Annual Financial Report

RNS Number : 2255Y

F&C Capital & Income Inv Tst PLC

27 November 2014

 



Date:                27 November 2014

Contact:           Julian Cane                                                   

                        F&C Investment Business Limited                   

                        020 7628 8000                                               

F&C Capital and Income Investment Trust plc

Audited Statement of Results

for the year ended 30 September 2014

Highlights

·    Dividend increased for the twenty first consecutive year

·    Total dividends for the year will be 9.85 pence per share, an increase of 4.2%, inclusive of the fourth interim dividend payable on 31 December 2014.

·    Net asset value total return for the year of 3.8%

·    Share price total return for the year of 6.0%, with the shares continuing to trade at a premium to net asset value.

Summary of results

Attributable to shareholders	30 September 2014	30 September 2013	% Change
Net asset value per share	251.76p	251.40p	0.1%
Revenue return per share	10.56p	11.26p	(6.2)%
Dividends per share	9.85p	9.45p	4.2%
Share price	258.00p	252.50p	2.2%
Net asset value total return	3.8%	17.7%	n/a
Share price total return	6.0%	16.4%	n/a

The Chairman, commenting on the results, said:

The world has had a lot to deal with in the past year. If it wasn't Crimea, ISIS, or Hong Kong, it was the Scottish referendum, UKIP or Ebola. Listing all these, it is perhaps a surprise that markets were able to make any progress at all.

In the realm of economics, things were a little calmer, especially in the US and UK. Markets finally saw some economic traction as the pace of recovery quickened. This led to sterling strength, particularly against the Euro, and interest rates looked as if they might move up. This tension between better growth and the withdrawal of monetary stimulus kept markets finely balanced as participants tried to understand what the world would look like with normalised monetary policy. Meanwhile, weak growth in Europe and the spectre of deflation promised that the baton of quantitative easing would pass to the Japanese and European Central Banks even as the US and UK took their foot off the monetary accelerator.

More recently, concerns over the pace of growth have resurfaced in a number of countries and commodity prices, including oil, have fallen. This reflects weak demand in key markets, most particularly China, which is now nearly five times the size of the UK economy and will be an increasingly important factor in determining the health of the world economy. The likelihood of significant rate rises has receded.

All of this narrative points to the fact that the hangover from the financial crisis has not dissipated. We are in a world of sub-par growth where debt problems have not really been addressed and where the monetary medicine has triggered inflation in assets rather than in consumer prices. It is possible that we have many more years of this ahead of us as we strive to shake off the effects of many decades of debt accumulation: we are unable to inflate our way out of it and unwilling to take write-downs.

Putting this together, we live in an economically unstable world where Central Banks are actively encouraging investors to take risk and where rising asset prices are the consequence of economic policy. Major potential problems lurk in Europe and in China, and mean that normalization is still some way off.

Performance

In the year under review, the Net Asset Value (NAV) per share, measured on a total return basis, rose by 3.8%. The share price delivered a total return of 6%, while the FTSE All-Share index increased by 6.1%.

While the short-term performance is somewhat disappointing, I would emphasise that it is appropriate for shareholders to look at the longer term numbers. Over three years, the NAV per share is up by 45.3%, while the FTSE All-Share is up by 47.9%, with most of that shortfall vis-à-vis the benchmark occurring in the most recent period. Over fifteen years, the NAV is up by 122.4%, the share price by 163.1% and the Index by 104.5%. As I have pointed out in previous statements, these returns have been generated with the benefit of lower risk and a higher yield than that offered by the Index, suggesting an attractive longer term risk/return trade-off.

During the year the Company has had average gearing of 4.9%. This is financed by a £20 million loan facility where the borrowing costs are lower than the income generated on the portfolio. This has had the effect of enhancing the income account. We also have a tactical short term facility of £15 million which is there to be used if markets suffer a significant setback. During the year, this remained undrawn.

