Final Results

RNS Number : 8862L

Investors Capital Trust PLC

13 May 2010

 



To:                    RNS

From:                Investors Capital Trust plc

Date:                13 May 2010

Results for the year ended 31 March 2010

·      Total distributions for the year to 31 March 2010 of 5.35p per share

·      Dividend yield of 6.7 and 6.0 per cent on A and B shares respectively at 31 March 2010, compared to the yield on the FTSE All-Share Capped 5% Index of 3.0 per cent

·      Net asset value total return per share for the year was 48.1 per cent, compared to the FTSE All-Share Capped 5% Index total return of 53.9 per cent

Chairman's Statement as follows:

Investment Objective and Policy

The Company's investment objective is to provide an attractive return to shareholders in the form of dividends and/or capital distributions, together with prospects for capital growth.

The Company's investment portfolio is managed in two parts. The first part comprises investments in UK equities and equity related securities (the Equities Portfolio) and the second part investments in fixed interest and other higher yielding stocks and securities (the Higher Yield Portfolio). At 31 March 2010, 65.2 per cent. of total assets was allocated to the Equities Portfolio and 27.4 per cent. to the Higher Yield Portfolio. The remaining 7.4 per cent. was held as cash and cash equivalents. This allocation will vary as a result of market movements and circumstances.

Capital Structure

The Company has two classes of shares: A shares and B shares. The net asset value attributable to the A shares and to the B shares is the same. The rights of each class are identical, save that only the A shares are entitled to receive dividends, while the B shares instead receive a capital distribution at the same time as, and in an equal amount to, each dividend. For certain shareholders there will be tax and other advantages in receiving a capital distribution rather than a dividend. Shares may be held and traded within units, each unit comprising three A shares and one B share.

The dividend yield on the A shares is enhanced due to the existence of the B shares. The B shares are innovative securities that provide returns in the form of quarterly capital distributions rather than dividends. These capital distributions fall to be taxed in accordance with rules relating to the taxation of chargeable gains. A fact sheet that provides more details on the B shares is available from the Company's website (www.investorscapital.co.uk). The 'Capital Structure' section on page 13 of the Annual Report also provides further information on the A and B shares.

The Company has the ability to borrow in pursuit of its investment objectives. The Company has a £33.5m loan facility with Lloyds TSB Scotland plc for a term to 28 September 2012.  The Company has entered into an interest rate swap to fix the all-in rate of interest on the loan at 5.86 per cent. per annum.

Investment Performance

At the time of writing my interim report to shareholders in November I indicated that 'the worst of the financial crisis may now be behind us'. It is pleasing to report that this appears to be the case, as equity markets and other risk assets have continued to recover. The unprecedented support to the global financial system from governments around the world appears to have achieved the objective of restoring stability to both financial markets and the banking system. The broader UK economy has only recently emerged from recession, although the resulting level of government indebtedness presents a significant headwind to the future rate of economic expansion. Globally, the economic recovery is being led by the Asian region, most notably China, the impact of which has been amplified by comparison with the more muted outlook for the developed Western economies. While the durability of Chinese economic expansion has thus far proved robust, a note of caution is warranted in assuming it will remain so.

The exceptional returns recorded in equity and corporate bond markets during the year have been led by the most cyclical and indebted businesses, many of which have cut their dividends. While these financially challenged businesses had the most to gain from an improvement in economic prospects, they do not feature heavily in our investment portfolio. Our investment approach focuses on companies which have strong balance sheets, visibility of earnings and good dividend cover. During the year to 31 March 2010 the Company's Equities Portfolio produced a total return of 43.9 per cent. which lagged the benchmark, the FTSE All-Share Capped 5% Index. Covering the period since the Company's launch in March 2007 the Equities Portfolio is 2.3 per cent. ahead of the benchmark index.  The Higher Yield Portfolio is invested in predominantly investment grade corporate bonds and returned 31.9 per cent. in total return terms for the year.     

Returns from the Equities Portfolio and the Higher Yield Portfolio, combined with the effect of gearing, resulted in the net asset value total return for the A and B shares of 48.1 per cent.  This return compares with the 53.9 per cent. total return for the FTSE All-Share Capped 5% Index.

