Final Results

RNS Number : 1271H

F&C Capital & Income Inv Tst PLC

27 November 2015

 



Date:                26 November 2015

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 2015

Highlights

·    Dividend increased for the twenty second consecutive year

·    A fourth interim dividend of 3.2 pence per share will be paid on 31 December 2015 bringing the total dividend for the year to 10.10 pence, an increase of 2.5%.

·    Net asset value total return for the year of 3.5% outperforming the benchmark which fell by 2.3%.

·    Share price total return for the year of 3.1%, with the shares continuing to trade at a premium to net asset value.

Summary of results

Attributable to shareholders	30 September 2015	30 September 2014	% Change
Net asset value total return	3.5%	3.8%	n/a
Share price total return	3.1%	6.0%	n/a
Benchmark* total return	(2.3)%	6.1%	n/a
Net asset value per share	250.51p	251.76p	(0.5)
Revenue return per share	10.10p	10.56p	(4.4)
Dividends per share	10.10p	9.85p	+2.5
Share price	256.00p	258.00p	(0.8)
Net asset value £'000s	236,876	231,387	+2.4

*FTSE All-Share Index

The Chairman, commenting on the results, said:

Looking back at last year's annual report, it seems we thought 2014 had been tumultuous. As we looked ahead, we thought the prospects for the current year were moderately attractive but likely to be characterised by greater volatility than we had been used to. In the event, markets had to deal with a collapse in commodity prices, a rapidly slowing Chinese economy, another Greek crisis, a strong dollar and relatively weak corporate earnings. At home a surprise election result and a better economic performance than expected provided anchors. Nevertheless, it was the global backdrop which dominated, with equity markets failing to make any headway. That most developed markets only fell quite modestly is testament to the continuing power of unorthodox monetary policy to trump the real world.

It has been a year of two halves. Having started on a quite a cheerful note, markets began to go wrong during the summer. Against a backdrop of uncertainty about when the Federal Reserve (Fed) in the US would begin to raise interest rates, the Chinese economy hit the skids. This matters globally in a way that it never has in the past. The Chinese economy is now the second largest in the world (and on some measures ranks pari passu with the US) and is a good six times the size of our own. The slowdown there has its genesis in the attempt by the authorities to shift the economy towards more consumer oriented activity and away from the old export model, which has led to a large amount of inefficient over-investment. This was compounded by a full scale stock market rout and then a series of clumsy official interventions in the attempt to stabilize matters. In the end, with a partial retreat from the reforms which the economy needs and an opening of the credit spigot, things calmed down. By then though, the damage had been done, especially in commodity markets, which are heavily represented in the UK market.

Closer to home, we are experiencing what in a previous era was termed 'profitless prosperity'. The economy is robust by the standards of the world post the financial crisis, but inflation is non-existent and profits are surprisingly anaemic. Despite low unemployment there are very few signs of any overheating outside the housing market, which occupies a very strange place in the UK psyche. The Bank of England has continued to make dovish noises about interest rates and is clearly concerned about the resilience of the global economy. It looks as if the UK will break step with the US, where the Fed is much more inclined to trigger an interest rate 'lift-off'.

Performance

This year, the net asset value (NAV) per share on a total return basis rose by 3.5%. The FTSE All-Share Index, our primary benchmark, fell by 2.3%, giving shareholders a handsome relative return, even if the absolute number is modest. The share price total return was 3.1%. As I have said before, however gratifying, the shorter term numbers for a Company like yours need to be treated as noise rather than a clear signal. Your Board looks much more intently at the longer term data and these are encouraging. Over three years, the NAV total return is up by 26.6% while the index is up by 23.3% and over five years, it is up 46.5% with the index trailing with a gain of 38.2%. In each period, the share price has also done better than the benchmark, more or less mirroring the NAV return.

The portfolio has employed less risk than the market to achieve this result, and also generates a higher yield, which can sometimes prove a headwind on the capital account. In sum, your Board believes these results are very satisfactory.

At the end of the year, the Company had gearing of 10.3% or £23 million, which contributed modestly to total return. In fact, the interest cost of this loan is 2.725% per annum, which means that its deployment into assets which themselves yield more than this, helps to increase the income account. There remains an undrawn part of the facility of £10 million which is available to the Manager should he feel that markets offer exceptional value.

