Final Results

RNS Number : 9382I

F&C Capital & Income Inv Tst PLC

25 November 2008

 



Date:           25 November 2008

Contact:    Julian Cane    

                     F&C Management Limited    

                     020 7628 8000    

F&C Capital and Income Investment Trust plc

Audited Statement of Results

for the year ended 30 September 2008

HIGHLIGHTS

• Final dividend recommended of 2.5 pence per share and a special dividend of 0.4 pence per share, brings the total dividend for the year to 8.4 pence per share - an increase of 13.5% year on year; 

• Over five years, the dividend has grown at a compound rate of 9.4%, well in excess of inflation which is the primary hurdle;

• Net asset value per share fell 22.5% compared to a fall in the benchmark, the FTSE All-Share Index, of 25.1%;

• Long-term performance remains strong relative to the FTSE All-Share Index.

Summary of results

Attributable to equity shareholders	30 September 2008	30 September 2007	% Change
Net assets	£158.20m	£204.13m	-22.5
Net asset value per share	200.45p	258.76p	-22.5
Net revenue after tax	£7.61m	£6.60m	+15.3
Revenue return per share	9.69p	8.25p	+17.5
Dividends per share	* 8.40p	7.40p	+13.5
Share price	196.50p	243.25p	-19.2

* Includes a special dividend of 0.4 pence per share.

  The Chairman, commenting on the results, said:

Last year was one of the worst on record for UK equity investors with the FTSE All-Share Index falling by 25.1%. Our share price fell 19.2% and the net asset value ("NAV") per share declined 22.5%. Despite that, the Company's earnings per share still grew by 17.5% and we are recommending a final dividend of 2.5 pence per share and a special dividend of 0.4 pence per share, as explained later. This brings the total dividend for the year to 8.4 pence per share - an increase of 13.5% year on year. 

At the time of writing in November it is impossible to know for sure whether actions by governments and central banks around the world have fully stabilised the financial markets but we are certainly heading for a recession. I describe below how the Board has reacted to the crisis and reviewed the Company's investment policy. 

Capital performance

At the heart of the weakness in all financial markets is the fact that levels of borrowing, particularly by individuals, but also by some governments and companies, had become unsustainable. Why did we all not see that coming? It is partly because the associated risks were hidden by layer upon layer of derivatives so that we lost sight of where the risks were attached in reality. Risk control methodology focused too much on data collected during a relatively long benign economic period, and not enough on what could happen in worse times. In other words, the various forms of stress testing turned out to be woefully flawed.  

The consequential loss of confidence virtually paralysed the financial system and triggered a very serious fall in asset prices, which subsequently made banks more reluctant to lend. This in turn caused asset prices to fall further, thus perpetuating the cycle and spreading from the US mortgage market, where the problems started, to nearly all other financial assets.

As we all know this financial turmoil had a severe impact on the UK equity market and on the Company's own portfolio. The fact that the NAV of the Company fell a little less than the wider market is a consequence of the relatively defensive approach taken by the Manager in both stock selection and gearing, and the longer term record of the Company still remains relatively strong. Over the last five and 10 years it has achieved capital growth, both in absolute terms and relative to the FTSE All-Share Index.

Revenue and dividend 

The revenue performance of the Company has by contrast been much more encouraging. I am pleased to report that once again the Company has achieved its income target and the dividend for the year has grown well in excess of the rate of inflation.

Growth in earnings per share of 17.5% was very strong and driven by a number of factors. First, the level of income generated by the portfolio has been well in excess of the previous year as there have been good levels of dividend growth from our investee companies. Second, our costs fell for a number of reasons. The management fee was reduced by 32% as it is based on the Company's asset value; also, for the first time, we did not have to pay VAT on the fee and were actually able to recover earlier VAT of £578,000, of which, £289,000 has been included in the revenue account, in line with the Company's accounting policies. This allows us to declare a special dividend of 0.4 pence per share.  Last, we paid less interest than in the previous year because we reduced our level of borrowing.