Earnings

The Company achieved total revenue income of £6.5m for the year. The yield on the Equities Portfolio was 3.7 per cent. as at 31 March 2010, equivalent to a yield relative to the FTSE All-Share Capped 5% Index of 123 per cent.

The Company's revenues for the period are below the level earned during 2009 as dividend cuts remained a feature of the market and deposit interest was at a reduced level. The lower level of deposit interest was a function of less cash held on deposit and exceptionally low rates of interest. The Company's cash balance was significantly reduced during the first half of the year as funds were invested into the Equities Portfolio to the benefit of the revenue account.

The marked improvement in corporate earnings is supportive for dividend income, although it is the sustainability of earnings that is fundamental to the outlook for dividends.  Cost cutting and currency benefits will need to give way to revenue led profit growth in order to support an ongoing recovery in dividends. We anticipate the severity of the recession, from which we are only just emerging, will dictate that companies take a cautious approach when setting dividend rates. Increased capital expenditure requirements together with the need to continue to reduce borrowings will put further pressure on the rate at which dividends will grow.

As noted in my statement last year, the level of the UK market dividend is heavily influenced by the US dollar/Sterling exchange rate. Approximately one third of the UK market dividend comes from companies that report in US dollars. The depreciation of Sterling against the US dollar in the second half of the year provided a benefit to dividend receipts. Consequently any recovery in Sterling would be to their detriment.   

Income from the Higher Yield Portfolio, which comprised predominantly investment grade corporate bonds, was broadly at the level anticipated.  The improved economic outlook, combined with a clear corporate focus to reduce balance sheet leverage, has significantly reduced the risk of bonds defaulting on coupon or principal payments. The strong capital gain recorded by corporate bonds, however, creates a re-investment issue with regard to revenue. Elevated redemption yields, particularly during the first half of last year, will not be repeated as bonds mature and proceeds are re-invested.

After providing for the fourth quarter dividend, the Company has revenue reserves of £0.6m at 31 March 2010.  The use of approximately one third of the Company's revenue reserve over the year is a reflection of the challenging dividend environment and low rate of interest on cash deposits. The Board expects to pay an unchanged dividend for the first half of the coming year. The many uncertainties noted above will be closely monitored during the year to assess whether it will be appropriate to maintain the dividend at current levels.

Dividends and Capital Returns

Dividends to A shareholders and capital distributions to B shareholders are paid quarterly in August, November, February and May each year. In respect of the distributions for the Company's first three quarters, the dividends paid on the A shares and capital distributions on the B shares were 1.325p per share for each quarter. A fourth quarter dividend was paid to A shareholders and capital distribution to B shareholders of 1.375p per share on 7 May 2010. This results in an unchanged dividend/capital distribution of 5.35p per share in respect of the year to 31 March 2010.  This represents a distribution yield for A shareholders of 6.7 per cent. and for B shareholders of 6.0 per cent., based on the A share price of 80.0 pence and the B share price of 89.5 pence as at 31 March 2010. These yields compare favourably with the yield on the FTSE All-Share Capped 5% Index of 3.0 per cent at that date.  For shareholders that hold units, the estimated distribution yield was 6.8 per cent. based on a unit price of 317p as at 31 March 2010.

The Company operates a distribution reinvestment scheme, details of which are available from the Company's Registrars, to enable B shareholders to reinvest their capital distributions in further B shares if they wish.

Discount and buy backs

The Company's A share price was at a discount to net asset value of 3.7 per cent. at 31 March 2010. The Company's B shares were at a premium to net asset value of 7.7 per cent at the same date. Over the year, the price of the Company's A shares traded at an average discount to net asset value per share of 0.9 per cent. and the Company's B shares traded at an average premium of 1.8 per cent. The Company has a stated buy back policy and, in accordance with this policy, the Company bought back 0.2m A shares during the year at an average discount of 5 per cent. to net asset value, thereby adding value for existing shareholders.  As a result of strong market demand, the Company issued net 2.0m B shares at net asset value or above.

Directors

The Board has appointed Mr James Williams as a non-executive Director. Mr Williams retired from Baring Asset Management in 2002, where he was chief investment officer and head of global investment strategy. He is a director of Prosperity Russian Domestic Fund and JPMorgan American Investment Trust plc. He is chairman of University College Falmouth. He was previously a director of Royal London Growth and Income Trust plc and of Close Brothers Group plc.