I would just highlight a number of key stock and sector decisions that went well. In particular, an underweight position in the mining sector was positive in itself, but within the sector, the portfolio held the more attractive businesses and in the financial service sector very good stock selection combined with an overweight position produced large net gains. Of course, not everything went well, with Raven Russia suffering from emerging markets malaise and Interior Services having contractual difficulties, but on balance, the positives outweighed the negatives.

Income Account

The revenue return per share was 10.1 pence per share, a decrease of 4.4% on the previous year. Corporate earnings have been under pressure, and are no higher today than they were four years ago. Dividends have been more robust than this but have been struggling to make much progress. Furthermore, the portfolio has been modestly rebalanced to give a greater exposure to growth businesses, on the grounds that the longer term dividend growth provided by these companies is likely to be faster than that offered by the market. Also, a number of companies which had provided high yields in the past were looking fully valued, and this capital has been redeployed. As in recent years, we again benefited from income disbursed as special dividends, particularly from the insurance sector. This year these special dividends amounted to £1.1 million compared to £1.2 million the previous year. In sum, with income in short supply because of such low interest rates, the search for income is becoming more difficult.

Low levels of market volatility have also produced very little opportunity to generate income from the option writing strategy, so this source of additional revenue has been cut off as well. This is an area which worked well for the Company in 2011 and 2012, but it does require specific market circumstances to achieve our objective of generating additional income with very little risk, and these have not been present in recent years. At some point, this situation will change and we will be in a position to act.

So far this year, the Company has paid three interim dividends amounting to 6.9 pence. We are proposing to pay a fourth dividend of 3.2 pence, to make a total for the year of 10.1 pence, amounting to a payout ratio of 100% of this year's revenue return. This represents a 2.5% increase over the 9.85 pence paid last year and compares well with inflation which is (as defined by the Consumer Price Index) running at an annual rate of -0.1%.

This is the 22nd consecutive year in which the annual dividend has increased. Its value has grown by 197% over the years since the Company began, well ahead of the rate of inflation and of the rate of growth of the benchmark dividend.

The fourth quarterly dividend will be paid as an interim rather than a final, because it means we can pay it at the end of the calendar year rather than delaying the process until after the Annual General Meeting (AGM) in February. To repeat what I said last year, the corporate governance mavens have criticised this approach and advise shareholders to vote against the practice. Nonetheless, we have consulted regularly with shareholders on this and it is clear that you would rather receive payment at the end of the year than in February in the following year, and the Board therefore remains of the view that this is very much in your interests and intends to continue on this basis.

On the cost side of the equation, we believe that the investment management costs of 0.4% offer good value and we do our best to keep a lid on all other expenses, many of which reflect the fixed cost of being in business. This year, our ongoing charges ratio, which covers everything except trading and finance costs, was 0.64%, compared with 0.66% last year. The Board thinks that it is important that this ratio should offer value and be competitive compared both with other investment trusts and with open ended competitors. In particular, costs have been falling in the open ended world as a result of regulatory change. We will continue to monitor and control costs to the extent we are able with the objective of offering you a competitively priced, well managed investment product.

Discount/Premium

In recent years, investment trusts which generate reliable income have often traded at a premium to net asset value. Your Company has been no exception and in the past year the shares have traded at an average premium of 2.2%. The range has swung between a premium of 5.8% to a discount, albeit briefly, of 1.1%. In order to cap the level of the premium, we have issued 2,650,000 shares this year, and taken in additional capital of £6.8 million as a result. This is positive for all shareholders, partly because issuing shares at a premium is mildly accretive for existing shareholders, but also because it allows the fixed costs to be spread over a larger base and gives the shares greater liquidity.

Should the shares trade at a material discount, we would of course reverse this policy and buy shares in so as to try and control the discount.

At the AGM in February, we will as usual be asking for authority to issue further shares without pre-emption rights equal to a level of 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 the interests of existing shareholders. The Board believes this resolution is in your interests and urges you to support it.

