Annual Financial Report

RNS Number : 5370W

Standard Life Equity Income Tst PLC

19 November 2010

 



STANDARD LIFE EQUITY INCOME TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 30 SEPTEMBER 2010

1.       CHAIRMAN'S STATEMENT

Income and Dividends

Revenue return per ordinary share for the year ended 30 September 2010 was 11.04p compared with 12.75p in the previous year, a decline of 13.4%.    The reduction in earnings mainly resulted from a smaller refund of VAT being received in the reporting period. In addition income from investments decreased by 4.2% during the period predominantly due to the suspension of dividends from BP in the second half.

An unchanged interim dividend of 3.15p was paid on 24 March 2010.  Your Board is now recommending an increase of 3% in the final dividend to 8.65p per share bringing total dividends to 11.80p per share compared with 11.55p per share last year. Having successfully built up revenue reserves over the last five years, the Board believes it is appropriate to increase the total dividend despite earnings not covering dividends this year. The prospects for dividend growth from the Company's portfolio have improved and the Company has a strong revenue reserve should the outturn be behind the Board's expectations.  

VAT on Investment Management Fees

No further repayments of VAT were received during the reporting period but interest of £112,000 was received after the year end from HMRC covering the period 2001 to 2003 and accrued in the accounts.  Discussions continue with HMRC through our former manager, Deutsche Asset Management, for the period since the Company's inception in 1991 to 1996. The Board is also supporting the PwC legal action to recover any non-recoverable VAT incurred by the Company since its inception but does not expect a conclusion from this for some years.

Performance

For the year ended 30 September 2010, your Company's net asset value total return was 11.8% compared with a 12.5% total return for the FTSE All-Share Index and 5.2% for the FTSE 350 High Yield Index.

The Company ranks fifth out of 21 peers in the UK Growth & Income sector based on net asset value total return over the three years ended 30 September 2010 (Source JP Morgan Cazenove).

The medium and long term performance of your Company has been reasonably consistent against its peers as the table below illustrates:

UK Growth & Income Peer Group	One Year Total Return	Three Year Total Return	Five Year Total Return
SLEIT	16/21	5/21	4/21

The Company's share price total return increased by 18.1% over the reporting period and the discount reduced to 4.3% (using statutory net asset values). 

The Manager's Report provides further information on the UK economy and equity market as well as a review of the portfolio of investments and activity during the financial year.

Gearing

Your Manager maintained the gearing level at around 10% for the vast majority of the financial year, expecting that the UK equity market would make reasonable progress, and this proved the correct decision with the FTSE All-Share Index providing a total return of 12.5% over the financial year. The Company renewed its borrowing facilities in February 2010 on terms that your Board regards as favourable.  A £15m one year credit facility was agreed at 100bps over LIBOR.

Marketing and Shareholder Communications

The Manager held meetings with private client and wealth managers.  In addition a number of individual holders attended your Company's AGM, held last year at the offices of JP Morgan Cazenove, the Company's stockbrokers.

Proposed European AIFM Directive

The Board and the Manager fully support the action and lobbying undertaken by the AIC to convince the relevant authorities to protect the position of investment trusts and their shareholders including the recognition of the important role of an independent board.

The Directive on Alternative Fund Managers continues to move slowly to completion, possibly later this year.  Your directors have taken part in the lobbying by the AIC and the UK authorities at this piece of regulation which remains quite unnecessary given the existing framework of company law and financial regulation in the UK.

Bonus Issue of Subscription Shares and Continuation Vote

I have indicated in the past the Board's desire to increase the size of the Company and thereby improve liquidity of the ordinary shares and reduce the TER. After taking advice and consulting with major shareholders the Board is proposing to issue subscription shares to qualifying shareholders on the basis of one subscription share for every five existing ordinary shares.  This will be subject to shareholder approval and I would draw your attention to the combined circular and prospectus that sets out in more detail the anticipated benefits to shareholders.

To enhance the value of the subscription shares to be issued, the Board has been advised to bring forward the next continuation vote to this year allowing a six year life for the subscription shares. Subject to shareholder approval the next continuation vote will therefore be 2016. The Board recommend that shareholders vote in favour of all resolutions to be held at the general meetings in December 2010.

Outlook

The Board and Manager remain confident of the outlook for the UK stock market. Recent macroeconomic data has generally been more positive than expected and portfolio companies are consistently reporting better earnings figures than anticipated by the market, especially those arising from overseas operations (over 60% of FTSE 100 earnings are generated overseas).

One encouraging point is the resumption of growth in dividends particularly in the last two quarters. Across the overall market dividends rose by just 1% in the year ended 30 September 2010, reflecting the impact of the decision by BP; but excluding this, the underlying figure was a rise of 9%. Dividend growth is an indication of a continuing improvement in corporate confidence. Increased merger and acquisition activity should also be supportive of the equity market.

The historic yield on the FTSE All-Share Index is around 3%, about the same return as ten-year Government stocks. For comparison your Company's shares offer a present dividend yield of 4%. Your Board believes that compared with past history equities are cheap relative to bonds and cash. It continues to believe that over the long term your Company will be able to deliver attractive returns from investment in equities.

Charles Wood OBE

Chairman

19 November 2010

2.       MANAGER'S REPORT

Market Review

Over the last 12 months, UK equities generally continued the rally that began in mid-March 2009 although the market remained volatile on concerns over the sustainability of the global economic recovery. The period started positively, as the global economy moved out of recession and corporate newsflow improved. Companies across a range of sectors, including consumer, industrial and financial firms, reported signs of improved trading, which boosted market performance. Merger and acquisition activity also picked up, with British Airways agreeing a deal with Spanish rival Iberia.