I am delighted to welcome James Williams as a Director of the Company and believe that his extensive involvement in the investment management industry for over 35 years will contribute significantly to the Board

Outlook

The improvement in economic prospects over the course of the last year has been marked, as has been the rise in the asset values. While the valuations of both equities and corporate bonds are reasonable, macro-economic risks to financial markets remain. Fiscal deficits in much of the developed world are at record high levels, a fact that the recent sovereign debt crisis in Greece has brought into sharp focus, and are perhaps the biggest challenge for the global economy. In the UK we must hope that the incoming Government acts quickly to retain the confidence of financial markets by putting in place a credible deficit reduction plan.

Manager's Review as follows:

Economic and Market Review

The UK economy emerged from recession during the fourth quarter of 2009, recording the first positive quarter of economic growth since early 2008. The stock market, pre-empting the turn in the economic cycle, troughed in March 2009 and went on to record a total return of 53.9 per cent for the year to 31 March 2010, as measured by the FTSE All-Share Capped 5% Index. In our report last year we noted the challenging near term economic outlook but took encouragement from the globally co-ordinated policy response to the financial crisis. Acutely aware of the risks of repeating the policy errors of the Great Depression in the 1930s and Japan's 'lost decade' of the 1990s, authorities around the world acted quickly and decisively. Interest rates were reduced to close to zero and the Central Banks embarked on the highly unusual policy of "quantitative easing", the process involving the open-market purchase of gilts and corporate bonds from financial institutions as a means of injecting money into the wider economy. The UK Government would eventually inject around £200 billion of liquidity into the economy through this mechanism. At the same time Treasury backed liquidity schemes provided a much needed funding lifeline for the banking sector which together with the improvement in asset values resulting from quantitative easing allowed the process of recapitalising the banking industry to begin.

The early optimism reflected in stock markets was proven to be justified when key economic indicators confirmed a marked slowing in the rate of decline of economic growth. The subsequent improvement in consumer confidence provided a much needed prop to high street spending and the housing market. The rate of unemployment increased during the year, however, it did not deteriorate to the extent to which many commentators feared at the outset of recession. In the wake of the general election, the intense pressure to control borrowing is likely to result in broad-based public sector reform with a consequent impact on public sector employment. The task of restoring UK fiscal credibility without stalling the economic recovery will require an extraordinary degree of policy finesse. The growing debt crisis in Greece serves as a warning to other countries as to the implications of losing control over their fiscal positions and thus the confidence of financial markets. The slow response of Eurozone governments to the Greek situation has fuelled fears of contagion and a potentially wider sovereign debt crisis.

Over the last six months Sterling has depreciated, most notably against the US dollar, as concerns have intensified over the state of UK public finances and the potential implications of a hung parliament. The devaluation of Sterling provides both a welcome boost to the competitive position of UK industry in addition to increasing the value of overseas profits earned by UK companies. While the recent improvement in corporate earnings has been encouraging it has been heavily dependent on cost cutting and currency benefits rather than revenue growth; the latter is necessary to underpin a sustainable improvement in earnings and dividends.

As with the UK equity market over the past year there has been a significant improvement in the fortunes of credit markets. Government yields have remained well supported, particularly at the shorter end of the yield curve, as Central Banks have kept interest rates at exceptionally low levels. In the UK base rates remained unchanged at a historic low of 0.5 per cent. Throughout the Company's year management of UK monetary policy has been by less conventional measures such as the quantitative easing programme noted earlier. The improvement in the economic outlook was also reflected in a declining rate of corporate bond defaults and consequently narrower credit spreads over gilts. The combination of improving fundamentals and attractive valuations resulted in a return of 21.7 per cent. for investment grade credit and an 83.9 per cent. return for non-investment grade credit.

Portfolio Review

Returns from the Equities Portfolio and the Higher Yield Portfolio, combined with the effect of gearing, resulted in a net asset value total return of 48.1 per cent. over the year to 31 March 2010. This compares with a return of 53.9 per cent. for the FTSE All-Share Capped 5% Index, the Company's benchmark.

Throughout the year we maintained our focus of investing in businesses which exhibit strong financial characteristics and occupy attractive positions within their respective industries. A fundamental consideration of our investment process is to assess the ability of a company to support its dividend. This approach has been central to delivering longer term out-performance against the Company's benchmark.

