Annual Financial Report

RNS Number : 7390C

North American Income Trust (The)

20 March 2014

 



THE NORTH AMERICAN INCOME TRUST PLC

 

ANNUAL FINANCIAL REPORT FOR THE YEAR ENDED 31 JANUARY 2014

INVESTMENT OBJECTIVE

To provide investors with above average dividend income and long term capital growth through active management of a portfolio consisting predominately of S&P 500 US equities. 

STRATEGIC REPORT 

1.         RESULTS

Financial Summary

	31 January 2014	31 January 2013	% change
Total assets	£286,555,000	£257,207,000	+11.4
Equity shareholders' funds	£271,952,000	£242,069,000	+12.3
Share price (mid market)	775.00p	738.00p	+5.0
Net asset value per share{A}	815.73p	769.00p	+6.1
Discount (difference between share price and net asset value)	5.0%	4.0%
Dividends and earnings
Revenue return per share	29.80p	19.72p	+51.1
Dividends per share (including proposed final dividend)	27.00p	19.50p	+38.5
Dividend yield (based on year end share price)	3.5%	2.6%
Dividend cover	1.10	1.01
Revenue reserves per share:
Prior to payment of third interim dividend declared and proposed final dividend{B}	23.63p	18.70p
After payment of third interim dividend declared and proposed final dividend{B}	7.63p	5.70p
Operating costs
Ongoing charges {C}	1.04%	0.81%
{A}      Including undistributed revenue.
{B}      For 2013 proposed final dividend only, as only one interim dividend was declared with respect to that year.
{C}      The ongoing charges ratio has been calculated in accordance with guidance issued by the AIC as the total of investment management fees and administrative expenses divided by the average cum income net asset value throughout the year.

PERFORMANCE	1 year return	3 year return{A}	5 year return{A}
Total return (Capital return plus dividends reinvested)	%	%	%
Share price	+8.9	+30.5	+75.4
Net asset value per share	+9.9	+29.4	+87.0
S&P 500 Index (in sterling terms) (reference index)	+17.2	+44.1	+111.1
{A} Cumulative return
The Company's investment objective changed on 29 May 2012 from a S&P 500 index-tracker trust to being actively managed. The three and five year performance figures shown reflect periods of time when the Company ran with these two different objectives.

2.         CHAIRMAN'S STATEMENT

This Annual Report looks different to those of recent years. This reflects changes in the Companies Act, the UK Corporate Governance Code and the remuneration regulations. We are required to ensure that the annual report and financial statements are fair, balanced and understandable; the Board believes that this is the case (see below).

Dividend

Compared to the year ended 31 January 2013, the revenue per Ordinary share has risen by 51% from 19.7p to 29.8p. This is the result of a full year of the new investment policy with its objective of providing an income that is above average as well as long term capital growth.

The Directors declared a third quarterly dividend of 6.0p per share (increased from 5.5p) which was paid on 14 February and are recommending a final dividend per Ordinary share of 10.0p, which will take the total dividends for the fiscal year to 27.0p (2013 - 19.5p), an increase of 38.5%.  2.8p per share will be added to the revenue reserve.  The full year 27.0p total dividend would represent a yield of 3.5%, using the share price of 775.0p at the year end, compared to the 2.1% yield from the S&P 500 index.

The final dividend will be payable on 3 June 2014 to shareholders on the register on 9 May 2014.  The quarterly dividends are paid in August, November, February and May each year.

Portfolio

During the year ended 31 January 2014, the Company's net asset value per share rose by 9.9% on a total return basis, in sterling terms. It is interesting to compare this result over the year with the S&P 500 index; this is not our benchmark but gives an indication of the performance of the US equity market. The S&P provided a total return of 17.2% in sterling terms, however, there was a sharp divergence between higher and lower yielding constituents of the index particularly beginning in mid-2013 when the Federal Reserve began to discuss the possible tapering of its asset purchase programme. A hypothetical basket of S&P 500 stocks yielding greater than 2.5% underperformed their lower yielding counterparts by over 6 percentage points assuming a constant basket of constituents. Relatively it was not a good year for yield stocks, but over the longer term we believe that the quality of the underlying companies in the portfolio can provide above average dividend growth as well as good performance in capital terms.

The Company's share price rose by 5.0% from 738.0p to 775.0p and ended the year with its share price standing at a 5.0% discount to net asset value, compared with a 4.0% discount at the end of the 2013 financial year. No shares were bought back in the period.  Despite ending the year with the share price trading at a discount to net asset value, the price stood at a premium to the net asset value from May to the first week of January.

As of 31 January 2014, the portfolio consisted of 42 equity holdings and 17 other holdings including corporate bonds; the latter represented approximately 9.3% of total assets. Further details of the portfolio are shown below.

Issue of New Shares

At the Annual General Meeting held in May 2013 shareholders renewed the annual authority to issue up to 10% of the Company's issued share capital for cash at a premium to the prevailing net asset value at the time of each issue. During the year the Company issued 1,860,000 new Ordinary shares at a premium raising an additional £16.4 million of new capital which represents 5.9% of the Ordinary shares in issue at the start of the year. New shares are only issued at a premium to net asset value.