Moving into 2010, UK equities maintained their upward trend, with the FTSE 100 Index exceeding the 5,700 level in March for the first time since June 2008. Initially, the market struggled on concerns over Greece's ability to repay its sovereign debt and President Obama's proposals for tough banking sector regulation. However, positive corporate earnings results and improving global economic data then provided a platform for the market to build on 2009's strong gains. For example, Barclays' £11.6 billion profit in 2009 was ahead of market expectations while many companies reported increasing profitability. Merger activity continued with the US food group Kraft's $19 billion takeover of Cadbury. 

However, the market then turned lower on fears over the possibility of a double-dip recession. In particular, fears over Greece's financial position and the possible impact on the rest of the Euro-zone dragged equities lower. The UK market initially reacted positively to the announcement of a €750 billion EU rescue package but this proved short-lived given concerns over the ability of some countries to deliver large debt cuts. In June, downbeat data from a number of countries were a further drag on the market.

Towards the end of the period, UK equities recovered as a measure of risk appetite returned to the market. The latest corporate earnings season got underway in July, with companies generally beating expectations on both earnings and sales. In addition, guidance from management was broadly positive, particularly among the more cyclically exposed businesses. After a weaker August, equities rose in September on better-than-expected macroeconomic data from the US and China, which helped to counter 'double-dip' fears.

Performance

For the year ended 30 September 2010, the Company's net asset value (capital return only) rose by 7.8%, underperforming the FTSE All-Share Index which rose by 8.8% whilst at the same time outperforming the FTSE 350 High Yield Index by 7.5%, which rose by only 0.3% (source: Thomson Datastream). Over the reporting period, the share price rose from 253.5p to 286.78p, an increase of 13%.

The Company's holdings in industrial stocks geared towards economic recovery were positive for performance during the period. For example, Melrose was the biggest contributor, as it announced interim results well ahead of expectations and raised its dividend.  GKN was also positive, benefiting from rising demand for cars. In addition IMI, Fenner, Mondi, and DS Smith all significantly boosted returns over the last 12 months.

Elsewhere, Xstrata and Rio Tinto added to returns as mining stocks benefited from higher commodity prices. However, not holding either Anglo American and BHP Billiton was a negative factor. Britvic made a strong contribution towards performance following good results and a well received acquisition. In the utilities sector, Northumbrian Water Group added to performance, while International Power received a merger approach from GDF Suez.

On the downside, BP was the main detractor from returns, asthe prospect of extensive litigation and clean up costs resulting from the Gulf of Mexico oil spill, alongside the implications for BP's dividend, all negatively impacted the share price. HMV Group detracted from performance as the sector was hit by concerns over the UK consumer and variable trading. Segro was also detrimental following negative sentiment towards the property sector, while management uncertainty proved negative for Micro Focus. Other negatives over the year included not owning SAB Miller which has a below average dividend yield, and owning Brewin Dolphin which underperformed due to concern regarding capital adequacy leading to a share placing.

Activity

During the period, we increased our investment in the utilities sector with the purchase of Severn Trent and United Utilities. Proposals from the OFWAT regulatory review were better than expected, leaving no requirement for equity issuance, and both companies offer attractive dividend yields. We bought National Grid on the expectation of positive regulatory news for its US operation but subsequently sold the company following the announcement of an unexpected rights issue.

Elsewhere, we continued to invest in companies that we expect to benefit from an improving economic outlook. For example, we bought United Business Media, which offered an above-average dividend yield and given signs of improvement in the advertising market. We also bought Stagecoach, as it has made cost savings, is financially strong and has good management. British Airways was another purchase, as it is exposed to a pick up in business travel.

Sales during the period included taking profits in companies following a period of strong performance, such as Mondi and Thomas Cook. In addition, we sold Tomkins after a bid for the company was completed, while we reduced our holding in Tullow Oil due to ongoing uncertainty surrounding licenses in Uganda. In the retail sector, we sold Home Retail Group, because of poor numbers at its Argos business, and HMV Group, following a poor trading statement and given risks to the dividend. 

Outlook

UK equities remain attractively valued when compared to bonds and cash. The market continues to be macro data driven at times, reflecting a lack of confidence in the sustainability of the economic recovery. We remain confident in the outlook for the UK equity market given strong corporate earnings momentum and generally strong balance sheets. We believe that our bottom-up Focus on Change investment approach leaves us well positioned to take advantage of investment opportunities as they arise.

Relative Performance Attribution*	%
Stock Selection	-0.88
Gearing	+0.86
Interest	-0.41
Other including net income	-0.48
Total	-0.91
* based upon statutory NAV

Top 5 Stock Level Contributions	Relative Position (%)	Contribution (%)
Melrose	1.7	0.6
IMI	1.2	0.6
Fenner	1.6	0.6
GKN	1.3	0.4
Barclays	-1.5	0.4
Bottom 5 Stock Level Contributors
BP	1.4	-0.7
Segro	1.0	-0.4
HMV Group	0.4	-0.3
Anglo American	-2.1	-0.3
Aviva	1.4	-0.3
Source: Standard Life Investments

Karen Robertson

Standard Life Investments

19 November 2010

3.    RESULTS & DIVIDENDS

At 30 September 2010	%
Total Return
Net asset value per ordinary share	11.8
FTSE All-Share Index	12.5

At 30 September	2010	2009	% change
Capital Return
Net asset value per ordinary share (including net revenue)	299.8p	280.3p	7.0
Net asset value per ordinary share (excluding net revenue)	291.9p	270.7p	7.8
Ordinary share price (mid market)	286.8p	253.5p	13.1
Discount of share price to net asset value (including net revenue)	4.3%	9.6%	n/a
Discount of share price to net asset value (excluding net revenue)	1.8%	6.4%	n/a
FTSE All -Share Index	2,867.6	2,634.8	8.8

At 30 September	2010	2009	% change
Total assets	£127.3m	£115.7m	10.0
Total shareholders' funds	£113.7m	£106.3m	7.0
Total expense ratio (AIC method)	1.0%	1.0%	n/a
Revenue return per ordinary share	11.04p	12.75p	-13.4
Dividend yield	4.1%	4.6%	n/a
Total dividends for the year (net)	11.80p	11.55p	2.2
Ordinary shares in issue (with voting rights)	37,930,579	37,930,579	-
Gearing (ratio of net borrowings to net assets)	2010	2009
Actual gearing ratio	9.5%	7.8%
Potential gearing ratio	11.5%	18.1%

4.       STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND ACCOUNTS

The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Financial Statements for each financial year. Under that law they have elected to prepare the Financial Statements in accordance with UK Accounting Standards. The Financial Statements are required by law to give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period.