Within the Equities Portfolio there were a number of holdings that recorded exceptional gains. Two such examples are Compass Group, the contract catering business, and Whitbread, the budget hotel and restaurant operator. Both benefited from successful management-led initiatives to improve underlying business performance at the same time as a turnaround in their end markets.  At a sector level the substantial position in tobacco companies was maintained.  Our largest holding in that sector is British American Tobacco which continues to lead the industry in product innovation. The company's success in maximising the value of its global brands allowed it to increase its annual dividend by 19 per cent. The emphasis placed on investing in businesses that offer the prospect of real dividend growth resulted in the Company being under-represented in the more economically sensitive and highly leveraged companies which led the market recovery. A number of the largest share price gains were recorded by businesses that had already cancelled dividend payments, most notably in the banking sector. The Company's Equities Portfolio has a limited equity exposure to domestic UK banks, favouring instead the international diversification offered by HSBC. As a source of dividend income the bank sector has lost its attraction as the majority of banks have either cut or cancelled dividend payments in order to preserve capital. 

The Higher Yield Portfolio is invested in a diversified corporate bond portfolio with a bias to investment grade issues. The modest equity holdings in the bank sector were complemented by exposure to bank credit which offered attractive yields. The Company benefited from the compression in yields on bank issued corporate bonds as the extent of government led support for the sector became apparent. During the year there was a high level of new issuance in credit markets as companies that were unable to access bank debt at a reasonable cost turned to bond investors. The portfolio supported a number of these new issues which were attractively priced in order to stimulate new investor demand.  As the year progressed the improvement in the broader economic climate increased the attraction of corporate bonds as an asset class which resulted in further yield compression. The total return on the Higher Yield Portfolio for the year was 31.9 per cent.

The Company materially reduced its cash balance in favour of the Equities Portfolio mostly during the early part of the financial year.

Outlook

Confidence in the global recovery has continued to gain momentum with growth in emerging economies, most notably China, providing a welcome counter-balance to the more subdued prospects for the developed Western economies. However the highly expansionary monetary policy which has been adopted in most major economies, and has fuelled the recovery of financial markets, will at some point need to be reined in. As so called "exit strategies" are implemented and policymakers move to a more neutral policy stance we believe investors will once again look to businesses with good earnings visibility, strong balance sheets and attractive dividend yields; the type of businesses to which our Equities Portfolio is strongly biased.

For further information, please contact:

Rodger McNair                                                                           Tel:        [phone]

Fund Manager to Investors Capital Trust plc

Michael Campbell

Company Secretary to Investors Capital Trust plc                          Tel:        [phone]

Consolidated Statement of Comprehensive Income (audited)

		Year to 31 March 2010
		£'000	£'000
	Note	Revenue	Capital	£'000
		Return	Return	Total
Capital gains on investments
Gains on investments held at fair value through profit or loss		-	31,187	31,187
Exchange differences		-	752	752
Revenue
Investment Income		6,460	-	6,460
Total income		6,460	31,939	38,399
Expenditure
Investment management fee		(217)	(506)	(723)
Other expenses		(414)	-	(414)
Total expenditure		(631)	(506)	(1,137)
Profit before finance costs and tax		5,829	31,433	37,262
Net finance costs
Interest on bank loan and interest rate swap		(593)	(1,385)	(1,978)
Total finance costs		(593)	(1,385)	(1,978)
Profit before tax		5,236	30,048	35,284
Tax		(425)	406	(19)
Profit/(loss) for the year		4,811	30,454	35,265
Other comprehensive income
Net gain on cashflow hedged net of tax		-	252	252
Total comprehensive income for the year		4,811	30,706	35,517
Earnings per share	2	3.79p	23.97p	27.76p

Consolidated Statement of Comprehensive Income (audited)

