Half Yearly Report

RNS Number : 8170S

Standard Life Equity Income Tst PLC

27 May 2009

 



STANDARD LIFE EQUITY INCOME TRUST PLC

Investment Objective

The objective of Standard Life Equity Income Trust 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. The portfolio 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 net assets; and

-    the top ten holdings within the portfolio will not in aggregate 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 their 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.

HALF-YEARLY FINANCIAL REPORT FOR THE SIX MONTHS ENDED 31 MARCH 2009

For further information, please contact:

Hilda Stewart

Press Manager, Standard Life Investments    Tel. [phone]

_________________________________________________________________________________________________

CHAIRMAN'S STATEMENT 

Performance

During the six months ended 31 March 2009, net asset value per share (excluding net revenue) decreased by 18.1%, which compares with a fall, in capital terms, of 20.1% for the FTSE All-Share Index, the Company's benchmark. 

The Company's performance, in a very difficult and volatile investment environment, compares favourably with its peers in the AIC UK Growth & Income sector. On an NAV total return basis the Company was ranked 5th out of 16 trusts over the six months ended 31 March 2009 (source: Fundamental Data).

The price of the Company's ordinary shares fell 15.5% from 241.0p per share to end the period at 203.8p per share. This represented a 1.7% discount to the net asset value per share (excluding net revenue) of 207.3p. 

The Manager's Report on pages 7 to 9 provides further information on the UK economy and equity market as well as a review of the portfolio of investments and key acquisitions and disposals during the period.

  Earnings and Interim Dividend

Revenue return per share increased to 6.28p, compared to 5.59p for the equivalent period last year. However, earnings would have fallen by 3.9% without the VAT refund, allocated to the revenue account, of 0.91p per share. Income from investments fell by 11.7% over the six month period principally due to lower dividends from financial companies. Lower management fees reflected falls in stock market levels. The Company continued to keep a tight control of its other expenses.

The ordinary shares currently yield 4.7% which compares favourably with interest rates being paid on savings accounts. The Board recognises that the level of dividends received from its investments will reduce this year as compared with last. However, having built up revenue reserves to £5.5m (14.4p per share) over the last few years the Board expects that the level of the final dividend will be at least maintained. 

The Board is declaring a maintained interim dividend of 3.15p per ordinary share. Over the year ended 31 March 2009 the Retail Prices Index fell by 0.4%. The interim dividend will be paid on 24 June 2009 to shareholders on the register at 5 June 2009. The ex-dividend date is 3 June 2009. The Board continues to target an increase in the dividend in real terms over the longer term.

Gearing

The Company did not utilise its borrowing facility during the six month reporting period. Adopting this cautious approach proved to be the appropriate course of action with the benchmark index down 20.1%. During March 2009 the cash position was reduced from 4% to 1% of net assets and since the period end the gearing has been increased to 5%. The Company supported a number of rights issues that offered very attractive dividend yields and took advantage of a number of attractive buying opportunities.  

Share Buybacks 

The Company did not buy back any shares in the period. The Board and the Manager continue to review the level of the Company's discount on a regular basis.

Marketing and Shareholder Communications

The focus of the Company's marketing activities remains targeted at private client and wealth managers. A number of private investors took the opportunity once again to meet the investment manager, Standard Life Investments, at the Company's AGM in London on 16 December 2008. 

Risk Management 

The Directors regularly review the principal risks which they have identified and the Directors set out delegated controls designed to manage those risks. During the last six months there has been no change in the principal risks facing the Company, which are set out in detail in the Directors' Report on pages 14 and 15 and at note 17 on pages 39 to 41 of the last set of annual accounts. The major risks associated with the Company are market price risk, being the risk that the value of investments will fluctuate as a result of factors other than interest rate or currency movements, gearing risk, and to a lesser extent liquidity risk, credit and interest rate risk.

