Annual Financial Report

RNS Number : 3513E

Martin Currie Portfolio Inv Tst PLC

05 April 2011

 



Martin Currie Portfolio Investment Trust plc

Annual Financial Results

Year to 31 January 2011

The financial information set out below does not constitute the company's statutory accounts for the years ended 31 January 2011 or 2010 but is derived from those accounts.  Statutory accounts for 2010 have been delivered to the Registrar of Companies and those for 2011 will be delivered following the company's annual general meeting. 

The auditor's have reported on those accounts; their report was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006.

A copy of the annual report and accounts has also been submitted to the National Storage Mechanism and will shortly be available for inspection at: www.Hemscott.com/nsm.do

The annual general meeting of the company will be held at the offices of Martin Currie, Saltire Court, 20 Castle Terrace, Edinburgh, EH1 2ES on 23 May 2011 at 12.30pm.  Full notice of the meeting can be found within the annual report and accounts.

The unedited full text of those parts of the annual report and accounts for the year ended 31 January 2011, which require to be published are set out on the following pages.

Financial Summary

Key data

	As at 31 January 2011	As at 31 January 2010
Net asset value per share*	135.5p	122.2p
FTSE All-Share index	3,044.3	2,660.5
Share price	125.0p	113.5p
Discount*	7.7%	7.1%

*Figures shown are inclusive of income as per AIC guidance.  The discount calculated, exclusive of income, was 6.8% (5.6%).

Total returns+

	For the year ended 31 January 2011	For the year ended 31 January 2010
Net asset value per share	14.8%	37.1%
FTSE All-Share index	18.1%	33.2%
Share price	13.5%	30.9%

+The combined effect of any dividend paid, together with the rise or fall in the share price, net asset value or FTSE All-Share index.

Income

	As at 31 January 2011	As at 31 January 2010
Revenue per share**	2.3p	2.8p
Dividend per share	3.5p	3.5p

**For details of calculation, refer to note 2

Total expenses***

(as a percentage of shareholders' funds)

	For the year ended 31 January 2011	For the year ended 31 January 2010
Excluding performance fees	0.9%	0.9%
Performance Fees	-	-
Total	0.9%	0.9%

***Total expenses (as a percentage of shareholders' funds) are calculated using average net assets over the period.

Chairman's Statement

Welcome to your 2011 annual report. The recovery in world stock markets which we reported in the half-yearly financial report in October has continued into the second half of our financial year.

In the 12-month period to 31 January 2011 the company's net asset value per share (NAV) returned 14.8%. The benchmark FTSE All-Share index returned 18.1% over the same period, while the company's share price returned 13.5%. With the benefit of hindsight this underperformance has been due to the cautious approach of the manager, who was understandably mindful of the considerable uncertainty and high volatility in equity markets in early 2010.

The company's benchmark is based on the UK stockmarket, reflecting a substantial portion of the assets and the domicile of our shareholders. Your portfolio manager, Tom Walker of Martin Currie, has the flexibility to invest up to 50% of the portfolio in the best international stocks and to have a portion of the portfolio in private equity. The performance in the 12 month period under review from each portion of the portfolio is reflected below:

·      The UK equity portion of the portfolio returned 10.0%

·      The international portion of the portfolio returned 19.2%

·      The private equity portion of the portfolio returned 19.6%

Dividends

The company's primary objective is capital growth and we, the board, do not constrain the manager's freedom to select the best investments by specifically seeking dividend yield. Nevertheless, we know that dividends are valued by shareholders and their payment is a significant discipline. Your board is recommending an unchanged final dividend of 2.5p per share (making 3.5p for the year), which will be paid on 21 June 2011 to shareholders on the register as at 3 June 2011. While this year's dividend will be partially funded from reserves, we plan to maintain the dividend in the year ahead and to grow the distribution over the long term.

5 year returns with dividends reinvested

FTSE All-Share                       Index	+24.1%
Martin Currie                  Portfolio share price	+30.2%
Net asset value per share	+29.2%

Source: FTSE International Ltd and Martin Currie Investment Management Ltd.

Past performance is not a guide to future returns

Positioning for the Future

Your board has been considering the most appropriate strategy for the company as we look to the challenges of the next 5-10 years. This has led to two key recommendations, which I explain below, and on which shareholders will have the opportunity to vote at the company's Annual General Meeting on 23 May 2011.

Martin Currie Portfolio was launched in 1999 to provide a diversified growth portfolio by investment in UK equities, international equities and private equity. As longer-term shareholders will know, our investment remit has become increasingly international over recent years. In January 2007 the board increased the maximum limit on international investments from 25% to 50%. The manager has successfully used this flexibility for the benefit of shareholders: in each of the subsequent financial years the international portfolio has outperformed the UK portfolio. Since inception the international equity portion of the portfolio has delivered a return of 166.2% compared with returns from the FTSE World and the UK's FTSE All Share indices of 58.2% and 55.5% respectively. The board has however retained a UK benchmark, which we believed had a relevance and familiarity for UK-based investors.

The board's view is that it is now time to allow the manager greater freedom more fully to reflect increasing globalisation and the returns to be achieved from world stock markets.

Shareholder Research

In 2010 we commissioned some independent research of shareholders' views and included a survey with the half-yearly report in October. Our objective was to ensure that we understood your investment goals, your views on Martin Currie Portfolio's strategy and to obtain feedback on how effectively we communicate with you. We received over 500 completed surveys from shareholders, which provided the board with a large and diverse range of views and insights. I would like to thank all shareholders who took the time and trouble to respond. The broad conclusions from the research were:

·      94% of shareholders who responded have held their shares for over five years and viewed Martin Currie Portfolio as a long-term investment.

·      Almost 50% of individual shareholders invest in eight or more equity funds, suggesting that Martin Currie Portfolio is a component part of shareholders' wider equity holdings.

·      There was overwhelming support for Martin Currie Portfolio's global approach, with 82% of respondents endorsing the growing internationalisation of Martin Currie Portfolio.

·      There was recognition of the board's emphasis on the dividend.

·      The private equity exposure was the lowest rated factor in perceived importance to shareholders.

·      The FTSE All Share benchmark was not viewed as particularlyimportant.

Recommendations

After careful consideration, your board has concluded that it would be in the best interest of shareholders to position Martin Currie Portfolio as a truly global equity investment trust with an appropriate global equity benchmark. The increasingly international nature of the portfolio means its performance relative to the FTSE All Share index is distorted by the concentration of the UK stockmarket in companies such as BP, Shell, HSBC and Vodafone. The UK index also has a significant weighting in resources stocks and a notable deficiency in the technology sector.

Your board therefore believes that:

1.   The company's investment objective should be changed to achieve long-term capital growth in excess of the capital return of the FTSE World index.