		Year to 31 March 2009
		£'000	£'000
	Note	Revenue	Capital	£'000
		Return	Return	Total
Capital losses on investments
Losses on investments held at fair value through profit or loss		-	(28,951)	(28,951)
Exchange differences		-	(2,440)	(2,440)
Revenue
Investment Income		6,960	-	6,960
Total income		6,960	(31,391)	(24,431)
Expenditure
Investment management fee		(211)	(491)	(702)
Other expenses		(383)	-	(383)
Total expenditure		(594)	(491)	(1,085)
Profit/(loss) before finance costs and tax		6,366	(31,882)	(25,516)
Net finance costs
Interest on bank loan and interest rate swap		(592)	(1,381)	(1,973)
Total finance costs		(592)	(1,381)	(1,973)
Profit/(loss) before tax		5,774	(33,263)	(27,489)
Tax		(620)	524	(96)
Profit/(loss) for the year		5,154	(32,739)	(27,585)
Other comprehensive income
Net loss on cashflow hedged net of tax		-	(2,668)	(2,668)
Total comprehensive income for the year		5,154	(35,407)	(30,253)
Earnings/(losses) per share	2	4.07p	(25.84p)	(21.77p)

Balance Sheets (audited)

as at 31 March 2010

		2010		2009
		Company	Group	Company	Group
	Note	£'000	£'000	£'000	£'000
Non-current assets
Investments held at fair value through profit or loss		132,349	132,099	87,911	87,661
Current assets
Other receivables		2,430	2,430	1,599	1,599
Cash and cash equivalents		9,278	9,278	24,403	24,403
		11,708	11,708	26,002	26,002
Total assets		144,057	143,807	113,913	113,663
Current liabilities
Other payables		(1,372)	(1,122)	(939)	(689)
Non-current liabilities
Bank loan		(33,482)	(33,482)	(33,476)	(33,476)
Interest rate swap		(3,160)	(3,160)	(3,412)	(3,412)
		(36,642)	(36,642)	(36,888)	(36,888)
Total liabilities		(38,014)	(37,764)	(37,827)	(37,577)
Net assets		106,043	106,043	76,086	76,086
Share capital	5	134	134	134	134
Share premium		22	22	22	22
Capital redemption reserve	5	5	5	5	5
Buy back reserve	5	90,990	90,990	89,227	89,227
Special capital reserve		29,514	29,514	31,189	31,189
Capital reserves		(16,550)	(16,550)	(46,725)	(46,725)
Revenue reserve		1,928	1,928	2,234	2,234
Equity shareholders' funds		106,043	106,043	76,086	76,086
Net asset value per A share	6	83.09p	83.09p	60.46p	60.46p
Net asset value per B share	6	83.09p	83.09p	60.46p	60.46p

Consolidated and Company Cash Flow Statement (audited)

for the year to 31 March 2010

	Year to 31 March 2010	Year to 31 March 2009
	£'000	£'000
Cash flows from operating activities
Profit/(loss) before finance costs and tax	37,262	(25,516)
Adjustments for:
(Gains)/losses on investments held at fair value through profit or loss	(31,187)	28,951
Exchange differences	(752)	2,440
(Increase)/decrease in receivables	(121)	143
Increase/(decrease) in payables	80	(78)
Purchases of investments	(37,988)	(51,317)
Sales of investments	25,024	53,262
	(7,682)	7,885
Tax paid	(105)	(15)
Net cash (outflow)/inflow from operating activities	(7,787)	7,870
Cash flows from financing activities
Dividends paid on A shares	(5,117)	(5,183)
Capital returns paid on B shares	(1,675)	(1,620)
Interest on bank loan and interest rate swap	(2,456)	(1,482)
Issue of shares from treasury	1,426	60
Shares purchased for cancellation	-	(544)
Shares purchased for treasury	(194)	(1,629)
Net cash outflow from financing activities	(8,016)	(10,398)
Net decrease in cash and cash equivalents	(15,803)	(2,528)
Currency gains/(losses)	678	(2,692)
Opening cash and cash equivalents	24,403	29,623
Closing cash and cash equivalents	9,278	24,403

Consolidated and Company Statement of Changes in Equity (audited)

for the year to 31 March 2010

	Share Capital	Share Premium	Capital Redemption Reserve	Buy Back Reserve	Special Capital Reserve	Capital Reserve - Investments sold	Capital Reserve - Investments held	Revenue Reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1 April 2009	134	22	5	89,227	31,189	(15,749)	(30,976)	2,234	76,086
Shares issued from treasury	-	-	-	1,957	-	(531)	-	-	1,426
Shares bought back for treasury	-	-	-	(194)	-	-	-	-	(194)
(Loss)/profit for the year	-	-	-	-	-	(1,816)	32,270	4,811	35,265
Dividends paid on A shares	-	-	-	-	-	-	-	(5,117)	(5,117)
Capital returns paid on B shares	-	-	-	-	(1,675)	-	-	-	(1,675)
Unrealised gain on revaluation of interest rate swap	-	-	-	-	-	-	252	-	252
At 31 March 2010	134	22	5	90,990	29,514	(18,096)	1,546	1,928	106,043

