Annual Financial Report

RNS Number : 0095H

Aurora Investment Trust PLC

13 June 2013

 



Annual Financial Report Announcement

Aurora Investment Trust plc

Year ended 28 February 2013

CHAIRMAN'S STATEMENT 

I am disappointed not to be able to report better news of the performance of Aurora over the last financial year, as I hoped would be the case in my Statement last year, given that several of the Company's particular holdings then appeared markedly cheap.

Aurora's objectives remain to outperform the London market, over the longer term, by a strategy of relatively concentrated investment in companies identified by the Manager as significantly undervalued, and with substantial growth potential.  The Manager's strategy has also been to invest in companies which, while listed in London, are largely based in faster growing, and particularly Asian, economies.  Since Aurora's launch in 1997 this strategy has outperformed the London market and, in particular, during periods when Stock Markets have performed strongly - albeit underperforming when markets have been weak.  The Trust is intended to be a "high beta" investment.  Over the past year, however, it has underperformed the London market by some 23%, essentially reflecting the poor performance of several of its key, special situation investments, as referred to in detail in the Manager's Report.

		Aurora (NAV per share)		Benchmark
Since launch 13/03/97		+90.4%		+55.4%
5 Years		-8.3%		+11.1%
4 Years		+62.9%		+82.7%
3 Years		-4.9%		+22.4%
1 Year		-13.3%		+10.0%

Aurora had a strong recovery from the 2008-09 financial crises and stock market trough, which its 4 year performance record reflects, but for the past 3 years performance has been disappointing.  This has been the result, in part, of the recovery in equity markets having been concentrated in larger capitalised, dividend paying stocks, albeit that they are now relatively expensive in terms of their earnings' multiples.  The Manager's strategy continues to make good sense, in principle, and it is to be hoped that Aurora's performance will recover over the current year.

The global background, generally, should be more supportive for equity markets, with global growth of 3.5% forecast for this year, even allowing for the disastrous economic performance in the Eurozone as a result of the "internal devaluation" policies being applied to sustain the Euro.  The Eurozone problems are by no means over.  There is a growing risk of political backlash in Southern Europe, with youth unemployment ranging between 30% and 60%.

Two particular factors have supported, and continue to drive, equity markets; substantial money creation in the USA, UK and, latterly, Japan; indeed Bernanke has stated publicly that part of the objective is to boost equity markets, in order to generate an improved, wealth induced, feel good factor for consumers. The second factor has been "artificially" low interest rates.  While huge sums of money have flowed into bonds over the past 5 years, increasingly investors are "hedging their bets" and diversifying more into equity markets.  Clearly one of the reasons why Asian markets have underperformed has been that they are at the end of the queue in terms of benefiting from money creation, particularly in the USA.  

Outlook

The economic and monetary scenario should remain broadly positive for equity markets over this year and equity performance has already started to broaden out beyond major, relatively defensive, companies, to include more medium sized and smaller companies with good prospects and on a global basis, as investors' risk appetites increase.  A significant part of the Trust's portfolio comprises such companies, several of which operate in the more dynamic, faster growing regions of the world.  The Board believes, therefore, that Aurora's investment strategy should be poised to benefit from this and that markets should be entering a period when Aurora's performance can improve markedly.

Tender Offer 

A Tender Offer for 10% of the share capital at a discount of 9% to the prevailing NAV was made to all shareholders last November.  This offer, which was accepted in full, reduced the size of the Trust by £1.85 million.  In view of the reduced size of the Trust there will be no repeat tender offer in the coming year.

Continuation Vote

An ordinary resolution that the Company should continue will be put forward to all shareholders at the AGM in July 2014.  Ahead of this the Chairman will be contacting shareholders to discuss proposals for the future of the Company.

AIFMD

Aurora will be registering as a small AIF and the Manager, Mars, is registering as a small AIFM under the new AIFMD regulatory requirements.

Dividend

The Board has decided to propose a further (indeed the sixteenth consecutive) modest increase to the dividend from last year's level of 3.55p to 3.75p.

AGM

I look forward to welcoming shareholders to the Company's AGM, which will be held at 12.00 noon on Wednesday 17 July 2013, at the offices of Cavendish Administration Limited, 145-157 St John Street, London EC1V 4RU.

Lord Flight

Chairman

13 June 2013

INVESTMENT MANAGER'S REVIEW AND OUTLOOK

The Olympic and Paralympic Games held in London last summer proved, despite deep fears expressed before the event by many Jeremiahs, outstanding and unequivocal successes. Moreover Team GB won a gratifyingly large number of medals, excelling, in particular, in the "sitting down" competitions - sailing, cycling, rowing and equestrianism - with which our Australian friends consider the British have a particular affinity. I, however, despite long hours at my desk, only deserve the wooden spoon for my efforts at fund management last year.

It was not only the stock-market which underwent, during the year, a descent and then later an ascent; the monarchy did too. Her Majesty the Queen parachuted down, or so it appeared, to the stadium to declare the Games open, then, later in the year, King Richard 111 was exhumed from his unmarked grave beneath a Leicester car park, where he had lain hitherto undisturbed for five centuries.

It was undoubtedly a wet, dismal and fruitless year for farmers and growth oriented fund managers alike. Not only was it the second wettest year in the recorded history of the UK but also my worst ever year for underperformance relative to the benchmark in my 32 year career.

Sadly, after an outstandingly good recovery from the 2008/9 trough in the stock-market, last year proved a second successive disastrous twelve months for the portfolio. Few loyal shareholders would disagree with the view that my performance would have been much improved had I had the foresight to invest the entire fund in War Loan, which traded above par for the first time for several generations for a brief magical moment during the games, rather than wait for various carefully selected special situations stocks to realise their exciting potential.  Fortunately, I remain confident that the realisation of their potential is only delayed, not diminished; my hope springs eternal and, I believe, with good reason.

There may have been a notable absence of wasps last summer but the portfolio was certainly stung by several shares which performed like lemons. Indeed the freakish weather itself played havoc with the operating conditions of a significant number of companies represented in the portfolio; these involve disparate investments in far flung parts of the globe ranging from coal, oranges, cement, to gold mining and insurance.  Meanwhile, much to my annoyance, my salmon fishing holiday in Iceland in August was marred by severe drought - certainly a year to forget!

I am deeply disappointed by the overall performance which occurred, despite having not only correctly forecast the economic disaster, which the Eurozone is proving to become (for an uncomfortably extended period of time I fear), along with the sluggish growth conditions likely to prevail in the UK economy in consequence. Simultaneously, I was also supremely confident that China would not undergo a hard landing, despite such a prediction by so many commentators.  I therefore feel much sympathy towards the few who correctly predicted the sub-prime mortgage debacle but who shorted the bonds too early and suffered much pain while awaiting the inevitable rewards. 

In summary, I failed to anticipate the psychology of the market place where the degree of liquidity of stocks was given overwhelming preference to the future growth prospects of smaller capitalised stocks, which have the ability to thrive in such a harsh environment.  The Chinese section of the portfolio also suffered badly on account of lack of trust in view of the high frequency of scandals and financial malpractice from the region. I remain fully confident, however, that the time for my favourite companies will come ere long.  Aided by a continuation in the rise in global stock-markets risk appetite will return to provide substantial rewards for patient investors.

PORTFOLIO

Last year I extolled at length the virtues of Asian Citrus.  Three to four months of exceptionally heavy rains over the main producing grove, however, made it a particularly difficult to harvest the summer crop.  Moreover the ground remained waterlogged for so long that the winter crop was also harshly affected by low production and more recently by blight.

The juice making division was in turn affected by both lower production during the rains (the need to avoid mould) and by lower prices of pineapple juice, on account of destocking by Philippine producers.  In addition, there was a three month delay in the completion of the new plant, which adds no less than an extra 66% to capacity.