Gearing

The Company has a three year £30 million uncommitted revolving bank facility provided by State Street Bank & Trust Company in place until October 2015.  The facility is repayable with no penalty and provides finance at a margin of 1.5% over Libor.  At the year-end $24 million (£14.6 million) of the facility was drawn down.  Further details on rates can be found in the notes to the accounts.

Market Review

North American equity markets performed strongly over the Company's financial year to the end of January 2014.  These strong equity markets persisted until the latter half of January. All-time highs were supported by the release of more positive US economic data and the growing expectance that new Fed chair, Janet Yellen, intends to continue the present accommodating monetary policy.  Federal Reserve officials at the end of January decided for the second time to trim their monthly bond purchases by $10 billion to $65 billion but also pledged to keep short-term interest rates very low "well past" the time the unemployment rate falls to 6.5%.  Ten-year Treasury yields bottomed early in May 2013 at 1.6% and rose by over 100 basis points) to finish the year end at 2.6%. Further details can be found in the Manager's report.

Marketing

The Board continues to market the company through the Investment Manager's initiative which provides a series of savings schemes through which savers can invest in the Company in a low cost and convenient manner.

Up-to-date information about the company, including monthly factsheets, interviews with the Manager and the latest net asset value and price of the Ordinary shares may be found on the Company's website at www.northamericanincome.co.uk.

Alternative Investment Fund Managers (AIFM) Directive

The Alternative Investment Fund Managers Directive ("the Directive") came into force in the UK on 22 July 2013 with a transitional period prior to full implementation during July 2014.  After consideration, the Board has agreed in principle to appoint a subsidiary of Aberdeen Asset Management PLC as the Company's AIFM as required by the Directive, which came into force on 22 July 2013.  The Board expects to be able to implement the changes in cooperation with Aberdeen Asset Managers Limited and other service providers prior to the expiry of the AIFMD's transitional arrangements in July 2014. 

Outlook

The US has seen a recovery.  Economic data look positive: the fiscal deficit has narrowed to 3%-4% of GDP from 10% just a few years ago whilst house prices are rising.  An increase in growth should provide additional support for stock prices as well as corporate profits, which are expected to grow 5-7% in 2014, up from around 6% last year.  The US 'shale revolution' has enabled increasing production of oil and gas and helped to reduce dependence on imported energy, diversifying the economy and providing a fillip to many companies.  Another bright spot is the growth in manufacturing, which tends to lead to job creation in other parts of the economy.

Despite deep ideological differences, Washington reached an uneasy truce that sidesteps the sort of funding crisis that almost shut down the country last year.  Negative impacts from fiscal drag and policy uncertainty are expected to ease. The two-year budget deal agreed by Congress should reduce gridlock on Capitol Hill.  Our manager continues to believe that the operating environment will remain positive for our investments and sees no signs that capital disciplines are declining.  This bodes well for cash generation and the continuation of progressive dividend payments.

In general the market is fairly valued. The S&P 500's price-to-earnings ratio expanded a great deal in 2013 and is back to near historical norms.  The market P-E, based on trailing 12-month earnings, has risen to almost 17x from 14x, however, there is still good value to be found in the type of companies in which we invest. 

Annual General Meeting ("AGM")

The Company's AGM will be held at 2.30 p.m. on Thursday 29 May 2014 at 40 Princes Street, Edinburgh. I hope that we shall see as many shareholders as possible.

James Ferguson

Chairman

19 March 2014

3.         MANAGER'S REVIEW

Market Review

North American equities, as measured by the broader-market S&P 500 Index, posted healthy gains for the 12-month period ended 31 January 2014. The modest decline of the Barclays U.S. Aggregate Bond Index, the US fixed income market benchmark, in sterling terms, was chiefly attributable to negative currency effect. Ten-year US Treasury yields were volatile and in December crossed the 3.0% threshold for the first time since July 2011. The yield subsequently declined in January to 2.67% but was still up 65 basis points over the period.  

The strongest performing sectors within the S&P 500 over the year were healthcare, consumer discretionary and industrials. Whilst recording positive returns, the more defensive and relatively higher dividend-paying sectors of telecommunication services and utilities significantly lagged the overall market and were the weakest performers. This was, in part, a reversal of what we had seen earlier in the year.

Strong equity markets persisted for most of the year (with a few periods of volatility) and hit all-time highs. At the macro level, returns were supported by positive US economic data and the growing expectation that new US Federal Reserve Chair Janet Yellen intended to maintain monetary accommodation. However, unlike in 2011 and 2012, when operating profit growth was meaningful to market performance, the near 30% rally of calendar year 2013 was primarily driven by a valuation re-rating of equities. Investors began to question valuations in January amid news of weak holiday sales and renewed growth fears from China and other emerging markets.

Performance

The Company's net asset value increased by 9.9% in sterling terms over the 12-month period with the equity portion returning 10.9% gross (before expenses); however, this still underperformed the S&P 500 by more than we would like.

