a new bank facility when the current one matures.

Annual General Meeting

Following representations from a number of shareholders who live a long distance from Edinburgh, the Company's Annual General Meeting this year will be held in London. It is the Board's intention to return to Edinburgh for the following Annual General Meeting. This year's Meeting will be held at 12 noon on Tuesday 29 January 2013 at the offices of F&C Asset Management plc, Exchange House, Primrose Street, London EC2A 2NY. It will be followed by a presentation from the Company's lead fund manager, Phil Doel. This is a good opportunity for shareholders to meet the Board and Managers.

Outlook

The Eurozone can be expected to remain an area of concern for investors in the year ahead. In the UK, although there have been signs recently of improvements in the economy, the government is not likely to deviate significantly from its austerity programme in the foreseeable future. An acceptable compromise in resolving the partisan divide over the US "fiscal cliff" is a necessary precursor to markets sustaining their recent performance.

Whilst we do anticipate positive returns from equity markets in the medium term, they are likely to be volatile in the near term following a year of good returns. The prospects for earnings and dividend growth have fallen in recent months but equities remain attractively valued relative to other asset classes and investors are likely to continue to seek higher quality companies which pay good levels of dividends. This should be of benefit to the Company.

Lynn Ruddick

Chairman

Income Statement

For the Year ended 30 September 2012

	Notes	2012	2012	2012
		Revenue	Capital	Total
		£'000	£'000	£'000
Gains on investments		-	41,800	41,800
Exchange differences		-	544	544
Income		21,887	-	21,887
Management expenses		(442)	(1,325)	(1,767)
Other expenses		(859)	-	(859)
Net return before finance costs & taxation		20,586	41,019	61,605
Finance costs		(1,028)	(3,082)	(4,110)
Return on ordinary activities before tax		19,558	37,937	57,495
Tax on ordinary activities		(471)	-	(471)
Return attributable to shareholders		19,087	37,937	57,024
Return per share	3	6.6p	13.0p	19.6p

The total column of this statement is the Profit and Loss Account of the Company.  The supplementary revenue and capital columns are both prepared under guidance published by The Association of Investment Companies.

All revenue and capital items in the above Income Statement derive from continuing operations.

No operations were acquired or discontinued in the year.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the Company have been reflected in the above Income Statement.

Income Statement

For the Year ended 30 September 2011

		2011	2011	2011
	Notes	Revenue	Capital	Total
		£'000	£'000	£'000
Losses on investments		-	(29,080)	(29,080)
Exchange differences		-	(152)	(152)
Income		19,166	-	19,166
Management expenses		(362)	(1,085)	(1,447)
Other expenses		(862)	-	(862)
Net return before finance costs & taxation		17,942	(30,317)	(12,375)
Finance Costs		(1,031)	(3,092)	(4,123)
Return on ordinary activities before tax		16,911	(33,409)	(16,498)
Tax on ordinary activities		(235)	-	(235)
Return attributable to shareholders		16,676	(33,409)	(16,733)
Return per share	3	5.7p	(11.5)p	(5.8)p

Reconciliation of Movements in Shareholders' Funds

For the year ended 30 September 2012

	Called up Share Capital	Capital Redemption Reserve	Capital Reserve	Revenue Reserve	Shareholders' Funds
	£'000	£'000	£'000	£'000	£'000
Opening shareholders' funds	72,778	15,563	223,835	31,117	343,293
Dividends paid	-	-	-	(17,782)	(17,782)
Return attributable to ordinary shareholders	-	-	37,937	19,087	57,024
Closing shareholders' funds	72,778	15,563	261,772	32,422	382,535

Reconciliation of Movements in Shareholders' Funds

For the year ended 30 September 2011

	Called up Share Capital	Capital Redemption Reserve	Capital Reserve	Revenue Reserve	Shareholders' Funds
	£'000	£'000	£'000	£'000	£'000
Opening shareholders' funds	72,778	15,563	257,244	32,208	377,793
Dividends paid	-	-	-	(17,767)	(17,767)
Return attributable to ordinary shareholders	-	-	(33,409)	16,676	(16,733)
Closing shareholders' funds	72,778	15,563	223,835	31,117	343,293

Balance Sheet

As at 30 September 2012

	2012	2011
	£'000	£'000
Fixed assets
Investments at fair value through profit or loss	445,115	413,563
Current assets
Debtors	3,573	2,945
Cash in bank and on deposit	14,486	10,671
	18,059	13,616
Creditors: amounts falling due within one year	(21,139)	(24,412)
Net current liabilities	(3,080)	(10,796)
Total assets less current liabilities	442,035	402,767
Creditors: amounts falling due after more than one year	(59,500)	(59,474)
Net assets	382,535	343,293
Capital and reserves
Called-up share capital	72,778	72,778
Capital redemption reserve	15,563	15,563
Capital reserve	261,772	223,835
Revenue reserve	32,422	31,117
Equity shareholders' funds	382,535	343,293
Net asset value per share	131.4p	117.9p

