Annual Report & Accounts and

RNS Number : 2212X

Monks Investment Trust PLC

20 June 2008

 

Regulatory Announcement

THE MONKS INVESTMENT TRUST PLC ('MONKS')

ANNUAL REPORT AND ACCOUNTS AND PROPOSED NEW ARTICLES OF ASSOCIATION

Copies of the Report and Accounts for the year ended 30 April 2008 and the proposed new articles of association of Monks have been submitted to the UK Listing Authority and will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility, which is situated at:

Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS

Tel: [phone]

The Report and Accounts for the year ended 30 April 2008 is also available on the Baillie Gifford website at:

http://www.bailliegifford.com/documents/65029_Monks_Annual_Report_April_2008.pdf

At the annual general meeting to be held on 5 August 2008, it is proposed that new articles of association be adopted in order to update Monks' existing articles of association to take account of changes in UK company law brought about by the implementation of the Companies Act 2006. A summary of the proposed changes to the existing articles of association is set out in the appendix to the Report and Accounts for the year ended 30 April 2008. The new articles of association are available to the public from Baillie Gifford & Co, Level 5, Ivybridge House, 1-5 Adam Street, London, WC2N 6AW.

The unedited full text of those parts of the Report and Accounts for the year ended 30 April 2008 which require to be published by DTR 4.1 is set out below.

Baillie Gifford & Co

Company Secretaries

20 June 2008

CHAIRMAN'S STATEMENT

Performance

In the year to 30 April 2008 net asset value per share, with borrowings at fair value, rose by 14.2% and the FTSE World Index in sterling terms fell by 1.4%. All of the increase in net asset value per share was achieved in the first half of the Company's year, during which period the comparative index rose by 4.4%. In the second half, net asset value per share fell by 0.3% and the index fell by 5.6%. The share price ended the year at 348.0p, 15.9% higher than at the end of the previous year and 2.2% off the record high reached in October.

Our holdings in oil and gas producers, oil service companies, mining companies and steelmakers performed particularly strongly, though it was notable that in the second half of the year these companies performed less well despite the oil price reaching a new record high, large increases in iron ore and coal prices, and rising exploration and development spending in the oil and gas industries. We also benefited from a large rise in the value of the Brazilian currency during the year and from holding cash. For the year as a whole, the main disappointment was the poor performance of Japanese property shares. In the second half there was also a significant fall in Asia ex-Japan, the impact of which was mitigated by sales following large gains in the earlier part of the year.

Earnings and Dividend

Earnings per share were 4.53p compared with 3.91p last year, an increase of 15.9%. Pre-tax earnings rose by 30.3% as a result of increased income from shares, bonds and cash and the recovery of VAT paid in previous years. We have exhausted tax losses carried forward and are now paying corporation tax with the result that post-tax earnings rose by only 9.9%. Excluding the impact of the recovery of VAT, the increase was 2.6% in post-tax earnings and 8.2% in earnings per share. The larger increase on a per share basis is a result of a reduction of 5.0% in the weighted average number of shares outstanding owing to share buy backs.

Monks invests with the aim of achieving capital growth rather than income and all costs are charged to the Revenue Account. As a result, earnings may fluctuate considerably from year to year and the Board has taken this into account in recommending a final dividend of 3.20p compared with 2.65p for the previous year. If approved, this will make the total dividend for the year 3.70p, an increase of 17.5% from the 3.15p paid last year. 

Investment Activity

During the year we made considerable changes to the portfolio and the Managers' Report explains many of these in more detail. Net sales of equities of £162.6m were partially offset by £45.4m of net purchases of bonds, so that net sales of equities and bonds combined amounted to £117.2m. The proceeds of these sales were used to repay all of our yen borrowings and repurchase shares. There was a small decline in the amount of cash held but effective gearing has been reduced; at the year end net current assets (mainly consisting of cash) were well in excess of the fair value of outstanding debt. Equities as a percentage of shareholders' funds were 87.8% and equities and bonds together were 98.1%. 

A motivation for many of the sales was the reduction of exposure to companies likely to suffer adverse effects from the bursting of the housing bubble in the United States, and the likelihood of similar problems occurring in the United Kingdom. The largest net reduction was unsurprisingly made in North America, followed by the UK. Profits were also taken in Asia after a period of rapidly rising share prices in the first half of the Company's year. Net purchases were made in Continental Europe and in non-Asian Emerging Markets. It should be emphasised, however, that these changes in geographical weightings were the outcome of decisions made to avoid or favour certain types of companies rather than to avoid or favour countries or regions. In general, what a company does and where it does it are more important than where its shares happen to be quoted.