As markets moved higher through 2013 our search for high quality dividends remained unchanged. Many of the companies with the highest returns last year had characteristics that rendered them unattractive to us. The rally also favoured smaller companies. Returns were lowest for larger companies and highest for smaller companies. Small, non-dividend paying companies did very well on the whole.  

The underperformance over the year was primarily attributable to three factors: sector allocation, the sterling-based performance of our Canadian holdings and stock-specific detractors.

The asset allocation lowlights were our consumer staples and telecom overweights and our consumer discretionary underweights. Both consumer staples and telecom are natural over-weights given growing cash generation and the willingness of those companies to grow distributions. Both sectors underperformed the reference index during the year.

Our Canadian holdings were impacted by the significant depreciation of the Canadian dollar during the period. This was a tough headwind that only the stock appreciation of Molson Coors managed to offset. The pricing difficulties of fertiliser maker Potash Corporation of Saskatchewan are well documented but appear to be incrementally improving with respect to the more dire expectations. The company expects higher volumes and lower cost of production and we expect to see growing distributions to shareholders. In aggregate, our Canadian investments are characterised by high cash-generation and management teams committed to dividend growth. They are accretive to our yield.

On a stock-specific level, shares of technology-related REIT Digital Realty Trust sold off in the fall of 2013 along with those of other REITs in response to the threat of Fed tapering. The shares also reacted negatively to threats of increased industry supply and accounting changes.  We used the lower valuation to add to our position making it a top three holding. Energy pipeline company TransCanada Corporation posted a weak performance amid uncertainty regarding the future of its Keystone XL pipeline which, if approved by the US government, is projected to transport about 800,000 barrels of oil per day. Given the strength of its long-term project backlog and the limited impact to earnings should the pipeline fail to win approval, we increased our investment. Tobacco company Philip Morris saw disappointing volumes in 2013 amid excise tax increases in several regions and broadly slower growth from many emerging markets.  As might be expected, we maintain our investment because of the high level of cash generation buttressed by its ability to use price to offset volume loss. Additionally, currency weakness in some of the company's principal operating markets (Japan, Indonesia and Thailand) had the effect of lowering earnings due to the translation effect back to a stronger dollar. Finally, our non-holding in Google, which had a strong performance over the reporting period, was a notable detractor from performance. Google's poor governance and lack of dividend distributions render it unsuitable for the Trust.

Nonetheless, there were noteworthy stock selection gains. In particular, our industrials holdings performed well, despite an underweight to the sector. The Trust also benefitted from positive stock selection within the technology sector, particularly our holdings in Microsoft and Paychex, whose shift in capital allocation strategy to grow their shareholder distributions was rewarded.  Non-holdings in high-yielders AT&T and tech device manufacturer Apple have also aided performance.

Overall, the prospective yield on the portfolio is close to 1.5 times that of the S&P 500, and that has grown in the low-double digits. To reiterate, we like the ability of our staple holdings to grow distributions from the combination of low organic growth and operational efficiencies. Operationally, these have performed as expected (with the exception of Philip Morris International), but the market remains uncertain of emerging market earnings for now and wary of overpaying for high dividend paying stocks. This has hurt our investments with an overseas earnings bias. As we manage this risk, we continue to look for domestically focused industrials with attractive yields. Companies like Praxair, Nucor and Republic Services are three such holdings.

Portfolio Activity

After several meetings with management over the past two years, we initiated an investment in Wisconsin Energy. This utility operates in a stable geography, has modest capital expenditure requirements and will use earnings growth to finance a growing dividend. The de-rating that utilities saw in the back end of the year enabled us to buy more cheaply in November. We also initiated a position in Wells Fargo, which is our only US banking investment. We believe that earnings and future dividend growth will be driven by its consistent leading position in business lending to small and medium-sized companies. Share price weakness in Target Corporation (Canadian store roll-out and data breach) was used as an opportunity to re-establish a position. Other new investments made during the year included toy manufacturer Mattel, Praxair and Potash Corporation.

We added to the portfolio's holdings in two REITs, Healthcare Realty Trust and Digital Realty Trust, after a period of weak share price performance for both companies. We later reduced the exposure to Digital Realty Trust after the stock price rose sharply in December and January. Additionally, we increased positions in Microsoft, Philip Morris, and miner Freeport-McMoRan Copper & Gold.

We sold our investment in Kellogg due to ongoing weakness in its core cereal business and a desire to reduce our overall consumer staples weighting. Other sales included packaged foods maker H.J. Heinz, consumer products company Kimberly Clark and pharmaceutical firm Bristol-Myers Squibb. We sold our holding in Lorillard, a tobacco company we had previously maintained as a large weight since the Trust's restructure. Whilst it is one of the highest yielders in the equity portfolio, we felt that regulatory risks around menthol cigarettes had begun to outweigh the attractiveness of its cash-flow and distribution policies. We also trimmed positions as share prices rose in Johnson & Johnson, supplemental life and health insurance provider Aflac, payroll services provider Paychex and consumer products maker Colgate-Palmolive Co.

Although the Trust's equity positioning since the beginning of the year has shifted towards more cyclical sources of dividend income, its overall positioning remains skewed towards high-quality dividend-payers, predominantly consumer non-cyclicals. 