Despite these woes, I remain extremely optimistic about the future in view of the high margins obtainable, the strong cash flows and the high visibility of growth in production as more trees reach maturity, not to mention inevitable long-term currency appreciation against sterling. Above all, this group is well placed to benefit from the government-inspired move to re-orient the Chinese economy towards the domestic consumer and away from exports.

I liken this investment to not only being able to utilise during a game of Scrabble all one's seven letters to make the high scoring word 'quixotic', but, even more fortunately, to being able to cover with it the slot entitled triple word score! Against such a background, and despite the exceptional size of the holding in the portfolio, I sleep well at night and dream of the rapidly increasing dividend.

Profit estimates and forecast cash levels for BTG have been raised several times during the last year. Although one of its more exciting drugs in development, Cytofab, had to be abandoned (but not before the holding had been severely trimmed), the group is performing well on several fronts. Of particularly noteworthy mention is the fact that the recent application to the FDA for Varisolve (varicose veins) has been accepted for review. Approval towards the end of the year is anxiously awaited; this 100% owned revolutionary treatment has potential of 'blockbuster' proportions.

The holding in West China Cement performed below my expectations. Although the group's capacity continued to expand to its current level of 23.7m tonnes (16.2m) the profitability did not expand in similar manner.  Selling prices were held back by the lack of construction during the extended period of heavy rains and by the disruption to the high speed rail contracts. Fortunately, operating conditions are slowly returning to normal and the new capacity in the region is being absorbed.2014 shows encouraging signs of being a boom year for construction in the region; Q1 2013 has already witnessed near 90% utilisation rates.

Although the takeover of Motorola by Google has abruptly halted Emblaze's rapid expansion plans for converting ordinary mobile phones into smart phones at very low cost, by incorporation of its unique software not involving servers, this should only prove a temporary glitch. The company has also signed contracts with two of China's largest handset manufacturers, namely TCL and HUAWEI, to provide further potential from Far Eastern markets.

Of much greater importance, however, for the share price is the outcome of the forthcoming lawsuits for infringement of its patents, in respect of video streaming, by several large international companies.  The date has been set for March 2014 for a trial by jury to hear the claim against Apple Inc. for alleged infringement of its patented  technology in the production of all the 350m Iphones and Ipads produced to date since 2009 - accordingly, a court approved claim for unpaid royalties at normal industry levels would transform the share price.    The case against Microsoft is of similar gigantic proportions and will be heard six months later. May David slay both these Goliaths!

Despite the fact that the property sector was the best performing sector in the Chinese stock-market, the price of Prosperity Minerals shares continues to languish at less than one third of net asset value. News of progress on sales of its massive residential/office/shopping/hotel development, which I visited in Guangzhou, is keenly awaited in the forthcoming results. I suspect that trading conditions have proved much stronger, despite the determination of the authorities to restrain the property market, than for the iron ore division which has undergone a period of relative inactivity.

In view of not only increasing political worries over Iran and North Korea as well as the rapid expansion of the money supply resulting from Quantitative Easing in the US, UK and Japan, which are set to increase future inflationary pressures, it appeared sensible to increase the portfolio's exposure to gold.  The existing holding in Medusa was accordingly substantially increased; this is a company based in the Philippines, where it benefits from a very low cost of production. Indeed the company's cost of production, at a total cost of less than US $400 per oz., is so low that it is represented in the lowest quartile (by cost)  of all producers of gold, thus providing a huge margin of safety against a possible falling gold price.

The company benefits from other major advantages over its peer group.  These include excellent operating conditions under a democratically elected US style of government, royalties having been newly reset at only 5%, no corporation tax for 8 years and a resource which will last for at least another 10, if not 30 years.

Production in the last year was severely curtailed by a monsoon (a once in thirty year event), which washed away the road to the mineshaft.  In addition, a series of breakdowns at the ore crushing mill caused further losses of production. As soon as the new more efficient and larger mill is commissioned in July, however, the productive capacity of the company is set to expand from its current level of 100,000 to no less than 400,000 oz. per year within the next 4 years, having been financed entirely out of the company's own cash resources.  Once that target has been achieved, there is the exciting prospect of a massive future dividend stream, further enhanced by the sales proceeds from the divestment of its copper resource, which the company has no intention to mine.

The long delay in gaining approval for GCM's massive and low cost opencast coal deposit in North Bangladesh, despite the ever increasing energy shortage in that country, has had a major injurious effect on the value of the portfolio. The company's management team continue to provide assurance, however, that permission will soon be forthcoming.  Encouraged by local M.P.s and Cabinet ministers alike, popular local support for the project, which alone could boost the annual growth in GDP for the whole economy by 1% p.a., continues to grow at a time when employment prospects remain scarce.  Should such permission be forthcoming, the accompanying rise in the share price may well produce a dramatic effect on the valuation of the entire portfolio.

As shareholders will have detected, I am unenthused about the prospects for the UK economy for the foreseeable future and have accordingly studiously avoided investing in companies with high domestic exposure.  Recently, however, two exceptions have been made.

Pennon Group, formerly known as South West Water, is a rather dull but well managed business with a sizeable waste management subsidiary.  When the share price was harmed on the news that the price of this subsidiary's saleable product, known as recyclates, (mainly sold to the Far East), had weakened, I took advantage of the opportunity.  Whilst waiting for an expected recovery in the price of recyclates the portfolio can benefit in the meantime from an assured dividend flow.

As longstanding shareholders will remember, I have been an enthusiast of the house-building industry for many years.  In my opinion it is a near certainty that there will be, for the foreseeable future, a severe shortage of new supply relative to the demand generated by the rapid increase in household formation. This situation will inevitably give rise to pricing power in the hands of those companies which have the financial muscle to own and develop large land banks in appropriate locations.

In the knowledge that only 98,000 new dwellings were constructed last year, I decided to regain exposure to the sector once more, spurred on by the degree of encouragement given to the industry by the government in recent months.  Having been impressed by the new financial disciplines imposed on the company i.e. the promise of increased dividend payments together with the absence of any exposure to debt, a holding in Persimmon was purchased.  It has since flourished.

It is evident to me that the problems of the UK and European financial industry are far from over. Accordingly, the holding in AVIVA was sold and a reduction (wrongly) from Prudential made. Moreover, there was no intention to increase the portfolio's exposure to the bank sector. I remain content to continue to hold the two relatively safe banks, namely HSBC and Standard Chartered, even though I was greatly annoyed to see both banks pilloried and heavily fined for having committed money laundering activities on a breathtaking scale, which led me to make a small reduction from the latter.

The only addition made during the year was in Man Group, which appeared severely undervalued. Following the recent change in management of this company my faith looks finally set to be rewarded. Although good gains were realised from the sale of the fixed interest holdings in both Royal Sun Alliance and Amlin I retained the small holding of Amlin Ordinaries, which had recovered well from its catastrophic weather related losses in Japan, New Zealand and US.

Gresham Computing fared well on the announcement that it had gained its first order for its banking software product, soon hopefully followed in the near future by many more.  In an era of increasing regulation the potential of its software for banking solutions is mouthwatering indeed. 

Pure Circle, the world's leading producer and marketer of stevia ingredients (natural sweetener with no calories), recently announced a rapid rise in sales from new product launches, particularly in the EU and the USA.  The group is well placed to benefit from the campaign around the globe to reduce the enormous problem of obesity.

OUTLOOK

After the Presidential elections and the postponement of the problems of the 'Fiscal cliff', now more aptly described  as a 'Fiscal slope', there is increased clarity which should lead investors to continue to support the US stock-market, which has performed well in recent months. Against a background of slowly rising employment and an improving housing market, US economic growth forecasts currently exceed 2.5%.