In the second half of the Company's year we formed a negative view on the outlook for sterling and since then the majority of cash balances have been held in other currencies. We also decided not to roll over maturing forward contracts that had been designed to improve the match between the currencies in which we have borrowings and the distribution of assets. Together with the repayment of yen borrowings, these changes leave the Company with all of its borrowings in sterling in the form of existing long-term debentures.

Discount and Buybacks

The discount (at fair value) narrowed from 11.3% to 10.0% over the course of the year. The Board considers the level of discount and has authorised the repurchase of shares when this will be of benefit to continuing shareholders as well as being in the interest of those shareholders who may not have the luxury of choosing the optimum time to sell some or all of their shares.

During the year to 30 April 2008 £54.7m was spent on the repurchase of 16.47m shares, increasing net asset value per share by 0.7%. If the proposed final dividend is approved, the total amount of money paid to continuing and exiting shareholders for the year (based on the issued share capital at the year end) will be £64.5m. This would be a substantial increase over the equivalent figure of £27.7m for the previous year.

Since the power to buy back shares was first granted in 1999, 123.8m shares have been bought back and cancelled, representing 32% of the share capital at the start of that period. The Board will continue to buy back shares if suitable opportunities appear.

VAT 

Following the rulings in various court cases during the year, VAT is no longer payable on management fees. In addition, the Company will be able to recover some of the VAT paid in previous years. We have recognised £1.2m as a debtor in the accounts in respect of the period from 2000. There could be further recoveries in respect of this period and the period from 1990 to 1996 but the amounts are uncertain. Further information is included in note 3.

Outlook

Despite, or possibly because of, the increasing integration of the global economy the prospects for parts of the world appear very different. In those countries such as the United States, the United Kingdom, Spain, Ireland and Australia, where growth in recent years has been accompanied by, and to varying extents fuelled by, a massive increase in property prices and a matching increase in indebtedness, the most likely outcome is a period of low growth or even contraction. As explained in more detail in the Managers' Report, banks are short of both capital and liquid funds and as a result credit has become much less freely available. A period of retrenchment, rising savings rates and falling property prices was overdue and is probably necessary to correct the imbalances created in recent years. In the countries in which the majority of the world's population live the situation is very different. The biggest concern here is that unwelcome consequence of too rapid growth, inflation. Here savings are abundant and exceed even the need for funds to support the high levels of investment in productive capacity and infrastructure that are accompanying the rapid growth of their economies. 

In the year ahead we will discover whether this divergence of fortunes can continue or whether we are only witnessing a lag between weakening demand in America and weakening activity in Asia, with knock-on effects on demand for commodities and capital goods, which will have the effect of spreading the impact to Latin America, Europe and beyond. In the longer run there seems little doubt that the economic centre of gravity of the world has shifted back to the East and the driving force of global growth will be rising consumption in China, India and other populous and rapidly developing countries, but it remains to be seen just how far along this road we have already travelled. Our portfolio is currently positioned to benefit from the continuation of global growth, with significant exposure to commodity and energy producers and to the companies that supply these industries.

An immediate concern is that one of the supports for equity markets in recent years, namely a net reduction in the quantity of publicly traded equity as companies have repurchased shares or been taken private, has been kicked away and companies are now raising large amounts of additional capital. Sovereign wealth funds have provided significant amounts of new equity for troubled financial institutions but their appetite is likely to be finite and there is a risk that there will be an overall downward pressure on equity markets. We also see inflation as a greater risk than deflation as the high cost of energy feeds through into other costs. In such circumstances opportunities are likely to arise in equity and fixed income markets to invest our cash into assets at prices that will yield attractive returns over the long run. We begin the year well-placed, with a substantial amount of cash available to invest.

AGM

Following the introduction of the Companies Act 2006, a number of changes to the Articles of Association are proposed. 

I hope shareholders will come to the Annual General Meeting, which will be held on 5 August 2008 at 11:00am at the RSA. Our manager will give a short presentation and there will be an opportunity to ask questions.