Governance Matters

Regulation

This is the first full year in which the Alternative Investment Fund Management Directive (AIFMD) has been in operation. We spent a lot of time and money preparing for this, and have to suffer ongoing costs of around £25,000 per year. I would like to be able to tell you that this offers you greater protection from the unscrupulous agents of the financial services industry, but it doesn't. A Company like yours, which invests in mainstream assets and is well resourced and managed with integrity, is treated no differently from its opposite, even though the risks are radically different.

There is more regulation coming, perhaps as soon as next year. As yet, we don't know the exact shape of what we face, but there is very little we can do about it except acknowledge that in many ways this wave of new rules is a logical response to the industry excesses of the pre-crisis era.

Board

We have reached the end of the succession planning process which started five years ago. At the AGM in February, John Emly will be retiring. John has been on the board of your Company since 2001, including time with F&C Income Growth Investment Trust with which your Company later merged. He has brought a lifetime of investment knowledge to his role as a director and has managed to combine a cool head in a crisis with real analytical acuity when reviewing the investments and questioning your fund manager. He has also been a delightful colleague and I speak for all of us when I say we will miss him. It seems a bit formulaic, but I would like to put on record our thanks to John for all his input and wisdom.

Joining us is Jane Lewis. Jane is a lawyer who has a long career specialising in investment trusts. She brings great knowledge of our industry and the challenges we face, having concentrated on the advisory side of the business. We have not had anybody with her skill set in the past and believe that she will bring an additional dimension to our work. I hope that she will have your support when she stands for election at the AGM.

AGM

The AGM of the Company will take place on Tuesday 9 February 2016 at Exchange House, Primrose Street, London EC2, at 11.30 am. As usual, Julian will be making a presentation on the investment scene and the whole Board will be present to answer any questions you may have.

Outlook

Normalisation of interest rates is still some way off and despite the rhetoric, the UK budget deficit remains troubling. Markets are likely to remain somewhat schizophrenic, responding on the one hand to the continuing monetary stimulus, while on the other being startled by unexpected global macro-economic and political events. UK stock markets are not especially expensive by global standards, and there is no reason to suspect that domestic developments will be anything other than mildly benign. Given that the effect of unorthodox monetary policy seems to be waning, the market is becoming increasingly sensitive to the tide of global events. This partly reflects the highly international dimension of the UK's major businesses, but also the increasing correlation of global markets, itself probably a reflection of monetary policy worldwide. It is of course foolish to attempt to forecast anything, but it does seem likely that interest rates will soon rise in the US even though the economy is not especially robust, while elsewhere the economic status quo ante looks set to persist. Having said that, I am reminded of JK Galbraith, who said: "The only function of economic forecasting is to make astrology look respectable."

Steven Bates

Chairman

26 November 2015

Income Statement

for the year ended 30 September	2015			2014
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
(Losses)/gains on investments and derivatives	-	(586)	(586)	-	125	125
Foreign exchange (losses)/gains	(4)	(48)	(52)	8	(21)	(13)
Income	10,848	-	10,848	10,904	-	10,904
Management fee	(520)	(520)	(1,040)	(505)	(505)	(1,010)
Other expenses	(576)	(12)	(588)	(515)	(13)	(528)
Net return before finance costs and taxation	9,748	(1,166)	8,582	9,892	(414)	9,478
Finance costs	(272)	(272)	(544)	(272)	(272)	(544)
Net return on ordinary activities before taxation	9,476	(1,438)	8,038	9,620	(686)	8,934
Taxation on ordinary activities	(1)	-	(1)	(45)	-	(45)
Net return attributable to shareholders	9,475	(1,438)	8,037	9,575	(686)	8,889
Return per share - pence	10.10	(1.53)	8.57	10.56	(0.76)	9.80

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 2015
		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 2014	22,977	101,615	4,146	4,434	88,229	9,986	231,387
Movements during the year      ended 30 September 2015
Dividends paid	-	-	-	-	-	(9,381)	(9,381)
Ordinary shares issued	663	6,170	-	-	-	-	6,833
Net return attributable to     Shareholders	-	-	-	-	(1,438)	9,475	8,037
Balance at 30 September 2015	23,640	107,785	4,146	4,434	86,791	10,080	236,876