Income Account

Income and dividends

The revenue return per share was 10.56 pence, a decrease of 6.2% from the previous year's 11.26 pence, which itself was an increase of 12.6% on the year to September 2012. Dividend growth from the equity portfolio was 11.9% over the two year period, compared with dividend growth of 8.1% for the FTSE All-Share Index. In recent years, the portfolio has benefited from dividends disbursed as special income dividends, particularly insurance companies, such as CatCo, Beazley and Lancashire; these were paid by those companies following a period of very strong trading performance, and as they don't want to retain the money for further investment. This year these special dividends amounted to £1.2m compared to £0.8m the previous year.

Income from the option writing strategy was also subdued for a second year and amounted to £274,000 compared with £261,000 last year. This reflects a lack of opportunity to capture attractive option premiums as volatility has remained very low despite the risky environment in the world. When volatility increases, which it surely will at some point, our ability to generate revenue from this source will improve. Our policy, though, is only to exploit this opportunity when it offers unusual returns for little risk. It is not to be relied upon to replace income lost as a result of shifts in the portfolio.

So far this year, we have paid three dividends amounting to 6.75 pence. We are proposing to pay a fourth dividend of 3.10 pence to give a total for the year of 9.85 pence, an increase of 4.2% over last year, well ahead of the rate of inflation and still fully covered by earnings despite their decline. As has become customary, we will be paying this as an interim dividend so that we can pay you at the end of the calendar year, rather than having to delay the process until after the AGM. For some reason, corporate governance specialists don't like this practice and often advise shareholders to object by opposing measures at the AGM, but your Board thinks its approach is in your interests and intends to carry on with it.

The increase this year brings the number of consecutive years of dividend increase to 21 and represents an increase in the value of the dividend of around 190% over the 21 years since the Company began. This is well ahead of inflation and the dividend growth of the benchmark: the objective of continuing this record is still very much intact.

 Costs

We keep a close eye on the costs of running the trust. This year, the ongoing charges (this is a sum which looks at the costs of running the Company from soup to nuts) was 0.66% of average net assets compared with 0.62% in the last year. We are conscious also of the fact that the competitive landscape in which your Company sits is changing as unit trusts respond to the Retail Distribution Review (RDR). This is causing downward pressure on unit trust fees and closing the gap that investment trusts had previously enjoyed. We do think that investing in investment trusts brings particular benefits to investors, and do not want to sit still and see our cost advantage eroded by competing open ended products. While a lot of our costs are by their very nature fixed, we scrutinize everything to make sure that we have not missed anything in the quest to drive them down.

Given the change in the landscape, we are also conscious that good communications are de rigueur for a Company like this. To that end, we support the manager in improving the materials sent to shareholders with an increasing emphasis on electronic communication, as well as articulating the strategy of the Company in clear terms. If any shareholders have ideas about how we could improve matters, please get in touch.

Discount/Premium

This has been another year when the shares have traded regularly at a premium to NAV. The year finished with the share price at 258p, a premium of 2.5% to the NAV. During the year, the range of trading was from a maximum premium of 3.5% to a discount of 2.0%. The shares only traded at a discount on 58 days. While the existence of a premium is evidence that the investment mandate is in demand, mostly as a result of the lack of investment opportunities with decent and growing income in a very low interest rate environment, it is as much a sign of market inefficiency as is a discount. While we would be in the market buying in shares were a material discount to emerge, it is logical that we should do the opposite when a premium persists. This year we issued 2,525,000 shares, all at a premium to NAV so as to avoid any dilution to existing shareholders. This has had the effect of increasing the share capital by 2.8%, which, other things being equal, improves market liquidity and gives the Company a larger base over which to spread our fixed costs.

As usual, at the AGM in February, we will be asking for authority to issue further shares without pre-emption rights equal up to 10% of the Company's shares in issue at the date of this report. These can only be issued at a premium which takes into account the need not to dilute existing shareholders. We believe this is in your interest and urge you to support it.