The US banking sector has to date done much more to recapitalise itself than its UK and European counterparts following the financial crisis. An important additional factor, to raise confidence for the future, is the rapid development of huge reserves of shale gas. The huge scale of these discoveries will eventually lead to energy independence and the probable renaissance of manufacturing industry in the US. It is currently difficult to comprehend that, according to several observers, the oil output from the US is set to exceed the level of Saudi Arabian production within a few years.

The Chinese and Asean economies continue to grow apace, albeit not quite as rapidly as pre 2007 but recently being aided by the rapid monetary expansion taking place in Japan.  The new administration has taken up the reins in China and appears to place greater emphasis on the quality of growth than in the past, involving a crackdown on corruption and a clampdown on the property sector to prevent over- investment.  To date this has had a detrimental effect on the portfolio's heavy exposure to the mining sector, but I remain confident that, as the year progresses, sentiment will improve markedly given further proof of relatively rapid economic growth in the region.

In complete contrast, Europe, with the exception of Germany, appears well set for several further years of decline.  The peripheral European countries have made limited progress recently in view of the austerity measures imposed on them by Brussels as the price for financial assistance; these are inevitably still inducing economic decline and rising unemployment.

Despite all attempts to unify the Eurozone and bring the banking system under a single regulator, unit labour costs continue to widen, which produces no grounds for confidence that any long term solution is achievable without any massive transfer of funds from Germany; a situation which is becoming ever less appealing to the German electorate.

Signor Draghi in June announced that he would do everything in his power to save the euro. Such a promise proved an instant catalyst for a sharp fall in sovereign bond yields amongst the stricken nations and a similar rise in their stock-markets. This, however, appears only a temporary respite without more fundamental change taking place.  The world now has a better understanding of the true meaning of those words.

The recent experience of the 'bail-in' of Cypriot banks involving deductions amounting to perhaps some 60% from large deposits, in order to refinance the banking system, may set the template for the future. In so doing it could bring forward the inevitable downfall of the weaker banks (as no one dares to make deposits with them) and thereby possibly hastening the breakup of the eurozone.  Having nearly killed the customer and shot himself in the foot, the barber making such haircuts must surely have been related to Sweeny Todd!

It is worth commenting that the recent debacle in Cyprus clearly illustrates how the Brussels bureaucrats have no carefully considered plan for the future of the Eurozone; they continue to stumble from one disaster to the next. The initial plan to deduct 15% from all deposits below 100,000 euros had to be abandoned, not only because of the popular clamour to do so, but because the bureaucrats realised that Brussels would have to honour its guarantee on these deposits itself! 

Since the election of M. Hollande as President of France, the country has noticeably declined in the political power stakes at Brussels and the economy is turning sour on account of the steep tax rises which have been imposed.  The most noticeable dynamic in recent months has been the rush by the plutocrats for Belgian citizenship.

Spain is undergoing huge social unrest as unemployment, particularly amongst the young, continues to mount, now exceeding 57 %. Was it on this count that the EU was awarded the Nobel Prize last year, or, was it for its still unbroken record of qualified audit reports, dare I ask?

Following the indecisive result from the recent elections the Italian government would appear to be almost paralysed once more and suffering from "rigor Montis".  The nation is suffering from its longest ever recession; production is down 25% from the 2007 peak, there is record unemployment and a government debt to GDP ratio of 125%. In recent months the only signs of life have been the smoke signals which emerged from the Vatican chimney.

The UK onshore economy is expected to grow modestly this year.  It remains hamstrung not only by the lack of any growth from its major trading partner (Europe currently represents 38% of the UK's external trade) but also because several major banks continue to draw in their horns to strengthen their balance sheets.  The prospects for certain cash generative companies which are well placed to benefit from growth trends meanwhile remain as good as ever.

However appealing the blandishments of Signor Draghi may sound, and however determined the eurocrats in Brussels currently appear in the hope of saving the eurozone in its current form, its undoubted 'Achilles heel' is youth unemployment.  This problem as mentioned earlier has already reached horrendous proportions, already much worse than at the trough of the 1930's US depression, yet sadly set to continue. It is blindingly obvious to outside observers that the 'heel' has become gangrenous. As with all cases of gangrene, as my grandfather discovered to his misfortune as a result of his wounds received on the Somme in 1916, there will have to be several amputations: Cyprus, Greece, Spain, Italy etc. Only thereafter can a full recovery to health and prosperity occur.  The recent and too long delayed reduction in interest rates is unlikely to have any effect.

Overall, despite such varied prospects from the different regions of the globe I remain excited about the prospects for this portfolio.  Defensive income stocks, which are not the remit of this trust, are currently extremely fully valued in general and consumer staples especially so; they have surely had their day in the sun in relative performance terms? It is now the turn of genuine growth stocks to shine as the appetite for risk rises.  This portfolio is pregnant with exciting potential from its diverse range of currently undervalued stocks.

I hope that shareholders who have been so patient and loyal will at long last reap a rich harvest of rewards over the coming months.

James Barstow

Mars Asset Management Limited

13 June 2013

REVENUE RESULT AND DIVIDEND

The Group's revenue loss after tax for the period amounted to £351,125 (2012: profit £59,211).  The Company made a revenue profit after tax of £415,211 (2012:£415,150). 

At the Annual General Meeting on 17 July 2013, a resolution will be proposed to approve a final dividend of 3.75p (2012: 3.55p) per ordinary share, absorbing £389,890 (2012: £410,105).  The final dividend will be paid on 26 July 2013 to shareholders on the register at 28 June 2013; the ordinary shares will go ex-dividend on 26 June 2013.  In accordance with International Financial Reporting Standards this dividend is not reflected in the financial statements for the year ended 28 February 2013.

RISK ANALYSIS

Risk diversification

At 28 February 2013 the Company and its subsidiary held 36 stocks, spread across 7 main sectors. 

The Board does not believe that it should normally or continuously impose prescriptive limits on the Investment Manager regarding the geographic breakdown or distribution by sector of the portfolio.  However, these matters are a subject of regular discussion between the Board and the Investment Manager and from time to time particular informal limits are agreed between them. 

Gearing Policy

The Company is usually geared to a moderate degree.  Borrowings are limited by the articles to a maximum of 30% of NAV and by the Company's bank covenant to 25% of NAV.  The Board has adopted a policy whereby under normal circumstances borrowings are to be kept to within approximately 20% of the Company's NAV, but with the flexibility to rise for limited periods.  This flexibility is considered desirable to avoid the possibility of forced sales in adverse market conditions.

The Board keeps the level of gearing and the extent, if any, of borrowing in foreign currencies under close review. 

Hedging

The Company does not use derivatives to hedge market or currency exposure.

The Board considers that the principal risks faced by the shareholders of the Company fall into two categories:

External Risks

Poor performance in the UK and/or world economies; poor corporate profits and dividends. 

Poor stock market performance caused by market-specific factors, such as rising interest rates, the unwinding of "bubbles" or disinvestment by institutions, superimposed on general economic factors, or caused by shocks, wars, disease etc.  The Board does not consider, however, that short-term volatility represents a risk for the long-term shareholder, since it regards long-term performance to be of primary importance.

Internal Risks

Poor asset management, which may include poor stock selection, excessive concentration of the portfolio, mistakes regarding currency movements, speculation in shares of companies without sound or established businesses and speculation in derivatives.  

Poor control of borrowing, including borrowing at excessive rates of interest relative to likely returns and borrowing excessive amounts leading to the breach of covenants and possible enforced sales of assets at disadvantageous prices.

Poor governance, compliance or administration, including particularly the risk of loss of investment trust status (S1159).

All these and other risks can result in shareholders not making acceptable returns from their investment in the Company.