2.   In keeping with the new investment objective, the board is proposing the following changes to the company's investment policy:

a)   Give the manager the freedom to choose the best investment ideas globally, while retaining a diversified portfolio.

b)   Remove the commitment to retain an exposure to private equity. Shareholders can, if they wish, invest directly in private equity much more easily than was previously the case through dedicated listed vehicles.

We do not propose any changes to our dividend policy. Over the last five years, Martin Currie Portfolio's dividend has grown by 9.7% per annum. While such a high rate of growth may not be sustainable in future, the board aims to grow the dividend over the long-term.

We believe a truly global approach measured against a global benchmark will provide two principal benefits for shareholders:

·      Performance - Around 90% of global equity opportunities are outside the UK. Having a focus on identifying the best global investment ideas - wherever they are based - should provide higher investment returns for shareholders.

·      Improved diversification - A truly global portfolio offers the greatest choice and diversification at regional, country, sector and stock levels.

We also believe that Martin Currie, as a global equities specialist, has the skills and depth of resources to identify the best stocks on a worldwide basis. Under Tom Walker's leadership the investment returns from the international part of the portfolio provide compelling evidence of these capabilities.

Auditors

The audit committee has tendered periodically the provision of audit services and has selected PricewaterhouseCoopers who therefore report, for the first time, on this annual report.

Looking Ahead

As Tom Walker explains in his Manager's Review on the following pages, the UK economy has particular and difficult issues to address and economic growth outside the UK has been stronger. International equity markets have progressed further than seemed likely a year ago and we are confident that many companies are poised to take advantage of an upturn in the global economy. However, 2011 has already delivered two obstacles to a smooth rise in equity markets: the political upheaval in North Africa and the Middle East, and the continuing impact of the terrible earthquake in Japan. Both may limit the potential for significant overall market gains in the near future, although astute stock selection from a global portfolio should still be able to deliver good returns.

Thank you for your continued support. I hope that you share the board's enthusiasm and endorse the proposed changes to the company's investment objective and policy set out above and detailed in Resolution 9 in the Notice of the Annual General Meeting on page 39. Please contact me if you have any questions. Contact details can be found on the back of this report.

I would like to invite all shareholders to attend the Annual General Meeting of the company to be held at 12.30pm on 23 May 2011 at the offices of Martin Currie, Saltire Court, 20 Castle Terrace, Edinburgh

Peter Berry

Chairman

5 April 2011

Manager's Review

Performance

This has been another strong year for equity-market performance. With obvious exceptions like Ireland and Greece, this strength was reflected in markets all over the world. Our benchmark, the FTSE All-Share index, rose by 18.1%. The NAV total return for the company gave back much of the previous year's outperformance, but still rose 14.8% over the 12 months. With hindsight, this has been a year when gearing and a more aggressive stance in portfolio construction would have enhanced returns. Concerns about levels of government debt and the uncertain economic outlook hardly restrained the progress of equities.

In our half-yearly report I highlighted the extreme volatility of stockmarkets in the first half of the year. The second half has been much less volatile. The FTSE All-Share, for example, rose 13.5% fairly steadily, with only a couple of downward dips.

Having become slightly cautious on the prospects for equity markets after their strong start to 2010, I raised cash and adopted a conservative positioning in the portfolio. As I reported at the interim stage, this positioning counted against our relative performance in the first half of the year.

Subsequently, governments and central banks in Europe and North America have continued to provide ever more stimulus to economic growth and markets. As a result, share prices have continued to rise. I invested our cash early in the second half of the year, and since then, despite a slightly cautious approach, we have almost fully participated in the strong market return. In the second half of the year, the company's NAV total return was 13.1%, compared with the FTSE All-Share's 13.5%.

Review

Over the year, volatility has been high across a number of different asset classes. In fact, although dollar/sterling/euro exchange rates and 10-year gilt and Treasury yields ended the review period where they started, they traded in an exceptionally wide range during the year. The European sovereign-debt crisis, exceptional rise in oil and other commodity prices, the stuttering recovery of developed economies, rising inflation and interest rates in developing economies and some important political changes have presented investors with an ever-changing backdrop.

As the year progressed, the spectres of a 'double dip' into recession or a Japanese-style deflationary spiral have become more remote. The combined effect of fiscal and monetary stimulus, together with the ongoing strong growth in many developing countries, has helped Western economies to get back on their feet. More importantly, companies have pared down their costs to such an extent that modest revenue growth with improved profit margins have led to strong corporate earnings.

During the second half of the year, I reinvested our cash, which stood at 11% of assets at the end of July 2010 and now stands at 1%. I also introduced a currency hedge; our significant exposure to overseas markets relative to our benchmark index makes us vulnerable to large currency swings. Although I do not have a strong view on the outlook for sterling versus the dollar, partially hedging our dollar exposure back into sterling reduces the relative risk of investing in excellent, dollar-denominated company shares. Beyond that, our geographic asset allocation is similar to a year ago, and our preference remains for companies with earnings outwith the UK.

United Kingdom

The UK economy has continued its fragile recovery from the recession, growing by 1.5% in 2010. Although growth in the fourth quarter of last year slipped into negative territory, we remain optimistic that the vibrance of other parts of the world will help to pull the UK economy through that dip. It is certainly fair to argue that the UK has some particular challenges. High household debt, a residential property market that, despite artificially low interest rates, remains beyond the means of many, unfettered inflation, and a government intent on correcting the fiscal deficit as quickly as possible are just some of the issues to be resolved. It seems likely that unemployment will stay at high levels, and it remains to be seen whether the current political leaders can carry the support of enough workers and voters, who will have to tighten their belts this year and beyond.

If this all sounds very downbeat, it is important to remember that the UK equity market is much more focused on external demand than it is on domestic UK demand. As I have stated for some years now, the portfolio of this company, which we have historically split into UK, overseas and private-equity categories, is increasingly global in its exposure to demand and growth opportunities. New additions to the 'UK portfolio' during the year exemplify this shift and include Barclays, a global bank, and Rio Tinto, a global mining company.

International

Overseas economies have outperformed expectations; whether in China and other developing countries or in the mature economies of Western Europe and the US, economic growth has surprised positively.

GDP in the US grew at 2.7% in 2010. This is slow by the standards of most post-recession breakouts, but looks good to those who expected a second brush with recession in 2010. In Europe, where newspaper headlines were all about the potential collapse of the eurozone, riots in Greece and youth unemployment in Spain, it was the steady growth of the German export sector that provided the positive surprise. As far as many European companies are concerned, Greece and Ireland are simply a sideshow. That is not to belittle the structural challenges presented by the two-paced European economy, but as long as there remains the political will to support the euro and the sickly peripheral European economies, corporate earnings growth will remain a more decisive driver of share prices. And company earnings in Europe and the US have been very strong in the last year.

