Annual Financial Report

RNS Number : 6769D

Dunedin Income Growth Inv Tst PLC

28 March 2011

 



DUNEDIN INCOME GROWTH INVESTMENT TRUST PLC

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 JANUARY 2011

The objective of Dunedin Income Growth Investment Trust PLC is to achieve growth of income and capital from a portfolio invested predominantly in companies listed or quoted in the United Kingdom.

Highlights

·     Net asset value per share up by 19.6% in total return terms outperforming the Company's benchmark, the FTSE All-Share Index which increased by 18.1% in total return terms. 

·     The Board is recommending an unchanged final dividend.  The total dividend for the year will amount to 10.25p (2010 - 10.25p).

For further information, please contact:-

Jeremy Whitley

Aberdeen Asset Managers Limited         0131 528 4000

Ian Massie

Aberdeen Asset Managers Limited         0131 528 4000

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise.  Investors may not get back the amount they originally invested.

1.          CHAIRMAN'S STATEMENT

The year under review has been one of good progress for your Company in economic and market conditions that have at times been extremely volatile. Returns have been good on both an absolute and a relative basis and Dunedin Income Growth Investment Trust ("DIGIT") is steadily improving what had been in recent years a disappointing investment performance. The Company's Net Asset Value per share (measured with debt priced at market value) increased from 198.80p to 226.81p.  This represented an increase of 19.6% in total return terms, slightly outperforming the Company's benchmark, the FTSE All-Share Index, which increased by 18.1% in total return terms.  At the same time the Company has taken a number of steps both to rebuild its income account and to enhance the quality and diversity of its investment portfolio.  Perhaps most importantly for many of our investors, we are recommending that the level of dividend be maintained.

Two separate developments marked out that progress during the course of the year. First, the vote of shareholders at the General Meeting held in December 2010 in favour of broadening the Company's mandate to allow it to invest up to 20% of its gross assets directly overseas was a very important decision. We believe that over time this expanded opportunity set will allow us to create a portfolio that has better prospects for capital growth, that is more diversified and which will have its income generating capabilities enhanced.

Secondly, we have had significant success in rebuilding our income account, both as a result of rising dividends received and through the expansion of our option writing programme. 2010/11 saw the income generated from option writing grow significantly and this helps to diversify our revenue sources whilst making a useful contribution to our distributable earnings.

I am also pleased to report that the Manager has made progress in its longstanding dispute with HMRC over outstanding VAT on management fees, as explained below. This has brought in a further payment of £2,418,000, of which £1,836,000 is treated as income. This comes at a most welcome point and makes a useful contribution to our ability to maintain the dividend while minimising the need to access our reserves, which remained largely untouched during the year.

I reported last year that the Board was encouraged by the early signs of improvement following the appointment of Jeremy Whitley as lead manager. It is pleasing to note that the Manager has continued to make progress during the year, not just in performance terms but in improving both the quality of the portfolio's holdings and their income generating capability. This progress has been achieved against a backdrop of generally favourable economic and corporate newsflow, interspersed with occasional panic over the indebtedness of various sovereign states in the European Union.

2010/11 witnessed better corporate performance than we had expected as companies benefited from their aggressive approach to cutting costs and improving working capital management during the crisis. Likewise economic data were also stronger than might reasonably have been expected, with a robust rebound in the manufacturing belt of northern Europe, continued strong growth from emerging markets and - towards the end of the period - signs of recovery emerging from the United States. The United Kingdom, too, was witnessing a pace of recovery ahead of expectations, but confidence was knocked somewhat by the weak economic growth figures at the end of 2010.

It was also a year in which the costs of the banking crisis began to be felt by governments, especially in Europe, as what began as private sector losses increasingly found their way onto public balance sheets. Greece and Ireland faced direct intervention from international monetary organisations, while the European Central Bank was forced into providing exceptional amounts of liquidity to the region's weakest banks. This caused moments of significant panic among investors and subsequent volatility in asset prices. This was particularly acute in May, at the time of the initial rescue package for Greece, in September and again in November as Ireland was bailed out. At various times during the year the financial health of Portugal, Spain, Italy and even Belgium has also come under close investor scrutiny.

In the UK, for the time being, the resolution of the Coalition Government to address the huge and wholly unsustainable budget deficit and large overall levels of indebtedness that it inherited has met with the approval of financial markets.  But significant political challenges lie ahead as employment in the public sector is cut back, taxes increase, social security payments reduce and the cost of living rises in response to global inflationary trends.

Gearing

The Company continues to believe that a modest level of financial gearing, whilst amplifying market movements in the short term, will enhance returns of both capital and income to shareholders over the long term, particularly at a time when interest rates remain low. To this end we employ two sources of financial leverage, a core long term fixed rate debenture (repayable in 2019) with a nominal value of £28.6 million; and a variable rate bank loan facility of £5 million. Over the course of the year we fully drew down our bank loan facility, increasing the absolute level of debt. However, rising equity markets have served to reduce our overall gearing. With debt valued at par, potential gearing has decreased from 9.9% at the end of the last financial year to 9.7% and, on a pure equity basis (allowing for our small bond portfolio and our cash holdings), it now stands closer to 2.7%. Since the year end we have expanded the facility from £5 million to £20 million on similar terms to the previous agreement.

Discount

Over the past year there was a significant narrowing in the discount to Net Asset Value at which the shares of your Company trades, from 9.0% to 2.0%. We did not undertake any share re-purchases during the year, but we are once again seeking shareholders' permission to do so and are prepared to use this measure in the light of both DIGIT's absolute level of discount and relative to those of our peer group.

Dividend

Last year's annual report made it clear that that while the Board was committed to maintaining the existing level of dividend payment for the financial year 2010/11, the maintenance of that level of distribution would depend on our assessment of the income generating ability of the portfolio over the longer term. We are therefore pleased to be recommending a final dividend of 6.5p, providing an unchanged total for 2010/11 of 10.25p.

This time last year, I was able to do no more than express the hope that dividend levels for 2011/12 would be maintained but, as discussed in our half yearly report, we were then affected by the Deepwater Horizon/Macondo disaster in the Gulf of Mexico and the consequent suspension of BP's dividend largely offset the dividend growth elsewhere in our portfolio. Happily, I am now pleased to say that the outturn for income generation is considerably better than we expected only six months ago and even BP is to resume payments, albeit at half the previous level. This, combined with the enhanced income generated through option writing and the VAT rebate, is allowing us to draw only modestly on our dividend reserves, which will remain in excess of 7.0p per share and provide an important cushion for future distributions.

While the current year's dividend is 99% covered by earnings, it is important to note that 12% of these derive from the non-recurring source of the repayment by HMRC of VAT and interest thereon. Our primary aim remains to cover the dividend with recurring income and our longer term ambition is to return to a regime where the dividend grows in real terms. The prospects for income generation look more propitious than they have done for some time and while it is too early to offer firm guidance on the outcome for 2011/12, the Board still has at its disposal a substantial revenue reserve and is prepared to use this at least to maintain the current level of dividend should there be an income shortfall for the coming year. 

The Board

Jean Matterson, who has served on this Board for 14 years, has expressed the wish to retire at the forthcoming AGM and is not therefore seeking re-election.  I would like to take this opportunity to thank Jean for her considerable and wide-ranging contributions over the years, not least in the roles of Chairman of the Nomination Committee and Senior Independent Director.

The Directors have recently discussed succession planning for the Board and, following a process which involved an external search consultant, welcome Catherine Claydon who joined the Board on 1 February 2011. 