MANAGERS' PORTFOLIO REVIEW

During the year significant changes were made to the portfolio. In particular, sixty-four of the holdings that were in the portfolio at the end of April 2007 were no longer there a year later. Of these, two, Abbott Group and Todco, were taken over but the rest were sold. At the year-end there also were thirty-nine new equity holdings and twenty-two new bond holdings. Rather than go through each individual decision in detail we have attempted to group them together in terms of broad themes in order to bring out the resulting changes to the overall portfolio.

The first theme is capital preservation. The global 'credit crunch' that was triggered by the bursting of the US house price bubble was not something that came out of a clear blue sky. It may in fact have been one of the most predicted financial crises, preceded as it was by numerous books, articles and warnings from well-informed sources. If there is anything truly surprising about it, then that is that it took so long to happen. This may have lulled investors, including ourselves, into remaining invested in companies that had benefited from the huge inflation of asset prices caused by the widespread availability of cheap credit. Despite the fact that in last year's annual report the Chairman expressed concern about loans being extended on excessively generous terms to borrowers likely to have difficulty repaying their debts, we started the year with a number of holdings in companies that could be expected to suffer serious reversals of fortune during a period in which these excesses were unwound. Purging the portfolio of these holdings was therefore necessary to avoid or limit losses to shareholders. Some of these sales took place relatively early in the Company's year, such as the sale of the highly aggressive mortgage lender Northern Rock in June 2007 at 955p. In other cases, however, we were guilty of being seduced by arguments about the quality of business models, the excellence of management and claims that all the bad news was already reflected in lowly valuations, and sales were delayed as a result. For example, it took us until the end of November 2007 to sell Wolseley, despite the fact that as a builders' merchant with a substantial American business it was clearly positioned right in the path of the storm. The holdings that were sold for reasons related to this broad theme included: financials such as Moody's, the rating agency, M&T Bank, an American bank, T Rowe Price, an American fund management company, AIB, an Irish bank, and UBS, the Swiss investment bank; house builders such as Ryland in the United States and Bovis and Persimmon in the United Kingdom; companies dependent on discretionary spending by American consumers such as Carnival, the cruise operator, and Nissan, the Japanese car maker; and the advertising agencies WPP and Omnicom.

A related theme is our exposure to the banking sector. We began the year with only a small proportion of the portfolio invested in bank shares, but on some measures our overall exposure to the sector increased during the year. Firstly, because we increased the amount of money held on deposit during much of the year and, secondly, because we subsequently invested some of this cash into bonds issued by banks. 

The collapse of the edifice of structured finance, the process by which loans were bundled together and then sliced and diced into new types of securities for sale to investors, derivatives created based on these securities and new, more exotic, securities created out of packages of these securities and derivatives, has left banks with a number of serious problems. One of the most obvious problems is that banks' holdings of these collateralised debt obligations, or CDOs, cannot be sold for anything like the values at which they had been carried on their balance sheets, leading to large write downs under mark-to-market accounting rules, which erode their capital. Another is the strain on balance sheets and liquidity caused by off-balance sheet exposures becoming on-balance sheet exposures. 

In recent years banks have set up a variety of off-balance sheet entities known as conduits and provided 'back-stop' lending facilities to these and structured investment vehicles, or SIVs. The conduits and SIVs bought relatively long dated securities, including CDOs and other securities backed by mortgages, credit card receivables etc., and funded these investments by issuing short-dated debts of their own in the form of commercial paper. This commercial paper was awarded high ratings by the leading credit rating agencies but offered slightly higher yields than similarly rated more traditional forms of commercial paper, making it attractive to investors seeking extra yield with minimal risk. 

Anything that seems too good to be true usually is and the straw that broke the camel's back was a high level of defaults on recently issued US 'sub-prime' mortgages. This cascaded through the complex and arcane structures of CDOs and closely related entities in ways that were not anticipated by rating agencies or purchasers, leading to unexpected losses for holders of securities regarded by them as extremely low risk. In the resulting climate of risk aversion, conduits and SIVs were unable to replace maturing issues of commercial paper with new ones and drew on the back-stop facilities granted by banks. Those banks then found themselves in need of cash to advance against portfolios of assets of questionable value. This contributed to increased demand for funds in the wholesale market in which banks borrow from each other. The increase in demand coincided with a reduced willingness on the part of those banks with available funds to lend to other banks. The potential lenders were particularly unwilling to lend for periods measured in months, for fear that they themselves might need that money before those deposits matured. As a result, the rates of interest banks were willing to offer on term deposits rose sharply, creating an opportunity for us to earn attractive returns by supplying funds to the banking system in the form of term deposits. Our initial investment was in sterling term deposits but towards the end of 2007 we became concerned about the over-valuation of the pound and so maturing sterling deposits were replaced by a mixture of euro, Swedish krona and Norwegian krone term deposits. Throughout we have restricted exposure to those banks that fall into the category of 'too big to fail', meaning that their failure would pose such a large risk to the overall financial system that central banks and governments would almost certainly intervene to prevent their collapse.

