Annual Financial Report

RNS Number : 6073Y

F&C Capital & Income Inv Tst PLC

06 December 2017

 

Date:                6 December 2017

Contact:           Julian Cane                                                   

                        F&C Investment Business Limited                   

                        020 7628 8000                                               

LEI:                  21380052ETTRKV2A6Y19

F&C Capital and Income Investment Trust PLC

Audited Statement of Results

for the year ended 30 September 2017

Highlights

·      Share price total return for the year was 15.8%, with an average premium to Net Asset Value of 1.6%.

·      Total ordinary dividends of 10.65 pence per share - an increase of 3.4% over the previous year and the 24^th consecutive annual increase.

·      Net Asset Value total return for the year was 16.6%, outperforming the benchmark FTSE All-Share Index return of 11.9%.

"An investor would probably be unwise to rely on the results of any given year as this can lead to a bumpy ride. To this end, we spend time focusing on longer term numbers and I am very pleased to say that these too are excellent. Over three years the Net Asset Value per share total return was 40.9%, with the benchmark up 27.8%; over five years it was 72.7% vs. 61.2%; over 10 years the return was 82.7% vs 75.2%; and over 20 years, it was 265.6% vs 216.3%."

Steve Bates

Chairman

Summary of results

Attributable to Shareholders	30 September 2017	30 September 2016	% Change
Share price total return	15.8%	16.6%	n/a
Net asset value per share total return	16.6%	16.6%	n/a
Benchmark* total return	11.9%	16.8%	n/a
Net asset value per share	317.11p	281.06p	+12.8
Revenue return per share	11.71p	11.26p	+4.0
Dividends per share	10.65p	10.30p	+3.4
Share price	321.00p	287.00p	+11.8
Net asset value (£'000s)	312,463	272,027	+14.9
On-going charges	0.59%	0.64%	n/a

*FTSE All-Share Index

The Chairman, commenting on the results, said:

We seem to have been stuck in a similar investing environment for ten years now. Investors have spent a lot of time and energy attempting to understand when and how circumstances might change, and have largely ended up concluding that they would not.

With the benefit of hindsight, the correct strategy for an investor to follow would simply have been to allow the monetary stimulus to do its work and then invest in the riskiest assets. This has proven a good outcome for equities at the expense of fixed income assets. There have, of course, been periods where this has seemed to be the wrong strategy, either because of geopolitical events or because the economy looked like it might tip over into recession or trigger runaway inflation. These moments added piquancy to the investment decision, but it was usually right to ignore the siren call of doing something different.

Today, things are in the process of shifting, but not by much. In the US, the Federal Reserve (Fed), led by Janet Yellen, believes that the current low level of inflation is a temporary phenomenon which will soon rise as unemployment continues to fall and wages increase in response to tighter labour market conditions. The Fed has declared that it will begin a process of quantitative tightening which is likely to lead to modest rises in interest rates and the removal of elements of monetary stimulus. This is all being executed quite cautiously, however.

In the UK, inflation has picked up, but largely as a result of the decline in sterling following the Brexit vote. It is likely that this is a step change adjustment to prices which will not follow through into excessive wage demands. The language of the Bank of England, though, has turned more hawkish because it believes that a very low unemployment rate, combined with a weariness about austerity holds a risk of increasing inflationary expectations. The UK is a global outlier on the inflation spectrum because of Brexit related risk.

Against this background - Groundhog Day, as it were, the UK market has performed quite respectably, rising by 11.9%, although most of the action took place in the first half of your Company's fiscal year. Smaller companies generated slightly higher returns than their larger brethren, but in general, the rising tide lifted all ships.

Performance

This year, our Net Asset Value per share on a total return basis was 16.6%. The FTSE All-Share Index, our benchmark, rose by 11.9% as mentioned earlier. This is an excellent return, coming as it does on the heels of a coincidentally identical outcome in the prior year, and it is very pleasing that Julian Cane, your fund manager, has shown the index a clean pair of heels. As an investor, you would probably be unwise to rely on the results of any given year. Experience shows that this can lead to a bumpy ride, given market volatility and the fact that Julian's investment horizon extends well beyond one year. To this end, your Board spends time focusing on longer term numbers, and I am pleased to report that these too are excellent. Over three years the Net Asset Value per share total return was 40.9%, with the benchmark up 27.8%; over five years it was 72.7% vs. 61.2%; over 10 years the return was 82.7% vs 75.2%; and over 20 years, it was 265.6% vs 216.3%.