Repayment of VAT on Management Fees

During the year the Company received a repayment of £1,297,000 from the Manager, representing the return of outstanding VAT charged on management fees for the periods 1990 to 1996 and 2001 to 2003. This sum has been allocated to the revenue and capital accounts in accordance with the accounting policy in place when the VAT was originally charged. The Company has also received £1,121,000 representing the simple interest due on the total repayment of VAT. This interest payment has been allocated to the revenue account.

As shareholders will be aware, we continue to investigate the recovery of VAT paid during the so-called "dead period" between 1996 and 2001, but it is still too early to give an indication of either the chances of success or the quantum that might be recovered.

Changes in Investment Policy

This is perhaps a good moment to remind ourselves what DIGIT seeks to offer investors. We have moved over the past five years from a mandate to invest in shares whose primary listing is on the London Stock Exchange to our current mandate which allows up to 20% of the portfolio to be invested in stocks with no direct connection with the UK or the London market.  This change has been driven partly by the realisation that the London exchange has become dominated by a small number of mega-stocks, both by market capitalisation and income generation - 38.0% of the dividends paid by the FTSE All-Share stocks in 2010 came from only 5 companies - and, before the Deepwater Horizon explosion, BP alone provided more than 13% of the income within that index.  We are also aware that good income growth opportunities are not confined to the London market and, by broadening the investment remit, our Manager is able to access a larger universe of high quality investment opportunities providing good and growing income without increasing risk.

Outlook

For all that we can invest directly overseas and irrespective of the fact that many of the companies listed in London have only a tenuous connection with British economic activity, we remain heavily committed to the UK and the success or otherwise of DIGIT rides significantly on the fortunes of the domestic economy and the skill of our Manager in correctly positioning the portfolio for various economic conditions. At the time of writing, the Coalition Government has completed less than a year in office and clearly faces many challenges, of which rising inflation is but one. It is likely that the Coalition's second year in office will be a time when steady nerves are needed.

In 2011/12 the economic situation promises more of the same volatility and uncertainty as we witnessed this year as western governments take steps to unwind a number of the exceptional policy stimuli that were deployed during the depths of the financial crisis. We expect moments of significant asset price fluctuation as investors take occasional fright at the extent of the challenges faced.  Regime change in North Africa together with instability in the Gulf are also sobering reminders that political risk has not gone away, while the recent catastrophes in Japan tell us that there are physical risks in addition to geopolitical dangers.  Both are likely to play significant roles in the volatility of equity prices as the year unfolds.

Nonetheless, we feel well placed to meet the challenges ahead. We have a portfolio populated with good quality businesses that are well run and possess excellent prospects. Thanks in part to our reserves, but also to the skill of our Manager, we have been able to maintain our dividend and even after a year which saw the share price grow by 22.0%, the yield on our shares at 31 January was an attractive 4.7%.  I believe that DIGIT is on course to achieve its key objective of generating enough income to cover and then grow our dividend, while fostering capital growth and maintaining a well diversified and high quality portfolio.

Annual General Meeting

The Company's Annual General Meeting takes place in Edinburgh, on 23 May 2011, and I look forward to seeing as many of you there as possible.

John Scott

Chairman

25 March 2011

2.         MANAGER'S REVIEW

While the year under review may have passed without the momentous market collapse of 2008/09 or the subsequent rally of 2009/10, nonetheless it remained a very challenging investment environment and certainly did not lack for drama at either the corporate or macro economic level. The FTSE All-Share's very respectable return of 18.1% masks a great deal of turbulence from events as diverse as the Deepwater Horizon disaster that nearly brought BP to its knees, to one of Rolls Royce's engines exploding aboard a Qantas Airbus A380 as well as the emergency bailouts of both Greece and Ireland.

As mentioned in the Chairman's Statement one of the most important events of the year for DIGIT was receiving approval at the General Meeting held in December to expand our remit to invest up to 20% of the Company's assets outside the UK market. Over the long term we believe this will bring significant benefits to our shareholders.

We also made good strides during the year in improving the overall quality of the portfolio, the size of our revenue base and the prospects for income growth over the longer term. After several difficult years for dividend generation we believe that the portfolio is now well positioned both to weather what may be a turbulent economic environment and to continue to make progress on growing underlying earnings per share.

Performance

Revenues from dividends received grew by 5% during the year, and had it not been for the cancellation of 75% of the BP dividend, that figure would have been closer to 8%. At the same time we significantly expanded our option writing programme generating £1.28 million, an increase of over 200% on 2009/10. All of this saw income advance, ignoring the one off nature of the VAT rebate, by 10.8% year on year.

Total return performance on a gross assets basis over the year saw the portfolio outpace the market delivering 18.8% against the FTSE All-Share's 18.1% return. Three main areas proved particularly profitable.

First, the early signs of a return to merger and acquisition activity saw us receive successful bid approaches for Arriva, Chloride and Care UK.  Whilst we felt the offer for Arriva substantially undervalued the company, despite voting against the deal we were unable to prevent the sale. The positive side effect was that it freed up cash for us to be able to invest in higher yielding and even better quality businesses.

Secondly, our focus on oil services as an area likely to see strong growth over the years ahead paid off as our investments in Amec, Weir Group and Wood Group performed very strongly as capital and operating expenditure from their major customers began to recover. Weir in particular benefited from a very significant increase in demand for its pump products in the new "shale gas" regions of the United States.

Finally, we witnessed a number of strong share price performances from companies still recovering from very oversold positions during the financial crisis.  Businesses such as GKN, XP Power and Millennium & Copthorne all delivered significant growth in profits and their share prices reacted appropriately as investors began to appreciate their attractions once more.

Rather perversely, despite losing real capital and income as a result we benefited on a relative basis from the BP disaster where our underweight position relative to the benchmark aided our performance. While the outcome was far from helpful it is a salutary reminder that diversification is critical and that making sure that DIGIT is not overly reliant on any one business or factor is very important. We also benefited from our very low allocation to the banking sector which broadly underperformed the wider market. Our only holdings remain the international banks of HSBC and Standard Chartered where we like their prudent approach to balance sheet management and their exposure to faster growing economies.  We continue to see substantial challenges ahead for the likes of Lloyds, RBS and Barclays, as well as little prospect of meaningful dividend distribution any time soon.

There were though some areas where our portfolio was not as well positioned as the market.  As now seems somewhat customary our underweight to the booming mining sector proved the most significant relative drag. After such a spectacular rise in metals and bulk commodity prices we are increasingly cautious, viewing this as driven by cheap money and extremely strong Chinese demand, both of which have the potential to reverse over the coming years. On a more practical note these companies have very low dividend pay out ratios which makes it hard for us to hold them in an income oriented portfolio such as DIGIT.

A number of other businesses experienced tougher trading during the course of the year. Cobham warned on the impact of US defence budget delays on their business. Roche faced challenges to their Avastin cancer franchise from regulators and National Grid came under mounting pressure over weak operational performance in their North American operations. Again, after many meetings with management teams and a lot of extra due diligence, we still believe in the longer term prospects for these companies and retain confidence in their business models and their capability to grow both income and dividends over the medium term.

Portfolio Activity

Changes to the portfolio were reasonably brisk over the course of the year. These have been concentrated on achieving three aims; firstly enhancing the dividend generating capacity of the Company, secondly diversifying that revenue base and thirdly improving the overall quality of the portfolio.