RISK CONTROLS

External risks

Information on the mitigation of risk by diversification and by control of gearing and hedging is given in the Investment Policy section in the annual report.

Further details concerning currency risks, liquidity risks and interest rate risks are given in note 19.

Internal risks

The control of risks related to governance, compliance and administration is dealt with in the report on Corporate Governance.

OUTLOOK

The outlook for the Group is discussed in the Chairman's Statement and the Investment Manager's Review and Outlook.

THE BOARD

The Directors of the Company and of AIT at any time during the year are stated below. 

Lord Flight (Chairman)

The Honourable James Nelson

James Barstow FCA

Richard Martin

All directors are non-executive, in as much as Mr Barstow is an employee of Mars Asset Management Limited and not of the Company. 

STATEMENT OF DIRECTORS' RESPONSIBILITIES FOR THE ANNUAL REPORT

The directors are responsible for preparing the Directors' Report, the Remuneration report and the financial statements in accordance with applicable law and regulations.

Company law in the United Kingdom requires the directors to prepare financial statements for each financial year.  Under that law the directors have to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and have elected to prepare the Company financial statements on the same basis.  Under company law the directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs and profit or loss of the Company and Group for that period.  In preparing these financial statements, the directors are required to:

·       select suitable accounting policies and then apply them consistently;

·       make judgements and accounting estimates which are reasonable and prudent;

·       state whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements;

·       prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements and the Remuneration Report comply with the Companies Act 2006 and Article 4 of the IAS Regulation.  They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the corporate and financial information included on the website used by the Company.

Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Disclosure of information to auditor

The directors confirm that:

·      so far as each director is aware, there is no relevant audit information of which the Company's auditor is unaware; and

·      the directors have taken all the steps that they ought to have taken as directors to make themselves aware of any relevant audit information and to establish that the auditors are aware of that information.

Statement under the Disclosure and Transparency Rules 4.1.12

The directors confirm that to the best of their knowledge and belief;

(a)   This annual 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; and

(b)   The financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company.

For and on behalf of the Board

Lord Flight

Chairman

13 June 2013

CONSOLIDATED STATEMENT OF

COMPREHENSIVE INCOME

FOR THE YEAR ENDED 28 FEBRUARY 2013

Year ended 28 February 2013

Year ended 29 February 2012

		Revenue	Capital	Total		Revenue	Capital	Total
Note		£'000	£'000	£'000		£'000	£'000	£'000
	(Losses)/Gains on investments designated at fair value through profit or loss	-	(2,65)	(2,653)		-	(5,913)	(5,913)
	Realised gains of trading subsidiary at fair value through profit or loss	-	-	-		214	-	214
	Unrealised losses of trading subsidiary at fair value through profit or loss	(755)	-	(755)		(710)	-	(710)
2	Investment income	865	-	865		1,100	-	1,100
	Total income	110	(2,653)	(2,543)		604	(5,913)	(5,309)
3	Investment management fees	(93)	(93)	(186)		(120)	(120)	(240)
3	Other expenses	(252)	-	(252)		(323)	-	(323)
	Profit/(loss) before finance costs and tax	(235)	(2,746)	(2,981)		161	(6,033)	(5,872)
6	Finance costs	(110)	(110)	(220)		(108)	(108)	(216)
	Profit/(loss) before tax	(345)	(2,856)	(3,201)		53	(6,141)	(6,088)
7	Tax	(6)	-	(6)		6	-	6
	Profit/(loss) and total comprehensive income for the year	(351)	(2,856)	(3,207)		59	(6,141)	(6,082)
9	Earnings per share	(3.12p)	(25.37p)	(28.49p)		0.51p	(52.55p)	(52.04p)

The revenue and capital columns, including the revenue and capital earnings per share data, are supplementary information prepared under guidance published by the AIC.  As permitted by S408 of the Companies Act 2006, the Company has not presented its own Statement of Comprehensive Income.  The amount of the Company's loss for the financial year was £3,207,172 (2012: loss £6,082,145)

All revenue and capital items in the above statement derive from continuing operations.  No operations were acquired or discontinued during the period.  All revenue is attributable to the equity holders of the parent company.  There are no minority interests. 

The Board recommends a final dividend of 3.75p per share (see note 8) out of the Company's revenue reserves

CONSOLIDATED BALANCE SHEET

AT 28 FEBRUARY 2013

		2013		2012
Notes		£'000		£'000
	NON-CURRENT ASSETS
10	Investments designated at fair value through profit or loss	21,932		27,565
	CURRENT ASSETS
	Investments designated at fair value through profit or loss	988		1,744
	Sales for future settlement	430		-
	Other receivables	107		173
	Cash and cash equivalents	120		37
		1,645		1,954
	TOTAL ASSETS	23,577		29,519
	CURRENT LIABILITIES:
	Other payables	72		84
	Bank loan and overdraft	4,153		4,616
		4,225		4,700
	TOTAL ASSETS LESS CURRENT LIABILITIES	19,352		24,819
	EQUITY
12	Called up share capital	3,598		3,598
	Capital redemption reserve	179		179
	Share premium account	10,997		10,997
14	Investment holding losses	(7,081)		(2,467)
14	Other capital reserves	13,251		13,343
	Revenue reserve	(1,592)		(831)
	TOTAL EQUITY	19,352		24,819
15	Net assets per ordinary share	186.13p		214.84p

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 28 FEBRUARY 2013

2013	Notes
		Share capital	Capital redemption reserve	Share premium account	Investment holding losses	Other capital reserves	Revenue reserve	Total
		£,000	£'000	£,000	£,000	£,000	£,000	£,000
Opening equity		3,598	179	10,997	(2,467)	13,343	(831)	24,819
Total comprehensive income/(loss) for the year		-	-	-	(4,614)	1,758	(351)	(3,207)
Purchase of own shares		-	-	-	-	(1,850)	-	(1,850)
Dividends paid	8	-	-	-	-	-	(410)	(410)
Closing equity		3,598	179	10,997	(7,081)	13,251	(1,592)	19,352

2012	Notes
		Share capital	Capital redemption reserve	Share premium account	Investment holding losses	Other capital reserves	Revenue reserve	Total
		£,000	£'000	£,000	£,000	£,000	£,000
Opening equity		3,598	179	10,997	6,097	14,487	(486)	34,872
Total comprehensive income/(loss) for the year		-	-	-	(8,564)	2,423	59	(6,082)
Purchase of own shares		-	-	-	-	(3,567)	-	(3,567)
Dividends paid	8	-	-	-	-	-	(404)	(404)
Closing equity		3,598	179	10,997	(2,467)	13,343	(831)	24,819

CONSOLIDATED CASH FLOW STATEMENT

FOR THE YEAR ENDED 29 FEBRUARY 2012

Notes		2013		2012
		£'000		£'000
	NET CASH FLOW FROM OPERATING ACTIVITIES
	Cash inflow from investment income and interest	927		1,025
	Cash inflow from trading investments	-		180
	Cash outflow from management expenses	(442)		(588)
	Payments to acquire portfolio investments	(4,650)		(7,997)
	Receipts on disposal of portfolio investments	7,199		11,453
	Tax (paid)/recovered	(6)		2
16	NET CASH FLOW FROM OPERATING ACTIVITIES	3,028		4,075
	CASH FLOWS FROM FINANCING ACTIVITIES
	Purchase of own shares	(1,850)		(3,567)
	Dividends paid	(410)		(404)
	Decrease in bank borrowings	(463)		(1,260)
	Finance charges and interest paid	(222)		(238)
	NET CASH FLOW FROM FINANCING ACTIVITIES	(2,945)		(5,469)
	INCREASE/(DECREASE) IN CASH	83		(1,394)
	Cash and cash equivalents at beginning of year	37		1,431
	(Decrease)/increase in cash	83		(1,394)
	Cash and cash equivalents at end of year	120		37