In preparing these Financial Statements, the Directors are required to:

-    select suitable accounting policies and then apply them consistently;

-    make judgments and estimates that are reasonable and prudent; and

-    state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Financial Statements.

The Directors are responsible for keeping adequate accounting records that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its Financial Statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's webpage hosted by the Manager. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors' Responsibility Statement

Each Director confirms, to the best of his knowledge, that:

-    the Financial Statements have been prepared in accordance with UK Accounting Standards, give a true and fair view of the assets, liabilities, financial position and profit; and that

-    the Directors' Report includes a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that the Company faces.

For and on behalf of the Board of Standard Life Equity Income Trust PLC

Charles Wood, OBE

Chairman

19 November 2010

5.       BUSINESS REVIEW

In conjunction with the rest of the Annual Report and Financial Statements, in particular, the Chairman's Statement and Manager's Report, this Business Review is intended to provide information about the Company's business and its results for the year.

Status and Principal Activity

The Company is an investment company within the meaning of Section 833 of the Companies Act 2006 and carries on business as an investment trust. The Company is a member of the Association of Investment Companies. The Company has been approved by HM Revenue & Customs as an investment trust for the purposes of Section 842 of the Income and Corporation Taxes Act 1988 for the year ended 30 September 2009. The Directors are of the opinion, under advice, that the Company has conducted its affairs for the year ended 30 September 2010 so as to be able to continue to obtain approval as an investment trust (now under Sections 1158 - 1159 of the Corporation Tax Act 2010) for that year. The Company intends to manage its affairs so as to be a qualifying investment for inclusion in the stocks and shares component of an Individual Savings Account and it is the Directors' intention that the Company should continue to be a qualifying investment.

Investment Objective

The Company's investment objective is to provide shareholders with an above average income from their equity investment while also providing real growth in capital and income.

Investment Policy

The Directors intend to achieve the investment objective by investing in a diversified portfolio consisting mainly of quoted UK equities which will normally comprise between 50 and 70 individual equity holdings.

In order to reduce risk in the Company without compromising flexibility:

-    no holding within the portfolio will exceed 10% of aggregate net assets; and

-    the top ten holdings within the portfolio will not exceed 50% of net assets.

Convertible preference shares, convertible loan stocks, gilts and corporate bonds may make up the balance of the portfolio.

The Directors have set parameters of between 95% and 115% for the level of gearing that can be employed. The maximum level of borrowings will therefore represent 15% of net assets and the maximum cash position will be equivalent to 5% of net assets. The Directors have delegated responsibility to the Manager for the operation of the gearing level within the above parameters.

The Manager's investment process combines asset allocation, stock selection, portfolio construction, risk management and dealing. The investment process is research-intensive and is driven by the Manager's distinctive 'Focus on Change' which recognises that different factors drive individual stocks and markets at different times in the cycle. This flexible, but disciplined investment process ensures that the Manager has the opportunity to perform in different market conditions.

Performance

In the year ended 30 September 2010, the Company's net asset value (capital, including income) rose by of 7.0% and the FTSE All-Share Index rose by 8.8%. Further details on future trends and factors that may impact on the future performance of the Company are included in the Chairman's Statement and Manager's Report.

Results and Dividends

Details of the Company's results are shown in the Financial Highlights.

The total revenue return attributable to ordinary shareholders for the year ended 30 September 2010 amounted to £4,189,000 (2009 - £4,836,000). An interim dividend of 3.15p per share was paid to eligible shareholders on 24 March 2010 (2009 - 3.15p) and the Directors are now recommending to shareholders that a final dividend per share of 8.65p (2009 - 8.40p) be paid on 21 December 2010 to shareholders on the share register as at the close of business on 3 December 2010. The ex-dividend date is 1 December 2010.

Details of the dividends paid during the year ended 30 September 2010 may be found in Note 7 to the Financial Statements.

An outline of the Company's performance, market background, investment activity and portfolio strategy during the year under review, as well as the Manager's investment outlook, is provided in the Manager's Report.

Monitoring Performance - Key Performance Indicators

The key performance indicators (KPIs) shown below have been identified by the Directors for determining the progress of the Company and a record of these measures, with comparatives, is disclosed in the Financial Highlights.

-    Net asset value (total return) relative to the Company's benchmark (FTSE All-Share Index Total Return)

-    Share price (capital return)

-    Discount to net asset value

At each Board meeting, the Directors consider a number of performance measures, including the KPIs, to assess the Company's success in achieving its investment objective.

Principal Risks and Uncertainties

The Directors regularly review the principal risks which they have identified and the Directors have set out delegated controls designed to manage those risks. Key risks within investment and strategy, for example inappropriate stock selection or gearing, are managed through investment policy, guidelines and restrictions and by the process of oversight at each Board meeting.