We are recommending a final dividend of 2.5 pence per share, which, when added to the interim dividends and the special dividend declared, brings the total dividend for the year to 8.4 pence, an increase of 13.5% year on year. Over five years, the dividend has grown at a compound rate of 9.4% and both of these growth rates are far in excess of inflation which is our primary hurdle. Excluding the special dividend, the underlying total dividend for the year is 8.0 pence, an increase of 8.1% over one year and 8.4% compounded over five years.

The timing of the final dividend has been changed so that it will now be paid in time to be included in the income distribution made by F&C to holders of its savings plans at the end of January.

VAT

In our annual report last year we explained that the Association of Investment Companies had won a case in the European Court of Justice freeing investment trusts from paying VAT on management fees in the future. This has noticeably reduced the costs of running the Company and opened up the possibility of recovering some past VAT payments. Accordingly the Board, with the valuable help of the Manager and our legal advisers Dickson Minto, has been active throughout the year pursuing such recoveries.  For complicated legal reasons the claims must be made by the Manager, on behalf of the Company, and must be divided into three different periods - 1992 to 1996, 1997 to March 2001 and April 2001 to September 2007. Both the Company and its subsidiary, F&C Income Growth Investment Trust PLC (in liquidation) ("FIGIT"), have potential claims. FIGIT was merged into the Company in 2005 but has been kept in being as a subsidiary in course of liquidation purely for this reason.

A reclaim has been made by the Manager in respect of the years 2001 to 2007 and the Board is sufficiently confident of receiving at least £578,000 (0.7 pence per share) that an accrual has been made in this year's results. This accrual is split equally between the revenue and capital accounts in accordance with the Company's accounting policies and the Company will be returning the 0.4 pence per share accrued in the revenue account to shareholders as a special dividend.  FIGIT has reached a similar stage in the reclaim process and the Directors expect it to pass up a capital distribution equal to the amounts it receives. An accrual has therefore been made in the capital account for the receipt of £260,000. 

At the time of writing the Directors are hopeful of receiving, but do not have sufficient certainty to accrue, further VAT repayments relating to the first period for both companies, as well as interest on all amounts reclaimed. At present we believe that recoveries for the middle period are unlikely. 

Share price performance and discount 

The commitment to ensuring the Company's share price should not trade at a material discount to NAV per share remains strong. To try to limit the discount a share buyback programme has been active during the year and in total 665,000 shares were bought at an average discount of 8.8%. The share price started the year at a discount to NAV per share of 6.0% and ended the year at a discount of 2.0%, with an average discount over the year of 4.5%.  There were no shares held in treasury at the year end.

Gearing 

The Company has included in its investment policy the power to borrow in order to invest in equities when the returns seem likely to exceed the cost of the borrowing and thus enhance shareholder value. Gearing was at only modest levels throughout the year and all loans had been repaid on 1 September. Since the year end and as markets moved lower, the Company has once again started to borrow to invest with the expectation of being able to achieve attractive long-term returns.

Although, with hindsight, it would have been profitable to protect the portfolio in some way, either through derivative transactions or from a substantial move into cash, the extent of the decrease in markets was not anticipated by either the Board or the Manager.  Such a change would not have been consistent with the Company's investment policy as approved by shareholders.  

Investment policy

The Board periodically reviews the Company's investment policy and takes a strategic look at whether we could or should propose changes to this policy in the interest of shareholders. The investment policy is unchanged. We have, for example, discussed in the past whether we could increase income to shareholders by taking more risk - being more adventurous so to speak - and more recently whether we should reduce risk further in the current turmoil. Our conclusion each time has been that our investment policy sets out to potential and present shareholders what kind of asset class they are choosing when buying shares in the Company and that we should not change "what it says on the tin". Against this background we feel that our Manager has done what we have asked.

Shareholders 

Despite difficult market conditions, it is positive to note that the Company has continued to diversify and add to its shareholder base. This has come primarily through the F&C savings plans which now have more than 21,000 investors. Growth has been particularly strong via the Child Trust Fund, which has more than offset the relative maturity of the Individual Savings Account.

