Annual Financial Report

RNS Number : 7789T

British Assets Trust PLC

25 November 2013

 



BRITISH ASSETS TRUST PLC

Date:  25 November 2013

Results for the year ended 30 September 2013

Highlights

·      Net asset value total return of 15.2 per cent

·      Share price total return of 15.6 per cent

·      Discount at the year end of 3.9 per cent (on an ex-income NAV with debt at market value basis)

·      Final dividend increase of 3.0 per cent brining the total dividend for the year  to 6.2522p per share, an increase of 2.3 per cent and representing a dividend yield of 4.7 per cent based on the year-end share price

·      Changes to the portfolio management approach

Chairman's Statement

Our net asset value total return of 15.2 per cent for the year ending 30 September 2013 was strong in absolute terms, although it fell short of the total return of 19.0 per cent from the composite benchmark (80 per cent FTSE All-Share Index and 20 per cent FTSE World (ex UK) Index) as described below.

The Board was pleased to announce a return to dividend growth during the year for the first time since 2009.  The dividend increase for the year as a whole was 2.3 per cent.

As explained in more detail below, the Board and Managers reviewed the Company's portfolio management approach during the year and some important changes are being introduced.

Market Overview

Global stockmarkets made good progress during the year, benefiting from the continued provision of liquidity by central banks. This performance has been achieved despite a number of continuing uncertainties and concerns, including long term agreement of the US budget deficit and debt ceiling, the scaling back of quantitative easing programmes, slowing economic growth in China and only limited signs of economic growth in Europe.

In the UK, the prospects for the economy as a whole have improved and there are signs of improving consumer confidence. Growth in corporate profits has, however, not been as strong as anticipated a year ago, and economic performance across the UK remains polarised, with London and the South East outperforming most other regions.

Performance

The table below provides a breakdown of the estimated contributions to the relative performance for the year.

Significant factors impacting performance included:
Stock selection
UK equities	-1.3
Global High Yield (ex UK) equities	-0.7
Emerging market  equities	-0.2
Regional equity asset allocation	-0.9
Corporate bonds	-0.9
Gearing (net of finance costs)	2.4
Expenses	-0.7

(Note: The above returns are calculated on a total return basis with net income reinvested. They show the estimated contributions to the Company's net asset value total return relative to the benchmark index. Contributions cannot be added together as they are calculated on a monthly geometric basis).

The UK Equities portfolio which is the largest component of our assets underperformed the FTSE All-Share Index by 2.1 per cent during the year as many higher yielding sectors of the market underperformed the broader index.

The worst relative performance from the individual portfolios was in the Company's Global High Yield (ex UK) portfolio.  As explained in more detail below, the Board reviewed the Company's sub-portfolio structure during the year and decided, amongst other things, to change its approach to international equity management. 

Throughout the year the Company retained an overweight exposure to emerging market equities which underperformed developed markets due to fears of the implications of a slowing Chinese economy and the announcement by the US Federal Reserve that the quantitative easing programme would be scaled back. This had a negative impact on the contribution from equity asset allocation.

In a rising market, gearing was a positive contributor to performance albeit reduced by the offsetting exposure to corporate bonds.

Changes to the Management of the Portfolio

The Board is seeking a total shareholder return that exceeds that of our benchmark, and a secure, growing dividend. .

Since the change in investment manager in 2011, the Board has been reviewing the best way to meet these objectives.  During the year the Board and Managers reviewed the investment approach and, after due consideration, it was decided to make changes to that approach, albeit within previously approved shareholder guidelines.

Whilst the Company's portfolio will continue to be invested mainly in UK listed equities, the total number of holdings will be reduced. These will be managed as one portfolio rather than as several sub-portfolios as has been the case hitherto. All holdings will be selected on the basis of fundamental research, utilising the wider skills within the Managers' investment teams. This represents a change in approach for most of the Company's international equity holdings which have been selected on a systematic (or quantitative) basis since December 2008.

The Board believes that this change will result in improved long term performance for our shareholders, whilst recognising that there may be higher levels of volatility in short term returns. The Managers have already started to implement the initial changes to the portfolio.  

Simplification of the portfolio enables the Managers to give suitable prominence to their individual best ideas to reflect their levels of conviction in those ideas in a simple, timely and meaningful fashion. This revised approach will be consistent across all the Company's investments. It will also allow the Managers to enact top down strategy views in a more precise and effective manner.

Earnings and Dividends

The Company's revenue earnings for the year were unchanged at 6.6p per share.

As stated in last year's Annual Report, the Board decided to allocate management fees and finance costs to revenue and capital in the ratio 35:65 with effect from 1 October 2012 (previously a ratio of 25:75). This had an effect of reducing earnings for the year by 0.2p per share. In addition, with a reduction in market volatility the Company generated less income from written option premiums. The combined effect of these items was a reduction in earnings for the year of 0.3p per share and on a like for like basis earnings per share were 5.1 per cent higher. This reflects an improvement in the dividends from the companies in the portfolio.

The Company's ongoing charges for the year were 0.70 per cent of shareholders' funds (2012: 0.72 per cent).