The Trust's fixed income segment had low turnover for the year under review. Portfolio changes made earlier in the year reduced duration and increased exposure to high yield bonds within a smaller fixed income element. These changes reduced the performance drag whilst providing an uplift to the revenue account at lower levels of risk. At the end of the year, the portfolio was positioned with 17 bond holdings, which continue to help diversify the Trust's roughly 40 equity positions, as well as providing some attractive yield uplift. We have been reinvesting the coupon income generated from the fixed income portfolio into the equity segment. Bond holdings represent 9.3% of gross assets and have an average yield to maturity of 5.7% on a 3.9-year average duration with an average credit rating that remains a notch below investment grade. 

Option activity was consistent with prior periods and remains typically equivalent to 5-8% of the Trust's gross assets or an average of 3-4 positions at any one time. As overall portfolio yields have decreased on higher share prices, options have given us scope to add incremental revenues. This activity remains consistent with our own company research and has contributed approximately 20% of trust revenue. 

Dividend Growth

Nearly 90% of our holdings raised their dividends over the past year. The weighted average dividend increase of the equity portfolio is around 10%. Dividend increases are being financed from internal cash flows, and there has been no significant increase in debt financing. Among the noteworthy dividend-raisers were Microsoft, Potash Corporation, Cisco and Wells Fargo, which raised their dividends by 20% or more over the year. Fiscal year 2015 is off to a good start with Dow Chemical, Blackrock, Molson Coors and Cisco all declaring double-digit increases in their regular dividends.

Outlook

On the whole, we continue to believe that the operating environment will remain positive for our investments. We see no signs of capital disciplines declining, which bodes well for cash generation and the continuation of progressive dividend payments. We expect to see modest dividend growth this year as payouts have risen and companies may be encouraged to increase capital expenditures that remain below trend. Activist shareholders and corporate activity will remain a feature of the landscape and holdings like PepsiCo, Proctor & Gamble and Dow Chemical continue to push back "shrink to grow" proposals. 

Our confidence in the operating environment translates to operating profit growth expectations of mid-single digits, in line with historic averages. Productivity or margin improvements are still possible with many of our holdings engaged in rolling efficiency programs. The impact of technology in reducing working capital requirements is underestimated. Dividend-paying stocks were de-rated last year, and we view this as a healthy correction to the number of holdings we viewed as expensive six months ago. While we continue to see strong revenue growth and margin expansion in North America, we also see improvements in the fundamentals of the foreign operations of our holdings, assuming that emerging market worries subside. That said, we are mindful of the impact on the Trust's returns should growth from emerging markets remain below rates seen in the last ten years. This will pressure demand for western consumer goods as well as having secondary impacts on EM currencies which may yet transmit to renewed inflation and higher interest rates. This sequence of events is not our core view but it is one we are mindful of. Lastly, thinking of currencies, we would be surprised to see the magnitude of Canadian dollar weakness and sterling strength repeated this year.

Overall, last year was challenging for the relative performance of the Company's total net asset value. It was a better year for dividend growth. The revenue account saw good growth and gives a solid foundation for the year ahead. In 2014 we could well see a reversal implying potentially lower growth in the revenue account but improved relative performance in the net asset value.  Irrespective, we remain focused on investing in those companies with the best prospects for sustainable dividend growth as well as remaining watchful of valuations, external risks and the implied impact to asset allocation.

Aberdeen Asset Managers Limited

19 March 2014

4.         OVERVIEW OF STRATEGY

Introduction

The Company is an investment trust and its Ordinary shares are listed on the premium segment of the London Stock Exchange. The Company aims to attract long term private and institutional investors wanting to benefit from the income and growth prospects of North American companies.

The Directors do not envisage any change in the Company's activity in the foreseeable future. 

Reference Index

The Board reviews performance against relevant factors, including the S&P 500 Index (in sterling terms) as well as peer group comparisons. The aim to provide investors with above average dividend income from predominantly US equities means that investment performance can diverge, possibly quite materially in either direction, from this or any other index.

Investment Policy

The Company invests in a portfolio predominantly comprised of S&P 500 constituents. The Company may also invest in Canadian stocks and US mid and small capitalisation companies to provide for diversified sources of income. The Company may invest up to 20 per cent. of its gross assets in fixed income investments, which may include non-investment grade debt.

The Company's investment policy is flexible, enabling it to invest in all types of securities, including (but not limited to) equities, preference shares, debt, convertible securities, warrants, depositary receipts and other equity-related securities.

The maximum single investment will not exceed 10 per cent. of gross assets at the time of investment and it is expected that the portfolio will contain around 50 holdings (including fixed income investments), with an absolute minimum of 35 holdings.

The composition of the Company's portfolio is not restricted by minimum or maximum market capitalisation, sector or country weightings.

The Company may borrow up to an amount equal to 20 per cent. of its net assets.

Subject to the prior approval of the Board, the Company may also use derivative instruments for efficient portfolio management, hedging and investment purposes. The Company's aggregate exposure to such instruments for investment purposes (excluding collateral held in respect of any such derivatives) will not exceed 20 per cent. of the Company's net assets at the time of the relevant acquisition, trade or borrowing.