In the case of China, estimated GDP growth of 10.3% is excellent, not least because the Chinese authorities have been doing their utmost to slow that economy down for most of the year. The reason that China and other developing countries have been trying to tighten money supply through interest-rate hikes and other methods is that inflation, notably in food prices, has reached alarmingly high levels. As we have already witnessed during this cycle, food inflation, if left unchecked, can lead to social unrest in various countries around the world. Social unrest and regime change are close bedfellows.

So the challenges in developed economies are very different from those in developing economies. But a global company's cost base and revenue stream often bear little or no relation to its country of domicile. In particular, for most of the large American and European companies in which we invest, the global economy is more important than any one country or region.

Beyond the global economic backdrop, good management, innovative products, sound finances and under-appreciated growth or valuation prospects are critical aspects of the stock-selection process that drives the content of our portfolio. New holdings in the last year include Norwegian offshore driller Seadrill, integrated oil companies Suncor and ConocoPhillips, global generic drug manufacturer Teva and fast-food restaurateur McDonald's.

Private equity

As liquidity in the banking system and economy at large has improved, so interest has started to return to private equity as an asset class. Our investments in private-equity funds, which suffered badly in the market downturn, have now enjoyed two years of recovery. Deals are starting to be done and debt reduced to more manageable levels. The funds we hold still stand at high discounts to their underlying portfolios.

Looking ahead, we will probably never revisit the boom years of the middle of the last decade, at least in the foreseeable future. Banks and other suppliers of capital will not extend so much credit on such attractive terms, so returns can never be as pumped up by excessive borrowing as they were in that era. Private equity will undoubtedly remain an exciting area in which to invest, but riskier than it was then. Subsequent to the balance sheet date, we have reduced our private equity exposure.

Outlook

Some people have dubbed 2011 as the year when 'austerity bites'. Clearly, as I have highlighted above, there is much to worry about in the economic backdrop backdrop and the recent earthquake, tsunami and nuclear crisis in Japan add to these worries. However, the global economic recovery has made some headway, and this progress should continue. Against that, earnings growth will be slower in 2011, maybe 10%, as the base is higher and the potential for margin expansion more limited. In addition, the equity market has tucked two good years under its belt, so it may be hard to repeat such healthy returns in 2011.

Overall, however, I remain constructive on global equities and look forward to continuing the search for some of the best companies in the world - companies whose fortunes do not hinge on financial acrobatics and a booming economic backdrop, whose management and products offer real growth opportunities, and whose share prices do not fully reflect that potential.

Tom Walker

5 April 2011      

Portfolio Summary

Portfolio distribution as at 31 January

By Region	2011	2010
United Kingdom	56.2%	57.3%
International*	33.5%	33.8%
Private Equity	9.9%	8.9%
Forward foreign currency contracts	0.4%	0.0%
	100.0%	100.0%

*International	2011	2010
North America	16.4%	15.9%
Europe (ex UK)	8.2%	8.5%
Global Emerging Markets	3.9%	4.9%
Japan	2.1%	2.3%
Developed Asia	1.9%	2.2%
Middle East	1.0%	-

By Sector (excluding cash and private equity)	2011 Company	2011 FTSE All Share Index
Oil and gas	16.5%	17.5%
Financials	16.0%	23.2%
Basic Materials	12.1%	13.1%
Industrials	10.9%	7.4%
Healthcare	10.5%	6.7%
Consumer goods	9.2%	10.8%
Technology	8.3%	1.7%
Consumer services	8.1%	9.7%
Utilities	5.4%	3.6%
Telecommunications	3.0%	6.3%
	100.0%	100.0%

By Asset Class (including cash and borrowings)	2011	2010
Equities	99.0%	94.8%
Cash	0.6%	5.2%
Forward foreign currency contracts	0.4%	0.0%
	100.0%	100.0%

Largest 10 Holdings	2011 Market Value £000	2011 % of total portfolio	2010 Market Value £000	2010 % of total portfolio
F&C Private Equity Trust*	12,353	8.4	10,843	8.0
HSBC Holdings	9,801	6.7	10,951	8.1
BP	5,805	4.0	11,228	8.3
British American Tobacco	5,733	3.9	4,744	3.5
Royal Dutch Shell	5,210	3.6	3,854	2.8
GlaxoSmithKline	5,047	3.4	7,479	5.5
Rio Tinto	4,954	3.4	-	-
BHP Billiton	4,421	3.0	6,341	4.7
BG	4,411	3.0	4,098	3.0
Xstrata	4,157	2.8	4,090	3.0

*Ordinary and restricted voting shares combined

United Kingdom Portfolio	Sector	Market Value £	% of total portfolio
Financials		18,309,707	12.5
HSBC Holdings	Banks	9,801,450	6.7
Prudential	Life Insurance	3,548,344	2.4
Barclays	Banks	3,012,095	2.1
Amlin	Nonlife Insurance	1,007,314	0.7
MAN Group	General Financial	940,504	0.6
Oil and Gas		15,426,349	10.6
BP	Oil and Gas producers	5,805,167	4.0
Royal Dutch Shell	Oil and Gas producers	5,210,400	3.6
BG	Oil and Gas producers	4,410,782	3.0
Healthcare		8,751,725	5.9
GlaxoSmithKline	Pharmaceuticals & biotechnology	5,046,878	3.4
Astrazeneca	Pharmaceuticals & biotechnology	3,704,847	2.5
Basic Materials		13,532,175	9.2
Rio Tinto	Mining	4,953,758	3.4
BHP Billiton	Mining	4,421,326	3.0
Xstrata	Mining	4,157,091	2.8
Consumer Goods		5,732,719	3.9
British American Tobacco	Tobacco	5,732,719	3.9
Telecommunications		3,950,044	2.6
BT Group	Telecommunications	2,856,120	1.9
Inmarsat	Telecommunications	1,093,924	0.7
Consumer Services		6,518,313	4.5
Tesco	Food and Drug retailers	3,051,983	2.1
Morrison (W) Supermarkets	Food and Drug retailers	2,141,234	1.5
Marstons	Beverages	1,325,096	0.9
Industrials		8,247,109	5.6
BAE Systems	Aerospace & defence	2,664,098	1.8
Weir	Industrial Engineering	2,526,860	1.7
Babcock International	Support services	2,276,686	1.6
Inchscape	Automobiles & parts	779,465	0.5
Utilities		2,023,982	1.4
Centrica	Gas, Water & Multi-utilities	2,023,982	1.4
Total United Kingdom Investments		82,492,123	56.2
International Portfolio	Country	Market value £	% of total portfolio
North America		24,153,163	16.4
Apple	United States	2,307,829	1.6
Suncor Energy	Canada	2,287,597	1.6
ConocoPhillips	United States	1,945,559	1.3
CVS	United States	1,923,392	1.3
Newmont Mining	United States	1,612,476	1.1
Cisco Systems	United States	1,548,614	1.1
Apache Corp	United States	1,497,822	1.0
Anadarko Petroleum	United States	1,478,948	1.0
Wal-Mart	United States	1,469,424	1.0
Ultra Petroleum	United States	1,429,799	1.0
Sempra Energy Corp	United States	1,368,069	0.9
McDonalds	United States	1,321,622	0.9
JP Morgan Chase	United States	1,223,417	0.8
Gilead Sciences	United States	1,083,937	0.7
Wellpoint	United States	869,303	0.6
Monsanto	United States	785,361	0.5
Europe (ex UK)		11,988,116	8.2
Tecnicas Reunidas	Spain	2,185,720	1.5
Annheuser-Busch Inbev	Belgium	2,066,062	1.4
ABB	Switzerland	1,920,902	1.3
Fresenius Medical Care	Germany	1,566,158	1.1
Tognum	Germany	1,522,938	1.0
Seadrill	Norway	1,383,457	1.0
Arcelormittal	Netherlands	1,342,879	0.9
Global Emerging Markets		5,801,677	3.9
Taiwan Semiconductor	Taiwan	2,258,754	1.5
PT Astra International	Indonesia	1,887,579	1.3
Infosys Technologies	India	1,655,344	1.1
Japan		3,011,043	2.1
Mitsui & Company	Japan	1,861,745	1.3
Nintendo	Japan	1,149,298	0.8
Developed Asia		2,874,775	1.9
New World Development	Hong Kong	1,665,499	1.1
China Mobile	Hong Kong	1,209,276	0.8
Middle East		1,511,192	1.0
Teva Pharmaceutical Industries	Israel	1,511,192	1.0
Total Overseas Investments		49,339,966	33.5
Private Equity	Country	Market Value £	% of total portfolio
F& C Private Equity 'Ordinary'	UK	10,736,175	7.3
F & C Private Equity 'RVS'	UK	1,617,084	1.1
Candover Investments	UK	1,411,794	1.0
SVG Capital	UK	662,892	0.5
Total Private Equity Investments		14,427,945	9.9
Forward foreign currency contracts		615,054	0.4
Total portfolio		146,875,088	100.0