The share price has more or less kept pace with the Net Asset Value returns throughout these periods except over 20 years where the effect of the shares initially trading at a material discount to net asset value has led to an even stronger return. It lagged slightly in the current year (+15.8%) as the premium slipped marginally. Julian has managed the portfolio throughout this era, and as I have pointed out before, the length of his tenure and his level-headed stewardship of your Company's assets are to be highly prized.

Gearing and Attribution

Average gearing over the course of the year was around 7% and our analysis shows that the contribution to total return from gearing was approximately one percentage point. We are considering how best to replace our fixed term borrowing facility which expires in March.

The biggest positive contributors to performance were in the Financial Services sector, especially OneSavings Bank (+64%), Intermediate Capital (+64%) and Arrow Global (+49%).  All have strong niche operations, high returns and good growth.  They are preferred to the larger "me-too" financials, which may have higher yields, but less attractive long-term prospects.

The biggest detractors from performance were our underweight positions in some of the largest sectors - Banks, Mining and Oil & Gas Producers.  Stock selection within these sectors was in line with the sector performance, but the relative lack of exposure had costs in relative terms because of their strong performance (Banks +29%, Mining +40%, Oil & Gas Producers +19%).

Income Account

The revenue return per share was 11.71 pence, representing an increase of 4.0% over the previous year. There have been some high profile profits warnings amongst large UK companies and the portfolio has been peripherally affected by some of these. Nevertheless, profits have remained quite robust and the dividend flow into the portfolio has held up, despite the fact that pay-out ratios are high. In determining the annual dividend payment, we take into account not just the health of the income account but also the rising level of inflation currently seen in the UK economy. The policy of the Board has always been to offer Shareholders a stable and growing dividend over time, and we recognise that from time to time it will be appropriate to dip into our revenue reserve to meet this objective. You will see from the accounts that our revenue reserve stands at £12.3 million or 12.5 pence per share, which is clearly robust enough to support dividend payments for many years ahead, should that prove necessary. 

This year so far, we have paid three interim dividends of 2.4 pence per share, amounting to a total of 7.2 pence per share. We will be paying a fourth interim dividend of 3.45 pence, bringing the total for the year to 10.65 pence fully covered by earnings. This equates to an increase of 3.4% over the last year and compares with the latest UK inflation (CPI) rate of 3.0%. This is the 24th consecutive year of increased ordinary dividends, a record which we very much hope to be able to continue. Over the longer term our dividend growth has been more than twice the rate of inflation.

To meet the needs of Shareholders we pay quarterly dividends in March, June, September and December, but this does mean you are unable to formerly approve a final dividend each year. As an alternative the Board will seek approval of this aspect of the Company's dividend policy by way of a resolution at the AGM and in future years.

Costs

On the cost side of the income account, our ongoing charges ratio (OCR) sits at 0.59%, compared with 0.64% last year. The overall cost of holding an asset eats into returns, of course, and although the returns in this statement are net of all those costs, it is a ratio which needs to be transparent to Shareholders. We try to ensure that our OCR is competitive with other savings vehicles, but we do acknowledge that passive structures may cost less than we do. It is therefore gratifying to note that your Company has provided you with a better return than an equivalent passive vehicle would have done both this year and over longer time periods, despite that extra cost.

Discount/Premium

Over the fiscal year, the shares have traded at an average premium to Net Asset Value of 1.6%. This pattern has persisted for several years now as investors have bid up the shares of investment trusts offering relatively high and growing income in an environment where interest rates are almost zero. The premium has allowed us to issue 1,750,000 new shares this year, for an additional capital contribution of £5.3 million. These shares are always issued at a premium large enough to avoid the risk of diluting the Net Asset Value for existing Shareholders and the new capital contributes to a larger asset base over which to spread our fixed costs. To this end, your Board believes that the continuing issuance of shares in this manner is in your interests.