VAT on Investment Management Fees

The Board was pleased to announce on 24 March 2009 a further VAT repayment of £608,631 being the refund received by the former manager for the period 2001-2005. This VAT refund has been allocated between revenue and capital in the same proportion that it was originally charged in the respective financial years and further details can be found in Note 9 to the Financial Statements. Further repayments of VAT in respect of earlier periods remain under negotiation with HMRC and our former manager. 

Outlook

The huge fiscal and monetary stimulus that has been initiated by governments all over the world has led to greater confidence in stock markets after the massive correction last autumn. By the end of March many commentators felt that the worst was past. But the underlying economic news remains weak, and the adjustment to an environment of much reduced credit has implied strategic reassessment by many company managements. Moreover quantitative easing and the implied manipulation of the market in fixed interest give an unusually difficult background to assess meaningfully the relative valuation of all types of investment.

Dividend growth is expected to be negative for the UK market overall in the next year. However, the Board and the Manager are relatively optimistic here. The defensive characteristics of the portfolio should provide some protection for the revenue account, reflecting the Manager's focus on robust business models that generate positive cash flows and transparency of earnings.

Arguably the uncertainty for individual company dividends and specific stock risk have strengthened the investment case for investment trusts given their diversified portfolios. Your Board is confident that the Manager has the focus to select underlying investments where the dividend outlook remains relatively favourable. 

In recent years the Company has raised the implied cover for the dividend, but our income obviously depends on the success of our underlying investments. This is probably a protracted economic cycle, but the Board and Manager are focused on our objectives and remain confident of generating attractive long term returns.

Charles Wood OBE

Chairman

26 May 2009

_________________________________________________________________________________________________ 

DIRECTORS' RESPONSIBILITY STATEMENT

The Directors are responsible for preparing the Half-Yearly Financial Report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge -

• the condensed Financial Statements have been prepared in accordance with the Accounting Standards Board's statement 'Half-Yearly Financial Reports'; and

• the Interim Management Report includes a fair review of the general conditions required by 4.2.7R and 4.2.8R of the Financial Services Authority's Disclosure and Transparency Rules.

The Half-Yearly Financial Report, for the six months ended 31 March 2009 comprises an Interim Management Report in the form of the Chairman's Statement, the Directors' Responsibility Statement and a condensed set of Financial Statements, and has not been audited or reviewed by the auditors pursuant to the Auditing Practices  Board's guidance on 'Review of Interim Financial Information'.

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

Charles Wood OBE

Chairman

26 May 2009

_________________________________________________________________________________________________ 

MANAGER'S REPORT

Market Review 

The UK equity market sold off aggressively over the six months to the end of March 2009, as concerns over the financial sector, particularly Banks and Life Insurers, led the market sharply lower. The government was forced to bail out several banks, diluting shareholder value further, as the economy slipped into recession. Equities continued to trade lower into 2009 with the FTSE 100 breaking through 3,500, a 15 year low, as banks announced huge losses and were forced to raise more capital; meanwhile the economic outlook continued to deteriorate. There was some respite in March, however, as UK Treasury plans to rid banks of up to £700 billion in assets spurred the market.

The financial sector was firmly in the spotlight, as the banking crisis came to a head. With some banks in danger of collapse, the government took decisive action by announcing a £400 billion rescue plan, taking a large equity stake in the sector. This did not, however, completely solve the problem, with Royal Bank of Scotland subsequently requiring a second government bailout, while also announcing a £24.1 billion loss for 2008. Lloyds Banking Group, meanwhile, reported a £10 billion annual loss. The sector did rally towards the end of the period, however, following positive announcements from the US, including Citigroup indicating it had been profitable in the first two months of the year and the US Treasury's toxic assets plan.