Going concern status

The company's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman's Statement, Manager's Review and the Report of the Directors.

In accordance with the Financial Reporting Council's guidance on going concern and liquidity risk issued in October 2009, the directors have undertaken a rigorous review of the company's ability to continue as a going concern. The company's assets consist of a diverse portfolio of listed equity shares which, in most circumstances, are realisable within a very short timescale. The directors are mindful of the principal risks and uncertainties disclosed on page 13 and have reviewed revenue forecasts and they believe that the company has adequate financial resources to continue its operational existence for the foreseeable future and for at least one year from the date of signing of this annual report. Accordingly, the directors continue to adopt the going concern basis in preparing these accounts.

Risks and Uncertainties

Risk and mitigation

The board closely monitors the risks of the company. The board carries out a risk workshop as part of its annual strategy meeting and has identified the following as key risks to the company. The board has also implemented specific mitigating measures to reduce the probability and impact of each risk to the greatest extent possible.

Loss of s1158-1159 status - In order to qualify as an investment trust, the company must comply with s1158-1159 of the Corporation Taxes Act 2010. 

S1158-1159 qualification criteria are continually monitored by Martin Currie and the results reported to the board.

Operational disruption at the manager's premises - Martin Currie has in place a full disaster recovery and business continuity plan which facilitates continued operation of the business should their premises be subject to operational disruption. The plan was last tested in December 2010 with successful results. Martin Currie maintains a fully operational off-site disaster recovery centre for use by key staff during any disruption.

Regulatory, accounting/internal control breach - The company must comply with the Companies Act 2006 and the UKLA Rules. The board relies on the services of its company secretary and its professional advisers to ensure compliance. 

Loss of investment team or portfolio manager - Martin Currie takes steps to reduce the likelihood of such an event by ensuring appropriate succession planning and the adoption of a team based approach, as well as special efforts to retain key personnel.

Failure to manage the discount - The board regularly discusses discount policy and has set parameters for the manager and the company's broker to follow.

Investment underperformance - The board manages the risk of investment underperformance by diversification of investments and through a set of investment restrictions and guidelines that are monitored and reported on by Martin Currie.  The board monitors the implementation and results of the investment process with the portfolio manager, who attends all board meetings, and reviews data that show statistical measures of the company's risk profile.

Gearing/Interest rate risk - From time to time the company finances its operations through bank borrowings. However, the board monitors such borrowings (gearing) closely and takes a prudent approach.  At the year end bank borrowings were nil. In accordance with the investment policy the limit on gearing is 20% of total assets.

Foreign exchange risk - A portion of the company's portfolio is held in currencies other than sterling and a high proportion of major UK listed companies receive a substantial percentage of their revenues from international operations, so in principle the board charges the manager to consider exchange risk in the normal course of market and stock analysis. From time to time the manager may, however, hedge overall exposure to a particular currency (for example the US dollar or Japanese yen) sometimes by borrowing in these currencies against portfolio exposure to them.

Counterparty risk - Martin Currie monitors counterparty relationships on behalf of the company. This process includes identifying major counterparties, mapping exposure and analysing the risks through the manager's risk, compliance, dealing, operations and middle office teams. The aim is to enable the board of the company to determine an appropriate level of counterparty risk exposure, and to diversify or mitigate this, as required. This process is subject to continual monitoring and review with any recommendations made to the board.

Major regulatory change - In response to the financial crisis, the European Commission produced a draft Alternative Investment Fund Managers Directive. The directive was mainly aimed at hedge funds and private equity funds but investment trusts fall within its scope.  Following intense lobbying, the worst outcomes suggested by the initial proposals have been avoided.  The board continues to monitor developments in the legislation to ensure the company can comply with any new requirements.

Liquidity test failure - In order to retain its place in the FTSE All-Share, the company must satisfy the liquidity test criteria set by the FTSE at each annual review. The liquidity of the company is monitored by the manager and the company's broker with a report being reviewed by the board regularly.

Directors' Responsibilities

The directors are responsible for preparing the Annual Report, the Directors Remuneration Report 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 prepared financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). 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 judgements and accounting 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 respectively;

·      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 and the Directors' Remuneration Report comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The financial statements are published on the www.martincurrieportfolio.com website, which is maintained by the manager. The maintenance and integrity of the website maintained by Martin Currie is, so far as it relates to the company, the responsibility of Martin Currie. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Each of the directors, whose names and functions are listed in the Board of Directors on page 9 confirm that, to the best of their knowledge:

·      the financial statements, which have been prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law), give a true and fair view of the assets, liabilities, financial position and profit of the company; and

·      the Report of the Directors' and Manager's Review 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 it faces. 