In order to satisfy demand for the Company's shares from investors, 700,000 shares were issued during the year at a small premium to NAV per share.

In order to seek opinions on their investment needs, a survey was recently completed by around 300 holders of the Company's shares within the F&C savings plans.  The Board was encouraged that the results indicated that the Company's objective meets shareholders' investment needs.  

Proportional voting for savings plans

The Manager has modified its arrangements under which investors in its savings plans vote at shareholder meetings. Under the new arrangements the nominee company, which holds around 80% of the share capital on behalf of these investors, will vote the shares held on behalf of plan holders who have not returned their voting directions in proportion to the directions of those who have, subject to any limits imposed by regulators.  Plan holders may exclude their shares from this arrangement if they wish.

Annual general meeting ("AGM") 

All shareholders are of course welcome to attend the AGM which will be held on 15 January 2009 at F&C's offices. As in previous years, the Manager will make a presentation on the results for the last year, investment policy and prospects for the coming year. I look forward to welcoming as many shareholders as are able to come to the meeting. 

Electronic communications

A resolution is to be put to the AGM to amend the Company's articles of association.  Part of these changes will allow the Company to communicate with shareholders both in electronic form and via a website in future.  We expect these new communication arrangements to begin in 2009 and will write to all shareholders in due course to allow you to elect to continue to receive paper copy documents.  

Outlook

Since the year end equity markets have been both weak and volatile. This has had an inevitable adverse impact on our NAV. The UK and much of the developed world are undoubtedly heading for a recession in the immediate future. Growth in China and India which many, including myself, thought a year ago would be relatively unaffected, is also slowing down. Overall growth is expected to recover only relatively slowly as it will inevitably take considerable time for debt to reduce to more sustainable levels. It is encouraging that the UK and US governments have stated that they will do whatever is necessary to restore stability to the financial system and are considering ways of increasing public expenditure to inject demand. This is clearly a necessary condition but it may not be a sufficient one to restore growth. Confidence between financial institutions is currently lacking and restricting the supply of capital to individuals and companies. The shock of the crisis seems likely to increase the desire to save and to reduce the scope for households to consume on the back of borrowing. Many households have lost wealth and may cancel or defer discretionary spending where they can. 

Against this background we anticipate company earnings and dividends will be under pressure, although exporters and companies with significant foreign earnings will benefit from the recent fall in sterling. But after the steep falls in stock markets around the globe, equity market valuations now appear attractive both in absolute terms and relative to cash or bonds. We have resumed borrowing to take advantage of these conditions and, as noted above, the portfolio is once again modestly geared. Our own dividend is comfortably covered by earnings and, although we are expecting little or no revenue growth from the portfolio, the outlook for our own dividend is reasonably positive. The Board still believes our investment policy is right.

Pen Kent
Chairman
25 November 2008

  Income Statement

for the year ended 30 September	2008			2007
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains and losses on investments	-	(47,234)	(47,234)	-	8,734	8,734
Foreign exchange gains	-	4	4	-	1	1
Income	8,480	260	8,740	7,947	-	7,947
Management fee	(348)	(348)	(696)	(513)	(513)	(1,026)
Recoverable VAT	289	289	578	-	-	-
Other expenses	(558)	(9)	(567)	(508)	(4)	(512)
Net return before finance costs and taxation	7,863	(47,038)	(39,175)	6,926	8,218	15,144
Finance costs	(178)	(178)	(356)	(285)	(285)	(570)
Net return on ordinary activities before taxation	7,685	(47,216)	(39,531)	6,641	7,933	14,574
Taxation on ordinary activities	(77)	-	(77)	(37)	-	(37)
Net return attributable to equity shareholders	7,608	(47,216)	(39,608)	6,604	7,933	14,537
Return per share - pence	9.69	(60.16)	(50.47)	8.25	9.92	18.17