The principal risks and uncertainties which give rise to specific risks which are associated with the Company, as identified by the Directors, are as follows:

-    Objective and Strategy risk: the Company and its investment objective become unattractive to investors. The Directors review regularly the Company's investment objective and investment policy in the light of investor sentiment and monitor closely whether the Company should continue in its present form. The Directors, through the Manager, hold regular discussions with major shareholders. A resolution to continue the Company in its present form is normally put to shareholders at every fifth Annual General Meeting ("AGM") and was last passed by shareholders at the AGM held on 20 December 2006. As outlined in the Chairman's Statement, it is proposed to bring forward the next continuation vote to this year allowing a six year life for the subscription shares.

-    Shareholder Profile risk: activist shareholders, whose interests are not consistent with the long term objectives of the Company, may be attracted on to the shareholder register. The Manager provides a shareholder analysis to the Directors at every meeting for their consideration of any action required in addition to regular reporting by the Company's stockbroker.

-    Resource risk: in common with most investment trusts, the Company has no employees. The Company therefore relies upon services provided by third parties. This particularly includes the Manager, to whom responsibility for the management of the Company has been delegated under an investment management agreement. The Directors review the performance of the Manager on a regular basis.

-    Investment and market risk: The Company is exposed to the effect of variations in share prices due to the nature of its business. A fall in the value of its investment portfolio will have an adverse effect on the value of shareholders' funds.

-    Capital structure and gearing risk: The Company's capital structure at 30 September 2010 consisted of equity share capital comprising Ordinary shares and debt in the form of a revolving credit facility with The Royal Bank of Scotland plc for up to £15m. In rising markets, the effect of the borrowings would be beneficial but in falling markets the gearing effect would adversely affect returns to shareholders. The Manager is able to increase or decrease the gearing level by repaying or drawing down periodically from the bank facility subject to Directors' overall restrictions on gearing. The bank facility is subject to regular monitoring by The Royal Bank of Scotland plc and covenants are supplied monthly to the bank by the Company.

-    Income and dividend risk: In view of the Company's investment objective, to provide for shareholders an above average income from their equity investment, the Manager is required to strike a balance more in favour of income return over capital growth. The Directors have adopted an accounting policy which permits 70% of the aggregate of the finance costs and investment management fees to be charged to the capital account within the Income Statement as opposed to the revenue account. This policy is reviewed regularly by the Directors in light of the expected long term split of returns between income and capital. The Directors receive frequent updates as to the progress made by the Manager towards the achievement of the income requirements of the Company's investment objective.

-    Regulatory risk: The Company operates in a complex regulatory environment and faces a number of regulatory risks. A breach of Section 1158 of the Corporation Tax Act 2010 (formerly Section 842 of the Income and Corporation Taxes Act 1988) would result in the Company being subject to capital gains tax on any portfolio investment gains. Breaches of other regulations, including the UKLA Listing Rules or the UKLA Disclosure and Transparency Rules, could lead to a number of detrimental outcomes and reputational damage. Breaches of controls by service providers such as the Manager and Company Secretary could also lead to reputational damage or loss.

-    The Directors have adopted a robust framework of controls which is designed to monitor the principal risks facing the Company and to provide a monitoring system to enable the Directors to mitigate these risks as far as possible.

-    Financial instruments and derivatives risk: further information relating to these risks may be found in Note 16 to the Financial Statements.

INCOME STATEMENT

for the year ended 30 September 2010

		2010			2009
	Notes	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net gains on investments at fair value	9	-	8,261	8,261	-	6,246	6,246
Income	2	4,715	-	4,715	4,922	-	4,922
Investment management fee	3	(234)	(545)	(779)	(183)	(428)	(611)
VAT recoverable on investment management fees	3	-	-	-	348	261	609
Administrative expenses	4	(226)	-	(226)	(240)	-	(240)
		_______	_______	_______	_______	_______	_______
NET RETURN BEFORE FINANCE COSTS AND TAXATION		4,255	7,716	11,971	4,847	6,079	10,926
Finance costs	5	(55)	(127)	(182)	(7)	(17)	(24)
		_______	_______	_______	_______	_______	_______
RETURN ON ORDINARY ACTIVITIES BEFORE TAXATION		4,200	7,589	11,789	4,840	6,062	10,902
Taxation	6	(11)	-	(11)	(4)	-	(4)
		_______	_______	_______	_______	_______	_______
RETURN ON ORDINARY ACTIVITIES AFTER TAXATION		4,189	7,589	11,778	4,836	6,062	10,898
		_______	_______	_______	_______	_______	_______
RETURN PER ORDINARY SHARE	8	11.04p	20.01p	31.05p	12.75p	15.98p	28.73p
		_______	_______	_______	_______	_______	_______

The total column of this statement represents the profit and loss account of the Company.

A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses are recognised in the Income Statement.

No operations were acquired or discontinued in the year.

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

The accompanying notes are an integral part of the Financial Statements.

BALANCE SHEET

as at 30 September 2010

		2010		2009
	Notes	£'000	£'000	£'000	£'000
FIXED ASSETS
Investments designated at fair value through profit or loss	9		124,322		114,186
CURRENT ASSETS
Debtors	10	1,036		812
AAA money market funds		1,695		737
Cash and short term deposits		226		8
		_______		_______
		2,957		1,557
		_______		_______
CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
Bank loan	11	(12,750)		(9,000)
Other Creditors	11	(828)		(441)
		_______		_______
		(13,578)		(9,441)
NET CURRENT LIABILITIES			(10,621)		(7,884)
			_______		_______
NET ASSETS			113,701		106,302
			_______		_______
CAPITAL AND RESERVES
Called-up share capital	12		9,935		9,935
Share premium account			20,373		20,373
Capital redemption reserve			12,615		12,615
Capital reserve			64,829		57,240
Revenue reserve			5,949		6,139
			_______		_______
EQUITY SHAREHOLDERS' FUNDS			113,701		106,302
			_______		_______
NET ASSET VALUE PER ORDINARY SHARE	13		299.76p		280.25p
			_______		_______