A first quarterly interim dividend of 1.442p per share was paid on 12 April 2013, and second and third quarterly interim dividends of 1.4853p per share were paid on 12 July and 11 October 2013.  The second and third interim dividends each represented an increase of 3.0 per cent compared to the dividends paid in the previous year.

It is the Company's objective to deliver dividend growth. Our ability to achieve this will be dependent upon, inter alia, the rate of dividend growth within the investment portfolio, the level of dividend cover and the level of accumulated revenue reserves. In particular, the Board is keen to ensure that any dividend growth is sustainable. Having not increased the dividend since 2009 the Board was pleased to be able to increase the second and third interim dividends by 3.0 per cent and, following a review of the Company's year-end results and its short to medium term revenue forecast, has decided to recommend the same percentage increase in the final dividend.  This will bring the total dividend for the year to 6.2522p per share, representing an overall increase of 2.3 per cent.  The final dividend of 1.8396 p per share will be paid on 31 January 2014 to shareholders on the register on 27 December 2013.

Gearing

At the end of the year, the Company's level of gearing, net of cash, was 16.7 per cent. This was represented by 3.9 per cent of equity gearing and 12.8 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 £50 million bank facility which matures in March 2016. The bank facility was put in place in March 2013 to replace the previous £60 million facility which matured at that time. The new facility includes terms which are typical for a facility of this nature, and the principal covenants are similar to those previously in place. £25 million of the bank facility was drawn down at the end of the year.

Alternative Investment Fund Managers' Directive ('AIFMD')

The AIFMD is European legislation which creates a European-wide framework for regulating managers of alternative investment funds ('AIFs'). Closed-ended investment companies fall within the remit of these new regulations. The legislation came into force in July 2013 but there is a twelve month transitional period which means that the Company has until July 2014 to comply. The Board has reviewed the impact of the directive on the Company's operations and decided to appoint a subsidiary of F&C Asset Management plc as the Company's AIFM, at no additional cost to the Company. Under the directive, the Company is also required to appoint a depository. The Board is well advanced in considering which organisation to appoint as the depository and, although this will result in an additional cost to the Company the Board does not expect this cost to be significant.

Board Composition

As previously announced, Jim Grover was appointed as a non-executive Director on 25 June 2013. Mr Grover was until, September 2013, Group Strategy Director of Diageo plc and a member of its Executive Committee.

During the year, the Board also announced that, having served as a non-executive Director since 1998, Jim MacLeod will retire from the Board at the Annual General Meeting. On behalf of the Board, I would like to thank Jim for his service to the Company throughout this period and in particular in his role as Chairman of the Audit Committee. Following Jim's retirement, it is the Board's intention that James Long will be appointed as Chairman of the Audit Committee.

Annual General Meeting and Separate Shareholder Presentation

The Annual General Meeting will be held at City of London Club, 19 Old Broad Street, London EC2N 1DS on Monday 27 January 2014 at 12 noon. It will be followed by a presentation from the Company's investment manager, Phil Doel. This is a good opportunity for shareholders to meet the Board and Managers.

In addition to the Annual General Meeting, there will be a separate shareholder presentation at the offices of F&C Asset Management plc, 80 George Street, Edinburgh EH2 3BU on Tuesday 17 December 2013 at 12.30pm. This meeting will also include a presentation from Phil Doel and the opportunity to ask questions of the Board and Managers.

The Board recognises that many of its shareholders would find it difficult to travel to either Edinburgh or London to attend an Annual General Meeting. It is hoped that this dual-meeting format provides a larger proportion of shareholders with an opportunity to meet the Board and Managers and to discuss the Company's activities and the Managers' outlook for markets.

Outlook

The slow and intermittent economic recovery in developed markets has continued.  With slack in labour markets, inflationary pressures are muted and hence the period of low interest rates looks set to continue in the near term. For so long as these conditions continue, equities should remain an attractive asset class, assuming profit projections are broadly maintained. The outlook for dividend growth also remains solid and this should help support stock market levels, as income continues to be of great importance to investors.

Against this backdrop, and with the changes which will continue to be implemented to the management of the portfolio, the Board believes that the Company is well positioned to make good progress in the year ahead.

Lynn Ruddick

Chairman

Income Statement

For the Year ended 30 September 2013

		2013	2013	2013
	Notes	Revenue	Capital	Total
		£'000	£'000	£'000
Gains on investments		-	41,028	41,028
Exchange differences		-	(154)	(154)
Income		22,382	-	22,382
Management expenses		(671)	(1,246)	(1,917)
Other expenses		(870)	-	(870)
Net return before finance costs & taxation		20,841	39,628	60,469
Finance Costs		(1,465)	(2,720)	(4,185)
Return on ordinary activities before tax		19,376	36,908	56,284
Tax on ordinary activities		(359)	-	(359)
Return attributable to shareholders		19,017	36,908	55,925
Return per share	3	6.6p	12.7p	19.3p

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 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