On behalf of the board

Peter Berry

Chairman

5 April 2011

 Income Statement

		Year to 31 January 2011			Year to 31 January 2010
	Note	Revenue £000	Capital £000	Total £000	Revenue £000	Capital £000	Total £000
Net gains on investments	7	-	15,462	15,462	-	36,875	36,875
Net currency gains/(losses)	11	-	72	72	-	(51)	( 51)
Income	3	3,501	715	4,216	4,325	195	4,520
Investment management fee		(238)	(476)	(714)	(222)	(444)	(666)
VAT recoverable on Investment management fee	15	-	-	-	-	97	97
Other expenses	5	(525)	-	(525)	(511)	(7)	(518)
Net return on ordinary activities before taxation		2,738	15,773	18,511	3,592	36,665	40,257
Taxation on ordinary activities	6	(104)	-	(104)	(102)	-	(102)
Return attributable to shareholders		2,634	15,773	18,407	3,490	36,665	40,155
Return per ordinary share	2	2.3p	14.0p	16.4p	2.8p	29.5p	32.3p

The total columns of this statement are the profit and loss account of the company.

The revenue and capital items are presented in accordance with the Association of Investment Companies (AIC) Statement of Recommended Practice.

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

No operations were acquired or discontinued in the year.

The notes to the accounts form part of these financial statements.

A Statement of Total Recognised Gains and Losses is not required as all gains and losses of the company have been reflected in the above statement.

Balance Sheet

		As at 31 January 2011		As at 31 January 2010
	Note	£000	£000	£000	£000
Fixed assets
Investments at fair value through profit or loss
Listed on the London Stock Exchange			96,920		89,855
Listed on overseas stock exchanges			49,340		45,647
	7		146,260		135,502
Forward foreign currency contracts			615		-
			146,875		135,502
Current Assets
Debtors and Prepayments	8	243		125
Cash at bank	9	890		7,467
		1,133		7,592
Creditors
Amounts falling due within one year	10	(277)		(378)
Net current assets			856		7,214
Total assets less current liabilities			14,731		142,716
Capitals and reserves
Called-up share capital		5,449		5,842
Special reserve		122,062		131,494
Capital redemption reserve		10,568		10,175
Capital reserve		3,001		(12,772)
Revenue reserve		6,651		7,977
Total shareholders' fund			147,731		142,716
Net Asset Value per ordinary share	2		135.5p		122.2p

The financial statements were approved and authorized for issue by the board on 5 April 2011, and signed on its behalf by Peter Berry, Chairman.

 

Reconciliation of Movements in Shareholders' Fund

 

 

	Note	Called up ordinary share capital £000	Capital redemption reserve £000	Special distributable reserve £000	Capital reserve £000	Revenue reserve £000	Total
Reconciliation of movements in shareholders' funds to 31 January 2011
At 31 January 2010		5,842	10,175	131,494	(12,772)	7,977	142,716
Ordinary shares bought back during the year		(393)	393	(9,432)	-	-	(9,432)
Gains on realisation of investments at fair value	7	-	-	-	6,954	-	6,954
Loss on realization of forward foreign exchange contracts		-	-	-	( 56)	-	(56)
Movement in currency gains		-	-	-	72	-	72
Movement in fair value gains		-	-	-	7,949	-	7,949
Movement in fair value of forward foreign exchange contracts		-	-	-	615	-	615
Capitalised expenses		-	-	-	(476)	-	(476)
Capital dividends received		-	-	-	715	-	715
Net revenue		-	-	-	-	2,634	2,634
Dividends paid	4	-	-	-	-	(3,960)	(3,960)
As at 31 January 2011		5,449	10,568	122,062	3,001	6,651	147,731

 

 

	Note	Called up ordinary share capital £000	Capital redemption reserve £000	Special distributable reserve £000	Capital reserve £000	Revenue reserve £000	Total
Reconciliation of movements in shareholders' funds to 31 January 2010
At 31 January 2009		6,699	9,318	149,138	(49,437)	9,006	124,724
Ordinary shares bought back during the year		(326)	326	(6,905)	-	-	(6,905)
Redemption of ordinary shares		(531)	531	(10,739)	-	-	(10,739)
Losses on realisation of investments at fair value	7	-	-	-	(6,623)	-	(6,623)
Movement in currency losses		-	-	-	(51)	-	(51)
Movement in fair value gains		-	-	-	43,498	-	43,498
Capitalised expenses		-	-	-	(451)	-	(451)
Capital dividends received		-	-	-	195	-	195
VAT recoverable on capital expenses		-	-	-	97		97
Net revenue						3,490	3,490
Dividends paid						(4,519)	(4,519)
As at 31 January 2010		5,842	10,175	131,494	(12,772)	7,977	142,716

 

The notes to the accounts form part of these financial statements.

Statement of Cash Flow

	Note	Year to 31 January 2011		Year to 31 January 2010
		£000	£000	£000	£000
Net cash inflow from operating activities	12		2,839		4,886
Taxation			-		-
Servicing of finance
Finance Cost: debt			-		-
Capital Expenditure and Financial Investment
Payment to acquire investments		(36,082)		(16,064)
Proceeds from sale of investments		40,042		34,315
Net loss from forward foreign currency exchange contracts		(56)		-
Net Cash inflow from capital expenditure and financial investment			3,904		18,251
Equity dividends paid			(3,960)		(4,519)
Net Cash inflow before financing			2,783		18,618
Financing
Repurchase of ordinary share capital	11		(9,432)		(6,905)
Redemption of ordinary shares			-		(10,739)
Increase/(decrease) in cash	13		(6,649)		974

The notes form part of these financial statements

Notes to the Financial Statements

1 Accounting policies

a) Basis of preparation - The financial statements have been prepared on a going concern basis and in accordance with 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 company is a UK listed company with a predominantly UK shareholder base. The results and the financial position of the company are expressed in Sterling, which is the functional and presentational currency of the company.

b) Income from 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, or where no ex-dividend date is quoted, when the company's right to receive payment is established. Franked investment income is stated net of the relevant tax credit. Other income includes any taxes deducted at source. Special dividends are credited to capital or revenue, according to the circumstances. Scrip dividends are treated as unfranked investment income; any excess in value of the shares received over the amount of the cash dividend is recognised as a capital item in the income statement. Income from underwriting commission is recognised as earned.

c) Interest receivable and payable, management expenses and other expenses are treated on an accruals basis.

d) The management fee and finance costs in relation to debt are recognised two-thirds as a capital item and one-third as a revenue item in the income statement in accordance with the board's expected long-term split of returns in the form of capital gains and income, respectively. The performance fee is recognised 100% as a capital item in the income statement as it relates entirely to the capital performance of the company. All expenses are charged to revenue except where they directly relate to the acquisition or disposal of an investment, in which case, they are added to the cost of the investment or deducted from the sale proceeds.

e) 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 time frame established by the market concerned, and are initially measured as fair value. Subsequent to initial recognition, investments are valued at fair value. 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's electronic trading service for UK blue chip securities including all the FTSE 100 constituents and the most liquid FTSE 250 along with some other securities. Gains and losses arising from changes in fair value are included in net profit or loss for the year as a capital item in the income statement and are ultimately recognised in the capital reserve.