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 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 2008
		Share	Capital				Total equity
	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 2007	20,548	76,334	3,154	6,034	93,581	4,480	204,131
Movements during the year ended 30 September 2008
Dividends paid	-	-	-	-	-	(6,193)	(6,193)
Shares purchased and held in treasury	-	-	-	(1,600)	-	-	(1,600)
Cancellation of ordinary shares previously held in treasury	(992)	-	992	-	-	-	-
Ordinary shares issued	175	1,296	-	-	-	-	1,471
Net return attributable to equity shareholders	-	-	-	-	(47,216)	7,608	(39,608)
Balance at 30 September 2008	19,731	77,630	4,146	4,434	46,365	5,895	158,201

for the year ended  30 September 2007
		Share	Capital				Total equity
	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 2006	20,548	76,334	3,154	10,313	85,648	4,758	200,755
Movements during the year ended 30 September 2007
Dividends paid	-	-	-	-	-	(6,882)	(6,882)
Shares purchased and held in treasury	-	-	-	(4,279)	-	-	(4,279)
Net return attributable to equityshareholders	-	-	-	-	7,933	6,604	14,537
Balance at 30 September 2007	20,548	76,334	3,154	6,034	93,581	4,480	204,131

  Balance Sheet

at 30 September		2008		2007
	£'000s	£'000s	£'000s	£'000s
Fixed assets
Quoted investments		157,136		213,328
Current assets
Debtors	1,908		875
Cash at bank and short-term deposits	437		346
	2,345		1,221
Creditors: amounts falling due within one year
Loans	-		(10,000)
Other	(1,280)		(418)
	(1,280)		(10,418)
Net current assets/(liabilities)		1,065		(9,197)
Net assets		158,201		204,131
Capital and reserves
Share capital		19,731		20,548
Share premium account		77,630		76,334
Capital redemption reserve		4,146		3,154
Special reserve		4,434		6,034
Capital reserves		46,365		93,581
Revenue reserve		5,895		4,480
Total shareholders' funds - equity		158,201		204,131
Net asset value per ordinary share - pence		200.45		258.76

  Cash Flow Statement

for the year ended 30 September		2008		2007
	£'000s	£'000s	£'000s	£'000s
Operating activities
Investment income received	8,085		7,783
Interest received	144		61
Other revenue	43		10
Fee paid to the management company	(786)		(868)
Fees paid to Directors	(83)		(80)
Other payments	(487)		(571)
Net cash inflow from operating activities		6,916		6,335
Servicing of finance
Interest paid	(375)		(575)
Net cash outflow from servicing of finance		(375)		(575)
Taxation
UK tax recovered/(paid)	1		(3)
Total taxation		1		(3)
Financial investment
Purchases of investments	(35,310)		(52,115)
Sales of investments	44,359		52,872
Other capital charges and credits	(11)		(5)
Net cash inflow from financial investment		9,038		752
Equity dividends paid		(6,193)		(6,882)
Net cash inflow/(outflow) before use of liquid resources and financing		9,387		(373)
Management of liquid resources
Increase in short-term deposits		(433)		(4)
Financing
Sterling loans (repaid)/raised	(10,000)		2,000	-
Shares purchased	(1,600)		(4,434)
Shares issued	1,471		-
Net cash outflow from financing		(10,129)		(2,434)
Decrease in cash		(1,175)		(2,811)

  Notes

1    Return per ordinary share

Revenue return

The revenue return per share is based on the revenue return attributable to equity shareholders of £7,608,000 profit (2007: £6,604,000 profit).

Capital return

The capital return per share is based on the capital return attributable to equity shareholders of £47,216,000 loss 

(2007: £7,933,000 profit).

Weighted average ordinary shares in issue

Both the revenue and capital returns per share are based on a weighted average of 78,479,263 (2007: 80,004,514) ordinary shares in issue during the year. Share held in treasury have been excluded from the weighted average number of shares in issue with effect from the date of purchase.

2    Dividends

The Directors recommend a final dividend in respect of the year ended 30 September 2008 of 2.50 pence per share (2007: 2.40 pence) and have declared a special dividend of 0.40 pence per share, both payable on 19 January 2009 to all shareholders on the register at close of business on 5 December 2008. The recommended final dividend is subject to approval by shareholders at the annual general meeting.