During the period we introduced three new companies, Zurich Financial Services, GDF Suez and Nestlé all of which have European listings. The introduction of Nestlé was a particularly good example of the benefit of the expansion in our powers to invest overseas.  We exited our position in McBride, the manufacturer of private label personal and household care products, as concern grew over their pricing power in an increasingly inflationary environment, and used these proceeds to build a holding in a truly world class company with a comparable dividend yield and a far better business model and longer term prospects. We also added to positions in our existing European holdings ENI, Total and Roche. This allowed us to diversify our exposure to large income generating sectors, namely oil and pharmaceuticals, and at the same time invest in good businesses with decent prospects for dividend generation and growth.

It was, though, not just a year of adding to overseas quoted companies and we made substantial additions to UK listed businesses such as Close Brothers, Aviva, Provident Financial and Pearson. All of these offer sustainable, above market dividend yields and help to diversify the end markets upon which we rely for income. Where opportunities presented themselves over the course of the year we also continued to make smaller additions to good quality businesses with healthy yields and attractive dividend growth prospects such as Tesco, Centrica, GlaxoSmithKline, Unilever and British American Tobacco. We also subscribed to both the National Grid and Standard Chartered rights issues and earned over £100,000 of additional revenue for providing underwriting capacity.

During the course of the year we reinvested capital from those companies that had performed strongly and where valuations were increasingly stretched and dividend yields low. As a result we took profits from the likes of GKN, Rio Tinto, BHP Billiton and Whitbread and reinvested in many of the names mentioned above.

We also completely exited a number of companies for similar reasons where very strong recoveries had normalised valuations and dividend yields were low, such as Millennium & Copthorne and XP Power.  Resolution was another company we sold, a legacy holding as a result of an historic position in Friends Provident. While we admired the business plan and the management, the company was more focussed on investment than returning cash to shareholders and did not fit with our income requirements.

Sub-scale positions in a number of smaller companies such as Bloomsbury, BPI and Low & Bonar were also disposed of during the year as we sought to enhance the quality and income generating capability of the portfolio.

Outlook

Warren Buffett's annual letter to Berkshire Hathaway shareholders this year contains the wonderful reminder that "no matter how serene today may be, tomorrow is always uncertain". That should serve as a useful caveat when proffering some thoughts on what we may experience during the course of 2011/12. 

One suspects that the year ahead will be one where companies and by extension investors will have to work harder to make money.  Equity valuations, whilst more expensive than a year ago, are not demanding relative to history.  However, it seems less likely that company earnings will surprise on the upside as often as they have done over the past two years as investor expectations are now at much higher levels.

Inflation remains on an upward trend and companies will need pricing power and robust business models if they are to avoid seeing their profit margins crimped. Likewise in the developed world governments are beginning the long process of unwinding the exceptional monetary and fiscal supports put in place during the crisis. Fiscal retrenchment seems likely to reduce spending by both consumers and states over coming years. Rising interest rates also seem certain in the nearer term.  Emerging economies, such as China, that have driven the global economy in recent years may also need to rein back some of that expansion as they seek to manage the strains that this breakneck growth has caused.

We will also no doubt witness further concern at some point over sovereign indebtedness in Europe and potentially among municipalities in the United States. Worries too will most likely continue to reverberate from the current upheaval in the Middle East, particularly in Libya, where at the time of writing, despite the best efforts of the international community, the current regime remains in place. Further afield the recent tragic earthquake, tsunami and consequent damage to the Fukushima nuclear power station has posed significant challenges to the Japanese economy and caused large falls in its domestic stock market. While there will be disruption to the supply chains of some our investee companies and some cost to our insurance holdings we expect the specific impact to be modest, though the wider economic implications are not yet fully clear. 

The brighter story comes from the corporate sector where balance sheets are in good shape and cash generation has been strong. That bodes well for companies exposed to corporate capital and operating investment. It also means that merger and acquisition activity is likely to increase further over the year as companies deploy surplus cash flow and underutilised balance sheets. Those same strong cash flows and balance sheets should also create a favourable environment for dividend delivery.  Distributions, given their cash nature, tend to be later cycle and we should start to see dividend growth catching up with earnings over the course of the year.

Whilst aware of the challenging macro environment, our strategy remains simple: to concentrate on generating a sustainable income stream and at the same time maintain a sensibly diversified portfolio by geography and profit pool. Now might seem a seductive time to lose sight of the risks that excess leverage, complexity and the cyclicality of earnings pose, but we believe it will be critical to keep focussing on the quality of the businesses we invest in if we wish to deliver good performance and dividend growth over the longer term.

Jeremy Whitley

Aberdeen Asset Managers Limited

25 March 2011

3.         BUSINESS REVIEW

The Board has prepared this Business Review in accordance with the requirements of Section 417 of the Companies Act 2006.  A review of the Company's activities is given in the Chairman's Statement and the Manager's Review. This includes a review of the business of the Company and its principal activities, likely future developments of the business and recommended dividend. The Board has adopted a matrix of the key risks that affect its business. Like most other companies, the present economic conditions continue to represent the greatest challenge, and risk, to the Company.  Beyond this, the major risks associated with the Company are detailed in note 19 to the Financial Statements.  Other risks include:

-     Performance risk:  A fall in the market value of the Company's portfolio would have an adverse effect on shareholders' funds.  The NAV performance relative to the Index and the underlying stock weightings in the portfolio against the Index weightings are monitored closely by the Board.

-     Discount volatility:  The Company's share price can trade at a discount to its underlying net asset value.  The Company operates a share buyback programme which is reviewed on a continuing basis. 

-     Regulatory risk:  The Company operates in a complex regulatory environment and faces a number of regulatory risks. Breaches of regulations, such as Section 1158 of the Corporation Tax Act 2010, the UKLA Listing Rules and the Companies Act, could lead to a number of detrimental outcomes and reputational damage. The Audit Committee monitors compliance with regulations by reviewing internal control reports from the Manager.

4.         STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the annual report & accounts and the financial statements, in accordance with applicable law and regulations. 

Company law requires the Directors to prepare financial statements for each financial year.  Under that law the Directors have elected to prepare the financial statements in accordance with UK Accounting Standards and applicable law (UK Generally Accepted Accounting Practice). 

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the Directors are required to:

-     select suitable accounting policies and then apply them consistently; 

-     make judgments and estimates that are reasonable and prudent; 

-     state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; and 

-     prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.  

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

Under applicable law and regulations, the Directors are also responsible for preparing a Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. 

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website.  Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

We confirm that to the best of our knowledge:

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

-     the Directors' Report includes a fair review of the development and performance of the business and the position of the Company, together with a description of the principal risks and uncertainties that the Company faces.

For Dunedin Income Growth Investment Trust PLC

Rory Macnamara

Audit Committee Chairman

25 March 2011

INCOME STATEMENT

		Year ended 31 January 2011			Year ended 31 January 2010
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Gains on investments	9	-	45,224	45,224	-	66,718	66,718
Currency (losses)/gains on investments		-	(125)	(125)	-	31	31
Income	2	16,904	-	16,904	14,251	-	14,251
Investment management fee	3	(522)	(783)	(1,305)	(447)	(671)	(1,118)
VAT recovered on investment management fees	3	715	582	1,297	172	401	573
Administrative expenses	4	(740)	(2)	(742)	(893)	-	(893)
		______	______	______	______	______	______
Net return before finance costs and taxation		16,357	44,896	61,253	13,083	66,479	79,562
Finance costs	5	(948)	(1,423)	(2,371)	(955)	(1,433)	(2,388)
		______	______	______	______	______	______
Return on ordinary activities before taxation		15,409	43,473	58,882	12,128	65,046	77,174
Taxation	6	(118)	-	(118)	(83)	-	(83)
		______	______	______	______	______	______
Return on ordinary activities after taxation		15,291	43,473	58,764	12,045	65,046	77,091
		______	______	______	______	______	______
Return per Ordinary share (pence):	8	10.15	28.85	39.00	7.99	43.16	51.15
		______	______	______	______	______	______
The column of this statement headed "Total" represents the profit and loss account of the Company.
A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses are recognised in the Income Statement.
All revenue and capital items in the above statement derive from continuing operations.
The accompanying notes are an integral part of the financial statements.