The Company does not generally intend to hedge its exposure to foreign currency.

The Company will not acquire securities that are unlisted or unquoted at the time of investment (with the exception of securities which are about to be listed or traded on a stock exchange). However, the Company may continue to hold securities that cease to be listed or quoted, if appropriate.

The Company may participate in the underwriting or sub-underwriting of investments where appropriate to do so.

The Company may invest in open-ended collective investment schemes and closed-ended funds that invest in the North American region. However, the Company will not invest more than 10 per cent., in aggregate, of the value of its gross assets in other listed investment companies (including listed investment trusts), provided that this restriction does not apply to investments in any such investment companies which themselves have stated investment policies to invest no more than 15 per cent. of their gross assets in other listed investment companies.

The Company will normally be substantially fully invested in accordance with its investment objective but, during periods in which changes in economic conditions or other factors so warrant, the Company may reduce its exposure to securities and increase its position in cash and money market instruments.

The Directors are responsible for determining the investment policy and the investment objective of the Company, while the day-to-day management of the Company's assets has been delegated to Aberdeen Asset Managers Limited (the "Manager" or "Aberdeen"). The Manager invests in a range of North American companies, following a bottom-up investment process based on a disciplined evaluation of companies through direct visits by its fund managers. Stock selection is the major source of added value, concentrating on quality first, then price. Top-down investment factors are secondary in the Manager's portfolio construction, with diversification rather than formal controls guiding stock and sector weights.

Principal Risks and Uncertainties

The principal risks facing the Company relate to the Company's investment activities and include market risk (comprising interest rate risk and other price risk), liquidity risk and credit risk. An explanation of these risks and how they are managed is contained in note 17 to the financial statements.  The Board has adopted a matrix of the key risks that affect its business.

Market and performance risk

The Company is exposed to the effect of variations in share prices and movements in the US$/£ exchange rate due to the nature of its business.  A fall in the market value of its portfolio would have an adverse effect on shareholders' funds.

Gearing risk

As at 31 January 2014 the Company had £14.6 million of borrowings. Gearing has the effect of exacerbating market falls and gains. In order to manage the level of gearing, the Board has set a maximum gearing ratio of 20%. 

Discount volatility

The Company's share price can trade at a discount to its underlying net asset value. The Board monitors the discount level of the Company's shares and will consider share buybacks when the discount exceeds 5% for any significant period of time assuming normal market conditions.

Regulatory risk

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

Dividend

The ability of the Company to pay dividends and any future dividend growth will depend primarily on the level of income received from its investments (which may be affected by currency movements, exchange controls or withholding taxes imposed by jurisdictions in which the Company invests) and the timing of receipt of such income by the Company. Accordingly, there is no guarantee that the Company's dividend income objective will continue to be met and the amount of the dividends paid to Ordinary Shareholders may fluctuate and may go down as well as up.

Derivatives

The Company uses derivatives primarily to enhance the income generation of the Company. The risks associated with such contracts are managed within guidelines set by the Board. 

Debt securities

Any debt securities that may be held by the Company will be affected by general changes in interest rates that will in turn result in increases or decreases in the market value of those instruments. When interest rates decline, the value of the Company's investments in fixed rate debt obligations can be expected to rise and, when interest rates rise, the value of those investments may decline. Adverse changes in the financial position of an issuer of debt securities or general economic conditions may impair the ability of the issuer to meet interest payments and repayments of principal. Accordingly, debt securities that may be held by the Company will also be subject to the inherent credit or default risks associated with the debt securities and there can be no assurance as to the levels of default and/or recovery that may be experienced by the Company with regard to such securities.

Scottish Independence

As a Scottish-registered Company, the Board is aware that there is uncertainty arising in relation to the referendum on Scottish independence due on 18 September 2014.  The Board has given consideration to the implications that this might have for the Company, however, considers that it is too early at this stage to prejudge the outcome of a vote, or of any subsequent negotiations as they may affect the Trust and its shareholders.

Performance and Outlook

At each Board meeting, the Directors consider a number of performance measures to assess the Company's success in achieving its objectives.  The Board also considers the marketing and promotion of the Company, including effective communications with shareholders. The future strategic direction and development of the Company is regularly discussed as part of Board meeting agendas.

A review of the Company's activities and performance during the year to 31 January 2014 and future developments is detailed in the Chairman's Statement and the Manager's Review. This covers market background, investment activity, portfolio strategy, dividend and gearing policy and investment outlook. A comprehensive analysis of the portfolio is provided in the Portfolio of Investments.

Key Performance Indicators (KPIs)

The main KPIs used by the Board in assessing the Company's performance include:

·      Net asset value v reference index (total return) and peer group

·      Premium/Discount

·      Dividend yield

·      Ongoing charges

Details of the Company's results are provided above. 

Duration

The Company does not have a fixed winding-up date, but shareholders are given the opportunity to vote on the continuation of the Company every three years at the Annual General Meeting.  The next continuation vote will be in 2015.