Cash Flow Statement

For the Year Ended 30 September 2012

	2012	2011
	£'000	£'000
Operating activities
Investment income received	20,126	17,894
Deposit interest received	40	24
Option premiums received	606	942
Underwriting commission received	76	25
Management expenses paid	(1,767)	(1,897)
Other cash payments	(863)	(880)
Net cash inflow from operating activities	18,218	16,108
Servicing of finance
Interest on 6.25 per cent Bonds 2031	(3,750)	(3,750)
Interest on revolving advance facility	(307)	(442)
Net cash outflow from servicing of finance	(4,057)	(4,192)
Capital expenditure and financial investment
Purchases of investments	(285,344)	(225,647)
Sales of investments	295,512	239,751
Net cash inflow from capital expenditure and financial investment	10,168	14,104
Equity dividends paid	(17,782)	(17,767)
Net cash inflow before financing	6,547	8,253
Financing
Revolving advance facility repaid	(2,917)	(4,312)
Net cash outflow from financing	(2,917)	(4,312)
Increase in cash	3,630	3,941
Reconciliation of net cash flow to movement in net debt
Increase in cash in the year	3,630	3,941
Revolving advance facility repaid	2,917	4,312
Change in net debt resulting from cash flows	6,547	8,253
Currency gains/(losses)	465	(310)
Increase in 6.25 per cent Bonds 2031 liability	(26)	(26)
Movement in net debt in the period	6,986	7,917
Opening net debt	(71,954)	(79,871)
Closing net debt	(64,968)	(71,954)

Principal Risks and Risk Management

The Company's assets consist mainly of listed securities and its principal risks are therefore market-related. The Company is also exposed to currency risk in respect of overseas markets in which it invests. Detailed explanations of the risks associated with the Company's financial instruments are contained in note 2.

Other risks faced by the Company include the following:

·    External - events such as terrorism, protectionism, inflation or deflation, economic shocks and recessions, regulatory changes and movements in interest rates and exchange rates could affect share prices in particular markets.

·    Investment and strategic - incorrect strategy, asset allocation, stock selection and the use of gearing could all lead to poor returns for shareholders.

·    Regulatory - breach of regulatory rules could lead to suspension of the Company's Stock Exchange listing, financial penalties, or a qualified audit report.  Loss of investment trust status could lead to the Company being subject to tax on capital gains.

·    Operational - failure of the Managers' accounting systems or disruption to the Managers' business, or that of third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders' confidence.

·    Financial - inadequate controls by the Managers or third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations. Breaching bond and loan covenants or being unable to replace maturing borrowing facilities could lead to a loss of shareholders' confidence and financial loss for shareholders.

The Board seeks to mitigate and manage these risks through continual review, policy setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Company's investment portfolio. Investment risk is spread through holding a wide range of securities in different countries and industrial sectors. The Managers make use of third party risk systems to monitor investment risk and the Board receives quarterly risk reports. The Board applies the principles detailed in the internal control guidance issued by the Financial Reporting Council.

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge, in respect of the Annual Report for the year ended 30 September 2012, of which this statement of results is an extract:

·      The financial statements have been prepared in accordance with applicable UK Accounting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      The Annual Report includes a fair review of the important events that have occurred during the financial year and their impact on the financial statements;

·      The Annual Report includes a description of the Company's principal risks and uncertainties; and

·      The Annual Report includes details of related party transactions that have taken place during the financial year.

On behalf of the Board

Lynn Ruddick

Director

Notes

1.         The financial statements have been prepared under UK Generally Accepted Accounting Practice ('UK GAAP') and in accordance with guidelines set out in the Statement of Recommended Practice ('SORP') for investment trust companies and venture capital trusts, issued in January 2009 by the Association of Investment Companies, except as disclosed in the following paragraph.

            Expenses which are allocated to capital are available to reduce the Company's liability to corporation tax.  The SORP recommends that the benefit of that tax relief should be allocated to capital and a corresponding charge made to revenue.  This is known as the 'marginal method' of allocating tax relief between capital and revenue.  The Company does not adopt the marginal method for two reasons.  Firstly, the Company has only one class of share and any allocation of tax relief between capital and revenue would have no impact on shareholders' funds.  Secondly, the significant unutilised management expenses and interest carried forward make it unlikely that the Company will be liable to corporation tax in the foreseeable future.  Had this allocation been made, the charge to revenue and corresponding credit to capital for the year ended 30 September 2012 would have been £456,000 (2011: £541,000).