BALANCE SHEET

		As at	As at
		31 January 2011	31 January 2010
	Notes	£'000	£'000
Non-current assets
Investments at fair value through profit or loss	9	361,864	328,928
		_________	_________
Current assets
Loans and receivables	10	2,098	2,470
Cash and short term deposits	17	3,566	566
AAA Money Market funds	17	13,866	2,386
		_________	_________
		19,530	5,422
		_________	_________
Creditors: amounts falling due within one year
Bank loan	11	(5,000)	(1,500)
Other creditors	11	(974)	(767)
		_________	_________
		(5,974)	(2,267)
		_________	_________
Net current assets		13,556	3,155
		_________	_________
Total assets less current liabilities		375,420	332,083
Creditors: amounts falling due after more than one year	12	(28,493)	(28,480)
		_________	_________
Net assets		346,927	303,603
		_________	_________
Capital and reserves
Called-up share capital	13	38,419	38,419
Share premium account		4,543	4,543
Capital redemption reserve		1,606	1,606
Capital reserve	14	281,917	238,444
Revenue reserve		20,442	20,591
		_________	_________
Equity shareholders' funds		346,927	303,603
		_________	_________
Adjusted net asset value per Ordinary share (pence):	18	230.13	201.37
		_________	_________

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 31 January 2011
			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 January 2010		38,419	4,543	1,606	238,444	20,591	303,603
Return on ordinary activities after taxation		-	-	-	43,473	15,291	58,764
Dividends paid	7	-	-	-	-	(15,440)	(15,440)
		______	______	______	______	______	______
Balance at 31 January 2011		38,419	4,543	1,606	281,917	20,442	346,927
		______	______	______	______	______	______
For the year ended 31 January 2010
			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 January 2009		38,419	4,543	1,606	173,398	23,978	241,944
Return on ordinary activities after taxation		-	-	-	65,046	12,045	77,091
Dividends paid	7	-	-	-	-	(15,432)	(15,432)
		______	______	______	______	______	______
Balance at 31 January 2010		38,419	4,543	1,606	238,444	20,591	303,603
		______	______	______	______	______	______

CASH FLOW STATEMENT

		Year ended		Year ended
		31 January 2011		31 January 2010
	Notes	£'000	£'000	£'000	£'000
Net cash inflow from operating activities	15		16,737		12,545
Servicing of finance
Interest paid			(2,362)		(2,366)
Taxation
Overseas withholding tax paid			(118)		(83)
Financial investment
Purchases of investments		(57,300)		(56,446)
Sales of investments		69,588		70,004
		_______		_______
Net cash inflow from financial investment			12,288		13,558
Equity dividends paid	7		(15,440)		(15,432)
			_______		_______
Net cash inflow before use of liquid resources and financing			11,105		8,222
Net cash outflow from management of liquid resources			(11,480)		(2,386)
			_______		_______
Net cash (outflow)/inflow before financing			(375)		5,836
Financing
Repayment of loans		(1,500)		(10,500)
Drawdown of loan		5,000		-
		_______		_______
Net cash inflow/(outflow) from financing			3,500		(10,500)
			_______		_______
Increase/(decrease) in cash			3,125		(4,664)
			_______		_______
Reconciliation of net cash flow to movements in net funds
Increase/(decrease) in cash as above			3,125		(4,664)
Net change in liquid resources			11,480		2,386
Exchange movements			(125)		31
			_______		_______
Movement in net funds in the period			14,480		(2,247)
Opening net funds			2,952		5,199
			_______		_______
Closing net funds			17,432		2,952
			_______		_______

NOTES

1.	Accounting policies
	(a)	Basis of preparation and going concern
		The financial statements have been prepared under the historical cost convention, as modified to include the revaluation of investments and in accordance with the applicable UK Accounting Standards and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts' (issued in January 2009). They have also been prepared on the assumption that approval as an investment trust will continue to be granted. The financial statements have been prepared on a going concern basis. The Directors believe this is appropriate for the reasons outlined in the Directors' Report.
		The financial statements and the net asset value per share figures have been prepared in accordance with UK Generally Accepted Accounting Practice (UK GAAP).
	(b)	Revenue, expenses and interest payable
		Income from equity investments (other than special dividends), including taxes deducted at source, is included in revenue by reference to the date on which the investment is quoted ex-dividend. Special dividends are credited to revenue or capital according to the circumstances. Foreign income is converted at the exchange rate applicable at the time of receipt. Interest receivable on AAA rated money market funds and short term deposits and expenses are accounted for on an accruals basis. Income from underwriting commission is recognised as earned. Interest payable is calculated on an effective yield basis.
		Expenses are charged to capital when they are incurred in connection with the maintenance or enhancement of the value of investments. In this respect, the investment management fee and relevant finance costs are allocated between revenue and capital in line with the Board's expectation of returns from the Company's investments over the long-term in the form of revenue and capital respectively (see note 3).
	(c)	Investments
		Investments have been designated upon initial recognition as fair value through profit or loss. Investments are recognised and de-recognised at trade date where a purchase or sale is under a contract whose terms require delivery within the timeframe established by the market concerned, and are measured initially at fair value. Subsequent to initial recognition, investments are recognised at fair value through profit or loss. For listed investments, this is deemed to be bid market prices or closing prices for SETS stocks sourced from the London Stock Exchange. SETS is the London Stock Exchange electronic trading service covering most of the market including all FTSE All-Share and the most liquid AIM constituents. Gains or losses arising from changes in fair value are included in net profit or loss for the period as a capital item in the Income Statement.
	(d)	Dividends payable
		Interim and final dividends are recognised in the period in which they are paid.
	(e)	Capital reserves
		Gains or losses on disposal of investments and changes in fair values of investments are transferred to the capital reserve. The capital element of the management fee and relevant finance costs are charged to this reserve. Any associated tax relief is also credited to this reserve.
		The Ordinary share capital on the Balance Sheet relates to the number of shares in issue and in treasury. Only when the shares are cancelled, either from treasury or directly, should a transfer be made to the capital redemption reserve.
	(f)	Taxation
		Deferred taxation is recognised in respect of all temporary differences that have originated but not reversed at the Balance Sheet date where transactions or events that result in an obligation to pay more or a right to pay less tax in future have occurred at the Balance Sheet date measured on an undiscounted basis and based on enacted tax rates. This is subject to deferred tax assets being recognised only if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying temporary differences can be deducted. Temporary differences are differences arising between the Company's taxable profits and its results as stated in the accounts which are capable of reversal in one or more subsequent periods.
		Owing to the Company's status as an investment trust, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
	(g)	Foreign currency
		The Company receives a proportion of its investment income in foreign currency. These amounts are translated at the rate ruling on the date of receipt. Assets and liabilities in foreign currencies are translated at the rates of exchange ruling on the Balance Sheet date.
	(h)	Traded options
		The Company may enter into certain derivatives (e.g. options). Option contracts are accounted for as separate derivative contracts and are therefore shown in other assets or other liabilities at their fair value i.e. market value adjusted for the amortisation of transaction expenses. The premium received and fair value changes in the open position are recognised in the revenue column, losses realised on the exercise of the contracts are recorded in the capital column of the Income Statement.
		In addition, the Company may enter into derivative contracts to manage market risk and gains or losses arising on such contracts are recorded in the capital column of the Income Statement.