COMPANY BALANCE SHEET

AT 28 FEBRUARY 2013

		2013		2012
Notes		£'000		£'000
	NON-CURRENT ASSETS
	Investments designated at fair value through profit or loss	21,932		27,565
	Investment in subsidiary	908		1,748
		22,840		29,313
	CURRENT ASSETS
	Sales for future settlement	430		-
	Other receivables	190		173
	Cash and cash equivalents	117		33
		737		206
	TOTAL ASSETS	23,577		29,519
	CURRENT LIABILITIES:
	Other payables	72		84
	Bank loan and overdraft	4,153		4,616
		4,225		4,700
	TOTAL ASSETS LESS CURRENT LIABILITIES	19,352		24,819
	EQUITY
	Called up share capital	3,598		3,598
	Capital redemption reserve	179		179
	Share premium account	10,997		10,997
	Investment holding losses	(9,350)		(3,970)
	Other capital reserves	13,251		13,343
	Revenue reserve	677		672
	TOTAL EQUITY	19,352		24,819

COMPANY STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 28 FEBRUARY 2013

2013	Notes
		Share capital	Capital  redemption reserve	Share premium account	Investment holding losses	Other capital reserves	Revenue reserve	Total
		£,000	£'000	£,000	£,000	£,000	£,000	£,000
Opening equity		3,598	179	10,997	(3,970)	13,343	672	24,819
Total comprehensive income/(loss) for the year		-	-	-	(5,380)	1,758	415	(3,207)
Purchase of own shares		-	-	-	-	(1,850)	-	(1,850)
Dividends paid	8	-	-	-	-	-	(410)	(410)
Closing equity		3,598	179	10,997	(9,350)	13,251	677	19,352

2012	Notes
		Share capital	Capital redemption reserve	Share premium account	Investment holding losses	Other capital reserves	Revenue reserve	Total
		£,000	£'000	£,000	£,000	£,000	£,000	£,000
Opening equity		3,598	179	10,997	4,950	14,487	661	34,872
Total comprehensive income/(loss) for the year		-	-	-	(8,920)	2,423	415	(6,082)
Purchase of own shares		-	-	-	-	(3,567)	-	(3,567)
Dividends paid	8	-	-	-	-	-	(404)	(404)
Closing equity		3,598	179	10,997	(3,970)	13,343	672	24,819

COMPANY CASH FLOW STATEMENT

FOR THE YEAR ENDED 28 FEBRUARY 2013

		2013		2012
		£'000		£'000
	NET CASH INFLOW FROM OPERATING ACTIVITIES
	Cash inflow from investment income and interest	855		885
	Cash outflow from management expenses	(443)		(588)
	Payments to acquire non-current asset investments	(4,650)		(7,997)
	Receipts on disposal of non-current asset investments	7,199		11,453
	Tax (paid)/recovered	(6)		2
	NET CASH INFLOW FROM OPERATING ACTIVITIES	2,955		3,755
	CASH FLOWS FROM INVESTING ACTIVITIES
	Decrease in loans advanced to subsidiary	74		319
	CASH FLOWS FROM FINANCING ACTIVITIES
	Purchase of own shares	(1,850)		(3,567)
	Dividends paid	(410)		(404)
	Increase/(decrease) in bank borrowings	(463)		(1,260)
	Finance charges and interest paid	(222)		(238)
	NET CASH FLOW FROM FINANCING ACTIVITIES	(2,945)		(5,469)
	INCREASE/(DECREASE) IN CASH	84		(1,395)
	Cash and cash equivalents at beginning of year	33		1,428
	(Decrease) / Increase in cash	84		(1,395)
	Cash and cash equivalents at end of year	117		33

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.     ACCOUNTING POLICIES

   Basis of Accounting

The financial statements of the Company and the Group have been prepared in accordance with International Financial Reporting Standards (IFRS), which comprise standards and interpretations approved by the IASB and International Accounting Standards and Standing Interpretations Committee interpretations approved by the IASC that remain in effect, and to the extent that they have been adopted by the European Union.  

Under IFRS, the AIC Statement of Recommended Practice "Financial Statements of Investment Trust Companies and Venture Capital Trusts" issued in January 2009 has no formal status, but the Group adheres to the guidance of the SORP. 

The accounting policies are unchanged from those used in the last annual financial statements except where otherwise stated.  The particular accounting policies adopted are described below:

(a)            Accounting Convention

The accounts are prepared under the historical cost basis, except for the measurement of fair value of investments.

(b)                      Basis of Consolidation

The Group accounts consolidate the accounts of the Company and of its subsidiary AIT Trading Limited ("AIT"), both drawn up to either 28 or 29 February each year.  As permitted by S408 of the Companies Act 2006, the Company has not presented its own Statement of Comprehensive Income.  The amount of the Company's loss for the financial year was £3,207,172 (2012: loss £6,082,145).

(c)            Investments

As the Company's business is investing in financial assets with a view to profiting from their total return in the form of increases in fair value, investments are designated as fair value through profit or loss on initial recognition in accordance with IAS 39.  At this time, fair value is the consideration given, excluding material transaction or other dealing costs associated with the investment. 

After initial recognition such investments are valued at fair value.  For quoted investments this is established by reference to bid, or last, market prices depending on the convention of the exchange on which the investment is quoted. Gains or losses are recognised in the capital column of the Statement of Comprehensive Income.  All purchases and sales of investments are accounted for on a trade date basis.     

The investment of the Company in AIT is stated at cost less impairment.   AIT's own investments are managed and performance evaluated on a fair value basis and accordingly are designated by AIT as "at fair value through profit or loss".  The AIT investments in quoted securities are valued at all times in accordance with current market values that represent fair value; at the time of acquisition they are valued on the basis of trade date accounting. Securities of companies whose prices are quoted on the London Stock Exchange are valued by reference to the Official List of the London Stock Exchange at their bid market prices at the close of the period. 

(d)            Income from Investments

Investment income from ordinary shares is accounted for on the basis of ex-dividend dates.  Income from fixed interest shares and securities is accounted for on an accruals basis using the effective interest method. Special Dividends are assessed on their individual merits and are credited to the capital column of the Statement of Comprehensive Income if the substance of the payment is a return of capital; with this exception all investment income is taken to the revenue column of the Statement of Comprehensive Income.  Income from gilts and bank interest receivable is accounted for on an accruals basis using the effective yield.

(e)            Capital Reserves

The Company is not precluded by its Articles from making any distribution of capital profits by way of dividend, but the Directors have no current plans to do so.  Profits and losses on disposals of investments are taken to the gains on disposal reserve.  Revaluation movements are taken to the investment holding reserve via the capital column of the Statement of Comprehensive Income.

(f)            Investment Management Fees, Finance Costs and Other Costs

Finance costs and monthly management fees are allocated between capital and revenue according to the Board's expected long-term split of returns between capital gains and income; one-half of these costs are charged to gains on disposal via the capital column of the Statement of Comprehensive Income. Performance-related fees are charged to gains on disposal via the capital column of the Statement of Comprehensive Income.  Other costs are normally charged to revenue, unless there is a compelling reason to charge to capital.  Tax relief in respect of costs allocated to capital is credited to capital via the capital column of the Statement of Comprehensive Income on the marginal basis.     

(g)            Taxation

Current income tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting period, that are unpaid at the balance sheet date. 

Deferred income taxes are calculated using the liability method on temporary differences.  Deferred tax is generally provided on the difference between the carrying amounts of assets and liabilities and their tax bases.  In addition, tax losses available to be carried forward as well as other income tax credits are assessed for recognition as deferred tax assets.

Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply at their respective period of realisation, provided they are enacted or substantively enacted at the balance sheet date.  Deferred tax liabilities are always provided for in full.  Deferred tax assets are recognised to the extent that it is probable that they will be able to be offset against future taxable income.

Changes in deferred tax assets or liabilities are recognised as a component of tax expense in the income statement, except where they relate to items that are charged or credited directly to equity.

 (h)          Foreign currency

The currency of the primary economic environment in which the Group companies operate (the functional currency) is pounds sterling ("Sterling"), which is also the presentational currency of the Group.  Transactions involving currencies other than Sterling are recorded at the exchange rate ruling on the transaction date.  At each balance sheet date, monetary items and non-monetary assets and liabilities, which are fair valued and which are denominated in foreign currencies, are retranslated at the closing rates of exchange.   Such exchange differences are included in the Statement of Comprehensive Income and allocated to capital if of a capital nature or to revenue if of a revenue nature.  Exchange differences allocated to capital are taken to gains on disposal or investment holding losses, as appropriate.

(i)          Cash and cash equivalents   

Cash and Cash Equivalents in the Cash Flow Statement comprise cash held at bank.

(j)          Dividends payable to equity shareholders

Dividends payable to equity shareholders are recognised in the Statement of Changes in Equity when they are paid, or have been approved by shareholders in the case of a final dividend.

2.	INCOME	2013		2012
	Income from investments:	£'000		£'000
	Franked dividends from listed  or quoted investments	432		661
	Unfranked income from overseas dividends	273		341
	Income from listed fixed interest securities	160		98
		865		1,100
	Other income:
	Bank interest receivable	-		-
		865		1,100

3.	INVESTMENT MANAGEMENT FEES AND OTHER EXPENSES		2013				2012
		Revenue	Capital	Total		Revenue	Capital	Total
		£'000	£'000	£'000		£'000	£'000	£'000
	Investment management fees                                      - monthly                                      - performance	93 -	93 -	186 -		120 -	120 -	240 -
		93	93	186		120	120	240
	Administration fees	72	-	72		58	-	58
	Custodian's fees	12	-	12		13	-	13
	Registrar's fees	12	-	12		14	-	14
	Directors' fees	79	-	79		79	-	79
	Consultancy payments	5	-	5		54	-	54
	Legal fees	6	-	6		18	-	18
	Auditors' fees - audit of the Company        and of the consolidated financial        statements        -     audit of the subsidiary	22 3	- -	22 3		22 3	- -	22 3
	-       other services	6	-	6		19	-	19
	Miscellaneous expenses	35	-	35		43	-	43
	Total other expenses	252	-	252		323	-	323
	All expenses include any relevant irrecoverable VAT

4.      DIRECTORS' FEES

         The fees paid or accrued were £73,921 (2012: £72,460).  There were no other emoluments.  The gross figures shown for directors' fees in note 3 above include employers' National Insurance charges or VAT, as appropriate.    

5.      TRANSACTION CHARGES

          Group

		2013		2012
		£'000		£'000
	Transaction costs on purchases of investments	17		28
	Transaction costs on sales of investments	13		26
	Total transaction costs included in gains or losses on investments at fair value through profit or loss	30		54

6.	INTEREST PAYABLE AND SIMILAR CHARGES		2013				2012
		Revenue	Capital	Total		Revenue	Capital	Total
		£'000	£'000	£'000		£'000	£'000	£'000
	Interest payable	61	61	122		81	81	162
	Facility and arrangement fees and other charges	49	49	98		27	27	54
		110	110	220		108	108	216

7.	TAXATION		2013				2012
		Revenue	Capital	Total		Revenue	Capital	Total
		£'000	£'000	£'000		£'000	£'000	£'000
	Corporation tax	-	-	-		-	-	-
	Overseas tax	6	-	6		(6)	-	(6)
	Tax charge in respect of the current year	6	-	6		(6)	-	(6)

             Current taxation

              The current taxation charge for the year is different from the standard rate of corporation tax in the UK (24.17%).  The differences are explained below:                   

		2013		2012
		£'000		£'000
	Total (loss)/profit before tax	(3,207)		(6,088)
	Theoretical tax at UK corporation tax rate of 24.17% (2012: 26%)	(770)		(1,582)
	Effects of:
	Capital (losses)/profits that are not taxable	(686)		(1,597)
	UK dividends which are not taxable	(104)		(165)
	Increase/(decrease) in excess tax losses	69		239
	Expenses charged to capital account for which a deduction is claimed	(49)		(59)
	Overseas tax recovered	6		(6)
	Actual current tax	6		(6)

The Company is an investment trust and therefore is not charged to tax on capital gains.

        

             Factors that may affect future tax charges

The Company has tax losses of £7,265,198 (2012: £6,826,713) in respect of management expenses and of £1,337,835 (2012: £1,360,868) in respect of loan interest.  Its subsidiary has trading losses carried forward of £2,663483 (2012: £1,909,720) and £83,069 (2012: Nil) in respect of loan interest.  These amounts are available to offset future taxable revenue.  A deferred tax asset has not been recognised in respect of those expenses and will be recoverable only to the extent that the Company has sufficient future taxable revenue.

8.          ORDINARY DIVIDENDS

				2013		2012
				£'000		£'000
Dividends reflected in the financial statements:
Final dividend paid for the year 2012 at 3.55p (2011: 3.5p)				410		404
Dividends not reflected in the financial statements:
Proposed final dividend for the year 2013 at 3.75p (2012: 3.55p)				390		410

9.         EARNINGS PER SHARE

Earnings per share are based on the loss of £3,207,172 (2012: loss £6,082,145) attributable to the weighted average of 11,257,914 (2012: 11,686,497) ordinary shares of 25p in issue during the year, excluding shares held in Treasury.

Supplementary information is provided as follows: revenue earnings per share are based on the revenue loss of £351,125 (2012: profit £59,211); capital earnings per share are based on the net capital loss of £2,856,047 (2012: loss £6,141,356), attributable to 11,257,914 (2012: 11,686,497) ordinary voting shares of 25p.

10.	INVESTMENTS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS	2013		2012
		£'000		£'000
	UK listed or quoted securities	20,497		25,899
	Hong Kong listed security	1,435		1,666
	Total non-current investments	21,932		27,565
	Movements during the year:
	Opening balance of investments, at cost	30,032		31,578
	Additions, at cost	4,650		7,255
	Disposals - proceeds received or receivable	(7,624)		(11,451)
	- less realised profits	1,955		2,650
	- at cost	(5,669)		(8,801)
	Cost of investments at  28 or 29 February	29,013		30,032
	Revaluation of investments to market value:
	Opening balance	(2,467)		6,097
	Decrease in unrealised appreciation debited to investment holding reserve	(4,614)		(8,564)
	Balance at 28 or 29 February	(7,081)		(2,467)
	Market value of non-current investments at 28 or 29 February	21,932		27,565

The Company holds a notifiable interest in the following company, the percentage shown being the relevant proportion of the share capital held:  GCM Resources 3.87%.

11.        SUBSIDIARY

             The Company has an investment in AIT Trading Limited (AIT), a wholly owned subsidiary registered in England and Wales, which comprises two ordinary shares of £1 each.  AIT undertakes purchases of investments for re-sale in the shorter term, with the objective of achieving a trading profit.  The loss before tax of AIT for the year was £766,336 (2012: loss £355,939).  The net deficit of AIT at the Balance Sheet date was £2,269,405 (2012: net deficit £1,503,069).  No dividend was paid from AIT to the Company (2011: £nil).

During the year the Company provided a short-term loan to AIT to finance its trading operations and charged interest to AIT at the same rate as was charged by Coutts to the Company.  At 28 February 2013 the amount outstanding, excluding interest, was £3,177,125 (2012: £3,250,625) together with £83,069 of interest (2012: £Nil).