The valuation of forward currency contracts are included on the balance sheet. Period changes to these valuations are recognised as unrealised gains and losses in the income statement.

f) Transaction costs incurred on the purchase and disposal of investments are recognised as a capital item in the income statements.

g) Transactions in foreign currencies are recorded at the rate ruling at the date of the transaction. Monetary assets and liabilities expressed in foreign currencies are translated into Sterling at rates of exchange ruling at the date of the balance sheet or at the related forward contract rate. Transactions in foreign currency are converted to Sterling at the rate ruling at the date of the transaction or, where forward foreign currency contracts have been taken out, at contractual rates and included as an exchange gain or loss in the capital reserve or the revenue account depending on whether the gain or loss is of a capital or revenue nature.

h) Cash at bank and in hand comprises cash and demand deposits which are readily convertible to a known amount of cash and are subject to insignificant risk of changes in value.

Other debtors and creditors (excluding borrowings) do not carry any interest, are short-term in nature and are accordingly stated at nominal value as reduced by appropriate allowances for estimated irrecoverable amounts.

i) Dividend payable - Under FRS21 final dividends should not be accrued in the financial statements unless they have been approved by shareholders before the Balance Sheet date. Interim dividends are only recognised when they have been paid. Dividends payable to equity shareholders are recognised in the Reconciliation of Movements in Shareholders' Funds when they have been approved by shareholders in the case of a final dividend, or paid in the case of an interim dividend and become a liability of the company.

j) Capital reserve - Gains or losses on realisation of investments and changes in fair values of investments are transferred to the capital reserve. Any changes in fair values of investments that are not readily convertible to cash are treated as unrealised gains or losses within 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 cost of share buy backs include the amount of consideration paid, including directly attributable costs and are deducted from the special distributable reserve until the shares are cancelled.

k) Deferred taxation - Deferred taxation is recognised in respect of all timing 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 only being recognised 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. Timing 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.

Due to the company's status as an investment trust company, 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.

l) The company uses derivative financial instruments to manage the risk associated with foreign currency fluctuations arising on the investments in currencies other than sterling. This is achieved by the use of forward foreign currency contracts. Derivative financial instruments are recognised initially at fair value on the contract date and subsequently remeasured to the fair value at each reporting date. The resulting gain or loss being is recognised as revenue or capital in the income statement depending on the nature and motive of each derivative transaction. The fair values of the derivative financial instruments are included within non-current assets or within current assets or current liabilities depending on the nature and motive of each derivative transaction.

2. 

	Year ended 31 January 2011	Year ended       31 January 2010
Returns and net asset value
The return and net asset value per ordinary share are calculated with reference to the following figures:
Revenue return	£2,634,000	£3,490,000
Revenue return attributable to ordinary shareholders
Weighted average number of shares in issue during year	112,515,991	124,260,224
Return per ordinary share	2.34p	2.81p
Capital return
Capital return attributable to ordinary shareholders	£15,773,000	£36,665,000
Weighted average number of shares in issue during year	112,515,991	124,260,224
Return per ordinary share	14.02p	29.51p
Total return
Total return per ordinary share	16.36p	32.32p
Net asset value per share	As at 31 January 2011	As at 31 January 2010
Net assets attributable to shareholders	£147,731,000	£142,716,000
Number of shares in issue at the year end	108,989,411	116,834,502
Net asset value per share	135.5p	122.2p

Between 1 February and 4 April 2011, a further 1,144,000 ordinary shares of 5p each have been bought back for cancellation at a cost of £1,405,893.

3. 

	2011 £000	2010 £000
Income from investments
From listed investment	2,594	3,237
UK equities	856	782
International equities	-	1
Stock dividends
Other income
Interest on deposits	29	31
Underwriting commission	22	42
Interest on VAT recoverable on investment management fees	-
	3,501	4,325

In addition, during the year ended 31 January 2011, the company received capital dividends of £311,000 and £404,000 from F&C Private Equity Trust and £41,000 from ABB Limited.  These related to capital distributions from both. During the year ended 31 January 2010, the company received a capital dividends of £155,000 and £40,000.  These related to capital distributions from F&C Private Equity Trust and ABB Limited respectively.

4.

	2011			2010
	Revenue £000	Capital £000	Total £000	Revenue £000	Capital £000	Total £000
Dividends
Year ended 31 January 2009 - final dividend of 2.50p	-	-	-	3,322	-	3,322
Year ended 31 January 2010 - interim dividend of 1.00p	-	-	-	1,197	-	1,197
Year ended 31 January 2010 - final dividend of 2.50p	2,839	-	2,839	-	-	-
Year ended 31 January 2011 - interim dividend of 1.00p	1,121	-	1,121	-	-	-
	3,960	-	3,960	4,519		4,519

Set out below are the total dividends payable in respect of the financial year which forms the basis on which the requirements of Section 1158-1159 of the Corporation Taxes Act 2010 (formerly s842 of the Income and Corporations Taxes Act 1988) are considered.

	2011 £000	2010 £000
Interim dividend of 1.00p for the year ended 31 January 2011 (2010: 1.00p)	1,121	1,197
Proposed final dividend of 2.50p for the year ended 31 January 2011 (2010: 2.50p)	2,780	2,921
	3,901	4,118

5.

Other expenses	2011 £000	2010 £000
Bank charges (including custody fees)	19	26
Directors' fees	124	120
Irrecoverable VAT	37	27
Legal fees	16	(3)
Marketing	19	31
Printing and postage	21	28
Registration fees	52	41
Secretarial fee	67	64
Advertising and public relations	45	63
Directors and officers liability insurance	18	16
Retainer paid to company broker	30	30
Other	57	47
	505	490

Auditors' remuneration	2011 £000	2010 £000
Payable to PricewaterhouseCoopers LLP for the audit of the company's annual accounts	20	-
Payable to Ernst & Young LLP for the audit of the company's annual accounts	-	21
	525	511

During the year to 31 January 2010 the company incurred £10,000 of expenses in relation to the VAT recovery which was allocated to capital and revenue in line with the accounting policy of the company for the period which the VAT was charged.  £7,000 was charged to capital.  There were no similar charges in the year to 31 January 2011.

Performance Fee

The performance fee for the year ended 31 January 2011 was nil (2010: nil).  Details of the management and secretarial agreements are provided in the full annual report.

6.