		2011	2010
2.	Income	£'000	£'000
	Income from investments
	UK listed - franked	11,964	11,622
	UK listed - unfranked	986	1,018
	Overseas dividend income	1,414	1,060
		_______	_______
		14,364	13,700
		_______	_______
	Other income
	Interest from AAA rated money market funds	40	-
	Deposit interest	-	3
	Interest on VAT recovered	1,121	-
	Income on derivatives	1,277	409
	Income from stock lending	-	(3)
	Underwriting commission	102	142
		_______	_______
		2,540	551
		_______	_______
	Total income	16,904	14,251
		_______	_______
	During the year, the Company received premiums totaling £1,279,000 (2010 - £436,000) in exchange for entering into derivative transactions. This also includes a mark to market on derivative contracts open at the year end. Derivatives utilised were based on individual FTSE 100 stocks and FT 500 World's largest companies. At the year end there were 22 open positions, valued at £283,000 (2010 - £77,000).

		2011			2010
		Revenue	Capital	Total	Revenue	Capital	Total
3.	Investment management fee	£'000	£'000	£'000	£'000	£'000	£'000
	Investment management fee	522	783	1,305	447	671	1,118
		______	______	______	______	______	______
	The management fee paid to Aberdeen Asset Managers Limited (the "Manager") for the year ended 31 January 2011 is calculated, on a monthly basis, at 0.45% on the first £225 million, 0.35% on the next £200 million and 0.25% on amounts over £425 million per annum of the net assets of the Company, with debt at par and excluding commonly managed funds. The management fee is chargeable 40% to revenue and 60% to capital. There were no commonly managed funds held in the portfolio during the year to 31 January 2011 (2010 - none).
	On 5 November 2007, the European Court of Justice ruled that management fees on investment trusts should be exempt from VAT.  HMRC announced its intention not to appeal against this ruling to the UK VAT Tribunal and therefore protective claims which have been made in relation to the Company have now been processed by HMRC.
	The VAT charged on the investment management fees has been refunded in stages. An amount of £1,020,000 relating to the period 1 January 2004 to 31 October 2007 was recognised in the financial statements for the year ended 31 January 2009 and an amount of £573,000 relating to the period 1 January 2001 to 31 December 2003 was recognised in the financial statements for the year ended 31 January 2010. Further amounts of £1,095,000 representing all VAT charged on investment management fees for the period 1 January 1990 to 4 December 1996 and £202,000 for the period 1 January 2001 to 31 December 2003 have been received and reflected in the current year's financial statements. The refunds have been allocated to revenue and capital in line with the accounting policy of the Company for the periods in which the VAT was charged.
	In addition, an amount of £1,121,000 in respect of interest on the above settled claims has been included in the current year's financial statements and credited wholly to revenue.

			2011	2010
4.	Administrative expenses		£'000	£'000
	Directors' fees		100	98
	Auditor's remuneration (excluding irrecoverable VAT):
	-	fees payable to the Company's auditor for the audit of the annual accounts	16	16
	-	fees payable to the Company's auditor and its associates for other services:
	-	interim review	6	5
	Investor Relations/Marketing Initiative		240	329
	Registrar's fees		101	91
	Printing and postage		54	46
	Irrecoverable VAT		69	80
	Other expenses		154	228
			_______	_______
			740	893
			_______	_______
	A payment of £240,000 (2010 - £329,000) was made to the Manager in respect of marketing and promotion of the Company.

		2011			2010
		Revenue	Capital	Total	Revenue	Capital	Total
5.	Finance costs	£'000	£'000	£'000	£'000	£'000	£'000
	Bank loan interest	42	64	106	49	74	123
	Debenture Stock - repayable after 5 years	901	1,351	2,252	901	1,351	2,252
	Amortised Debenture Stock premium and issue expenses	5	8	13	5	8	13
		______	______	______	______	______	______
		948	1,423	2,371	955	1,433	2,388
		______	______	______	______	______	______

				2011			2010
			Revenue	Capital	Total	Revenue	Capital	Total
6.	Taxation		£'000	£'000	£'000	£'000	£'000	£'000
	(a)	Analysis of charge for the year
		Corporation tax at 28% (2010 - 28%)	-	-	-	261	-	261
		Double taxation relief	-	-	-	(261)	-	(261)
		Overseas tax suffered	154	-	154	114	-	114
		Overseas tax reclaimable	(36)	-	(36)	(31)	-	(31)
			______	______	______	______	______	______
		Current tax charge for the year	118	-	118	83	-	83
			______	______	______	______	______	______
	(b)	Factors affecting the tax charge for the year
		The tax assessed for the year is lower than the rate of corporation tax rate of 28% (2010 - effective rate of 28%).  The differences are explained below:
			2011			2010
			Revenue	Capital	Total	Revenue	Capital	Total
			£'000	£'000	£'000	£'000	£'000	£'000
		Return on ordinary activities before taxation	15,409	43,473	58,882	12,128	65,046	77,174
			______	______	______	______	______	______
		Corporation tax at 28% (2010 - 28%)	4,315	12,172	16,487	3,396	18,213	21,609
		Effects of:
		Non-taxable UK dividends	(3,350)	-	(3,350)	(3,254)	-	(3,254)
		Non-taxable stock dividends	(51)	-	(51)	(57)	-	(57)
		Capital gains on investments not taxable	-	(12,663)	(12,663)	-	(18,681)	(18,681)
		Income taxable in different years	-	-	-	3	-	3
		Overseas taxes	118	-	118	(179)	-	(179)
		Non-taxable overseas dividends	(377)	-	(377)	(116)	-	(116)
		Utilisation of management expenses	(537)	456	(81)	290	468	758
		Capital loss on exchange movements	-	35	35	-	-	-
			______	______	______	______	______	______
		Current tax charge	118	-	118	83	-	83
			______	______	______	______	______	______
	(c)	Factors that may affect future tax charges
		At the year end, the Company has, for taxation purposes only, accumulated unrelieved management expenses and loan relationship deficits of £103,063,000 (2010 - £104,288,000). A deferred tax asset in respect of this has not been recognised and these expenses will only be utilised if the Company has profits chargeable to corporation tax in the future.

			2011		2010
7.	Dividends		£'000		£'000
	Amounts recognised as distributions to equity holders in the period:
	Final dividend for the year ended 31 January 2010 - 6.50p (2009 - 6.50p) paid 21 May 2010		9,796		9,796
	Interim dividend for the year ended 31 January 2011 - 3.75p (2010 - 3.75p) paid 8 October 2010		5,651		5,651
	Return of unclaimed dividends		(7)		(15)
			_______		_______
	Dividends paid in the period		15,440		15,432
			_______		_______
	The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has not been included as a liability in these financial statements.
	The table below sets out the total dividends paid and proposed in respect of the financial year, which is the basis upon which the requirements of Sections 1158-1159 of the Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £15,291,000 (2010 - £12,045,000).
		2011		2010
		£'000		£'000
	Interim dividend for the year ended 31 January 2011 - 3.75p (2010 - 3.75p)	5,651		5,651
	Proposed final dividend for the year ended 31 January 2011 - 6.50p (2010 - 6.50p)	9,796		9,796
		_______		_______
		15,447		15,447
		_______		_______
	There have been no shares bought back since the year end and the proposed final dividend for 2011 is based on the latest share capital of 150,706,187 Ordinary shares.