We believe that other ways to profit from the distress in the financial system have also been thrown up. One of these opportunities has arisen in the market for bonds issued by banks and other financial companies. These bonds have been trading at prices that appear to reflect a level of forthcoming defaults that would be much worse than the outcome of previous periods of extreme distress for banking systems around the world. The most likely explanation for this state of affairs can be found in the discovery that the conduits and SIVs mentioned above were among the largest buyers of bonds issued by financial companies, including banks. They are now sellers rather than buyers and at the same time banks and other financial companies are finding that they need to issue more bonds to bolster their balance sheets. We believe it is this imbalance between buyers and sellers that accounts for the unusually large premium over the interest rate on government bonds rather than a realistic estimate of the likelihood of suffering a loss of capital if held to maturity. This premium is likely to reduce over time as banks rebuild their capital positions through a combination of equity issues and retained earnings. A number of bank regulators around the world have also indicated that they believe that in future banks should be required to have more equity to support a given level of business. All of these developments are unhelpful to holders of bank shares, at least in the near term, as they will be diluted and suffer from dividend cuts, but they are extremely good for holders of bank bonds, as they increase the cushion of equity that has to be eaten through before bond holders suffer losses. 

It is our view that it is the premium or 'spread' over government bond yields that will contract, rather than that the absolute level of bond prices will rise, and we are concerned that government bond yields are in fact too low in light of the outlook for inflation. We have, therefore, bought floating rate euro-denominated bonds and hedged our sterling-denominated investment grade bond holdings against the risk of a general rise in yields by selling a gilt future. Through these means we are effectively only investing in the change in spread.

We did not succeed entirely in anticipating the ramifications of the unfolding credit crisis and, in particular, we did not foresee its impact on our holdings of Japanese real estate investment trusts and property companies. Vacancy rates in the major metropolitan areas are low, new supply is very limited, rents have been rising, albeit relatively gradually, and yields are attractive relative to returns available on government bonds. Despite this, capital values have been falling under the pressure of forced sellers, the effective closure of the market for securities backed by commercial mortgages and reductions in maximum loan to value ratios. The companies in which we invest have strong balance sheets and have demonstrated that they are able to secure bank finance. We believe that this should enable them to buy assets at attractive prices, and so we have made some small additions in this area. 

Overall we now have a bit less invested in Japanese equities than we had a year ago. One reason for this is that the holding in the Baillie Gifford Japanese Smaller Companies Fund has been sold. We no longer see a very strong case for a broad exposure to smaller companies in Japan, based on the observation that in this group the good companies are not cheap while the cheap companies are not good. The holding in the Baillie Gifford British Smaller Companies Fund has also been sold. We see a difference in the prospects of companies exposed to the effects of the financial crisis on the economies of the United Kingdom, the United States and parts of Continental Europe and those of companies whose customers are in industries benefiting from the booming demand from those parts of the world that have not been living beyond their means. The United Kingdom is home to a number of high quality engineering businesses with strong exports and in the current circumstances having direct holdings in such companies appears preferable to a broad exposure to a range of small British companies. New holdings in the UK that fit into this general engineering theme include: Aggreko, a provider of temporary power; Cookson, which supplies the steel industry worldwide; Hamworthy, which supplies valves for ships; Renishaw, which supplies the machine tool industry; Rotork, which makes equipment for controlling valves; Rolls-Royce, which makes aero engines; and Wellstream, which makes flexible pipes for the oil industry. A similar theme can be seen in new holdings in other engineering companies elsewhere including: SNC-Lavalin in Canada, one of the world's largest engineering consultancies; Alstom in France, which makes power generation equipment and trains; Sandvik in Sweden, which makes cutting tools and mining equipment; and Vallourec in France, which makes seamless pipes for the oil and gas industry. We also took new holdings in two steel producers, ArcelorMittal, the world's largest steel maker based in the Netherlands and US Steel, a leading American steel maker with its own iron ore supplies. 