Consolidated and Company Statement of Changes in Equity (audited)

for the year to 31 March 2009

	Share Capital	Share Premium	Capital Redemption Reserve	Buy Back Reserve	Special Capital Reserve	Capital Reserve - Investments sold	Capital Reserve - Investments held	Revenue Reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 1 April 2008	138	22	1	91,306	32,809	220	(11,504)	2,263	115,255
Shares issued from treasury	-	-	-	94	-	(34)	-	-	60
Shares bought back for cancellation	(1)	-	1	(544)	-	-	-	-	(544)
Shares bought back for treasury	-	-	-	(1,629)	-	-	-	-	(1,629)
Shares cancelled from treasury	(3)	-	3	-	-	-	-	-	-
Profit/(loss) for the year	-	-	-	-	-	(15,935)	(16,804)	5,154	(27,585)
Dividends paid on A shares	-	-	-	-	-	-	-	(5,183)	(5,183)
Capital returns paid on B shares	-	-	-	-	(1,620)	-	-	-	(1,620)
Unrealised loss on revaluation of interest rate swap	-	-	-	-	-	-	(2,668)	-	(2,668)
At 31 March 2009	134	22	5	89,227	31,189	(15,749)	(30,976)	2,234	76,086

Investors Capital Trust plc

Principal Risks and Risk Management

The Company's assets consist mainly of listed equity and fixed interest securities and its principal risks are therefore market-related. More detailed explanations of these risks and the way in which they are managed are contained in the notes to the accounts.

Other risks faced by the Company include the following:

·      External - events such as terrorism, protectionism, inflation or deflation, economic recessions and movements in interest rates and exchange rates could affect share prices in particular markets.

·      Investment and strategic - incorrect strategy, asset allocation, stock selection and the use of gearing could all lead to poor returns for shareholders.

·      Regulatory - breach of regulatory rules could lead to suspension of the Company's Stock Exchange listing, financial penalties, or a qualified audit report. Breach of Section 842 of the Income and Corporation Taxes Act 1988 could lead to the Company being subject to tax on capital gains.

·      Operational - failure of the Manager's accounting systems or disruption to the Manager's business, or that of third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders' confidence.

·      Financial - inadequate controls by the Manager or third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations. Breaching loan covenants could lead to a loss of shareholders' confidence and financial loss for shareholders.

The Board seeks to mitigate and manage these risks through continual review, policy setting and reliance upon contractual obligations. It also regularly monitors the investment environment and the management of the Company's investment portfolio, and applies the principles detailed in the internal control guidance issued by the Financial Reporting Council.

Investors Capital Trust plc

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

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

·      The financial statements contained within the Annual Report for the year ended 31 March 2010, of which this statement of results is an extract, have been prepared in accordance with applicable International Financial Reporting 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 Chairman's Statement and Manager's Review include a fair review of the important events that have occurred during the financial year and their impact on the financial statements;

·      'Principal Risks and Risk Management' includes a description of the Company's principal risks and uncertainties; and

·      The Annual Report includes details of related party transactions, if any, that have taken place during the financial year.

On behalf of the Board

J Martin Haldane                                                

Chairman                                                           

12 May 2010

Notes (audited)

1.            The financial statements of the Group, which are the responsibility of, and were approved by the Board on 12 May 2010, have been prepared in accordance with the Companies Act 2006, International Financial Reporting Standards (''IFRS''), which comprise standards and interpretations approved by the International Accounting Standards Board (''IASB''), and International Accounting Standards and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee (''IASC'') that remain in effect, and to the extent that they have been adopted by the European Union.

Where presentational guidance set out in the Statement of Recommended Practice (''SORP'') for investment trusts issued by the Association of Investment Companies (''AIC'') in January 2009 is consistent with the requirements of IFRS, the Directors have sought to prepare the results on a basis compliant with the recommendations of the SORP.