		2011		2010
8.	Return per Ordinary share	£'000	p	£'000	p
	Revenue return	15,291	10.15	12,045	7.99
	Capital return	43,473	28.85	65,046	43.16
		_______	_______	_______	_______
	Total return	58,764	39.00	77,091	51.15
		_______	_______	_______	_______
	Weighted average number of Ordinary shares in issue		150,706,187		150,706,187

			Listed	Listed
			2011	2010
9.	Investments: listed at fair value through profit or loss		£'000	£'000
	Opening fair value		328,928	272,729
	Opening investment holding (gains)/losses		(31,182)	64,237
			_______	_______
	Opening book cost		297,746	336,966
	Purchases at cost		57,300	56,446
	Sales	- proceeds	(69,588)	(66,965)
		- realised gains/(losses)	10,116	(28,004)
	Loss on traded index option contracts		(238)	(697)
			_______	_______
	Closing book cost		295,336	297,746
	Closing investment holdings gains		66,528	31,182
			_______	_______
	Closing fair value		361,864	328,928
			_______	_______
			2011	2010
	Gains/(losses) on investments		£'000	£'000
	Realised gains/(losses) on sales		10,116	(28,004)
	Loss on traded index option contracts		(238)	(697)
	Change in investment holdings gains		35,346	95,419
			_______	_______
			45,224	66,718
			_______	_______
	Transaction costs
	During the year expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within gains on investments in the Income Statement.
	The total costs were as follows:
			2011	2010
			£'000	£'000
	Purchases		248	241
	Sales		68	73
			_______	_______
			316	314
			_______	_______

		2011	2010
10.	Debtors: amounts falling due within one year	£'000	£'000
	Net dividends and interest receivable	746	760
	Tax recoverable	188	91
	VAT recoverable	-	1,593
	Interest on VAT recoverable	1,121	-
	Other loans and receivables	43	26
		_______	_______
		2,098	2,470
		_______	_______

11.	Creditors: amounts falling due within one year
	(a)	Bank loan
		At 31 January 2010 £1,500,000 was drawn down with Royal Bank of Scotland plc. In July 2010 the Company entered into a one year £5,000,000 revolving credit agreement with Abbey National Treasury Services a subsidiary of Santander. On 31 July 2010 the loan facility with Royal Bank of Scotland plc was repaid in full. At the year end the facility was drawn down in full at an interest rate of 2.171%. The terms of the loan facility contain covenants that gross borrowings should not exceed 35% of adjusted assets and that the minimum net assets of the Company are £150,000,000.
			2011	2010
	(b)	Other creditors	£'000	£'000
		Debenture Stock and bank loan interest	574	578
		Traded option contracts	283	77
		Sundry creditors	117	112
			_______	_______
			974	767
			_______	_______

		2011	2010
12.	Creditors: amounts falling due after more than one year	£'000	£'000
	7⅞% Debenture Stock 2019 (issued in 1997)	28,600	28,600
	Unamortised Debenture Stock premium and issue expenses	(107)	(120)
		_______	_______
	Amortised cost of Debenture Stock	28,493	28,480
		_______	_______
	The 7⅞% Debenture Stock is due to be redeemed at par on 30 April 2019 and interest is payable in half-yearly instalments in April and October. The Debenture Stock is secured by a floating charge over the whole of the assets of the Company. The Company has complied with the Debenture Stock Trust Deed that total borrowings should not be greater than adjusted capital and reserves throughout the year and up to the date this report was signed.
	The market value of the Debenture Stock as at 31 January 2011 was £33,605,000 (2010 - £32,480,000), the value being calculated per the disclosure in note 19. The effect on the net asset value of deducting the Debenture Stock at market value rather than at par is disclosed in note 18.

		2011	2010
13.	Called-up share capital	£'000	£'000
	Allotted, called up and fully paid:
	150,706,187 (2010 - 150,706,187) Ordinary shares of 25p each - equity	37,676	37,676
	Treasury shares:
	2,971,748 (2010 - 2,971,748) Ordinary shares of 25p each - equity	743	743
		_______	_______
		38,419	38,419
		_______	_______
	During the year there were no Ordinary shares repurchased (2010 - nil), and no treasury shares cancelled (2010 - nil).

		2011	2010
14.	Capital reserve	£'000	£'000
	At 31 January 2010	238,444	173,398
	Net gains/(losses) on sales of investments during the year	10,116	(28,004)
	Movement in investment holdings gains during the year	35,346	95,419
	Loss on traded index option contracts	(238)	(697)
	Currency (losses)/gains	(125)	31
	Finance costs of borrowings (note 5)	(1,423)	(1,433)
	Investment management fee	(783)	(671)
	VAT recoverable on management fees	582	401
	Administrative expenses	(2)	-
		_______	_______
	At 31 January 2011	281,917	238,444
		_______	_______
	Included in the total above are investment holdings gains at the year end of £66,528,000 (2010 - £31,182,000).

15.	Reconciliation of net return before finance costs and	2011	2010
	taxation to net cash inflow from operating activities	£'000	£'000
	Net return on ordinary activities before finance costs and taxation	61,253	79,562
	Adjustment for:
	Gains on investments	(45,224)	(66,718)
	Currency losses/(gains)	125	(31)
	Decrease in accrued income	14	260
	Decrease/(increase) in other debtors	358	(542)
	Increase in other creditors	211	14
		_______	_______
		16,737	12,545
		_______	_______

		Equity		Equity
		share capital		share capital
		(including premium)	Debenture stock	(including premium)	Debenture stock
		2011	2011	2010	2010
16.	Analysis of changes in financing during the year	£'000	£'000	£'000	£'000
	Opening balance at 31 January 2010	42,962	28,480	42,962	28,467
	Movement in unamortised Debenture Stock discount and issue expenses	-	13	-	13
		_______	_______	_______	_______
	Closing balance at 31 January 2011	42,962	28,493	42,962	28,480
		_______	_______	_______	_______
	The Ordinary share capital on the Balance Sheet relates to the number of shares in issue and in treasury. Only when the shares are cancelled, either from treasury or directly, should a transfer be made to the capital redemption reserve.

				Amortisation
				of issue
		At		expenses	At
		31 January 2010	Cash flow	and premium	31 January 2011
17.	Analysis of changes in net debt	£'000	£'000	£'000	£'000
	Cash and short term deposits	566	3,000	-	3,566
	AAA Money Market funds	2,386	11,480	-	13,866
	Debt due within one year	(1,500)	(3,500)	-	(5,000)
	Debt due after more than one year	(28,480)	-	(13)	(28,493)
		_______	_______	_______	_______
	Net debt	(27,028)	10,980	(13)	(16,061)
		_______	_______	_______	_______