Governance Matters

Regulation

As mentioned in my last statement, we have devoted considerable time and money to preparing the Company for the new EU regulatory regime known as the Alternative Investment Fund Management Directive (AIFMD). This is a piece of legislation the effect of which is to apply a similar regulatory framework to closed ended funds as applies to open ended vehicles. The regulators' argument is that investment trusts are more complex than unit trusts and that their shareholders require extra protection. This is not a view we share, and unfortunately, compliance comes at a cost but carries no obvious benefit for you. We had no choice but to comply, however, and the necessary arrangements were put in place in July. The legal costs of doing so were £7,000 and the ongoing extra cost per annum will amount to 0.01% per annum or, in the jargon of the financial world, one basis point. While I would like to tell you that this is the last piece of legislation we will face, I fear that is not the case. The regulatory pendulum continues to swing in the direction of greater controls, and the concept of a cost benefit analysis appears to carry no weight.

I would like to record the Board's gratitude to F&C for its help during this process. They certainly eased the burden of what was a peculiarly tedious task.

Board

Sadly, Pen Kent, my predecessor, died at the beginning of 2014, but his influence on your Company continues to be felt. The succession plan he designed rumbles forward, and this year, we are very pleased to have appointed Tim Scholefield to the Board. Tim was, until the Spring of this year, the Head of Equities at Baring Asset Management and has had a long and distinguished career in the asset management industry. The plan is that Tim will replace the investment knowledge to be lost when Neil Dunford retires following the AGM. He is particularly well qualified to take on this role and his arrival softens the blow of losing Neil. I hope that he will have your support when he stands for election at the AGM.

Neil has been on the Board for nine years, and has been a subtle and incisive interrogator of the investment process, displaying a light touch which belies the weight of the questioning. This is no easy task. It is important to avoid second guessing the investment manager while still ensuring that the investment process is diligently applied. We will miss Neil and I would like to record formally our gratitude to him for his contribution over the years.

AGM

The AGM will take place on Wednesday 11 February 2015 at the Company's registered office, Exchange House, Primrose St, London EC2 at noon. I encourage all shareholders to attend. As usual, Julian Cane will be making a presentation on the investment scene, and the whole Board will be present to answer any questions you may have. The business of the AGM this year is mostly routine.

Outlook

As time goes by, the unusual monetary experiment in which we are living comes to seem increasingly normal. When markets get the jitters about what life might be like if interest rates were to return to normal, we see oil poured on the troubled waters. Evidently, there is no tolerance on the part of Central Banks for an economic setback and equally a profound concern that asset prices might fall and themselves trigger economic decline. Eventually, this has to stop, but it is unlikely to come to an end without policy normalisation. In the meantime, we are likely to remain in a world which is reasonably attractive for equity investors, albeit more prone to volatility than has been the case in the past year.

Steven Bates

Chairman

27 November 2014

Income Statement

for the year ended 30 September	2014			2013
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains on investments and derivatives	-	125	125	-	25,281	25,281
Foreign exchange gains/(losses)	8	(21)	(13)	(9)	(483)	(492)
Income	10,904	-	10,904	11,191	-	11,191
Management fee	(505)	(505)	(1,010)	(463)	(463)	(926)
Other expenses	(515)	(13)	(528)	(534)	(10)	(544)
Net return before finance costs and taxation	9,892	(414)	9,478	10,185	24,325	34,510
Finance costs	(272)	(272)	(544)	(199)	(199)	(398)
Net return on ordinary activities before taxation	9,620	(686)	8,934	9,986	24,126	34,112
Taxation on ordinary activities	(45)	-	(45)	(45)	-	(45)
Net return attributable to shareholders	9,575	(686)	8,889	9,941	24,126	34,067
Return per share - pence	10.56	(0.76)	9.80	11.26	27.32	38.58

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

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

A statement of total recognised gains and losses is not required as all gains and losses of the Company have been reflected in the above statement.