The Company makes an impairment provision when AIT is in a net deficit position, of an amount equal to the net deficit. 

	2012	Movement	2013
	£'000	£'000	£'000
Loan to AIT	3,251	(74)	3,177
Provision for impairment	(1,503)	(766)	(2,269)
Net investment	1,748	(840)	908

12.	SHARE CAPITAL
	At 28 February:		2013		2012
	Authorised
	Ordinary shares of 25p	Number	40,000,000		40,000,000
		£'000	10,000		10,000
	Allotted, issued and fully paid
	Ordinary shares of 25p	Number	14,391,389		14,391,389
		£'000	3,598		3,598

During the year ended 28 February 2013 the Company purchased 1,155,191 of its own shares (2012: 1,400,000).  No shares were cancelled during the year (2011: Nil).  At 28 February 2013, the Company had 14,391,389 shares in issue, of which 3,994,330 are held in Treasury; the number of voting shares in issue is 10,397,059. 

13.        TOTAL EQUITY

Total Equity includes, in addition to Share Capital, the following reserves:

Capital Redemption Reserve.  When any shares are redeemed or cancelled, a transfer of realised profit must be made to this reserve in order to maintain the level of capital that is not distributable. 

Share Premium Account.  When shares are issued at a premium to their nominal value, the "capital profit" arising on their allotment must be held in a Share Premium Account, which is not distributable in the ordinary course and may be utilised only in certain limited circumstances.

Capital profits arising from the Company's investment transactions are held as Capital Reserves, subdivided between Gains on Disposal for profits arising upon sales of investments and Investment Holding gains/losses for portfolio revaluations.  The movements on this account are analysed in note 14 below.  

The Company's Revenue Reserves are the net profits that have arisen from the Company's revenue income in the form of dividends and interest, less operating expenses and dividends paid out to the Company's shareholders.

14.	CAPITAL RESERVES	2013			2012
		£'000		£'000
	Investment holding gains/(losses)
	Opening balance	(2,467)		6,097
	Revaluation of investments  - listed	(4,614)		(8,564)
	Balance of investment holding profits/(losses) account at 28 February	(7,081)		(2,467)
	Other capital reserves
	Opening balance	13,343			14,487
	Net gains and losses on realisation of investments	1,955			2,650
	Expenses of capital management: management fees	(93)			(120)
	: finance costs	(110)			(107)
	Net expenses	(203)			(227)
	Purchase of own shares	(1,850)			(3,567)
	Exchange differences	6			-
	Balance of other capital reserves at 28 February	13,251			13,343

	Total capital reserve at 28 February	6,170		10,876

The capital reserves of the Company are identical to those of the Group, except that a provision is made when necessary against the Company's investment holding account for any amount loaned to AIT Trading Limited that is not covered by the subsidiary's net assets.  At 28 February 2013 such a provision was made of £2,269,405 (2012: £1,503,069).

15.        NET ASSETS PER ORDINARY SHARE

The figure for net assets per ordinary share is based on £19,352,159 (2012: £24,818,866) divided by 10,397,059 (2012: 11,552,250) voting ordinary shares in issue at 28 February 2013, excluding shares held in Treasury.

16.	RECONCILIATION OF PROFIT BEFORE FINANCE COSTS AND TAX TO NET CASH INFLOW FROM OPERATING ACTIVITIES	2013		2012
		£'000		£'000
	Loss before finance costs and tax	(2,982)		(5,872)
	Decrease in non-current investments	5,633		10,110
	Decrease in current investments	756		676
	(Increase) in sales for future settlement	(430)		-
	Decrease/(increase) in other receivables	65		(104)
	(Decrease) in purchases for future settlement	-		(741)
	(Decrease)/increase in other payables	(8)		1
	Taxation (paid)/recovered	(6)		5
	Net cash inflow from operating activities	3,028		4,075

17.        RELATED PARTY TRANSACTIONS

Details of transactions with AIT Trading Limited are set out in note 11.

Details of the management, administration and secretarial contracts can be found in the annual report.  As disclosed in that Report, Mr Barstow is a director both of the Company and of the Investment Manager.  Fees payable to the Investment Manager are detailed in note 3.  Other payables include accruals of a monthly management fee of £14,434 (2012: £17,745) and an administration fee of £6,000 (2012: £6,000).  No performance fee was accrued (2012: £Nil).  All figures include any appropriate VAT. 

18.        FINANCIAL ASSETS/LIABILITIES

Investments are carried in the balance sheet at fair value.  For other financial assets and financial liabilities, the balance sheet value is considered to be a reasonable approximation of fair value.

Financial assets - Group

The Group's financial assets comprise equity investments, fixed interest securities, short-term receivables and cash balances.  The currency and cash-flow profile of those financial assets was: 

		2013				2012
	Interest bearing	Non- interest bearing	Total		Interest bearing	Non- interest bearing	Total
	£'000	£'000	£'000		£'000	£'000	£'000
Non-current investments at fair value through profit or loss:
£ sterling equities	-	19,260	19,260		-	23,906	23,906
Hong Kong $ equities	-	1,435	1,435		-	1,666	1,666
£ fixed interest	1,237	-	1,237		1,993	-	1,993
	1,237	20,695	21,932		1,993	25,572	27,565
Short term trade receivables	-	430	430		-	-	-
Cash at bank:
Floating rate - £ sterling	-	120	120		-	37	37
	-	550	550		-	37	37

Cash at bank includes £34,326 (2012: £24,365) held by the Group's custodian, The Northern Trust Company.

Financial assets - Company

The Company's financial assets comprise equity investments, fixed interest securities, short-term receivables and cash balances.  The currency and cash-flow profile of those financial assets was: 

		2013				2012
	Interest bearing	Non- interest bearing	Total		Interest bearing	Non- interest bearing	Total
	£'000	£'000	£'000		£'000	£'000	£'000
Non-current investments at fair value through profit or loss:
£ sterling equities	-	19,260	19,260		-	23,906	23,906
Hong Kong $ equities	-	1,435	1,435		-	1,666	1,666
£ fixed interest	1,237	-	1,237		1,993	-	1,993
	1,237	20,695	21,932		1,993	25,572	27,565
Short term trade receivables	-	430	430		-	-	-
Cash at bank:
Floating rate - £ sterling	-	117	117		-	33	33
	-	547	547		-	33	33

Cash at bank includes £31,963 (2012: £24,365) held by the Group's custodian, The Northern Trust Company.

Financial liabilities - Company and Group

The Group finances its investment activities through the Company's ordinary share capital, reserves and borrowing.  The Group's financial liabilities comprise its overdraft facility and other short-term trade payables. Foreign currency balances are stated in the accounts in sterling at the exchange rate as at the Balance Sheet date.

The Company has borrowing facilities from its banker, Coutts & Co, comprising a revolving credit of up to £5 million (2012: £6.5 million) plus an overdraft facility of up to £2 million (or the equivalent in euros and/or US dollars in all cases).  Interest is charged at 2.25% over LIBOR in the case of the loan and over Coutts' base rate in the case of the overdraft.  The facilities are secured upon the shares and securities of the Company.  They are repayable upon demand, but normally are reviewed annually by the bank. 

The currency and cash-flow profile of the financial liabilities of the Group and of the Company was:

	2013		2012
	£'000		£'000
Interest bearing: Bank overdraft:
Sterling	4,153		4,616
	4,153		4,616
Non interest bearing:
Short term trade payables	-		-
	4,153		4,616

19.        FINANCIAL INSTRUMENTS - RISK ANALYSIS

Company and Group

The general risk analysis undertaken by the Board and its overall policy approach to risk management are set out in the Business Review.  Issues associated with portfolio distribution and concentration risk are discussed in the Investment Policy section of the Business Review.  This note, which is incorporated in accordance with accounting standard IFRS7, examines in greater detail the identification, measurement and management of risks potentially affecting the value of financial instruments and how those risks potentially affect the performance and financial position of the Company. 