Only minor changes have been made to the overall positions in oil and gas producers and oil service companies. Taken together these positions still represent one of the largest exposures within the portfolio. The pattern of previous years has been repeated with the oil price reaching new record levels as production growth has fallen short of expectations and demand has continued to grow rapidly despite high prices. There has also been a recovery in North American gas prices. Two of our holdings, EOG and Petrobras announced major new discoveries. EOG substantially increased its reserves of gas in North America and Petrobras announced two new discoveries in deepwater off the coast of Brazil, one of which may turn out to be one of the largest new discoveries in decades. This Petrobras discovery encapsulates many of the issues facing oil companies in their efforts to find and develop new reserves of oil to replace those currently in production. It involved drilling more than three miles under the seabed, which in turn lies more than a mile below the surface of the ocean and the technical challenges involved in developing these reserves will be immense. It is hard to avoid the conclusion that oil is getting harder to find and more expensive to produce. 

Apart from the handful of companies such as Petrobras that are able to grow their production and increase their reserves, the main beneficiaries of these trends have been the oil service companies that supply the drilling rigs, services and equipment needed to explore for and develop these new reserves and to squeeze out as much oil and gas as possible from existing fields. New holdings in this area have been taken in companies that are well placed to benefit from increasing activity in deep water. These include Cameron International in the United States, which makes equipment used on the sea-bed, Seadrill in Norway, which has one of the fastest growing and most modern fleet of ultra-deepwater drilling rigs and drillships, and Aker Solutions, also Norwegian, which supplies drilling equipment for the latest generations of deepwater drilling rigs and equipment used in developing deepwater fields. We have, however, also taken some profits during the year in some of our successful holdings. 

In addition to these major themes, the following changes are worth highlighting. We took some profits in our largest holding, the Baillie Gifford Pacific Fund, following a period of strong performance, on concerns that proved well-founded that share prices in the region had run too far in the latest round of 'China fever'. The Asia-Pacific region remains one of the regions in which we continue to find attractive investments and we have taken some direct holdings in Hong Kong based bulk shipping companies during the year. A new area of investment for us is the Middle East, where economies have been booming and we now have holdings in the United Arab Emirates and Egypt. Small holdings have also been taken in companies benefiting from rising agricultural prices. We are continuing to look for opportunities in this area, in alternatives to oil, including coal, and for ways to profit from the general rise in inflation around the world. 

DISTRIBUTION OF ASSETS

at 30 April 2008

				30 April 2008 %		30 April 2007 %
Equities:	United Kingdom			10.3		13.9
	Continental Europe			17.5		13.9
	North America			19.2		25.2
	Japan			6.3		10.7
	Asia Pacific			15.5		15.1
	Other Emerging Markets			12.7		5.9
				81.5		84.7
Bonds:    United Kingdom				5.2		3.8
Overseas				4.4		2.3
Net liquid assets				8.9		9.2
Total assets (before deduction of borrowings)				100.0		100.0

THIRTY LARGEST EQUITY HOLDINGS  at 30 April 2008
Name	Region		Business		2008				2007
					Value £'000	% of total assets	Value £'000
Baillie Gifford Pacific    Fund		Asia Pacific		Investment fund	79,956	7.2		83,475
Petrobras		Other Emerging Markets		Integrated oil	56,229	5.1		26,277
EOG Resources		North America		Gas exploration and     production	33,765	3.0		22,951
Schlumberger		North America		Oilfield services	32,962	3.0		30,153
National Oilwell Varco		North America		Drilling equipment     manufacturer	25,708	2.3		16,575
CVRD		Other Emerging Markets		General mining	22,306	2.0		11,826
US Steel		North America		Steel producers	21,539	1.9		-
BHP Billiton		Asia Pacific		Diversified resources	18,900	1.7		11,844
Reliance Industries		Asia Pacific		Petrochemical firm	18,380	1.7		12,632
Blackrock World Mining		United Kingdom		Investment trust	17,780	1.6		-
Diamond Offshore    Drilling		North America		Offshore drilling	17,722	1.6		15,785
Seadrill		Continental Europe		Contract drilling services	17,654	1.6		-
ArcelorMittal		Continental Europe		Steel company	16,333	1.5		-
Atlas Copco		Continental Europe		Industrial compressors and    mining equipment	16,136	1.5		19,413
Cameron International		North America		Oilfield equipment    manufacturer	15,712	1.4		-
Maritime Capital Partners		Asia Pacific		Marine transportation	15,450	1.4		-
Pacific Basin Shipping		Asia Pacific		Marine transportation	15,328	1.4		-
Rolls Royce Group		United Kingdom		Aerospace equipment    provider	14,024	1.3		-
Aker Solutions		Continental Europe		Engineering and construction    services	12,795	1.1		-
Norilsk Nickel		Other Emerging Markets		Nonferrous metals	12,678	1.1		9,057
Richemont		Continental Europe		Luxury goods	11,839	1.1		-
Rio Tinto		United Kingdom		Diversified mining group	11,820	1.1		12,292
Komatsu		Japan		Mining and construction    equipment	11,539	1.0		-
Nestlé		Continental Europe		Food and consumer products	11,164	1.0		7,153
Alstom		Continental Europe		Power generation and    transport equipment	11,156	1.0		-
Imperial Energy		Other Emerging Markets		Oil and gas exploration and    production	10,880	1.0		-
Vallourec		Continental Europe		Specialty steel pipe    manufacturers	10,695	1.0		-
Canon		Japan		Copiers/printers and cameras	10,516	1.0		11,823
Aggreko		United Kingdom		Temporary power units	10,504	0.9		-
Intesa Sanpaolo		Continental Europe		Retail banking	10,333	0.9		11,515
					591,803	53.4		302,771