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

Balance Sheet

at 30 September		2015		2014
	£'000s	£'000s	£'000s	£'000s
Fixed assets
Investments		260,898		241,039
Current assets
Debtors	1,704		2,691
Cash at bank and short-term deposits	-		8,561
	1,704		11,252
Creditors: amounts falling due within one year	(5,726)		(904)
Net current (liabilities)/assets		(4,022)		10,348
Total assets less current liabilities		256,876		251,387
Creditors: amounts falling due in more than one year
Loans		(20,000)		(20,000)
Net assets		236,876		231,387
Capital and reserves
Share capital		23,640		22,977
Share premium account		107,785		101,615
Capital redemption reserve		4,146		4,146
Special reserve		4,434		4,434
Capital reserves		86,791		88,229
Revenue reserve		10,080		9,986
Total shareholders' funds		236,876		231,387
Net asset value per ordinary share - pence		250.51		251.76

Cash Flow Statement

for the year ended 30 September		2015		2014
	£'000s	£'000s	£'000s	£'000s
Operating activities
Investment income received	10,874		10,559
Interest received	20		22
Other revenue	-		35
Premium from option writing	-		274
Fee paid to management company	(1,035)		(1,004)
Fees paid to Directors	(119)		(122)
Other payments	(457)		(428)
Net cash inflow from operating activities		9,283		9,336
Servicing of finance
Interest paid	(409)		(544)
Net cash outflow from the servicing of finance		(409)		(544)
Financial investment
Purchases of investments and derivatives	(51,056)		(83,922)
Sales of investments and derivatives	32,958		76,476
Other capital charges	(17)		(12)
Net cash outflow from financial investment		(18,115)		(7,458)
Equity dividends paid		(9,381)		(8,842)
Net cash outflow before use of      liquid resources and financing		(18,622)		(7,508)
Management of liquid resources
Decrease/(increase) in short-term deposits		8,400		(290)
Financing
Shares issued	6,833		7,907
Net cash inflow from financing		6,833		7,907
Net (decrease)/increase in cash		(3,389)		109

Notes

1   Return per ordinary share

Revenue return

The revenue return per share of 10.10p (2014: 10.56p) is based on the revenue return attributable to shareholders of £9,475,000 profit (2014: £9,575,000 profit).

Capital return

The capital return per share of (1.53)p (2014: (0.76)p) is based on the capital return attributable to shareholders of £1,438,000 loss (2014: £686,000 loss).

Total return

The total return per share of 8.57p (2014: 9.80p) is based on the total return attributable to shareholders of £8,037,000 profit (2014: £8,889,000 profit).

Weighted average ordinary shares in issue

Both the revenue and capital returns per share are based on a weighted average of 93,820,364 (2014: 90,639,610) 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 2015 of 3.20 pence per share, payable on 31 December 2015 to all shareholders on the register at close of business on 11 December 2015.

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 2015 amounted to £nil (30 September 2014 - £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 £260,898,000 at 30 September 2015 (2014: £241,039,000) 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. 

(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 2015 and 80 at 30 September 2014); 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. The Company's Depositary, JP Morgan Europe Limited, has regulatory responsibilities relating to segregation and safe keeping of the Company's financial assets, amongst other duties. The Board has direct access to the Depositary and receives regular reports from it via the Manager.

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 F&C's Risk Management 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 Tuesday 9 February 2016 at 11.30 a.m.

5    Report and accounts

The report and accounts for the year ended 30 September 2015 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

26 November 2015

 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 are inappropriate 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 and holds a separate meeting each year to consider strategic issues. Market intelligence is maintained via the Company's 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 to ensure investors are fully informed.

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 by the Board 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: The 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 control reports from the Manager covering risk and compliance including oversight of third party service providers.  The Board has access to F&C's 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.

 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, 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;

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

·      the Annual Report and Accounts taken as a whole is fair balanced and understandable ; and

·      having assessed the principal risks and other matters discussed in connection with the Viability Statement, the Directors consider it appropriate to adopt the going concern basis in preparing the accounts.

On behalf of the Board

Steven Bates

Chairman

26 November 2015

 

END

 

 

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