	2011			2010
	Revenue £000	Capital £000	Total £000	Revenue £000	Capital £000	Total £000
Taxation on ordinary activities	104	-	104	102	-	102
Foreign Tax

As at 31 January 2011, the company had unutilised management expenses of £18.1 million (2010: £16.9 million), and non-trading loan relationship deficit of £4,778,000 (2010: £4,778,000) carried forward. These balances have been generated because such a large part of the company's income is derived from dividends from UK companies. The company is not expected to generate taxable income in a future period in excess of deductible expenses for that period and, accordingly, is unlikely to be able to reduce future tax liabilities by offsetting these losses.

These losses are not recognised as a deferred tax asset because the company is not expected to generate taxable income in a future period in excess of deductible expenses for that future period and, accordingly, is unlikely to be able to reduce future tax liabilities by offsetting these losses.

Due to the company's status as an investment trust and the intention to continue to meet the conditions required to obtain approval in the foreseeable future, the company has not provided deferred tax on capital gains and losses arising on the revaluation or disposal of investments.

The corporation tax rate was 28% (2010: 28%) The tax charge for the year differs from the charge resulting from applying the standard rate of corporation tax in the UK for an investment trust company. The differences are explained below.

	2011 £000	2010 £000
Net return before taxation	18,511	40,257
Corporation tax at effective rate of 28% (2010: 28%)	5,183	11,272
Effects of:
Non taxable UK dividend income	(726)	(906)
Currency (gains)/losses not taxable	(  20)	14
Capital distributions not taxable	(200)	(54)
Gains on investments not taxable	(4,329)	(10,325)
Overseas dividends non taxable	(224)	(125)
Movement in income accruals taxable on receipt	4	8
Overseas tax suffered	104	102
Increase in excess management and loan expenses	312	116
Total current year tax charge	104	102

7.

Investments	As at 31 January 2011 £000	As at 31 January 2010 £000
Opening valuation	135,502	117,919
Opening unrealised investment holding (gains)/losses	(17,743)	25,755
Opening Cost	117,759	143,674
Purchases at cost	35,972	14,948
Disposal proceeds	(40,117)	(34.240)
Net profit/(loss) on disposal of investments	6,954	(6,623)
Disposal at cost	(33,163)	(40,863)
Closing cost	120,568	117,759
Closing unrealised investment holding gains	25,692	17,743
Valuation as at 31 January	146,260	135,502

Gains on investments	As at 31 January 2011 £000	As at 31 January 2010 £000
Net profit/(loss) on disposal of investments	6,954	(6,623)
Net gain on revaluation of investments	7,949	43,498
Net loss on realisation of forward foreign exchange contracts	(56)	-
Net gain on revaluation of forward foreign exchange contracts	615	-
	15,462	36,875

The transaction cost of acquiring investments during the year was £195,000 (2010:£56,000). For disposals, transaction costs were £42,000 (2010: £46,000).

During the year there was a write down in the book cost of F&C Private Equity Trust plc A shares of £687,000 (2010: £189,000) and ABB Limited of £33,000 (2010: £36,000) which were reflected in the realised net profit of £6,954,000 (2010: net loss £6,623,000).  These were as a result of capital repayments.

8. 

	As at 31 January 2011 £000	As at 31 January 2010 £000
Debtors: amounts falling due within one year
Dividends receivable	98	51
Amount due from brokers	75	-
Taxation recoverable	29	36
Other debtors	41	38
	243	125

9.

	As at 31 January 2011 £000	As at 31 January 2010 £000
Cash at bank
Sterling bank account	890	7,466
Foreign bank account	-	1
	890	7,467

10.

Creditors	As at 31 January 2011 £000	As at 31 January 2010 £000
Amounts falling due within one year
Due to brokers	-	110
Due to Martin Currie	200	192
Other creditors	77	76
	277	378

Information with regard to transactions with related parties is provided in note 14.  For interest rate risk analysis in respect of debtors and creditors please refer to note 16.

11. 

Called up share capital and analysis of capital reserves	Number of shares	As at 31 January 2011 £000	Number of shares	As at 31 January 2010 £000
Ordinary shares 5p
Authorised	1,000,000,000	50,000	1,000,000,000	50,000
Ordinary shares in issue at beginning of the year	116,834,502	5,842	133,990,458	6,699
Ordinary shares bought back during the year	(7,845,091)	(393)	(6,525,580)	(326)
Ordinary shares redeemed during the year	-	-	(10,630,376)	(531)
Ordinary shares in issue at end of the year	108,989,411	5,449	116,834,502	5,842

The total cost of share buybacks for the year to 31 January 2011 was £9,432,000 (2010: £17,644,000).

The analysis of the capital reserve is as follows:

	Realised capital reserve £000	Unrealised investment holding gains £000	Total capital reserve £000
At 31 January 2010	(30,515)	17,743	(12,772)
Gains on realisation of investments at fair value	6,954	-	6,954
Movement in fair value gains of investments	-	7,949	7,949
Losses on realisation of forward foreign exchange contracts	(56)	-	(56)
Movement in fair value gains of forward foreign exchange contracts	-	615	615
Movement in currency gains	72	-	72
Capitalised expenses	(476)	-	(476)
Capital dividends received	715	-	715
At 31 January 2011	(23,306)	26,307	3,001

The above split in capital reserve is shown in accordance with provisions of the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts'.

12. 

	2011 £000	2010 £000
Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities
Return on ordinary activities before finance costs and taxation	18,511	40,257
Adjustments for:
Gains on investments	(15,462)	(36,875)
Effect of foreign exchange rates	(72)	51
(Increase)/decrease in dividends receivable and other debtors	(50)	1,501
Increase in other creditors and other accruals	9	51
Overseas withholding tax suffered	(97)	(99)
Net cash inflow from operating activities	2,839	4,886

13.

Analysis of changes in net funds	As at 31 Jan 2010 £000	Cash Flow £000	Exchange Movement £000	As at 31 Jan 2011 £000
Cash at bank and in hand	7,467	(6,649)	72	890

Analysis of changes in net funds	As at 31 Jan 2009 £000	Cash Flow £000	Exchange Movement £000	As at 31 Jan 2010 £000
Cash at bank and in hand	6,544	974	(51)	7,467

14. Related Party Transactions

With the exception of the management and secretarial fees as disclosed in the Income Statement and note 6, there have been no related party transactions during the year.

15.  VAT recoverable

On 5 November 2007, the European Court of Justice ruled that management fees should be exempt from VAT.

The manager submitted a claim to HMRC for VAT charged on investment management fees for the period 1 April 2001 to 30 September 2007.  A refund of £1,480,000 and interest of £232,000 was received from HMRC during the year to 31 January 2010 and repaid to the company.  The refund was allocated to capital and revenue in line with the accounting policy of the company for the period in which the VAT was charged. Interest was allocated entirely to revenue.  The reclaim for previous periods is uncertain and the company has taken no account in these financial statements of any such repayment.