Reconciliation of Movements in Shareholders' Funds

for the year ended 30 September 2014
		Share	Capital				Total
	Share	premium	redemption	Special	Capital	Revenue	shareholders'
	capital	account	reserve	reserve	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 September 2013	22,346	95,614	4,146	4,434	88,915	9,253	224,708
Movements during the year      ended 30 September 2014
Dividends paid	-	-	-	-	-	(8,842)	(8,842)
Ordinary shares issued	631	6,001	-	-	-	-	6,632
Net return attributable to     Shareholders	-	-	-	-	(686)	9,575	8,889
Balance at 30 September 2014	22,977	101,615	4,146	4,434	88,229	9,986	231,387

for the year ended 30 September 2013
		Share	Capital				Total
	Share	premium	redemption	Special	Capital	Revenue	shareholders'
	capital	account	reserve	reserve	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 September 2012	21,971	92,250	4,146	4,434	64,789	7,522	195,112
Movements during the year      ended 30 September 2013
Dividends paid	-	-	-	-	-	(8,210)	(8,210)
Ordinary shares issued	375	3,364	-	-	-	-	3,739
Net return attributable to     Shareholders	-	-	-	-	24,126	9,941	34,067
Balance at 30 September 2013	22,346	95,614	4,146	4,434	88,915	9,253	224,708

Balance Sheet

at 30 September		2014		2013
	£'000s	£'000s	£'000s	£'000s
Fixed assets
Investments		241,039		232,570
Current assets
Debtors	2,691		4,472
Cash at bank and short-term deposits	8,561		8,183
	11,252		12,655
Creditors: amounts falling due within one year	(904)		(517)
Net current assets		10,348		12,138
Total assets less current liabilities		251,387		244,708
Creditors: amounts falling due in more than one year
Loans		(20,000)		(20,000)
Net assets		231,387		224,708
Capital and reserves
Share capital		22,977		22,346
Share premium account		101,615		95,614
Capital redemption reserve		4,146		4,146
Special reserve		4,434		4,434
Capital reserves		88,229		88,915
Revenue reserve		9,986		9,253
Total shareholders' funds		231,387		224,708
Net asset value per ordinary share - pence		251.76		251.40

Cash Flow Statement

for the year ended 30 September		2014		2013
	£'000s	£'000s	£'000s	£'000s
Operating activities
Investment income received	10,559		10,429
Interest received	22		26
Other revenue	35		19
Premium from option writing	274		261
Fee paid to management company	(1,004)		(885)
Fees paid to Directors	(122)		(110)
Other payments	(428)		(466)
Net cash inflow from operating activities		9,336		9,274
Servicing of finance
Interest paid	(544)		(404)
Net cash outflow from the servicing of finance		(544)		(404)
Financial investment
Purchases of investments and derivatives	(83,922)		(55,917)
Sales of investments and derivatives	76,476		43,848
Other capital charges	(12)		(9)
Net cash outflow from financial investment		(7,458)		(12,078)
Equity dividends paid		(8,842)		(8,210)
Net cash outflow before use of      liquid resources and financing		(7,508)		(11,418)
Management of liquid resources
Increase in short-term deposits		(290)		(2,650)
Financing
Loans drawn	-		11,577
Shares issued	7,907		2,464
Net cash inflow from financing		7,907		14,041
Net increase/(decrease) in cash		109		(27)

Notes

1   Return per ordinary share

Revenue return

The revenue return per share of 10.56p (2013: 11.26p) is based on the revenue return attributable to shareholders of £9,575,000 profit (2013: £9,941,000 profit).

Capital return

The capital return per share of (0.76p) (2013: 27.32p) is based on the capital return attributable to shareholders of £686,000 loss (2013: £24,126,000 profit).

Total return

The total return per share of 9.80p (2013: 38.58p) is based on the total return attributable to shareholders of £8,889,000 profit (2013: £34,067,000 profit).

Weighted average ordinary shares in issue

Both the revenue and capital returns per share are based on a weighted average of 90,639,610 (2013: 88,294,679) ordinary shares in issue during the year.