Economic data over the period continued to weaken. House prices fell and unemployment rose as a range of companies announced job cuts. The pain also extended to the high street, with a steady stream of retailers entering administration. This included Woolworths, Zavvi, MFI and Whittards. Indeed, the UK economy officially entered recession, as GDP shrank by 1.6% in the fourth quarter of 2008. In an attempt to boost the ailing economy, the Bank of England cut interest rates from 5% to 0.5%, their lowest ever level. It also announced plans to pump £75 billion into the economy through quantitative easing measures, whereby it would buy bonds in the hope of increasing liquidity within the economy.

Performance

For the six months ended 31 March 2009, the Company's net asset value (excluding net revenue) fell by 18.1%, outperforming the FTSE All-Share Index which fell by 20.1% (source: Thomson Datastream). 

Activity

Within the resources sector our underweight position in Rio Tinto was positive for performance, as the withdrawal of BHP Billiton's bid drove the share price lower in the first part of the period. In the first quarter of 2009, we began to increase our position, which contributed to returns, as commodity prices were boosted by resurgent demand in Asia. However, our underweight position in BHP Billiton proved negative, while not holding BG Group was detrimental as the company also benefited from increased commodity prices.

Our decision to move underweight in the banking sector made a positive contribution to returns over the period, as the financial crisis deepened. For example, Royal Bank of Scotland was forced to raise further equity in order to gain entry to the government's Asset Protection Scheme, while HSBC's share price lagged during its rights issue process. Lloyds Banking Group was also weak, as it announced huge losses relating to its takeover of HBOS.

Elsewhere, Thomas Cook benefited from a reduction in capacity in the travel industry and delivered a positive trading update. Tullow Oil was also strong, as it made significant oil discoveries in Uganda. On the downside, insurer Aviva made a negative contribution, as the market sold down the insurer after it maintained its dividend despite capital concerns. 

We increased exposure to the property sector by investing in Hammerson, as a rights issue helped steady the balance sheet and the shares offered an attractive dividend. We bought power station Drax, as it also had an appealing dividend yield. Paper and plastic packaging manufacturer DS Smith was another purchase, as it announced strong results and maintained its dividend. Meanwhile, we added to retailer Next, as its balance sheet remained strong and its dividend looked safe. We also added to HMV, on the belief it would benefit from the demise of Woolworths and Zavvi. 

Ongoing problems in the banking sector led us to sell our holdings in Royal Bank of Scotland, Lloyds Banking Group and Barclays. Elsewhere, we sold industrial materials stock Cookson Group, on concerns over its exposure to slowing demand for steel. Moving into 2009, we sold Pennon Group, the water company, given the risks posed by a regulatory review and the possibility of downgrades at its waste management business. We also reduced our holding in FirstGroup, which suffered because of weakness in its Greyhound bus operation in the US.

Outlook

The outlook for the UK economy remains weak, with the best hopes for recovery coming from policy action having a positive effect on consumer disposable incomes, easing monetary conditions feeding through to recovery, and bank recapitalisation leading to better credit availability. The earnings outlook for UK companies remains weak, although parts of the market remain on excessively depressed valuations, providing opportunities for investment. In this environment, we will continue to focus on solid companies with strong balance sheets and resilient earnings.

Standard Life Investments Limited

Manager

26 May 2009

_________________________________________________________________________________________________

INCOME STATEMENT 

		Six months ended  31 March 2009 (unaudited)			Six months ended  31 March 2008 (unaudited)
	Notes	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net losses on investments at fair value		-	(18,048)	(18,048)	-	(15,066)	(15,066)
Income	2	2,247	-	2,247	2,544	-	2,544
Investment management fee		(83)	(193)	(276)	(129)	(301)	(430)
VAT recoverable on investment management fees	9	348	261	609	-	-	-
Administrative expenses		(126)	-	(126)	(164)	-	(164)
		________	________	________	________	________	________
Net return before finance costs and taxation		2,386	(17,980)	(15,594)	2,251	(15,367)	(13,116)
Finance costs		-	-	-	(126)	(293)	(419)
		________	________	________	________	________	________
Return on ordinary activities before taxation		2,386	(17,980)	(15,594)	2,125	(15,660)	(13,535)
Taxation on ordinary activities		(4)	-	(4)	(4)	-	(4)
		________	________	________	________	________	________
Return on ordinary activities after taxation		2,382	(17,980)	(15,598)	2,121	(15,660)	(13,539)
Return per ordinary share	4	6.28p	(47.40p)	(41.12p)	5.59p	(41.29p)	(35.70p)

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

The Company has no recognised gains or losses other than those recognised in the Income Statement above.