2.         Financial instruments

The Company's financial instruments comprise equity and fixed interest investments, foreign currency exchange contracts, cash balances, bonds, a bank loan and debtors and creditors that arise directly from its operations. As an investment trust the Company holds a portfolio of financial assets in pursuit of its investment objective. The Company makes use of borrowings to achieve improved performance in rising markets. The risk of borrowings may be reduced by raising the level of cash balances held.  The Company also has the ability to enter into derivative transactions in the form of financial currency contracts and futures and options, subject to Board approval, for the purpose of managing currency and market risk arising from the Company's portfolio, and enhancing income. 

Listed fixed asset investments held are valued at fair value. For listed securities this is either bid price or the last traded price depending on the convention of the exchange on which the investment is listed.  Unquoted investments are valued by the Directors on the basis of all information available to them at the time of valuation.   

The main risks that the Company faces arising from its financial instruments are:

(i)         market price risk, being the risk that the value of investment holdings will fluctuate as a result of changes in market prices caused by factors other than interest rate or currency rate movements;

            (ii)         interest rate risk, being the risk that the future cash flows of a financial instrument will fluctuate because of changes in market interest rates;

(iii)        credit risk, being the risk that a counterparty to a financial instrument will fail to       discharge an obligation or commitment that it has entered into with the Company;

(iv)        liquidity risk, being the risk that the Company may not be able to liquidate its investments quickly enough to meet its ongoing financial commitments; and

(v)         foreign currency risk, being the risk that the value of investment holdings, investment purchases, investment sales and income will fluctuate because of movements in currency rates.

Market price risk

The management of market price risk is part of the fund management process and is typical of equity -investment. The portfolio is managed with an awareness of the effects of adverse price movements through detailed and continuing analysis with an objective of maximising overall returns to shareholders. Derivatives may be used from time to time to hedge - specific market risk, gain exposure to a specific market or to enhance income.

Interest rate risk

(a)  Floating rate

Interest payments are received on cash balances by reference to the bank base rate for the relevant currency for each deposit.

(b)  Fixed rate

The Company holds fixed interest investments and has fixed interest liabilities.

The bonds are denominated in sterling. In the event that the Company decides to repay the bonds before their maturity date the terms of issue may result in a penalty for early repayment.

Credit risk

Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Company. The carrying amounts of financial assets best represents the maximum credit risk exposure at the balance sheet date.

Credit risk arising on transactions with brokers relates to transactions awaiting settlement. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the diversity of counterparties used.

All the assets of the Company which are traded on a recognised exchange are held by JPMorgan Chase Bank, the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to securities held by the custodian to be delayed or limited. The Board monitors the Company's risk by reviewing the custodian's internal control reports.  The Managers have a monitoring procedure in respect of counterparty risk which is reviewed on an ongoing basis.

The credit risk on liquid funds and derivative financial instruments is controlled through the Managers' process for approving counterparties, which incorporates both a quantitative and qualitative review process in order to achieve a substantial overview of the credit worthiness of all counterparties. Bankruptcy or insolvency of such counterparties may cause the Company's ability to access cash placed on deposit to be delayed, limited or lost. 

Liquidity risk

The Company maintains sufficient investments in cash and readily realisable securities to pay accounts payable and expenses as they fall due. Short term flexibility is achieved, where necessary, through the use of overdraft facilities.  The Company's liquidity risk is managed on an ongoing basis by the Managers.

Foreign currency risk

The Company invests in overseas securities and holds foreign currency cash balances which give rise to currency risks. In the year to 30 September 2012, the Company entered into US Dollar and Euro foreign currency contracts with a view to partially hedging these currency risks

3.         Return per Ordinary Share is based on a weighted average of 291,112,282 (2011 same) Ordinary Shares in issue during the year. 

4.         The proposed final dividend of 1.786p per Ordinary Share will be paid on 31 January 2013 to  shareholders on the register at close of business on 28 December 2012.

            The last date for receipt of mandate instructions for those shareholders who wish to join the Dividend Reinvestment Plan is 10 January 2013.

5.         The Company had 291,112,282 (2011: same) Ordinary Shares in issue as at 30 September 2012.

6.         The Company's geographic exposure as a percentage of ordinary shareholders' funds at 30 September 2012 was as follows (comparative figures are for 30 September 2011).

	2012	2011
UK equities	75.2	79.3
Global High Yield (ex UK) equities	19.3	17.8
Emerging Markets equities	8.4	7.8
Corporate Bonds	13.5	15.6
Gearing	(16.4)	(20.5)
Total	100.0	100.0

7.         This announcement is not the Company's statutory accounts.  The statutory accounts for the year ended 30 September 2011 have been delivered to the Registrar of Companies and have received an audit report which was unqualified and did not contain any emphasis of matter.

The Annual Report for the year ended 30 September 2012 will be posted to shareholders and is available for inspection at 80 George Street, Edinburgh EH2 3BU, the registered office of the Company, and on the Company's website, www.british-assets.co.uk.

Enquiries:         

Phil Doel

Investment Manager

F&C Asset Management plc - 0207 628 8000

 

END

 

 

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