Board Diversity

The Board recognises the importance of having a range of skilled, experienced individuals with the appropriate knowledge in order to allow the Board to fulfill its obligations.  At 31 January 2014, the Board consisted of three males. The Company has no employees.

Employee and Socially Responsible Policies

As the Company has delegated the management of the portfolio, it has no employees and therefore has no requirement for disclosures in this area. The Company's socially responsible investment policy is out in the Statement of Corporate Governance.

Global Greenhouse Gas Emissions

The Company has no greenhouse gas emissions to report from the operations of its Company, nor does it have responsibility for any other emissions producing sources under the Companies Act 2006 (Strategic Report and Directors' Reports) Regulations 2013. 

The Manager's corporate socially responsible policy including environmental policy can be found on http://www.aberdeen-asset.com/aam.nsf/groupCsr/home.

James Ferguson

Chairman

19 March 2014

PORTFOLIO INVESTMENTS

Investment Portfolio - Ten Largest Equity Investments

		Valuation	Total	Valuation
	Industry	2014	assets	2013
Company	classification	£'000	%	£'000
Microsoft
Microsoft manufactures and licenses software products for operating systems, applications, software development and internet services.	Systems Software	11,535	4.0	7,905
Digital Realty Trust
Digital Realty Trust, Inc. is a real estate investment trust (REIT) that engages in the ownership, acquisition, development, redevelopment, and management of technology-related real estate.	Real Estate Investment Trusts	9,761	3.4	5,354
Pepsico
PepsiCo, Inc. operates as a food and beverage company worldwide.	Beverages	9,068	3.2	5,121
Potash Corp Of Saskatchewan
Potash Corporation of Saskatchewan Inc., together with its subsidiaries, produces and sells fertilizers and related industrial and feed products primarily in the United States and Canada.	Chemicals	8,631	3.0	-
Philip Morris
Philip Morris International Inc., through its subsidiaries, manufactures and sells cigarettes and other tobacco products.	Tobacco	8,454	2.9	5,798
Royal Bank of Canada
Royal Bank of Canada, a diversified financial service company, provides personal and commercial banking, wealth management, insurance, investor, and capital markets products and services worldwide.	Commercial Banks	8,430	2.9	5,884
ConocoPhillips
ConocoPhillips is a global energy producer, and also has businesses in refining and transporting commodities.	Oil, Gas & Consumable Fuels	8,181	2.9	7,080
Nucor
Nucor Corporation, together with its subsidiaries, engages in the manufacture and sale of steel and steel products in North America and internationally.	Metals & Mining	8,083	2.8	3,414
Baxter International
Baxter International Inc. develops, manufactures, and markets products for people with hemophilia, immune disorders, infectious diseases, kidney diseases, trauma, and other chronic and acute medical conditions.	Healthcare Equipment & Supplies	7,998	2.8	5,514
TransCanada
TransCanada Corporation operates as an energy infrastructure company in North America.	Oil, Gas & Consumable Fuels	7,928	2.8	6,129
Ten largest equity investments		88,069	30.7

Investment Portfolio - Other Equity Investments
As at 31 January 2014
		Valuation	Total	Valuation
	Industry	2014	assets	2013
Company	classification	£'000	%	£'000
Telus	Diversified Telecommunication Services	7,670	2.7	7,668
Republic Services	Commercial Services & Supplies	7,488	2.6	5,546
Pfizer	Pharmaceuticals	7,399	2.6	5,760
Wells Fargo	Commercial Banks	7,319	2.5	-
Chevron	Oil, Gas & Consumable Fuels	6,997	2.4	7,482
CMS Energy	Multi-Utilities	6,918	2.4	7,289
Intel	Semiconductors & Semiconductor Equipment	6,577	2.3	6,681
Verizon Communications	Diversified Telecommunication Services	6,574	2.3	6,740
Kraft Foods	Food Products	6,504	2.3	6,594
Johnson & Johnson	Pharmaceuticals	6,185	2.2	8,356
Twenty largest equity investments		157,700	55.0
Cisco Systems	Telecommunications Equipment	6,159	2.2	5,691
Dow Chemical	Chemicals	6,038	2.1	3,388
Winsconsin Energy	Multi-Utilities	5,515	1.9	-
CME Group	Investment Services	5,513	1.9	5,545
Freeport-McMoRan Copper & Gold	Metals & Mining	5,427	1.9	3,902
Aflac	Insurance	4,960	1.7	5,617
Procter & Gamble	Household Products	4,772	1.7	5,919
Target	Multiline Retail	4,715	1.7	2,920
Mattel	Leisure Equipment & Products	4,713	1.7	-
Exxon Mobil	Oil, Gas & Consumable Fuels	4,671	1.6	3,916
Thirty largest equity investments		210,183	73.4
Lockheed Martin	Aerospace & Defense	4,539	1.6	5,311
Emerson Electric	Electrical Equipment	4,518	1.6	3,531
Paychex	IT Services	4,128	1.4	7,107
Molson Coors Brewing	Beverages	4,046	1.4	3,235
Blackrock	Capital Markets	3,712	1.3	3,487
Genuine Parts	Distributors	3,543	1.2	4,050
Healthcare Realty Trust	Real Estate Investment Trusts	3,418	1.2	5,205
Sysco	Food & Staples Retailing	3,214	1.1	3,921
Colgate-Palmolive	Household Products	3,089	1.1	1,884
Staples	Specialty Retail	2,976	1.0	5,264
Forty largest equity investments		247,366	86.3
Praxair	Chemicals	2,649	0.9	-
Southern Company	Electric Utilities	2,456	0.9	2,730
Total equity investments		252,471	88.1