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

The accompanying notes are an integral part of the financial statements.

_________________________________________________________________________________________________

  INCOME STATEMENT (Cont'd)

		Year ended 30 September 2008 (audited)
	Notes	Revenue £'000	Capital £'000	Total £'000
Net losses on investments at fair value		-	(32,659)	(32,659)
Income	2	5,479	-	5,479
Investment management fee		(235)	(547)	(782)
VAT recoverable on investment management fees	9	61	143	204
Administrative expenses		(311)	-	(311)
		________	________	________
Net return before finance costs and taxation		4,994	(33,063)	(28,069)
Finance costs		(199)	(458)	(657)
		________	________	________
Return on ordinary activities before taxation		4,795	(33,521)	(28,726)
Taxation on ordinary activities		(13)	-	(13)
		________	________	________
Return on ordinary activities after taxation		4,782	(33,521)	(28,739)
Return per ordinary share	4	12.61p	(88.38p)	(75.77p)

___________________________________________________________________________________________________

  RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

Six months ended 31 March 2009 (unaudited)	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		-	-	-	(17,980)	2,382	(15,598)
Dividends paid	3	-	-	-	-	(2,974)	(2,974)
		__________	__________	__________	__________	__________	__________
Balance at 31 March 2009		9,935	20,373	12,615	33,198	4,880	81,001
		__________	__________	__________	__________	__________	__________
Six months ended 31 March 2008 (unaudited)		Share  capital £'000	Share premium account £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total £'000
Balance at 30 September 2007		9,935	20,373	12,615	84,699	4,711	132,333
Return on ordinary activities after taxation		-	-	-	(15,660)	2,121	(13,539)
Dividends paid	3	-	-	-	-	(2,826)	(2,826)
		__________	__________	__________	__________	__________	__________
Balance at 31 March 2008		9,935	20,373	12,615	69,039	4,006	115,968
		__________	__________	__________	__________	__________	__________
Year ended 30 September 2008 (audited)		Share  capital £'000	Share  premium account £'000	Capital redemption reserve £'000	Capital reserve £'000	Revenue reserve £'000	Total £'000
Balance at 30 September 2007		9,935	20,373	12,615	84,699	4,711	132,333
Return on ordinary activities after taxation		-	-	-	(33,521)	4,782	(28,739)
Dividends paid	3	-	-	-	-	(4,021)	(4,021)
		__________	__________	__________	__________	__________	__________
Balance at 30 September 2008		9,935	20,373	12,615	51,178	5,472	99,573
		__________	__________	__________	__________	__________	__________

_________________________________________________________________________________________________________

  BALANCE SHEET 

	Notes	As at 31 March 2009 (unaudited) £'000	As at 31 March 2008 (unaudited) £'000	As at 30 September 2008 (audited) £'000
Fixed assets
Investments at fair value through profit or loss		79,482	125,003	95,255
		__________	__________	__________
Current assets
Debtors		553	1,530	931
AAA money market funds		1,207	2,908	3,635
Cash at bank and in hand		15	54	50
		__________	__________	__________
		1,775	4,492	4,616
		__________	__________	__________
Creditors: amounts falling due within one year
Bank loan		-	(13,000)	-
Other creditors		(256)	(527)	(298)
		(256)	(13,527)	(298)
		__________	__________	__________
Net current assets/(liabilities)		1,519	(9,035)	4,318
		__________	__________	__________
Net assets		81,001	115,968	99,573
		__________	__________	__________
Capital and reserves
Called-up share capital		9,935	9,935	9,935
Share premium account		20,373	20,373	20,373
Capital redemption reserve		12,615	12,615	12,615
Capital reserve	5	33,198	69,039	51,178
Revenue reserve		4,880	4,006	5,472
		__________	__________	__________
Equity shareholders' funds		81,001	115,968	99,573
		__________	__________	__________
Net asset value per ordinary share	6	213.55p	305.74p	262.51p