2.            The Company's earnings per share are based on the profit for the year of £35,265,000 (year to 31 March 2009: loss of £27,585,000) and on 95,595,897 A shares (2009: 96,526,391) and 31,453,607 B shares (2009: 30,170,456), being the weighted average number of shares in issue of each share class during the year. 

The Company's revenue earnings per share are based on the revenue profit for the year of £4,811,000 (year to 31 March 2009: £5,154,000) and on the weighted average number of shares in issue as above.

The Company's capital earnings per share are based on the capital profit for the year of £30,454,000 (year to 31 March 2009: loss of £32,739,000) and on the weighted average number of shares in issue as above.

3.            The Group results comprise those of the Company and those of Investors Securities Company Limited, a wholly owned subsidiary which deals in securities.

4.            The fourth interim dividend of 1.375p per A share, was paid on 7 May 2010 to A shareholders on the register at close of business on 9 April 2010, having an ex-dividend date of 7 April 2010. The fourth capital distribution of 1.375p per B share was paid on 7 May 2010 to B shareholders on the register on 9 April 2010.

5.            During the year the Company bought back 240,000 (2009: 2,145,000) A Shares to hold in treasury at a cost of £146,000 (2009: £1,629,000) and 80,000 (2009: nil) B Shares to hold in treasury at a cost of £48,000 (2009: £nil). The Company did not buy back any shares for cancellation during the year (2009: 715,000 B Shares at a cost of £544,000). The Company resold 2,105,000 (2009: 100,000) B Shares from treasury, receiving net proceeds of £1,426,000 (2009: £60,000)

At 31 March 2010 the Company held 6,489,000 (2009: 6,249,000) A Shares and 25,000 (2009: 2,050,000) B Shares in treasury.

6.            The Company's basic net asset value per share of 83.09p (2009: 60.46p) is based on the equity shareholders' funds of £106,043,000 (2009: £76,086,000) and on 127,629,847 equity shares, consisting of 95,578,144 A Shares and 32,051,703 B Shares (2009: 125,844,847  equity shares, consisting of 95,818,144 A Shares and 30,026,703 B Shares), being the number of shares in issue at the year end.

The Company's shares may also be traded as units, each unit consisting of three A Shares and one B Share. The basic net asset value per unit as at 31 March 2010 was therefore 332.36p (2009: 241.84p).

The Company's treasury net asset value per share, incorporating the 6,289,000 A shares and 25,000 B shares held in treasury at the year end, was 82.94p (2009: 60.40p). The Company's treasury net asset value per unit at the end of the year was 331.76p (2009: 241.60p). The Company's policy is to only re-sell shares held in treasury at a price representing a discount of not more than 5 per cent to net asset value at the time of sale, together with other conditions. Accordingly, for the purpose of the calculation, such treasury shares are valued at the higher of net asset value less 5 per cent and the mid market share price at each year end.

7.            Financial Instruments

The Company's financial instruments comprise equity and fixed interest investments, cash balances, receivables and payables that arise directly from its operations and borrowings which include an interest rate swap. As an investment trust the Company holds a portfolio of financial assets in pursuit of its investment objective. The Company makes use of borrowings to achieve enhanced returns. The downside risk of borrowings can be reduced by raising the level of cash balances held. At 31 March 2010, borrowings were exceeded in value by cash balances and fixed interest securities resulting in a net ungeared exposure to equities.

The Company may use derivatives for efficient portfolio management from time to time. The only derivatives used in the year were the interest rate swap on the bank loan, forward foreign exchange currency contracts to hedge currency movements and the writing of call options over some investments held in the Equities Portfolio.

The fair value of the financial assets and liabilities of the Company at 31 March 2010 is not materially different from their carrying value in the financial statements.

The Company is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, market price risk, liquidity risk, interest rate risk and foreign currency risk.

The Board reviews and agrees policies for managing its risk exposure. These policies are summarised below and have remained unchanged for the year under review.

Credit risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Company.

The Company's principal financial assets are bank balances and cash, other receivables and investments, which represent the Company's maximum exposure to credit risk in relation to financial assets. The Company did not have any exposure to any financial assets which were past due or impaired at the year end.