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 30 September 2010	Notes	Share capital £'000	Share premium account £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total £'000
Balance at 30 September 2009		9,935	20,373	12,615	57,240	6,139	106,302
Return on ordinary activities after taxation		-	-	-	7,589	4,189	11,778
Dividends paid	7	-	-	-	-	(4,379)	(4,379)
		_______	_______	_______	_______	_______	_______
BALANCE AT 30 SEPTEMBER 2010		9,935	20,373	12,615	64,829	5,949	113,701
		_______	_______	_______	_______	_______	_______

For the year ended 30 September 2009	Notes	Share capital £'000	Share premium account £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total £'000
Balance at 30 September 2008		9,935	20,373	12,615	51,178	5,472	99,573
Return on ordinary activities after taxation		-	-	-	6,062	4,836	10,898
Dividends paid	7	-	-	-	-	(4,169)	(4,169)
		_______	_______	_______	_______	_______	_______
BALANCE AT 30 SEPTEMBER 2009		9,935	20,373	12,615	57,240	6,139	106,302
		_______	_______	_______	_______	_______	_______

The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.

The accompanying notes are an integral part of the Financial Statements.

CASHFLOW STATEMENT

Year ended 30 September 2010

			2010		2009
		Notes	£'000	£'000	£'000	£'000
	NET CASH INFLOW FROM OPERATING ACTIVITIES	14		3,498		4,754
	NET CASH OUTFLOW FROM SERVICING OF FINANCE			(177)		(21)
	FINANCIAL INVESTMENT
	Purchases of investments		(29,270)		(50,796)
	Sales of investments		27,754		38,292
			________		________
	NET CASH OUTFLOW FROM FINANCIAL INVESTMENT			(1,516)		(12,504)
	EQUITY DIVIDENDS PAID			(4,379)		(4,169)
				________		________
				(2,574)		(11,940)
	MANAGEMENT OF LIQUID RESOURCES
	Purchase of AAA money market funds		(25,083)		(35,475)
	Sale of AAA money market funds		24,125		38,373
			________		________
	NET CASH (OUTFLOW)/INFLOW FROM MANAGEMENT OF LIQUID RESOURCES			(958)		2,898
				________		________
	NET CASH OUTFLOW BEFORE FINANCING			(3,532)		(9,042)
	FINANCING
	Drawdown of loan		3,750		9,000
			________		________
	NET CASH INFLOW FROM FINANCING			3,750		9,000
				________		________
	INCREASE/(DECREASE) IN CASH			218		(42)
				________		________
	RECONCILIATION OF NET CASH FLOW TO MOVEMENTS IN NET DEBT
	Increase/(decrease) in cash as above		218		(42)
	Net change in liquid resources		958		(2,898)
	Drawdown of loan		(3,750)		(9,000)
			________		________
	MOVEMENT IN NET DEBT IN YEAR			(2,574)		(11,940)
	Opening net (debt)/funds			(8,255)		3,685
				________		________
	CLOSING NET DEBT	15		(10,829)		(8,255)
				________		________

NOTES TO FINANCIAL STATEMENTS:

For the year ended 30 September 2010

1.	Accounting policies
	(a)      Basis of accounting The Financial Statements have been prepared in accordance with applicable UK Accounting Standards and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (issued in January 2009). They have also been prepared on the assumption that approval as an investment trust will continue to be granted. The Financial Statements have been prepared on a going concern basis. All values are rounded to the nearest thousand pounds (£000) except where indicated otherwise. (b)     Valuation of investments The Company's business is investing in financial assets with a view to profiting from their total return in the form of income and capital growth. This portfolio of financial assets is managed and its performance evaluated on a fair value basis, in accordance with a documented investment strategy, and information about the portfolio is provided internally on that basis to the Company's Board of Directors. Accordingly, upon initial recognition the Company designates the investments 'at fair value through profit or loss'. They are included initially at fair value, which is taken to be their cost (excluding expenses incidental to the acquisition which are written off in the Income Statement, and allocated to 'capital' at the time of acquisition). Subsequent to initial recognition, investments are valued at fair value through profit or loss. For listed investments, this is deemed to be bid market prices or closing prices for SETS stocks sourced from the London Stock Exchange. SETS is the London Stock Exchange electronic trading service covering most of the market including all FTSE 100 constituents and most liquid FTSE 250 along with some other securities. Gains and losses arising from changes in fair value are included in net profit or loss for the period as a capital item in the Income Statement and are ultimately recognised in the capital reserve. (c)      AAA money market funds The AAA money market funds are used by the Company to provide additional short term liquidity. As they are not listed on a recognised exchange and due to their short term nature, they are recognised in the Financial Statements as a current asset and are included at fair value through profit or loss. (d)     Income Income from equity investments (other than special dividends), including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend. Special dividends are credited to revenue or capital according to the circumstances. Foreign income is converted at the exchange rate applicable at the time of receipt. Interest receivable on short term deposits is accounted for on an accruals basis. (e)     Expenses and interest payable Expenses are accounted for on an accruals basis. Expenses are charged to capital when they are incurred in connection with the maintenance or enhancement of the value of investments. In this respect, the investment management fee and relevant finance costs are allocated between revenue and capital in line with the Board's expectation of returns from the Company's investments over the long term in the form of revenue and capital respectively (see notes 3 and 5). Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the Income Statement. (f)      Dividends payable In accordance with FRS21, dividends that are declared and approved by the Company after the Balance Sheet date are not recognised as a liability of the Company at the Balance Sheet date. (g)     Capital reserves Gains or losses on disposal of investments and changes in fair values of investments are included within the capital reserve. The capital element of the management fee along with any associated irrecoverable VAT and relevant finance costs are charged to this reserve. Any associated tax relief is also credited to this reserve.
	(h)     Taxation Deferred taxation is recognised in respect of all temporary differences that have originated but not reversed at the Balance Sheet date where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the Balance Sheet date measured on an undiscounted basis and based on enacted tax rates. 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 future reversal of the underlying temporary differences can be deducted. Temporary differences are differences arising between the Company's taxable profits and its results as stated in the accounts which are capable of reversal in one or more subsequent periods. Owing to the Company's status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.  (i)      Foreign currency Overseas monetary assets and liabilities are converted into Sterling at the rate of exchange ruling at the Balance Sheet date.  Transactions during the year involving foreign currencies are converted at the rate of exchange ruling at the transaction date.  Any gain or loss arising from a change in exchange rates subsequent to the date of the transaction is included as an exchange gain or loss in the Income Statement.