____________________________________________________________________________________________________

  CASHFLOW STATEMENT

	Six months ended 31 March 2009 (unaudited) £'000	Six months ended 31 March 2008 (unaudited) £'000	Year ended 30 September 2008 (audited) £'000
Net return on ordinary activities before finance costs and taxation	(15,594)	(13,116)	(28,069)
Adjustments for:
Losses on investments at fair value	18,048	15,066	32,659
(Increase)/decrease in accrued income	(3)	(388)	339
Increase in other debtors	(6)	(8)	-
(Decrease)/increase in other creditors	(38)	90	65
	__________	__________	__________
Net cash inflow from operating activities	2,407	1,644	4,994
Net cash outflow from servicing of finance	(2)	(557)	(795)
Net tax paid	(4)	-	(14)
Net cash (outflow)/inflow from financial investment	(1,890)	938	12,758
Equity dividends paid	(2,974)	(2,826)	(4,021)
Net cash inflow from management of liquid resources	2,428	805	78
	__________	__________	__________
Net cash (outflow)/inflow before financing	(35)	4	13,000
Net cash outflow from financing	-	-	(13,000)
	__________	__________	__________
(Decrease)/increase in cash	(35)	4	-
	__________	__________	__________
Reconciliation of net cash flow to movement in net debt
(Decrease)/increase in cash as above	(35)	4	-
Net change in liquid resources	(2,428)	(805)	(78)
Repayment of loan	-	-	13,000
	__________	__________	__________
Movement in net debt in the period	(2,463)	(801)	12,922
Opening net funds/(debt)	3,685	(9,237)	(9,237)
	__________	__________	__________
Closing net funds/(debt)	1,222	(10,038)	3,685
	__________	__________	__________
Represented by:
Cash at bank and in hand	15	54	50
AAA money market funds	1,207	2,908	3,635
Bank loan	-	(13,000)	-
	__________	__________	__________
	1,222	(10,038)	3,685
	__________	__________	__________

_______________________________________________________________________________________________________

  NOTES TO THE FINANCIAL STATEMENTS

1.    Accounting policies

(a)    Basis of accounting

The accounts have been prepared in accordance with applicable UK Accounting Standards, with pronouncements on half-yearly reporting issued by the Accounting Standards Board and with the Statement of Recommended Practice for 'Financial Statements of Investments 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 and the net asset value per share figures have been prepared in accordance with UK Generally Accepted Accounting Practice (UK GAAP) and using the same accounting policies as the preceding annual accounts.

(b)    Dividends payable

Dividends are recognised in the period in which they are paid.

2.	Income	Six months ended 31 March 2009	Six months ended 31 March 2008	Year ended 30 September 2008
	Income from investments	£'000	£'000	£'000
	Franked investment income	2,120	2,420	5,021
	Unfranked investment income	42	29	275
	Scrip dividends	-	12	38
		__________	__________	__________
		2,162	2,461	5,334
		__________	__________	__________
	Other income
	AAA money market interest	64	80	135
	Bank interest	21	3	7
	Underwriting commission	-	-	3
		__________	__________	__________
		85	83	145
		__________	__________	__________
		2,247	2,544	5,479
		__________	__________	__________