The risks concerned are categorised as follows:

             A) Potential Market Risks, which are principally (i) Currency Risk (ii) Interest Rate Risk and (iii) Other Price Risk. 

B) Liquidity Risk

C) Credit Risk

Each is considered in turn below:

             A (i) Currency Risk

All the securities are listed on the London Stock Exchange or quoted on AIM, with the exception of West China Cement, which was previously quoted on AIM but is now listed on the Hong Kong Exchange; the Manager is not required to sell this holding, but will not add to it since it ceased to be quoted in London.  Where the underlying currency or currency of quotation is not sterling this is noted.   The element of currency risk on investments may be indirect and reflected in the effect of underlying currency movements upon the London market price, whether quoted in foreign currency or not. 

Based on the portfolio as at 28 February 2013, there were no investments denominated in Euros and consequently there was no currency risk arising from the possibility of a fall in the value of sterling against the Euro, impacting upon the value of investments or income.  West China Cement is now denominated in Hong Kong Dollars; a 10% rise in sterling against the Hong Kong Dollar would result, all other factors remaining unchanged, in a fall of £143,561 in the value of the portfolio.                  

The Company had no foreign currency borrowings at 28 February 2013 (2012: Nil).  In view of the elimination of foreign currency borrowings, no sensitivity analysis is presented for this risk.

A (ii) Interest Rate Risk

The weighted average interest rate of the fixed rate financial assets is 9.43% (2012: 7.79%) and the weighted average period for which rates are fixed is indefinite (2012: indefinite).  The list of the Company's holdings in the annual report includes details of the split between equities and fixed interest securities. 

With the exception of cash, no interest rate risks arise in respect of any current asset.   All cash held as a current asset is sterling denominated, earning interest at the bank's or custodian's variable interest rates. 

Interest is charged on the bank borrowing facilities at the bank's variable interest rates as appropriate to the currency concerned in the case of each balance.  At 28 February 2013, the Company's total borrowing was £4,152,746 (2012 £4,616,181): all of which was borrowed in sterling, upon which the interest cost at the year end was 2.75% (2012: 2.75%).  

A 2% rise in LIBOR, applied to the sterling loan and overdraft balance as at 28 February 2013, would decrease net income by £83,055 on an annual basis.   

A (iii) Other Price Risk

The principal price risk for the Company is the price volatility of shares that are owned by the Company.  As described in the Investment Manager's Review, the Company spreads its investments across different sectors and geographies, but, as shown by the Portfolio Analysis in the annual report, the Company may maintain relatively strong concentrations in particular sectors selected by the Manager, such as the Resources sector. 

B  Liquidity Risk

             Liquidity Risk is considered to be small, because the portfolio is invested in readily realisable securities.  As a consequence, cash flow risks are also considered to be small.  The Investment Manager estimates that, under normal market conditions and without causing excessive disturbance to the prices of the securities concerned, the majority of the portfolio could be realised within seven days.

The Company's overdraft facility is repayable upon demand, although normally renewed annually.  The Directors believe that the facility will be renewed in 2013.  In view of the Company's ability to sell investments, as stated above, the Company is able to reduce or eliminate its borrowing, if necessary.

C Credit Risk

The Company invests in quoted equities and fixed interest securities.  The Company's investments are held by The Northern Trust Company ("the Custodian"), which is a large international bank with a high reputation.  The Company's normal policy is to remain fully invested at most times and not to hold very large quantities of cash.  At 28 February 2013, Group cash at bank comprised £34,326 (2012: £24,365) held by the Custodian and £85,371 held by Coutts & Co (2012: £12,707), also part of a large international bank with a very high credit rating.

Credit Risk arising on transactions with brokers relates to transactions awaiting settlement.  This risk is considered to be very low because transactions are almost always undertaken on a delivery versus payment basis with member firms of the London Stock Exchange.             

             D Capital management policies and procedures

The Group' s capital management objectives are:

to ensure the Group's ability to continue as a going concern; and

to provide an adequate return to shareholders

by pursuing investment policies commensurately with the level of risk.

The Group monitors capital on the basis of the carrying amount of equity, less cash and cash equivalents as presented on the face of the statement of financial position.

The Group sets the amount of capital in proportion to its overall financing structure, i.e. equity and financial liabilities. The Group manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders (within the statutory limits applying to investment trusts), return capital to shareholders, issue new shares, or sell assets to reduce debt.

Since an overdraft was taken out in 1997, the Group has consistently honoured its covenant obligations, among which the principal capital ratio is described under Gearing Policy.

20.        FAIR VALUE HIERARCHY

Under IFRS7 investment companies are required to disclose the fair value hierarchy that classifies financial instruments measured at fair value at one of three levels according to the relative reliability of the inputs used to estimate the fair values.

Classification		Input
Level 1		Valued using quoted prices in active markets for identical assets
Level 2		Valued by reference to valuation techniques using observable inputs other than quoted prices included within Level 1
Level 3		Valued by reference to valuation techniques using inputs that are not based on observable market data

Categorisation within the hierarchy has been determined on the basis of the lowest level input that is significant to the fair value measurement of the relevant asset.

Assessment of Hierarchy - Group

The valuation techniques used by the Group are explained in the Accounting Policies Note 1(c).  As at 28 February 2013, all investments held by the Group, including all current investments held for trading by the Company's subsidiary, are considered to fall within Level 1:

		2013		2012
Level 1		22,920		29,309
Level 2		-		-
Level 3		-		-

Assessment of Hierarchy - Company

The Company's subsidiary is held at cost less impairment and therefore its valuation as an investment in the Company's balance sheet does not fall within the fair value hierarchy:

		2013		2012
Level 1		21,932		27,565
Level 2		-		-
Level 3		-		-

21.        Standards, amendments and interpretations to existing standards that are not yet effective and have not been adopted early by the Group

At the date of authorisation of these financial statements, certain new standards, amendments and interpretations to existing standards have been published but are not yet effective, and have not been adopted early by the Group.

The Directors anticipate that all of the pronouncements will be adopted in the Group's accounting policies for the first period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Group's financial statements is provided below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Group's financial statements.

IFRS 9 Financial Instruments (effective from 1 January 2015)

IFRS 10 Consolidated Financial Statements (effective from 1 January 2013)

IFRS12 Disclosure of interests in Other Entities (effective from 1 January2013)

IFRS 13 Fair Value Measurement (effective from 1 January 2013)

No material impact is expected on the financial statements from the above standards.

22.       FINANCIAL INFORMATION

This announcement does not constitute the Company's statutory accounts.  The financial information for 2013 is derived from the statutory accounts for 2013, which will be delivered to the registrar of companies following the Company's Annual General Meeting.  The statutory accounts for 2012 have been delivered to the registrar of companies.  The auditors have reported on the 2012 and 2013 accounts; their reports were unqualified and did not include a statement under Section 498(2) or (3) of the Companies Act 2006. The Annual Report for the year ended 28 February 2013 was approved on 13 June 2013.  It will be posted to shareholders and will be made available on the Manager's website at www.marsassetmanagement.co.uk This announcement contains regulated information under the Disclosure Rules and Transparency Rules of the FSA. The annual report will be submitted to the National Storage Mechanism and will shortly be available for inspection at: http://www.morningstar.co.uk/NSM

23.       ANNUAL GENERAL MEETING

The Annual General Meeting will be held on 17 July 2013 at 12.00 noon at 145-157 St. John Street, London, EC1V 4RU. 13 June 2013 Secretary and registered office: Cavendish Administration Limited 145-157 St John Street London EC1V 4RU Tel: [phone]

 

END

 

 

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