2.	Income	2010 £'000	2009 £'000
	Income from investments
	Franked investment income	4,398	4,731
	Overseas and unfranked investment income	151	92
		________	________
		4,549	4,823
		________	________
	Other income
	AAA money market interest	9	72
	Interest from HMRC	112	21
	Underwriting commission	45	6
		________	________
		166	99
		________	________
	Total income	4,715	4,922
		________	________
3.	Investment management fee	2010 £'000	2009 £'000
	Investment management fee	779	611
	Allocated to capital	(545)	(428)
		________	________
		234	183
		________	________

		The Company has an agreement with Standard Life for the provision of management services. The contract is terminable by either party on not less than six months' notice. The fee is based on 0.65% of total assets, payable quarterly in arrears and is chargeable 30% to revenue and 70% to capital (see note 1(e)).
	On 5 November 2007, the European Court of Justice ruled that management fees on investment trusts should be exempt from VAT.  Deutsche Asset Management (UK) Limited, the former Investment Manager, has refunded £609,000 (excluding simple interest) to the Company for VAT charged on investment management fees for the period 2001 to 2005 (date of termination) and this was included in the Financial Statements for the year ended 30 September 2009.  This repayment was allocated between revenue and capital in line with the accounting policy of the Company for the periods in which the VAT was charged.  The reclaim for previous periods is at present uncertain and the Company has taken no account in these Financial Statements of any such repayment. Interest of £112,000 (2009 - £21,000) on the repaid VAT was received on 8 October 2010 and has been recognised in the current year.

4.	Administrative expenses	2010 £'000	2009 £'000
	Directors' fees	81	75
	Fees payable to the Company's Auditor (excluding VAT):
	- for the audit of the annual Financial Statements	18	17
	Professional fees	36	7
	Other expenses	91	141
		________	________
		226	240
		________	________
	With the exception of fees payable to the Company's auditor, irrecoverable VAT has been included under the relevant expense line above. Irrecoverable VAT on fees payable to the Company's auditor is included within other expenses.

5.	Finance costs	2010 £'000	2009 £'000
	On bank loans and overdrafts:
	Allocated to revenue reserve	55	7
	Allocated to capital reserve	127	17
		________	________
		182	24
		________	________
	Finance costs are chargeable 30% to revenue and 70% to capital (see note 1(e)).

6.	Taxation	2010 £'000	2009 £'000
	(a)   Analysis of charge for the year
	Overseas withholding tax	11	4
		________	________
	(b)   Factors affecting current tax charge for the year
	A reconciliation of the Company's current tax charge is set out below:
	Total return on ordinary activities before taxation	11,789	10,902
		________	________
	Return on ordinary activities at the UK standard rate of corporation tax 28% (2009 - 28%)	3,301	3,053
	Effects of:
	Gains on investments not taxable	(2,313)	(1,749)
	Non-taxable income	(1,248)	(1,332)
	Excess management expenses and loan relationship debit expenses	260	57
	Double tax relief utilised	-	(29)
	Overseas withholding tax	11	4
		________	________
	Total taxation	11	4
		________	________
	At 30 September 2010, the Company had unutilised management expenses and loan relationship losses of £12,052,000 (2009 - £11,123,000). No deferred tax asset has been recognised on the unutilised management expenses and loan relationship losses as it is unlikely there will be suitable taxable profits from which the future reversal of the deferred tax asset could be deducted.

7.	Dividends on Ordinary shares	2010 £'000	2009 £'000
	Amounts recognised as distributions to equity holders in the year:
	Final dividend for 2009 of 8.40p per share (2008 - 7.85p)	3,186	2,978
	Interim dividend for 2010 of 3.15p per share (2009 - 3.15p)	1,195	1,195
	Return of unclaimed dividends	(2)	(4)
		________	________
		4,379	4,169
		________	________
	The proposed final dividend for 2010 is subject to approval by shareholders at the AGM and has not been included as a liability in these Financial Statements. We set out below the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Section 1158-1159 of the Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £4,189,000 (2009 - £4,836,000).
	Interim dividend for 2010 of 3.15p per share (2009 - 3.15p)	1,195	1,195
	Proposed final dividend for 2010 of 8.65p per share (2009 - 8.40p )	3,281	3,186
		________	________
		4,476	4,381
		________	________

		2010			2009
8.	Return per Ordinary share	£'000	p		£'000	p
	The returns per Ordinary share have been based on the following figures:
	Revenue return	4,189		11.04	4,836	12.75
	Capital return	7,589		20.01	6,062	15.98
		________		________	________	________
	Total return	11,778		31.05	10,898	28.73
		________		________	________	________
	Weighted average number of Ordinary shares in issueA			37,930,579	37,930,579
				___________	___________
	A Calculated excluding shares held in treasury.