18.	Net asset value per share
	Equity shareholders' funds have been calculated in accordance with the provisions of Financial Reporting Standard 4 'Capital Instruments'. The analysis of equity shareholders' funds on the face of the Balance Sheet does not reflect the rights under the Articles of Association of the Ordinary shareholders on a return of assets. These rights are reflected in the net asset value and the net asset value per share attributable to Ordinary shareholders at the year end, adjusted to reflect the deduction of the Debenture Stock at par. A reconciliation between the two sets of figures is as follows:
		2011	2010
	Equity shareholders' funds	£346,927,000	£303,603,000
	Adjusted net assets	£346,820,000	£303,483,000
	Number of equity shares in issue at year end  ª	150,706,187	150,706,187
	Equity shareholders' funds per share	230.20p	201.45p
	Less: unamortised Debenture Stock premium and issue expenses	(0.07p)	(0.08p)
		_______	_______
	Adjusted net asset value per share	230.13p	201.37p
	ª  excluding shares held in treasury	_______	_______
	The net asset value per share at 31 January 2011, adjusted to include the Debenture Stock at market value rather than at par is 226.81p (2010 - 198.80p).
	The movements during the year of the assets attributable to the Ordinary shares were as follows:
		2011	2010
		£'000	£'000
	Opening adjusted net assets	303,483	241,811
	Capital return for the year	43,473	65,046
	Revenue on ordinary activities after taxation	15,291	12,045
	Dividends appropriated in the year	(15,440)	(15,432)
	Movement in unamortised Debenture Stock premium and issue expenses	13	13
		_______	_______
	Closing adjusted net assets	346,820	303,483
		_______	_______

19.	Financial instruments
	The Company's financial instruments comprise securities and other investments, cash balances, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income. The Company also has the ability to enter into derivative transactions in the form of forward foreign currency contracts and futures and options for the purpose of managing currency and market risks arising from the Company's activities.
	During the year, the Company entered into certain derivative contracts. Positions closed during the year realised a loss of £1,590,000 (2010 - £697,000). As disclosed in note 2, the premium received and fair value changes in respect of options written in the year was £1,279,000 (2010 - £436,000). The largest position in derivative contracts held during the year at any given time was £381,000 (2010 - £110,000). The Company had 22 open positions in derivative contracts at 31 January 2011 valued at £283,000 (2010 - £77,000). At 31 January 2011 the Company held no FTSE 100 Put options (2010 - £62,000).
	Risk management
	The Manager has a dedicated investment management process, which ensures that the investment policy is followed. Stock selection procedures are in place based on active portfolio management and identification of stocks. The portfolio is reviewed on a periodic basis by a Senior Investment Manager and also by the Manager's Investment Committee.
	The Manager has an independent Investment Risk department for reviewing the investment risk parameters of the Company's portfolio on a regular basis. The department reports to the Manager's Performance Review Committee which is chaired by the Manager's Chief Investment Officer. The department's responsibility is to review and monitor ex-ante (predicted) portfolio risk and style characteristics using best practice, industry standard multi-factor models.
	Additionally, the Manager's Compliance department continually monitors the Company's investment and borrowing powers and reports to the Manager's Risk Management Committee.
	The main risks the Company faces from its financial instruments are (i) market risk (comprising interest rate risk, currency risk and other price risk), (ii) liquidity risk and (iii) credit risk.
	The Board regularly reviews and agrees policies for managing each of these risks. The Manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term debtors and creditors, other than for currency disclosures.
	(i) Market risk
	The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk and other price risk.
	Interest rate risk
	Interest rate movements may affect:
	- the fair value of the investments in fixed interest rate securities;
	- the level of income receivable on cash deposits; and
	- interest payable on the Company's variable rate borrowings.
	The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.
	Interest risk profile
	The interest rate risk profile of the portfolio of financial assets and liabilities at the Balance Sheet date was as follows:
				Weighted
				average
				period for		Weighted
				which		average		Fixed	Floating
				rate is fixed		interest rate		rate	rate
	At 31 January 2011			Years		%		£'000	£'000
	Assets
	Sterling			10.49		2.65		5,742	17,432
				_______		_______		_______	_______
	Total assets			-		-		5,742	17,432
				_______		_______		_______	_______
	Liabilities
	Bank loans			0.19		2.17		(5,000)	-
	Debenture Stock			8.25		7.87		(28,493)	-
				_______		_______		_______	_______
	Total liabilities			-		-		(33,493)	-
				_______		_______		_______	_______
				Weighted
				average
				period for		Weighted
				which		average		Fixed	Floating
				rate is fixed		interest rate		rate	rate
	At 31 January 2010			Years		%		£'000	£'000
	Assets
	Sterling			15.13		6.98		8,389	2,952
				_______		_______		_______	_______
	Total assets			-		-		8,389	2,952
				_______		_______		_______	_______
	Liabilities
	Bank loans			0.08		2.47		(1,500)	-
	Debenture Stock			9.25		7.87		(28,480)	-
				_______		_______		_______	_______
	Total liabilities			-		-		(29,980)	-
				_______		_______		_______	_______
	The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average interest rate on bank loans is based on the interest rate payable, weighted by the total value of the loans. The maturity dates of the Company's borrowings are shown in notes 11 and 12 to the financial statements.
	The floating rate assets consist of cash deposits on call earning interest at prevailing market rates.
	The Company's equity portfolio and short-term debtors and creditors (excluding bank loans) have been excluded from the above tables. All financial liabilities are measured at amortised cost.
	Interest rate sensitivity
	The sensitivity analysis below has been determined based on the exposure to interest rates at the Balance Sheet date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.
	If interest rates had been 50 basis points higher and all other variables were held constant, the Company's profit before tax for the year ended 31 January 2011 would increase by £87,000 (2010 - increase by £15,000) and had interest rates been 50 basis points lower the converse would apply. This is attributable to the Company's exposure to interest rates on its floating rate cash balances. The Company holds no financial instruments that will have an equity reserve impact.
	In the opinion of the Directors, the sensitivity analysis is not representative of the year as a whole, since the level of exposure changes frequently as part of the interest rate risk management process used to meet the Company's objectives.
	Foreign currency risk
	A proportion of the Company's investment portfolio is invested in overseas securities whose values are subject to fluctuation due to changes in foreign exchange rates. In addition, the impact of changes in foreign exchange rates upon the profits of investee companies can result, indirectly, in changes in their valuations. Consequently the Balance Sheet can be affected by movements in exchange rates and it is the Company's policy not to hedge this risk.
	The revenue account is subject to currency fluctuations arising on dividends paid in foreign currencies and, indirectly, due to the impact of foreign exchange rates upon the profits of investee companies. The Company does not hedge this currency risk.
	Foreign currency risk exposure by currency of denomination:
		31 January 2011					31 January 2010
			Net		Total			Net		Total
			monetary		currency			monetary		currency
		Investments	assets		exposure		Investments	assets		exposure
		£'000	£'000		£'000		£'000	£'000		£'000
	Euro	28,571	184		28,755		14,618	-		14,618
	Swiss Francs	11,904	184		12,088		4,119	-		4,119
	Sterling	321,389	(15,305)		306,084		310,191	(25,325)		284,866
		_______	_______		_______		_______	_______		_______
	Total	361,864	(14,937)		346,927		328,928	(25,325)		303,603
		_______	_______		_______		_______	_______		_______
	The asset allocation between specific markets can vary from time to time based on the Manager's opinion of the attractiveness of the individual stocks in these markets.
	Foreign currency sensitivity
	There is no sensitivity analysis included as the Board believes the amount exposed to foreign currency denominated monetary assets to be immaterial. Where the Company's equity investments (which are non-monetary items) are priced in a foreign currency, they have been included within the other price risk sensitivity analysis so as to show the overall level of exposure.
	Other price risk
	Other price risks (i.e. changes in market prices other than those arising from interest rate or currency risk) may affect the value of the quoted investments.
	It is the Board's policy to hold an appropriate spread of investments in the portfolio in order to reduce the risk arising from factors specific to a particular sector. Both the allocation of assets and the stock selection process act to reduce market risk. The Manager actively monitors market prices throughout the year and reports to the Board, which meets regularly in order to review investment strategy. The investments held by the Company are listed on various stock exchanges in the UK and Europe.
	Other price risk sensitivity
	If market prices at the Balance Sheet date had been 10% higher while all other variables remained constant, the return attributable to ordinary shareholders for the year ended 31 January 2011 would have increased by £36,186,000 (2010 - increase of £32,889,000 excluding a FTSE 100 Put option valued at £62,000) and equity reserves would have increased by the same amount. Had market prices been 10% lower the converse would apply.
	(ii) Liquidity risk
	This is the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities.
	The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. Borrowings comprise Debenture Stock and a revolving facility. The Debenture Stock provides secure long-term funding while short term flexibility is achieved through the borrowing facility. It is the Board's policy to maintain a gearing level, measured on the most stringent basis of calculation after netting off cash equivalents, of less than 30% at all times. Details of borrowings at 31 January 2011 are shown in notes 11 and 12.
	Liquidity risk is not considered to be significant as the Company's assets comprise mainly cash and listed securities, which can be sold to meet funding commitments if necessary. Short-term flexibility is achieved through the use of loan and overdraft facilities, details of which can be found in note 11. Under the terms of the loan facility, the Manager provides the lender with loan covenant reports on a monthly basis, to provide the lender with assurance that the terms of the facility are not being breached. The Manager will also review the credit rating of a lender on a regular basis. Details of the Board's policy on gearing are shown in the interest rate risk section of this note.
	Liquidity risk exposure
	At 31 January 2011 and 31 January 2010 the amortised cost of the Company's Debenture Stock was £28,493,000 and £28,480,000 respectively. This is due to be redeemed at par on 30 April 2019. At 31 January 2011 and 31 January 2010 the Company's bank loans, amounted to £5,000,000 and £1,500,000, respectively. The facility is committed until July 2011.
	(iii) Credit risk
	This is failure of the counterparty to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss.
	The Company considers credit risk not to be significant as it is actively managed as follows:
	-     investment transactions are carried out with a large number of brokers, whose credit standing is reviewed periodically by the Manager, and limits are set on the amount that may be due from any one broker;
	-     the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the review of failed trade reports on a monthly basis. In addition, the custodian carries out a stock reconciliation to third party administrators' records on a monthly basis to ensure discrepancies are picked up on a timely basis. The Manager's Compliance department carries out periodic reviews of the custodian's operations and reports its finding to the Manager's Risk Management Committee. This review will also include checks on the maintenance and security of investments held;
	-     the risk of counterparty exposure due to stock lending is mitigated by the review of collateral positions provided daily by the various counterparties involved;
	-     cash is held only with reputable banks whose credit ratings are monitored on a regular basis.
	None of the Company's financial assets is secured by collateral or other credit enhancements.
	Credit risk exposure
	In summary, compared to the amounts in the Balance Sheet, the maximum exposure to credit risk at 31 January was as follows:
					2011			2010
					Balance		Maximum	Balance		Maximum
					Sheet		exposure	Sheet		exposure
					£'000		£'000	£'000		£'000
	Current assets
	Fixed interest securities				5,742		5,742	8,389		8,389
	Debtors and prepayments				2,098		2,098	2,470		2,470
	Cash and short term deposits				17,432		17,432	2,952		2,952
					_______		_______	_______		_______
					25,272		25,272	13,811		13,811
					_______		_______	_______		_______
	None of the Company's financial assets is past due or impaired.
	Fair values of financial assets and financial liabilities
	The fair value of borrowings has been calculated at £38,605,000 as at 31 January 2011 (2010 - £33,980,000) compared to an accounts value in the financial statements of £33,600,000 (2010 - £30,100,000) (note 11 and 12). The fair value of each loan is determined by aggregating the expected future cash flows for that loan discounted at a rate comprising the borrower's margin plus an average of market rates applicable to loans of a similar period of time and currency. All other assets and liabilities of the Company are included in the Balance Sheet at fair value.