Investment Portfolio - Other Investments
As at 31 January 2014
		Valuation	Total	Valuation
	Industry	2014	assets	2013
Company	classification	£'000	%	£'000
HSBC Finance 6.676% 15/01/21	Consumer Finance	2,482	0.9	2,631
General Electric Capital 7.125% Non-Cum Perp Pref	Diversified Financial Services	2,414	0.8	2,561
Qwest 7.25% 15/10/35	Telephone Communications	2,270	0.8	2,477
First Data 7.375% 15/06/19	IT Services	2,262	0.8	2,318
Seagate HDD Cayman 7% 01/11/21	Computer & Office Equipment	2,086	0.7	2,145
Blackstone Holdings Finance 5.875% 15/03/21	Capital Markets	2,058	0.7	2,092
Bombardier 7.75% 15/03/20	Aerospace & Defense	1,728	0.6	1,833
Windstream 7.75% 01/10/21	Diversified Telecommunication Services	1,669	0.6	1,800
Cincinnati Bell 8.375% 15/10/20	Diversified Telecommunication Services	1,657	0.6	1,728
International Lease Finance Corp 6.25% 15/05/19	Diversified Financial Services	1,592	0.6	1,680
Ten largest other investments		20,218	7.1
Hilcorp Energy 8% 15/02/20	Oil, Gas & Consumable Fuels	1,518	0.5	1,614
Alpha Natural Resources 6.25% 01/06/21	Oil, Gas & Consumable Fuels	1,301	0.4	1,476
Taseko Mines 7.75% 15/04/19	Metals & Mining	1,053	0.4	1,053
Post Holdings 7.375% 15/02/22	Food Products	748	0.3	809
Tenneco 6.875% 15/12/20	Auto Components	668	0.2	695
Entergy Louisiana 6.3% 01/09/35	Electric Utilities	517	0.2	535
Genon Energy 9.875% 15/10/20	Independent Power Producers & Energy Traders	516	0.2	583
Total other investments		26,539	9.3
Total equity investments		252,471	88.1
Total investments		279,010	97.4
Net current assets{A}		7,545	2.6
Total assets{A}		286,555	100.0
{A} Excluding bank loan of £14,603,000.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report & Accounts and the financial statements, in accordance with applicable law and regulations. 

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors have elected to prepare the financial statements in accordance with UK Accounting Standards. 

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 these financial statements, the Directors are required to: 

· select suitable accounting policies and then apply them consistently; 

· make judgments and estimates that are reasonable and prudent;

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

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

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

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

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

We confirm that to the best of our knowledge:

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

· that in the opinion of the Directors, the Annual Report and Accounts taken as a whole, is fair, balanced and understandable and it provides the information necessary to assess the Company's performance, business model and strategy; and

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

For The North American Income Trust plc

James Ferguson

Chairman

19 March 2014

GOING CONCERN

The Company's assets comprise mainly readily realisable securities which can be sold to meet funding commitments if necessary. The Company has a two year credit facility in place which is available until July 2015. The Board considers that the Group has adequate financial resources to continue in operational existence for the foreseeable future. Accordingly, the Directors believe that it is appropriate to prepare the financial statements on a going concern basis.

DIVIDENDS

	Rate	xd date	Record date	Payment date
1st Interim dividend 2014	5.50p	3 July 2013	5 July 2013	2 August 2013
2nd Interim dividend 2014	5.50p	2 October 2013	4 October 2013	1 November 2013
3rd Interim dividend 2014	6.00p	22 January 2014	24 January 2014	14 February 2014
Proposed final dividend 2014	10.00p	7 May 2014	9 May 2014	3 June 2014
	________
Total dividends 2014	27.00p
	________
Interim dividend 2013	6.50p	26 September 2012	28 September 2012	26 October 2012
Final dividend 2013	13.00p	24 April 2013	26 April 2013	24 May 2013
	________
Total dividends 2013	19.50p
	________

FINANCIAL STATEMENTS

INCOME STATEMENT (audited)