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 842 of the Income and Corporation Taxes Act 1988. 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, as set out in detail in the Directors' Report and Business Review. 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 and include the valuation of financial assets and liabilities at fair value. The Company does not make use of hedge accounting rules.

(a) Market risks 

The fair value of equity and other financial securities 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 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. 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.

(b) Liquidity risk

The Company is required to raise funds to meet commitments associated with financial instruments and share buy-backs. 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 (70 at 30 September 2008); the liquid nature of the portfolio of investments; the industrial and geographical diversity of the portfolio; and the existence of an ongoing loan facility agreement. Cash balances are held with approved banks, usually on overnight deposit. The Company does not normally invest in derivative products. 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 Lloyds TSB Scotland plc of £20 million, which is renewable in September 2009. 

(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. The Board approves all counterparties used in such transactions, which must be settled on the basis of delivery against payment (except where local market conditions do not permit).

A list of pre-approved counterparties is maintained and regularly reviewed by the Manager and the Board. Broker and stock lending 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. Securities can only be loaned to third parties in exchange for collateral which exceeds the value of the securities throughout the duration of the loan. The Company has not engaged in stock lending during the year (2007: same). 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 the Manager (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, group accounts and other public information indicative of its financial position and performance.

The Company had no credit-rated bonds or similar securities or derivatives in its portfolio at the year end (2007: none) and does not normally invest in them. 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 Thursday 15 January 2009 at 11.30 a.m. 

5    Report and accounts

The report and accounts for the year ended 30 September 2008 will be posted to shareholders and made available on the website www.fandccit.com in early December 2008. 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 Management Limited, Secretary

Exchange House, Primrose Street, London EC2A 2NY

25 November 2008

  Principal risks

The specific key risks faced by the Company, together with our mitigation approach, include the following: 

• Investment strategy - inappropriate long-term strategy, asset allocation and stock selection might lead to underperformance against the Company's benchmark and peer group.  The Board periodically reviews the investment strategy and regularly monitors the Company's investment portfolio, investment selection, performance and operations of the Manager. 

• Investment management resources - the quality of the management team employed by F&C is a crucial factor in delivering good performance, and loss of the Manager's key staff could affect investment returns. The Manager develops its recruitment and remuneration packages in order to retain key staff, has training and development programmes in place and undertakes succession planning.

• Regulatory - failure to comply with applicable legal and regulatory requirements could result in the Company losing its listing and/or being subject to corporation tax on the sale of its investments. The Board reviews regular reports from the Manager on the controls in place to ensure the Company's compliance with these requirements, together with regular investment listings and income forecasts as part of its monitoring of compliance with Section 842. 

• Operational - failure of the Manager's core accounting systems, or a disastrous disruption to its business, could lead to an inability to provide accurate reporting and monitoring. The Manager is contractually obliged to ensure that its conduct of business conforms to applicable laws and regulations. The Manager has confirmed that reliable back-up systems are in place. 

• Financial - inadequate financial controls could result in misappropriation of assets, loss of income and debtor receipts and inaccurate reporting of NAV per share. The Board regularly reviews the Manager's statements on its internal controls and procedures and subjects the books and records of the Company to an annual audit.

• Counterparties - the Company is exposed to potential failures by counterparties; more details are included in note 3 (c).

Statement of Directors' Responsibilities in Respect of the Financial Statements

In accordance with Chapter 4 of the Disclosure and Transparency Rules the Directors confirm, in respect of the annual report for the year ended 30 September 2008 of which this statement of results is an extract, that to the best of their knowledge: 

• the financial statements have been prepared in accordance with applicable UK 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 annual report includes a fair review of the important events that have occurred during the financial year and of the principal risks and uncertainties and their impact on the financial statements; and 

• the annual report includes details on related party transactions. 

On behalf of the Board

Pen Kent

Chairman

25 November 2008

 

END

 

 

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