20.	Fair value hierarchy
	Under FRS 29 'Financial Instruments: Disclosures' an entity is required to classify fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. The fair value hierarchy shall have the following levels:
	-      Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
	-      Level 2: inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
	-      Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
	The financial assets and liabilities measured at fair value in the statement of financial position are grouped into the fair value hierarchy as follows:
			Level 1	Level 2	Level 3	Total
	31 January 2011	Note	£'000	£'000	£'000	£'000
	Financial assets at fair value through profit or loss
	Quoted equities	a)	356,122	-	-	356,122
	Quoted bonds	b)	5,742	-	-	5,742
	Derivatives	c)	-	-	-	-
			_______	_______	_______	_______
	Total		361,864	-	-	361,864
			_______	_______	_______	_______
	Financial liabilities at fair value through profit or loss
	Derivatives	c)	(257)	(26)	-	(283)
			361,607	(26)	-	361,581
			Level 1	Level 2	Level 3	Total
	31 January 2010	Note	£'000	£'000	£'000	£'000
	Financial assets at fair value through profit or loss
	Quoted equities	a)	320,477	-	-	320,477
	Quoted bonds	b)	8,389	-	-	8,389
	Derivatives	c)	62	-	-	62
			_______	_______	_______	_______
	Total		328,928	-	-	328,928
			_______	_______	_______	_______
	Financial liabilities at fair value through profit or loss
	Derivatives	c)	(77)	-	-	(77)
			_______	_______	_______	_______
			328,851	-	-	328,851
			_______	_______	_______	_______
	a) Quoted equities
	The fair value of the Company's investments in quoted equities has been determined by reference to their quoted bid prices at the reporting date. Quoted equities included in Fair Value Level 1 are actively traded on recognised stock exchanges.
	b) Quoted bonds
	The fair value of the Company's investments in corporate quoted bonds has been determined by reference to their quoted bid prices at the reporting date.
	c) Derivatives
	The fair value of the Company's investments in Exchange Traded Options has been determined using observable market inputs on an exchange traded basis and therefore has been classed as Level 1. The fair value of the Company's investments in Over the Counter Options has been determined using observable market inputs other than quoted prices included within Level 1.

21.	Capital management policies and procedures
	The Company's capital management objectives are:
	- to ensure that the Company will be able to continue as a going concern; and
	- to maximise the return to its equity shareholders through an appropriate balance of equity capital and debt.
	The capital of the Company consists of equity, comprising issued capital, reserves and retained earnings.
	The Board monitors and reviews the broad structure of the Company's capital. This review includes the nature and planned level of gearing, which takes account of the Manager's views on the market and the extent to which revenue in excess of that which is required to be distributed should be retained. The Company is not subject to any externally imposed capital requirements.

22.        The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 January 2011 or 2010. The financial information for 2010 is derived from the statutory accounts for 2010 which have been delivered to the Registrar of Companies. The statutory accounts for 2011 will be delivered following the Company's Annual General Meeting.  The auditor has reported on those accounts and their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498(2) or (3) of the Companies Act 2006 or equivalent preceding legislation.  The Company's Annual General Meeting will be held at 40 Princes Street, Edinburgh, EH2 2BY on Monday 23 May 2011 at 12 noon.  The final dividend if approved at the AGM will be payable on 25 May 2011 to shareholders on the register at 26 April 2011 (Ex-dividend date 20 April 2011).

23.        The Annual Report and Accounts will be posted to shareholders mid April 2011 and copies will be available from the registered office of the Manager and on the Company's website, www.dunedinincomegrowth.co.uk.

Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise.  Investors may not get back the amount they originally invested.

 

END

 

 

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