2   Dividends

The Directors have declared a fourth interim dividend in respect of the year ended 30 September 2014 of 3.10 pence per share, payable on 31 December 2014 to all shareholders on the register at close of business on 12 December 2014.

3   Financial risk management

The Company is an investment company, listed on the London Stock Exchange, and conducts its affairs so as to qualify in the United Kingdom ("UK") as an investment trust under the provisions of section 1158 of the CTA. In so qualifying, the Company is exempted in the UK from corporation tax on capital gains on its portfolio of investments.

The Company's investment objective is to secure long-term capital and income growth from a portfolio consisting mainly of FTSE All-Share companies. The Company can also have exposure to leading overseas companies, with the value of the non-UK portfolio not exceeding 10% of the Company's gross assets. In pursuing this objective, the Company is exposed to financial risks which could result in a reduction of either or both of the value of the net assets and the profits available for distribution by way of dividend. These financial risks are principally related to the market (currency movements, interest rate changes and security price movements), liquidity and credit. The Board, together with the Manager, is responsible for the Company's risk management. The Directors' policies and processes for managing the financial risks are set out in (a), (b) and (c) below.

The accounting policies which govern the reported Balance Sheet carrying values of the underlying financial assets and liabilities, as well as the related income and expenditure, are in compliance with UK accounting standards and best practice. The Company does not make use of hedge accounting rules.

(a) Market risks

The fair value of equity and other financial securities including derivatives held in the Company's portfolio fluctuates with changes in market prices. Prices are themselves affected by movements in currencies and interest rates and by other financial issues, including the market perception of future risks. The Board sets policies for managing these risks within the Company's objective and meets regularly to review full, timely and relevant information on investment performance and financial results. The Manager assesses exposure to market risks when making each investment decision and monitors ongoing market risk within the portfolio.

As up to 10% of the Company's gross assets can be invested in non-UK assets, other assets and liabilities may be denominated in currencies other than sterling and may also be exposed to interest rate risks. The Manager and the Board regularly monitor these risks. The Company does not normally hold significant cash balances. It is not the Board's general policy to borrow in currencies other than sterling and euros, any such borrowings would be limited to amounts and currencies commensurate with the portfolio's exposure to those currencies, thereby limiting the Company's exposure to future changes in foreign exchange rates.

A description of derivative positions, which are also exposed to market price changes, together with the Manager's and Board's strategies for using these positions for efficient portfolio management, is contained in this note under "Other market risk exposures". The exposure on the Company's positions at 30 September 2014 amounted to £nil (30 September 2013 - £nil).

Gearing may be short or long-term in foreign currencies and enables the Company to take a long-term view of the countries and markets in which it is invested without having to be concerned about short-term volatility.

Income earned in foreign currencies is converted to sterling on receipt. The Board regularly monitors the effects on net revenue of interest earned on deposits and paid on gearing.

Other market risk exposures

The portfolio of investments, valued at £241,039,000 at 30 September 2014 (2013: £232,570,000) is exposed to market price changes.  The Manager assesses these exposures at the time of making each investment decision.  The Board reviews the overall exposures at each meeting against indices and other relevant information.  Derivative contracts entered into during the year comprise options written in the expectation that they will not be exercised. 

(b) Liquidity risk

The Company is required to raise funds to meet commitments associated with financial instruments and share buybacks. These funds may be raised either through the realisation of assets or through increased borrowing. The risk of the Company not having sufficient liquidity at any time is not considered by the Board to be significant, given: the number of quoted investments held in the Company's portfolio (80 at 30 September 2014 and 81 at 30 September 2013); the liquid nature of the portfolio of investments; the industrial and geographical diversity of the portfolio; and the existence of an ongoing loan and overdraft facility agreement. Cash balances are held with approved banks, usually on overnight deposit. The Manager reviews liquidity at the time of making each investment decision. The Board reviews liquidity exposure at each meeting.