There is no guarantee that the existence of a premium will continue indefinitely, but if it comes to an end, we will be as assiduous in buying shares back as we have been in issuing them.

Governance Matters

This year, the investment management industry has been wrestling with a new piece of regulation called MiFID II which comes into effect in January 2018. This expands on the earlier Markets in Financial Instruments Directive (MiFID) and while its purpose is to improve the functioning of financial markets and increase customer protection it is also causing large parts of the industry to tear its hair out. Many of our Shareholders who hold their shares through the F&C Savings Plans will have been asked by F&C to provide information, such as their National Insurance Number or date of birth if this hasn't already been supplied.  Tiresome though this is, we would urge those of you who haven't responded to do so as the rules as they currently stand mean that restrictions will be placed on your savings plan account; monthly investments, dividend reinvestments and the ability to make one-off purchases will, reluctantly, have to be put on hold in January until the information has been provided.

Another aspect of the directive affecting investment managers is the requirement to produce a Key Information Document, without which an investment product cannot be sold to retail investors.  The way the information in the document has to be presented is highly complicated and prescriptive resulting in what might politely be described as a somewhat perverse outcome, given its intended use of informing and protecting investors.  This is an industry wide matter not limited to your Company and it is to be hoped in time that any issues arising from it will be quickly resolved. 

Continuation vote and Shareholder satisfaction

Shareholders have the opportunity to vote every five years on whether the Company should continue as an investment trust. This will next arise at the forthcoming AGM.  In the past, we have canvassed opinion ahead of continuation votes and this year we have again conducted a survey amongst our Shareholders to solicit a broad range of your views and opinions. 

We achieved an overall response rate of 10% and good feedback.  The most important elements of the survey concerned your views about the performance of the trust and the various characteristics of our mandate which most appealed. On the first point, 85% of participants felt that the performance of the trust was satisfactory or very satisfactory, which compares favourably to the 60% rating we received in 2012. As to the appeal of the characteristics, 15% of participants considered it to be dividend growth while another 15% saw it as being growth in capital. That is perhaps not surprising given our dual mandate, but a notable 22% regarded a feeling of relative safety as most important and, in a similar vein, another 18% felt that the reputation and security offered by F&C was the most attractive feature.  Strong performance and the yield largely took up the balance between them. There was also detailed feedback on the content and usefulness of the website and some other areas, which the Board will also take into account.

This is helpful and supportive feedback and I would like to thank all of you who took the time to participate. The survey was taken from a sample of the Shareholder base, so if you were not included and wish to express an opinion good or bad, please let us know directly. We will take all views into account as we move forward.

Annual General Meeting

The AGM will take place on 13 February 2018.  Julian will be giving a presentation on the investment scene and the Directors will be available to answer any questions you may have. As I have mentioned, one important matter is the continuation vote. In view of the support we have received from the Shareholder survey and strong performance we have no hesitation in recommending that you vote in favour of continuation. The Directors intend to vote their own Shareholdings the same way.

Outlook

The expansion in the global economy has been underway now for several years, albeit at rather a muted pace. The monetary authorities around the world are gradually attempting to bring some semblance of normality back to interest rates, but caution remains the watchword, as debt levels are elevated and economies are still fragile. This is arguably a slightly less benign environment than that which has reigned in the last couple of years, but it is also not a harbinger of doom and gloom. Most stock market analysts would not be surprised if markets trod water for a while. Valuations (in general) are somewhat elevated and investors seem complacent about risks in both economic and political spheres.

In the UK, things are quite difficult, largely because of the uncertainty surrounding Brexit and the fact that economic activity seems to be suffering as a result. Again, the UK is not an island (metaphorically, anyway) and many of the businesses here will prosper regardless of the Brexit outturn. It is not easy, but with Julian you have a trusty skipper at the wheel.

Steven Bates
Chairman
6 December 2017

Principal Risks and Future Prospects

The principal risks and their mitigations are described below. Note 22 on the Report and Accounts details the Financial Risk Management of the Company. The risks that affect the Company's ongoing operations may vary in significance from time to time. The principal risks identified as most relevant to the assessment of the Company's future prospects and viability were those relating to potential investment portfolio under-performance and its effect on the share price; discount movement; dividends; and threats to security over the Company's assets.