RELATED PARTY TRANSACTIONS

The Directors' fees for the year are detailed in the Directors' Remuneration Report. No Director has a contract of service with the Company. During the year no Director was interested in any contract or other matter requiring disclosure under section 232 of the Companies Act 1985. Baillie Gifford & Co are employed by the Company as Managers and Secretaries under a management agreement which is terminable on not less than 12 months notice, or on shorter notice in certain circumstances. The fee in respect of each quarter is 0.1125% of the total assets less current liabilities. The management fee is levied on all assets, including holdings in collective investment schemes (OEICs) managed by Baillie Gifford & Co. However the class of shares in OEICs held by the Company does not attract a management fee.  The details of the management fee are as follows:

	2008 £'000		2007 £'000
Investment management fee	5,095		4,714
VAT suffered	153		189
	5,248		4,903

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks facing the Company relate to the Companies investment activities. These risks are market risk (comprising currency risk, interest rate risk and other price risk), liquidity risk and credit risk.

The Board monitors closely the Company's exposures to these risks but does so in order to reduce the likelihood of a permanent reduction in the Company's net assets rather than to minimise the short term volatility.

Further information on these risks and how they are managed is contained in the Annual Report.

In addition, breach of section 842 of the Income and Corporation Taxes Act 1988 could lead to the Company being subject to capital gains tax. The Managers monitor investment movements and the level of forecast income and expenditure to ensure the provisions of section 842 are not breached.

STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS

The Directors are responsible for preparing the Annual 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 they have elected to prepare the financial statements in accordance with applicable law and UK Accounting Standards (UK Generally Accepted Accounting Practice).

The financial statements are required by law to 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 those financial statements, the Directors are required to: 

•    select suitable accounting policies and then apply them consistently; 

•    make judgements 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 in which case there should be supporting assumptions or qualifications as necessary. 

The Directors confirm that they have complied with the above requirements in preparing the financial statements.

The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements comply with the Companies Act. 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 (including Business Review), Directors' Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.

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 Annual Report includes a fair view 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.

By order of the Board 
JGD FERGUSON 

6 June 2008

INCOME STATEMENT

	For the year ended 30 April 2008				For the year ended 30 April 2007
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total  £'000
Gains on investments	-	118,594	118,594		-	36,155	36,155
Currency (losses)/gains	-	(67)	(67)		-	5,224	5,224
Income (note 2)	28,735	-	28,735		25,738	-	25,738
Investment management fee	(5,248)	-	(5,248)		(4,903)	-	(4,903)
Recoverable VAT (note 3)	1,164	-	1,164		-	-	-
Other administrative expenses	(1,018)	-	(1,018)		(735)	-	(735)
Net return before finance costs and taxation	23,633	118,527	142,160		20,100	41,379	61,479
Finance costs of borrowings	(7,872)	-	(7,872)		(8,002)	-	(8,002)
Net return on ordinary activities before taxation	15,761	118,527	134,288		12,098	41,379	53,477
Tax on ordinary activities	(3,476)	-	(3,476)		(916)	-	(916)
Net return on ordinary activities after taxation	12,285	118,527	130,812		11,182	41,379	52,561
Net return per ordinary share (note 4)	4.53p	43.68p	48.21p		3.91p	14.49p	18.40p
Dividends paid and proposed per ordinary share (note 5)	3.70p				3.15p

   The total column of the Income Statement is the profit and loss account of the Company.