16. Derivatives and other 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, futures and options, for the purpose of managing currency and market risks arising from the company's activities.

The main risks the company faces from its financial instruments are (i) market price 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 price 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; and

- the level of income receivable on cash deposits;

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.

The board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. Borrowings may comprise fixed rate, revolving, and uncommitted facilities. Current guidelines state that the total borrowings will not exceed 20 per cent of the total assets of the company.

Interest risk profile

The interest rate risk profile of the portfolio of financial assets and liabilities at the balance sheet date was as follows:

At 31 January 2011	Rate %	Local currency 000	Foreign Exchange Rate	Sterling equivalent £000
Assets
Sterling	-	890	1,000	890
				890
At 31 January 2010
Assets
Sterling	-	7,466	1,000	7,466
US Dollar	-	2	1,602	1
				7,467

Interest rate sensitivity

The sensitivity analyses below have been determined based on the exposure to interest rates for both derivative and non-derivative instruments 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 or lower and all other variables were held constant, the company's profit for the year ended 31 January 2011 would increase / decrease by £4,000 (2010 : increase / decrease by £nil ). This is mainly attributable to the company's exposure to interest rates on its floating rate cash balances.

Foreign currency risk

A significant proportion of the company's investment portfolio is invested in overseas securities and the balance sheet can be significantly affected by movements in foreign exchange rates. It is not the company's policy to hedge this risk on a continuing basis but the company may, from time to time, match specific overseas investment with foreign currency borrowings.

The revenue account is subject to currency fluctuation arising on overseas income.

Foreign currency risk exposure by currency of denomination:

	31 January 2011
	Overseas Investments £000	Net monetary assets £000	Total currency exposure £000
US Dollar	27,290	11	27,301
Euro	8,684	-	8,684
Japanese Yen	3,011	-	3,011
Hong Kong Dollar	2,875	-	2,875
Canadian Dollar	2,288	-	2,288
Swiss Franc	1,921	-	1,921
Indonesian Rupiah	1,888	-	1,888
Norwegian Krone	1,383	-	1,383
Total overseas investments	49,340	11	49,340
Sterling	96,920	845	96,920
Forward foreign currency contracts	615	-	615
Total	146,875	856	147,731

	31 January 2010
	Overseas Investments £000	Net monetary assets £000	Total currency exposure £000
US Dollar	25,602	4	25,606
Euro	9,860	-	9,860
Japanese Yen	3,144	-	3,144
Hong Kong Dollar	2,934	-	2,934
Canadian Dollar	-	-	-
Swiss Franc	1,636	-	1,636
Indonesian Rupiah	2,471	-	2,471
Norwegian Krone	-	-	-
Total	45,647	4	45,651
Sterling	89,855	7,210	97,065
Forward foreign currency contracts	-	-	-
Total	135,502	7,214	142,716

The asset allocation between specific markets can vary from time to time based on the portfolio manager's opinion of the attractiveness of the individual markets.

Foreign currency sensitivity

There were minimal foreign currency denominated monetary items at the year end.

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 country or sector. The allocation of assets to international markets, as detailed on page 6, and the stock selection process both 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 worldwide.

Other price risk sensitivity

If market prices (excluding forward foreign currency contracts) at the balance sheet date had been 15% higher or lower while all other variables remained constant, the return attributable to ordinary shareholders at the year ended 31 January 2011 would have increased / decreased by £21,939,000 (2010 : increase / decrease of £20,325,000) and equity reserves would have increased / decreased by the same amount.

(ii) Liquidity risk

This is the risk that the company will encounter difficulty in meeting obligations associated with financial liabilities.

Liquidity risk is not considered to be significant as the company's assets comprise mainly readily realisable securities, which can be sold to meet funding commitments if necessary.

(iii) Credit risk

This is the risk of failure of the counterparty to a transaction to discharge its obligations under that transaction that could result in the company suffering a loss.

The risk is managed as follows:

·      investment transactions are carried out with a large number of brokers, whose credit rating is reviewed periodically by the portfolio manager, and limits are set on the amount that may be due from any one broker; and

·      cash is held only with reputable banks with high quality external credit ratings.

None of the company's financial assets are secured by collateral.

Fair values of financial assets and financial liabilities

There were no borrowings as at 31 January 2011 (2010: £nil). All other assets and liabilities of the company are included in the balance sheet at fair value.

17 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;

·      to maximise the return to its equity shareholders through an appropriate balance of equity capital and debt; and

·      to limit gearing to 20% of total assets.

The board monitors and reviews the broad structure of the company's capital on an ongoing basis. 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 under the investment trust rules should be retained.

The analysis of shareholders' funds is as follows:

	As at 31 January 2011 £000	As at 31 January 2010 £000
Called up ordinary share capital	5,449	5,842
Capital redemption reserve	10,568	10,175
Special distributable reserve	122,062	131,494
Capital reserve	3,001	(12,772)
Revenue reserve	6,651	7,977
Total shareholders' funds	147,731	142,716

18 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 asset or liability, either directly (ie as prices) or indirectly (ie 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 balance sheet are grouped into the fair value hierarchy as follows:

	2011
Financial assets at fair value through profit or loss	Level 1 £000	Level 2 £000	Level 3 £000	Total £000
Quoted equities	146,260	-	-	146,260
Forward foreign exchange contracts	-	615	-	615
Net fair value	146,260	615	-	146,875

	2010
Financial assets at fair value through profit or loss	Level 1 £000	Level 2 £000	Level 3 £000	Total £000
Quoted equities	135,502			135,502
Net fair value	135,502			135,502

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)         Forward foreign exchange contracts

The fair value of the company's forward foreign exchange contracts have been determined using observable market inputs.  There have been no movements between levels in the fair value hierarchy during the year.

19 Post balance sheet event

Since the year end a further 1,144,000 Ordinary shares of 5p each have been bought back for a consideration of £1,405,893.

A number of changes to the UK Corporation tax system were announced in the June 2010 Budget including legislation to reduce the main rate of corporation tax from 28% to 27% from 1 April 2011. As this change had been substantively enacted at the balance sheet date its effect is included in these financial statements. The March 2011 Budget included revised legislation to reduce the main rate of corporation tax from 28% to 26% from 1 April 2011. As this change had not been substantively enacted at the balance sheet date its effect is not included in these financial statements.

Further reductions to the main rate are proposed to reduce the rate by 1% per annum to 23% by 1 April 2014. These changes had not been substantively enacted at the balance sheet date and, therefore, are not included in these financial statements. 

Website

At www.martincurrieportfolio.com we maintain a website specifically for shareholders in the trust and their advisers. It includes price and performance statistics, monthly update, webcasts, online versions of the trust's annual and interim reports and information on how to invest.

 

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