The Company has a loan facility with State Street Bank and Trust Company of £35 million.

(c) Credit risk and counterparty exposure

The Company is exposed to potential failure by counterparties to deliver securities for which the Company has paid, or to pay for securities which the Company has delivered. Such transactions must be settled on the basis of delivery against payment (except where local market conditions do not permit).

Responsibility for the approval, limit setting and monitoring of counterparties is delegated to the Manager and a list of approved counterparties is periodically reviewed by the Board. Broker counterparties are selected based on a combination of criteria, including credit rating, balance sheet strength and membership of a relevant regulatory body. The rate of default in the past has been negligible. Cash and deposits are held with approved banks.

The Company has an ongoing contract with its custodian for the provision of custody services. The contract is reviewed regularly. Details of securities held in custody on behalf of the Company are received and reconciled monthly.

To the extent that the Manager carries out management and administrative duties (or causes similar duties to be carried out by third parties) on the Company's behalf, the Company is exposed to counterparty risk. The Board assesses this risk through regular meetings with the management of F&C (including the fund manager) and with the Manager's internal audit function. In reaching its conclusions, the Board also reviews the Manager's parent group's annual audit and assurance faculty report.

None of the Company's financial liabilities are past their due date or impaired.

4    Annual general meeting

The annual general meeting will be held at the registered office of the Company, Exchange House, Primrose Street, London EC2A 2NY on Wednesday 11 February 2015 at 11.30 a.m.

5    Report and accounts

The report and accounts for the year ended 30 September 2014 will be posted to shareholders and made available on the website www.fandccit.com shortly. Copies may also be obtained from the Company's registered office, Exchange House, Primrose Street, London EC2A 2NY.

By order of the Board

F&C Investment Business Limited, Secretary

27 November 2014

 Principal risks

The principal risks and uncertainties faced by the Company, and the controls and actions to mitigate those risks are described below.

Objective and strategy areinappropriate in relation to investor demands, adversely affecting control over share price discount/premium.

Mitigation: The Board monitors performance versus peers and benchmark at each meeting. Market intelligence is maintained via the Company Broker. Shareholder satisfaction surveys are conducted at least every five years ahead of the Company's continuation vote. The Board regularly considers ongoing charges and underlying dividends from portfolio companies, and consequent dividend paying capacity of the Company. An interactive website is updated daily.

Asset allocation, sector and stock selection and use of gearing and derivatives is inappropriate

Mitigation: The portfolio is diversified and comprises quoted securities. Investment policy and performance are considered at each Board meeting. All loan agreements are approved and cash and borrowing limits are set and monitored regularly.

Failure of Manager as main service provider or loss of senior staff could cause reputational damage or put the business in jeopardy.

Mitigation: Board meets regularly with the management of F&C and receives regular Internal Control and Risk Reports from the Manager. The Manager's appointment is reviewed annually. The contract can be moved at six months' notice.

Errors, fraud or control failures at service providers or loss of data through cyber attack or business continuity failure could damage reputation or investors interests or result in loss of assets.

Mitigation: The Board receives regular reports from manager on oversight of third party service providers, together with annual Internal Audit reports on service providers' internal controls. Oversight includes; audit site visits; compliance monitoring; key performance indicators and detailed investigation of complaints and errors. The Board has access to F&C's risk and compliance functions. The Depositary appointed by the Board in July oversees custody of investments and cash in accordance with Alternative Investment Fund Manager Directive (AIFMD).

Statement of Directors' Responsibilities in Respect of the Financial Statements

In accordance with Chapter 4 of the Disclosure and Transparency Rules the Directors confirm, that to the best of their knowledge:

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

·      the Strategic Report includes a fair review of the development and performance of the Company and the important events that have occurred during the financial year and their impact on the financial statements, including a description of the principal risks and uncertainties for the forthcoming financial year; and

·      the financial statements and the Directors' Report include details on related party transactions.

On behalf of the Board

Steven Bates

Chairman

27 November 2014

 

END

 

 

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