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

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

SUMMARISED BALANCE SHEET

at 30 April 2008

		30 April 2008		30 April 2007
		£'000		£'000
Fixed assets
Investments		1,011,054		1,009,631
Current assets
Debtors		17,245		7,719
Cash and deposits		88,016		98,450
		105,261		106,169
Creditors
Amounts falling due within one year		(4,997)		(3,421)
Net current assets		100,264		102,748
Total assets less current liabilities		1,111,318		1,112,379
Creditors
Amounts falling due after more than one year (note 6)		(79,516)		(148,942)
Provisions for liabilities and charges
Deferred taxation		(950)		-
Total net assets		1,030,852		963,437
Capital and Reserves
Called-up share capital		13,209		14,033
Share premium		11,100		11,100
Capital redemption reserve		6,189		5,365
Capital reserve - realised		695,683		632,275
Capital reserve - unrealised		273,211		272,795
Revenue reserve		31,460		27,869
Equity shareholders' funds		1,030,852		963,437
Net asset value per ordinary share		386.5p		338.4p
(after deducting borrowings at fair value)
Net asset value per ordinary share		390.0p		343.1p
(after deducting borrowings at par)
Ordinary shares in issue (note 7)		264,179,859		280,652,693

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

For the year ended 30 April 2008

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve - realised £'000	Capital reserve - unrealised £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 May 2007	14,033	11,100	5,365	632,275	272,795	27,869	963,437
Net return on ordinary activities after taxation	-	-	-	118,111	416	12,285	130,812
Shares purchased for cancellation	(824)	-	824	(54,703)	-	-	(54,703)
Dividends paid during the year	-	-	-	-	-	(8,694)	(8,694)
Shareholders' funds at 30 April 2008	13,209	11,100	6,189	695,683	273,211	31,460	1,030,852

For the year ended 30 April 2007

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve - realised £'000	Capital reserve - unrealised £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 May 2006	14,368	11,100	5,030	519,996	362,574	22,130	935,198
Net return on ordinary activities after taxation	-	-	-	131,158	(89,779)	11,182	52,561
Shares purchased for cancellation	(335)	-	335	(18,879)	-	-	(18,879)
Dividends paid during the year	-	-	-	-	-	(5,443)	(5,443)
Shareholders' funds at 30 April 2007	14,033	11,100	5,365	632,275	272,795	27,869	963,437

SUMMARISED CASH FLOW STATEMENT
	For the year ended       30 April 2008			For the year ended       30 April 2007
	£’000	£’000			£’000	£’000
Net cash inflow from operating activities		21,486				18,412
Net cash outflow from servicing of finance		(8,222)				(8,027)
Taxation
Overseas tax incurred	(1,080)				(893)
Income tax incurred	(82)				(35)
Total tax paid		(1,162)				(928)
Financial investment
Acquisitions of investments	(454,078)				(386,008)
Disposals of investments	564,380				475,607
Forward currency contracts	130				(2,498)
Currency gains/(losses)	3,171				(2,878)
Net cash inflow from financial investment		113,603				84,223
Equity dividends paid		(8,694)				(5,443)
Net cash inflow before use of liquid resources and financing		117,011				88,237
Liquid resources
Decrease/(increase) in short term deposits	11,555				(65,000)
Net cash inflow/(outflow) from use of liquid resources		11,555				(65,000)
Financing
Shares purchased for cancellation	(54,706)				(18,876)
Bank loans repaid	(81,216)				-
Net cash outflow from financing		(135,922)				(18,876)
(Decrease)/increase in cash		(7,356)				4,361
Reconciliation of net cash flow to movement in net funds/(debt)
(Decrease)/increase in cash in the year		(7,356)				4,361
(Decrease)/increase in short term deposits		(11,555)				65,000
Net cash outflow from bank loans		81,216				-
Exchange movement on short term deposits		8,477				-
Exchange movement on bank loans		(11,758)				10,513
Other non-cash changes		(32)				(33)
Movement in net funds/(debt) in the year		58,992				79,841
Net debt at 1 May		(50,492)				(130,333)
Net funds/(debt) at 30 April		8,500				(50,492)
Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities
Net return before finance costs and taxation		142,160				61,479
Gains on investments		(118,594)				(36,155)
Currency losses/(gains)		67				(5,224)
Amortisation of fixed interest book cost		(632)				(805)
Increase in accrued income		(411)				(823)
Increase in debtors		(1,111)				(81)
Increase in creditors		7				21
Net cash inflow from operating activities		21,486				18,412