·      Risk description:  Inappropriate business  or marketing strategy particularly in relation to investor needs giving rise to a share price discount to net asset value per share. Unchanged throughout the year under review.

Mitigation: The Board holds a separate meeting each year to consider strategic issues.  Market intelligence is maintained via the Company's broker. The effectiveness of the marketing strategy is also reviewed at each Board meeting. Shareholder satisfaction surveys are conducted at least every five years ahead of the Company's continuation vote. A share buyback policy would be employed in the event of extensive discount volatility.

·      Risk description: Unfavourable markets or asset allocation, sector and stock selection and use of gearing and derivatives are inappropriate giving rise to investment underperformance as well as impacting capacity to pay dividends. Unchanged throughout the year under review. 

Mitigation: The portfolio of quoted securities is diversified and the Company's structure enables it to take a long-term view. Investment policy, performance, revenue and gearing are reviewed at each Board meeting. F&C's Performance and Risk Oversight team provides independent oversight on investment risk management. The Board regularly considers operating costs along with underlying dividend income and the implications for the dividend payment capacity of the Company.

·      Risk description: Failure of F&C as the Company's main service provider to continue to operate effectively including the loss of key staff. Unchanged throughout the year under review.

Mitigation: The Board meets regularly with the management of F&C and meets their risk management team to review Internal Control and Risk Reports. F&C's appointment is reviewed annually and can be terminated on six month's notice. They structure their recruitment and remuneration packages in order to retain key staff and work closely with the Board on any significant management changes.

·      Risk description: Errors, fraud or control failures at service providers (including the F&C savings plan administrator) or loss of data through increasing cyber threats or business continuity failure could damage reputation or investors' interests or result in losses. Risk of cyber attacks increased in the year under review.

Mitigation: The Board receives regular control reports from F&C covering risk and compliance including oversight of third party service providers. The Board has access to their Head of Business Risk and requires any significant issues directly relevant to the Company to be reported immediately. The Depositary is specifically liable for loss of any of the Company's securities and cash held in custody.

Rolling Three Year Viability Horizon

When considering the risk of under-performance, the Board assessed and evaluated the following areas through a series of stress tests:

• potential illiquidity of the Company's portfolio;

• the effects of any substantial future falls in investment values and income receipts on the ability to repay and re-     negotiate borrowings;

• potential breaches of loan covenants, the maintenance of dividend payments and retention of investors; and

• the potential need for extensive share buybacks in the event of share price volatility and a move to a wide discount.

Based on its assessment and evaluation of the Company's future prospects, the Board has a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the coming three years; the Company's business model, strategy and the embedded characteristics have helped define and maintain the stability of the Company since inception. The Board expects this to continue and will assess viability over subsequent three year rolling periods.

Statement of Directors' Responsibilities  

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

·      the financial statements, prepared in accordance with applicable accounting standards give a true and fair view of the assets, liabilities, financial position and profit of the Company;

·      the Strategic 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 they face; and

·      the annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for Shareholders to assess the Company's position and performance, business model and strategy.

On behalf of the Board

Steven Bates

Chairman

6 December 2017

Income Statement

for the year ended 30 September	2017			2016
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains on investments	-	34,881	34,881	-	29,310	29,310
Foreign exchange gains/(losses)	8	(7)	1	31	(4)	27
Income	12,767	-	12,767	12,155	-	12,155
Management fee	(637)	(637)	(1,274)	(555)	(555)	(1,110)
Other expenses	(499)	(19)	(518)	(511)	(7)	(518)
Net return before finance costs and taxation	11,639	34,218	45,857	11,120	28,744	39,864
Finance costs	(283)	(283)	(566)	(330)	(330)	(660)
Net return on ordinary activities before taxation	11,356	33,935	45,291	10,790	28,414	39,204
Taxation on ordinary activities	103	-	103	(5)	-	(5)
Net return attributable to Shareholders	11,459	33,935	45,394	10,785	28,414	39,199
Return per share - pence	11.71	34.69	46.40	11.26	29.66	40.92

The total column of this statement is the profit and loss account of the Company. The revenue return and capital return columns are supplementary to this and are prepared under guidance published by the Association of Investment Companies.