3.	Dividends	Six months ended 31 March 2009 £'000	Six months ended 31 March 2008 £'000	Year ended 30 September 2008 £'000
	Ordinary dividends on equity shares
	deducted from reserves:
	Interim dividend for 2008 of 3.15p per share	-	-	1,195
	Final dividend for 2008 of 7.85p per share (2007 - 7.45p)	2,978	2,826	2,826
	Refund of unclaimed dividends from previous periods	(4)	-	-
		__________	__________	__________
		2,974	2,826	4,021
		__________	__________	__________

4.	Return per ordinary share	Six months ended 31 March 2009 p	Six months ended 31 March 2008 p	Year ended 30 September 2008 p
	Revenue return	6.28	5.59	12.61
	Capital return	(47.40)	(41.29)	(88.38)
		__________	__________	__________
	Total return	(41.12)	(35.70)	(75.77)
		__________	__________	__________
	The figures above are based on the following figures:
		£'000	£'000	£'000
	Revenue return	2,382	2,121	4,782
	Capital return	(17,980)	(15,660)	(33,521)
		__________	__________	__________
	Total return	(15,598)	(13,539)	(28,739)
		__________	__________	__________
	Weighted average number of ordinary shares*	37,930,579	37,930,579	37,930,579
		__________	__________	__________

* Calculated excluding shares held in treasury.

     5.    Capital Reserve

     The capital reserve figure reflected in the Balance Sheet includes investment holdings losses at the period end of  
     £21,126,000 (31 March 2008 - £2,721,000; 30 September 2008 - £19,159,000).

6.	Net asset value per ordinary share	Six months ended 31 March 2009	Six months ended 31 March 2008	Year ended 30 September 2008
	Attributable net assets (£'000)	81,001	115,968	99,573
	Number of ordinary shares in issue*	37,930,579	37,930,579	37,930,579
	NAV per ordinary share (p)	213.55	305.74	262.51

* Excludes shares in issue held in treasury.

7.    Transaction costs

During the period 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 losses on investments at fair value in the Income Statement. The total costs were as follows:

		Six months ended 31 March 2009 £'000	Six months ended 31 March 2008 £'000	Year ended 30 September 2008 £'000
	Purchases	155	152	268
	Sales	32	35	86
		__________	__________	__________
		187	187	354
		__________	__________	__________

8.    Interim Report

The financial information contained in this Half-Yearly Financial Report does not constitute statutory accounts as defined in Sections 434-436 of the Companies Act 2006. The financial information for the six months ended 31 March 2009 and 31 March 2008 has not been audited.

The information for the year ended 30 September 2008 has been extracted from the latest published audited financial statements which have been filed with the Registrar of Companies. The report of the auditors on those accounts contained no qualification or statement under Section 237 (2) or (3) of the Companies Act 1985.

9.    Contingent assets

On 5 November 2007, the European Court of Justice ruled that management fees on investment trusts should be exempt from VAT. HM Revenue & Customs ('HMRC') subsequently announced its intention not to appeal against this ruling to the UK VAT Tribunal and therefore protective claims which have been made in relation to the Company will be processed by HMRC in due course. 

During the period Deutsche Asset Management (UK) Limited, the former Investment Manager, has refunded £608,631 (excluding simple interest) to the Company for VAT charged on investment management fees for the period 2001 to 2005 (date of termination) and this has been included in these financial statements. 

Standard Life (Corporate Funds) Limited refunded approximately £204,000 to the Company for VAT charged on investment management fees for the period 2005 (date of appointment) to 2007 and this was included in the financial statements for the year ended 30 September 2008.

The repayments have been 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.

10.    This Half-Yearly Financial Report was approved by the Board on 26 May 2009 and the Interim Report will be posted to shareholders in June 2009 and will be available from the Secretary and the Manager, Standard Life Investments (www.standardlifeinvestments.co.uk/its).

.

For Aberdeen Asset Management PLC

SECRETARY

26 May 2009

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. Investors may not get back the amount they originally invested.

 

END

 

 

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