Reconciliation of Movements in Shareholders' Funds

For the year ended 30 September 2013

	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	261,772	32,422	382,535
Share buy-backs	-	-	(2,243)	-	(2,243)
Dividends paid	-	-	-	(17,872)	(17,872)
Return attributable to ordinary shareholders	-	-	36,908	19,017	55,925
Closing shareholders' funds	72,778	15,563	296,437	33,567	418,345

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

Balance Sheet

As at 30 September 2013

	2013	2012
	£'000	£'000
Fixed assets
Investments at fair value through profit or loss	488,278	445,115
Current assets
Debtors	23,072	3,573
Cash in bank and on deposit	14,594	14,486
	37,666	18,059
Creditors: amounts falling due within one year	(48,072)	(21,139)
Net current liabilities	(10,406)	(3,080)
Total assets less current liabilities	477,872	442,035
Creditors: amounts falling due after more than one year	(59,527)	(59,500)
Net assets	418,345	382,535
Capital and reserves
Called-up share capital	72,778	72,778
Capital redemption reserve	15,563	15,563
Capital reserve	296,437	261,772
Revenue reserve	33,567	32,422
Equity shareholders' funds	418,345	382,535
Net asset value per share	144.5p	131.4p

Cash Flow Statement

For the Year Ended 30 September 2012

	2013	2012
	£'000	£'000
Operating activities
Investment income received	21,823	20,126
Deposit interest received	29	40
Option premiums received	409	606
Underwriting commission received	39	76
Management expenses paid	(1,917)	(1,767)
Other cash payments	(897)	(863)
Net cash inflow from operating activities	19,486	18,218
Servicing of finance
Interest on 6.25 per cent Bonds 2031	(3,750)	(3,750)
Interest on revolving advance facility	(422)	(307)
Net cash outflow from servicing of finance	(4,172)	(4,057)
Capital expenditure and financial investment
Purchases of investments	(344,520)	(285,344)
Sales of investments	344,617	295,512
Net cash inflow from capital expenditure and financial investment	97	10,168
Equity dividends paid	(17,872)	(17,782)
Net cash (outflow)/inflow before financing	(2,461)	6,547
Financing
Revolving advance facility drawndown/(repaid)	5,015	(2,917)
Ordinary Shares purchased to be held in treasury	(2,243)	-
Net cash inflow/(outflow) from financing	2,772	(2,917)
Increase in cash	311	3,630
Reconciliation of net cash flow to movement in net debt
Increase in cash in the year	311	3,630
Revolving advance facility (drawndown)/repaid	(5,015)	2,917
Change in net debt resulting from cash flows	(4,704)	6,547
Currency (losses)/gains	(187)	465
Increase in 6.25 per cent Bonds 2031 liability	(27)	(26)
Movement in net debt in the period	(4,918)	6,986
Opening net debt	(64,968)	(71,954)
Closing net debt	(69,886)	(64,968)

Principal Risks and Risk Management

The Board applies the principles detailed in the internal control guidance issued by the Financial Reporting Council, and has established an ongoing process designed to meet the particular needs of the Company in managing the risks and uncertainties to which it is exposed.

The principal risks and uncertainties faced by the Company are described below and in note 2 which provides detailed explanations of the risks associated with the Company's financial instruments.

·    Market - the Company's fixed assets consist almost entirely of listed securities and it is therefore exposed to movements in the prices of individual securities and the market generally.

·    Investment and strategic - incorrect investment 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 its business, or that of other 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 other 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 monitor investment risk and the Board receives quarterly risk reports.

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 2013, 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 2013 would have been £165,000 (2012: £456,000).

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 with a view to achieving improved performance in 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. 

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 value of financial instruments will fluctuate or that the future cash flows of financial instruments 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 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 bond portfolio is exposed to movements in price due to fluctuations in interest rates. 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, to 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 in order to achieve an 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 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 2013, 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 290,245,981 (2012: 291,112,282) Ordinary Shares in issue during the year. 

4.         The proposed final dividend of 1.8396p per Ordinary Share will be paid on 31 January 2014 to shareholders on the register at close of business on 27 December 2013.

            The last date for receipt of mandate instructions for those shareholders who wish to join the Dividend Reinvestment Plan is 10 January 2014.

5.         The Company had 289,412,282 (2012: 291,112,282) Ordinary Shares in issue as at 30 September 2013, excluding these shares bought back and held in treasury..

6.         The Company's geographic exposure as a percentage of ordinary shareholders' funds at 30 September 2013 was as follows (comparative figures are for 30 September 2012).

	2013	2012
UK equities	78.1	75.2
International Equities: - Developed Americas - Developed Europe - Other Developed - Emerging Markets	6.7 8.3 1.2 9.6	6.3 5.3 5.4 10.7
Corporate Bonds	12.8	13.5
Gearing	(16.7)	(16.4)
Total	100.0	100.0

7.         This announcement is not the Company's statutory accounts.  The statutory accounts for the year ended 30 September 2012 have been delivered to the Registrar of Companies and received an audit report which was unqualified and did not contain any emphasis of matter.

The Annual Report for the year ended 30 September 2013 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

 

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