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

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

Statement of Changes in Equity

for the year ended 30 September 2017
		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 2016	24,196	112,997	4,146	4,434	115,205	11,049	272,027
Movements during the year      ended 30 September 2017
Dividends paid	-	-	-	-	-	(10,221)	(10,221)
Ordinary shares issued	438	4,825	-	-	-	-	5,263
Net return attributable to     Shareholders	-	-	-	-	33,935	11,459	45,394
Balance at 30 September 2017	24,634	117,822	4,146	4,434	149,140	12,287	312,463

for the year ended 30 September 2016
		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 2015	23,640	107,785	4,146	4,434	86,791	10,080	236,876
Movements during the year      ended 30 September 2016
Dividends paid	-	-	-	-	-	(9,816)	(9,816)
Ordinary shares issued	556	5,212	-	-	-	-	5,768
Net return attributable to     Shareholders	-	-	-	-	28,414	10,785	39,199
Balance at 30 September 2016	24,196	112,997	4,146	4,434	115,205	11,049	272,027

Balance Sheet

at 30 September	2017	2016
	£'000s	£'000s
Fixed assets
Investments	326,719	296,594
Current assets
Debtors	1,215	1,193
Cash at bank and short-term deposits	4,962	-
Total current assets	6,177	1,193
Current liabilities
Creditors: amounts falling due within one year	(433)	(760)
Loans	(20,000)	-
Total current liabilities	(20,433)	(760)
Net current (liabilities)/assets	(14,256)	433
Total assets less current liabilities	312,463	297,027
Creditors: amounts falling due in more than one year
Loans	-	(25,000)
Net assets	312,463	272,027
Capital and reserves
Share capital	24,634	24,196
Share premium account	117,822	112,997
Capital redemption reserve	4,146	4,146
Special reserve	4,434	4,434
Capital reserves	149,140	115,205
Revenue reserve	12,287	11,049
Total Shareholders' funds	312,463	272,027
Net asset value per ordinary share - pence	317.11	281.06

Statement of Cash Flows

for the year ended 30 September	2017	2016
	£'000s	£'000s
Cash flows from operating activities before dividends received and interest paid	(1,583)	(1,492)
Dividends received	12,674	11,787
Interest paid	(569)	(784)
Cash flows from operating activities	10,522	9,511
Investing activities
Purchase of investments	(34,559)	(42,272)
Sales of investments	39,315	34,720
Other capital charges	(19)	(2)
Cash flows from investing activities	4,737	(7,554)
Cash flows before financing activities	15,259	1,957
Financing activities
Equity dividends paid	(10,221)	(9,816)
Net proceeds from issuance of new shares	5,263	5,768
Drawdown of loans	-	5,000
Repayment of loans	(5,000)	-
Cash flows from financing activities	(9,958)	952
Net movement in cash and cash equivalents	5,301	2,909
Cash and cash equivalents at the beginning of the year	(340)	(3,276)
Effect of movement in foreign exchange	1	27
Cash and cash equivalents at the end of the year	4,962	(340)
Represented by:
Cash at bank and short-term deposit/(bank overdraft)	4,962	(340)

Notes

1   Return per ordinary share

Revenue return

The revenue return per share of 11.71p (2016: 11.26p) is based on the revenue return attributable to Shareholders of £11,459,000 profit (2016: £10,785,000 profit).

Capital return

The capital return per share of 34.69p (2016: 29.66p) is based on the capital return attributable to Shareholders of £33,935,000 profit (2016: £28,414,000 profit).

Total return

The total return per share of 46.40p (2016: 40.92p) is based on the total return attributable to Shareholders of £45,394,000 profit (2016: £39,199,000 profit).

Weighted average ordinary shares in issue

The returns per share are based on a weighted average of 97,835,501 (2016: 95,807,560) 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 2017 of 3.45 pence per share, payable on 27 December 2017 to all Shareholders on the register at close of business on 15 December 2017.

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 full details of financial risks are contained in note 22 in the Report and Accounts.

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 Tuesday 13 February 2018 at 11.30 a.m.

5    Report and accounts

The report and accounts for the year ended 30 September 2017 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

6 December 2017

 

END

 

 

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