NOTES

	The financial information within this announcement has been extracted from the audited financial statements for the year to 30 April 2008 have been prepared on the basis of the accounting policies set out in the Company's Annual Financial Statements at 30 April 2007.
			2008					2007
			£'000					£'000
2.	Income
	Income from investments		23,482					21,905
	Other income		5,253					3,833
			28,735					25,738
3.	Recoverable VAT
	In 2004 the Association of Investment Companies (the 'AIC'), together with JPMorgan Claverhouse Investment Trust, launched a case against HM Revenue & Customs ('HMRC') to challenge whether Value Added Tax ('VAT') should be charged on investment management fees. In June 2007 the European Court of Justice found in favour of the AIC.  Since then HMRC has accepted that management fees should be exempt from VAT and has acknowledged its liability to pay claims in respect of VAT borne by investment companies. No VAT has been charged on management fees since July 2007 and the Manager has submitted repayment claims to HMRC for the periods from 2000 to 2007 and from 1990 to 1996. The Board is satisfied that at least £1.2m is certain to be recovered by the Manager on behalf of the Company in respect of the period 2000 to 2007 and therefore this amount has been recognised in the current year.  The Board however considers that there are too many uncertainties to allow any reasonable estimate of any further amounts potentially recoverable over both periods. The Company will receive from the Manager any interest paid by HMRC on the amounts eventually recovered.
4.	Net return per ordinary share
			2008					2007
	Revenue return		4.53p					3.91p
	Capital return		43.68p					14.49p
	Total return		48.21p					18.40p
	Revenue return per ordinary share is based on the net revenue on ordinary activities after taxation of £12,285,000 (2007 - £11,182,000) and on 271,319,153 (2007 - 285,637,104) ordinary shares of 5p, being the weighted average number of ordinary shares in issue during the year. Capital return per ordinary share is based on the net capital gain for the financial year of £118,527,000 (2007 - £41,379,000) and on  271,319,153 (2007 - 285,637,104) ordinary shares, being the weighted average number of ordinary shares in issue during the year. There are no dilutive or potentially dilutive shares in issue.
5.	Ordinary Dividends
		2008		2007		2008 £'000				2007 £'000
	Amounts recognised as distributions in the period:
	Previous year's final (paid 6 August 2007)	2.65p		1.40p		7,371				4,014
	Interim (paid 31 January 2008)	0.50p		0.50p		1,323				1,429
		3.15p		1.90p		8,694				5,443
	We also set out below the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of section 842 of the Income and Corporation Taxes Act 1988 are considered. The revenue available for distribution by way of dividend for the year is £12,285,000 (2007 - £11,182,000).

5.	Ordinary Dividends (Ctd)
		2008		2007		2008 £'000		2007 £'000
	Dividends paid and proposed in the period:
	Adjustment to previous year's final dividend re shares bought back					(66)		(9)
	Interim dividend per ordinary share (paid 31 January 2008)	0.50p		0.50p		1,323		1,429
	Proposed final dividend per ordinary share (payable 8 August 2008)	3.20p		2.65p		8,454		7,437
		3.70p		3.15p		9,711		8,857
	If approved the final dividend will be paid on 8 August 2008 to all shareholders on the register at the close of business on 11 July 2008. The ex-dividend date is 9 July 2008.
6.	During the year the Company repaid ¥16.6bn borrowings at a cost of £81.2m. The fair value of borrowings at 30 April 2008 was £89,260,000 (2007 - £162,651,000).
7.	In the year to 30 April 2008 the Company bought back 16,472,834 ordinary shares with a nominal value of £824,000 at a total cost of £54,703,000. At 30 April 2008 the Company had authority to buy back a further 30,929,969 ordinary shares.
8.	The financial information set out above does not constitute the Company's statutory accounts for the year ended  30 April 2008. The financial information for 2007 is derived from the statutory accounts for 2007 which have been delivered to the Registrar of Companies. The Auditors have reported on the 2007 accounts; their report was unqualified and it did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The statutory accounts for 2008 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.
9.	None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

 

END

 

 

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