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. A list of pre-approved counterparties used in such transactions is maintained and regularly reviewed by the Manager, and transactions must be settled on a basis of delivery against payment. Broker counterparties are selected based on a combination of criteria, including credit rating, balance sheet strength and membership of a relevant regulatory body. Risk relating to unsettled transactions is considered to be small due to the short settlement period involved and the acceptable quality of the brokers used. The rate of default in the past has been insignificant.

All of the assets of the Company, other than the dealing subsidiary, are held by JPMorgan Chase Bank, the Company's custodian. Bankruptcy or insolvency of the custodian may cause the Company's rights with respect to the securities held by the custodian to be delayed or limited. The Board monitors the Company's risk by reviewing the custodian's internal control reports.

The credit risk on liquid funds and derivative financial instruments is limited because the counterparties are banks with high credit ratings, normally rated AA or higher, assigned by international credit rating agencies. Bankruptcy or insolvency of such financial institutions may cause the Company's ability to access cash placed on deposit to be delayed, limited or lost.

The Company has no significant concentration of credit risk with exposure spread over a number of counterparties and financial institutions.

Market price risk

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 Group's strategy for the management of market price risk is driven by the Company's investment policy. The Board sets policies for managing this risk and meets regularly to review full, timely and relevant information on investment performance and financial results. The management of market price risk is part of the fund management process and is typical of equity and fixed interest investment. The portfolio is managed with an awareness of the effects of adverse price movements through detailed and continuing analysis with an objective of maximising overall returns to shareholders. Investment and portfolio performance are discussed in more detail in the Manager's Review.

Liquidity risk

Liquidity risk is the risk that the Company will encounter difficulty in realising assets or otherwise raising funds to meet financial commitments. The risk of the Company not having sufficient liquidity at any time is not considered by the Board to be significant, given the liquid nature of the portfolio of investments and the level of cash and cash equivalents ordinarily held. However, where there has been a deterioration in credit quality or an event of default the Company may not be able to liquidate quickly, at fair value, some of its investments in the Higher Yield Portfolio. Cash balances are held with reputable banks with a credit rating of normally AA or higher, usually on overnight deposit. The Manager reviews liquidity at the time of making each investment decision. The Board reviews liquidity exposure at each meeting.

In certain circumstances, the terms of the Company's bank loan entitle the lender to demand early repayment and, in such circumstances, the Company's ability to maintain dividend levels and the net asset value attributable to equity shareholders could be adversely affected. Such early repayment may be required in the event of a change of control of the Company or on the occurrence of certain events of default which are customary for facilities of this type. These include events of non payment, breach of other obligations, misrepresentations, insolvency and insolvency proceedings, illegality and a material adverse change in the financial condition of the Company.

Interest rate risk

Some of the Company's financial instruments are interest bearing. They are a mix of both fixed and variable rate instruments with differing maturities. As a consequence, the Company is exposed to interest rate risk due to fluctuations in the prevailing market rate.

Floating rate

When the Company retains cash balances the majority of the cash is held in deposit accounts. The benchmark rate which determines the interest payments received on cash balances is the bank base rate, which was 0.5 per cent at 31 March 2010 (2009: 0.5 per cent).

The Company's Equities Portfolio does not contain any fixed interest or floating rate interest assets.

The £33.5 million term loan has been classified as fixed interest as the variable rate loan has been fixed by an interest rate swap, of the same nominal value and duration as the loan.

Foreign currency risk

In order to achieve a diversified portfolio of higher yielding securities the Company invests partly in overseas securities which gives rise to currency risks. In the year to 31 March 2010, the Company entered into US Dollar and Euro foreign exchange currency contracts with a view to hedging these currency risks.

Given the policy to hedge currency risk on non-sterling denominated assets by entering into forward foreign exchange currency contracts, the weakening or strengthening of Sterling against either the US Dollar or Euro will not have a significant net impact on either the total column of the Consolidated Statement of Comprehensive Income for the year or net asset value as at 31 March 2010.

8.            These are not full statutory accounts in terms of Section 434 of the Companies Act 2006. The full audited annual report and accounts for the year ended 31 March 2010 will be sent to shareholders in May 2010 and will be available for inspection at 80 George Street, Edinburgh, the registered office of the Company.  The full annual report and accounts will be available on the Company's website www.investorscapital.co.uk.

The audited accounts for the year to 31 March 2010 will be lodged with the Registrar of Companies following the Annual General Meeting to be held on 29 June 2010.

 

END

 

 

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