9.	Investments	2010 £'000	2009 £'000
	Fair value through profit or loss
	Opening book cost	109,652	114,414
	Opening fair value gains/(losses) on investments held	4,534	(19,159)
		________	________
		114,186	95,255
	Opening fair value
	Movements in the year:
	Purchases at cost	29,645	50,900
	Sales  - proceeds	(27,770)	(38,215)
	- gains/(losses) on sales	1,123	(17,447)
	Current year fair value gains on investments held	7,138	23,693
		________	________
	Closing fair value	124,322	114,186
		________	________
	Closing book cost	112,650	109,652
	Closing fair value gains on investments held	11,672	4,534
		________	________
	Closing fair value	124,322	114,186
		________	________
	Gains/(losses) on investments held at fair value through profit or loss
	Gains/(losses) on sales	1,123	(17,447)
	Increase in fair value of investments held	7,138	23,693
		________	________
		8,261	6,246
		________	________
	Transaction costs
	During the year, expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within gains on investments in the Income Statement. The total costs were as follows:
	Purchases	175	307
	Sales	36	54
		________	________
	Total	211	361
		________	________

10.	Debtors: amounts falling due within one year	2010 £'000	2009 £'000
	Amounts due from brokers	326	310
	Net dividends and interest receivable	568	482
	Other debtors	142	20
		________	________
		1,036	812
		________	________

11.	Creditors: amounts falling due within one year	2010 £'000	2009 £'000
	Bank loan	12,750	9,000
	Amounts due to brokers	520	145
	Investment management fee payable	207	189
	Sundry creditors	101	107
		________	________
		13,578	9,441
		________	________

As at 30 September 2010, the Company had drawn down £10.75 million and £2.0 million (2009 - £9.0 million) of the £15 million (2009 - £20 million) loan facility arranged with The Royal Bank of Scotland plc (2009 - Lloyds TSB), at interest rates of 1.5736% and 1.57204% (2009 - 0.8232%) per annum maturing on 18 October 2010 and 27 October 2010 respectively. Subsequent to the year end, the £10.75 million loan was rolled over from 18 October 2010 to 18 November 2010 at an interest rate of 1.57235%.

		30 September 2010		30 September 2009
12.	Called up share capital	Number	£'000	Number	£'000
	Issued and fully paid:
	Ordinary shares of 25p each	37,930,579	9,483	37,930,579	9,483
	Treasury shares	1,807,328	452	1,807,328	452
		___________	________	___________	________
		39,737,907	9,935	39,737,907	9,935
		___________	________	___________	________
	Balance brought and carried forward	1,807,328	452	1,807,328	452
		___________	________	___________	________

13.	Net asset value	2010	2009
	The net asset value per share and the net asset value attributable to the Ordinary shares at the year end calculated in accordance with the Articles of Association were as follows:
	Total shareholders' funds	£113,701,000	£106,302,000
	Number of Ordinary shares in issue at year end A	37,930,579	37,930,579
	Net asset value per share	299.76p	280.25p
	A Excludes shares in issue held in treasury.

14.	Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities	2010 £'000	2009 £'000
	Net return before finance costs and taxation	11,971	10,926
	Adjustments for:
	Net gains on investments at fair value	(8,261)	(6,246)
	(Increase)/decrease in accrued income	(200)	40
	(Increase)/decrease in other debtors	(2)	1
	Increase in other creditors	7	37
	Net overseas tax paid	(17)	(4)
		________	________
	Net cash inflow from operating activities	3,498	4,754
		________	________

15.	Analysis of changes in net debt	At 30 September 2009 £'000	Cashflow  £'000	At 30 September 2010  £'000
	Cash at bank and in hand	8	218	226
	AAA money market funds	737	958	1,695
	Bank loan	(9,000)	(3,750)	(12,750)
		________	________	________
	Net debt	(8,255)	(2,574)	(10,829)
		________	________	________

16.	Financial instruments
	Risk management The Company's financial instruments comprise securities and other investments, cash balances, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income. The Company also has the ability to enter into derivative transactions for the purpose of managing currency and market risks arising from the Company's activities. The main risks the Company faces from its financial instruments are (i) market price risk (comprising interest rate risk, currency risk and other price risk), (ii) liquidity risk and (iii) credit risk. The Board regularly reviews and agrees policies for managing each of these risks. The Manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term debtors and creditors which do not carry interest.
	(i) Market risk The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk and other price risk. Interest rate risk Interest rate movements may affect: -    the fair value of the investments in fixed interest rate securities; -    the level of income receivable on cash deposits; -    interest payable on the Company's variable rate borrowings. The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions. It is the Company's policy to increase its exposure to equity market price risk through the judicious use of borrowings. When borrowed funds are invested in equities, the effect is to magnify the impact on Shareholders' funds of changes - both positive and negative - in the value of the portfolio. Interest rate profile The interest rate risk profile of the portfolio of financial assets and liabilities at the Balance Sheet date was as follows:

		As at 30 September 2010	Weighted average period for which rate is fixed Years		Weighted average interest rate %			Fixed rate £000		Floating rate £000
		Assets
		AAA money market funds	-		0.56			-		1,695
		Cash deposits	-		0.05			-		226
			________		________			________		________
		Total assets	-		0.50			-		1,921
			________		________			________		________
		Liabilities
		Bank loans	0.1		1.57			12,750		-
			________		________			________		________
		Total liabilities	0.1		1.57			12,750		-
			________		________			________		________
		As at 30 September 2009
		Assets
		AAA money market funds	-		0.45			-		737
		Cash deposits	-		0.05			-		8
			________		________			________		________
		Total assets	-		0.45			-		745
			________		________			________		________
		Liabilities
		Bank loans	0.1		0.82			9,000		-
			________		________			________		________
		Total liabilities	0.1		0.82			9,000		-
			________		________			________		________
		The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average interest rate on bank loans is based on the interest rate payable, weighted by the total value of the loans. The floating rate assets consist of AAA money market funds and cash deposits on call earning interest at prevailing market rates. All financial liabilities are measured at amortised cost. Maturity profile The Company did not hold any financial assets at 30 September 2010 or 30 September 2009 that had a maturity date. As detailed in note 11, the loans drawn down had maturity dates of 18 October 2010 and 27 October 2010 at the Balance Sheet date (2009 : 12 October 2009). Interest rate sensitivity The sensitivity analyses below have been determined based on the exposure to interest rates at the Balance Sheet date and with the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates. If interest rates had been 100 basis points higher or lower and all other variables were held constant, the Company's: -     profit for the year ended 30 September 2010 would increase/decrease by £108,000 (2009 : increase/decrease by £83,000). This is mainly attributable to the Company's exposure to interest rates on its fixed rate borrowings and floating rate cash balances.
	Other price risk Other price risks (ie changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments. It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular sector. The allocation of assets and the stock selection process, both act to reduce market risk. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy.  The investments held by the Company are listed on the London Stock Exchange. Other price risk sensitivity If market prices at the Balance Sheet date had been 10% higher or lower while all other variables remained constant, the return attributable to ordinary shareholders and equity for the year ended 30 September 2010 would have increased/decreased by £12,432,000 (2009 - increase/decrease of £11,419,000). This is based on the Company's equity portfolio held at each year end. (ii)       Liquidity risk This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. Liquidity risk is not considered to be significant as the Company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the use of loan and overdraft facilities (note 11).
		(iii)       Credit risk This is failure of the counter party to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss. The risk is not significant, and is managed as follows: -    where the investment manager makes an investment in a bond, corporate or otherwise, the credit rating of the issuer is taken into account so as to minimise the risk to the Company of default; -    investment transactions are carried out with a large number of brokers, whose credit-standing and credit rating is reviewed periodically by the investment manager, and limits are set on the amount that may be due from any one broker; -    cash and money invested in AAA money market funds are held only with reputable banks with high quality external credit enhancements. None of the Company's financial assets are secured by collateral or other credit enhancements. Credit risk exposure In summary, compared to the amount in the Balance Sheet, the maximum exposure to credit risk at 30 September was as follows:
				2010			2009
				Balance Sheet  £'000		Maximum exposure £'000	Balance Sheet £'000		Maximum exposure £'000
		Current assets
		Debtors		1,036		1,036	812		812
		Cash and short term deposits		226		226	8		8
				________		________	________		________
				1,262		1,262	820		820
				________		________	________		________

	None of the Company's financial assets is past due or impaired.
	Fair values of financial assets and financial liabilities The fair value of borrowings has been calculated at £12,757,000 as at 30 September 2010 compared to an accounts value in the Financial Statements of £12,750,000 (note 11). The fair value of each loan is determined by aggregating the expected future cash flows for that loan discounted at a rate comprising the borrower's margin plus an average of market rates applicable to loans of a similar period of time and currency.  All other assets and liabilities of the Company are included in the Balance Sheet at amortised cost which is equivalent to fair value.
17.	Fair value hierarchy
	Amendments to FRS 29 'Financial Instruments: Disclosures', effective from 1 January 2009, require an entity to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy has the following levels: -    Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; -    Level 2: inputs other than quoted orices included within Level 1 that are observable for the assets or liabilities, either directly (ie as prices) or indirectly (ie derived from prices); and -    Level 3: inputs for the assets or liabilities that are not based on observable market data (unobservable inputs). The financial assets and liabilities measured at fair value in the Balance Sheet are grouped into the fair value hierarchy at 30 September 2010 as follows:
	Financial assets at fair value through profit or loss	Level 1 £'000	Level 2 £'000	Level 3 £'000	Total £'000
	Quoted equities	124,322	-	-	124,322
	AAA money market funds	1,695	-	-	1,695
		________	________	________	________
		126,017	-	-	126,017
		________	________	________	________

18.

Capital management policies and procedures

The Company's capital management objectives are: -    to ensure that the Company will be able to continue as a going concern; and -    to maximise the income and capital return to its equity shareholders through an appropriate balance of equity capital and debt. The Board normally seeks to limit gearing to 15% of net assets. At the year end the Company had actual gearing of 9.5% (2009 - 7.8%). The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the Manager's views on the market and the extent to which revenue in excess of that which is required to be distributed should be retained. The Company's objectives, policies and processes for managing capital are unchanged from the preceding accounting period.

Additional Notes to Annual Financial Report

The Annual General Meeting will be held on 17 December 2010 at 10.30a.m. at J.P.Morgan Cazenove's offices, 20 Moorgate, London, EC2R 6DA.

The Annual Financial Report Announcement is not the Company's statutory accounts. The above results for the year ended 30 September 2010 are an abridged version of the Company's full accounts, which have been approved and audited with an unqualified report. The 2009 and 2010 statutory accounts received unqualified reports from the Company's auditors and did not include any reference to matters to which the auditors drew attention by way of emphasis without qualifying the reports, and did not contain a statement under s.498 of the Companies Act 2006. The financial information for 2009 is derived from the statutory accounts for 2009 which have been delivered to the Registrar of Companies. The 2010 accounts will be filed with the Registrar of Companies in due course.

The Annual Report will be posted to shareholders in November 2010 and additional copies will be available from the Manager (Investor Helpline - Tel. [phone]) or by download from the Company's webpage (www.standardlifeinvestments.com/its).

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise and may be affected by exchange rate movements.  Investors may not get back the amount they originally invested.

For Standard Life Equity Income Trust PLC

Aberdeen Asset Management PLC, Secretary

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