		Year ended 31 January 2014			Year ended 31 January 2013
		Revenue	Capital	Total	Revenue	Capital	Total
	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Net gains on investments	9	-	12,652	12,652	-	20,480	20,480
Net currency gains/(losses)	16	-	56	56	-	(171)	(171)
Income	2	12,929	-	12,929	8,338	-	8,338
Investment management fee	3	(667)	(1,555)	(2,222)	(515)	(851)	(1,366)
Administrative expenses	5	(616)	-	(616)	(605)	(254)	(859)
		______	______	_____	______	______	_____
Net return on before finance costs and taxation		11,646	11,153	22,799	7,218	19,204	26,422
Finance costs	4	(94)	(219)	(313)	(32)	(74)	(106)
		______	______	_____	______	______	_____
Return on ordinary activities before taxation		11,552	10,934	22,486	7,186	19,130	26,316
Taxation	6	(1,863)	669	(1,194)	(978)	-	(978)
		______	______	_____	______	______	_____
Return on ordinary activities after taxation		9,689	11,603	21,292	6,208	19,130	25,338
		______	______	_____	______	______	_____
Return per share (pence)	8	29.80	35.69	65.49	19.72	60.77	80.49
		______	______	_____	______	______	_____
The total column of this statement represents the profit and loss account of the Company.
A Statement of Total Recognised Gains and Losses has not been prepared as all gains and losses are recognised in the Income Statement.
All revenue and capital items in the above statement derive from continuing operations.
The accompanying notes are an integral part of the financial statements.
Proposed final dividend
The Board is proposing a final dividend of 10.0p per share (£3,334,000), making a total dividend of 27.0p per share (£8,947,000) for the year to 31 January 2014 which, if approved, will be payable on 3 June 2014 (see note 7).
For the year ended 31 January 2013, the final dividend was 13.00p per share (£4,092,000) making a total dividend of 19.50p per share (£6,138,000).

BALANCE SHEET (audited)

		As at	As at
		31 January 2014	31 January 2013
	Notes	£'000	£'000
Fixed assets
Investments at fair value through profit or loss	9	279,010	248,001
		________	________
Current assets
Debtors and prepayments	10	949	843
Cash and short term deposits	16	7,329	9,238
		________	________
		8,278	10,081
		________	________
Creditors: amounts falling due within one year
Bank loan	11	(14,603)	(15,138)
Other payables	11	(733)	(875)
		________	________
		(15,336)	(16,013)
		________	________
Net current liabilities		(7,058)	(5,932)
		________	________
Net assets		271,952	242,069
		________	________
Capital and reserves
Called-up share capital	12	8,335	7,870
Share premium account		48,467	32,643
Capital redemption reserve		14,225	14,225
Capital reserve	13	192,983	181,444
Revenue reserve		7,942	5,887
		________	________
Equity shareholders' funds		271,952	242,069
		________	________
Net asset value per share (pence)	14	815.73	769.00
		________	________

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS (audited)

For the year ended 31 January 2014
		Share	Capital
	Share	premium	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 January 2013	7,870	32,643	14,225	181,444	5,887	242,069
Issue of Ordinary shares	465	15,824	-	-	-	16,289
Return on ordinary activities after taxation	-	-	-	11,603	9,689	21,292
Dividends paid (see note 7)	-	-	-	-	(7,698)	(7,698)
	_____	______	______	______	______	______
Balance at 31 January 2014	8,335	48,467	14,225	193,047	7,878	271,952
	_____	______	______	______	______	______
For the year ended 31 January 2013
		Share	Capital
	Share	premium	redemption	Capital	Revenue
	capital	account	reserve	reserve	reserve	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 31 January 2012	7,870	32,643	14,225	162,314	3,357	220,409
Return on ordinary activities after taxation	-	-	-	19,130	6,208	25,338
Dividends paid (see note 7)	-	-	-	-	(3,678)	(3,678)
	_____	______	______	______	______	______
Balance at 31 January 2013	7,870	32,643	14,225	181,444	5,887	242,069
	_____	______	______	______	______	______
The revenue reserve represents the amount of the Company's reserves distributable by way of dividend.
The accompanying notes are an integral part of the financial statements.

CASH FLOW STATEMENT (audited)

		Year ended		Year ended
		31 January 2014		31 January 2013
	Notes	£'000	£'000	£'000	£'000
Net cash inflow from operating activities	15		9,956		6,198
Servicing of finance
Interest paid			(313)		(102)
Taxation
Overseas withholding tax paid		(1,240)		(957)
		______		______
Net tax paid			(1,240)		(957)
Financial investment
Purchases of investments		(100,760)		(269,518)
Sales of investments		82,336		259,926
		______		______
Net cash outflow from financial investment			(18,424)		(9,592)
Equity dividends paid			(7,698)		(3,678)
			______		______
Net cash outflow before financing			(17,719)		(8,131)
Financing
Issue of Ordinary shares		16,289		-
Drawdown of bank loan		-		15,138
			______		______
Net cash inflow from financing			16,289		15,138
			______		______
(Decrease)/increase in cash			(1,430)		7,007
			______		______
Reconciliation of net cash flow to movement in net debt
(Decrease)/increase in cash as above			(1,430)		7,007
Drawdown of bank loan			-		(15,138)
Exchange movements			56		(171)
			______		______
Movement in net debt in the year			(1,374)		(8,302)
Opening net (debt)/funds			(5,900)		2,402
			______		______
Closing net debt	16		(7,274)		(5,900)
			______		______

NOTES TO THE FINANCIAL STATEMENTS (audited)

1.	Accounting policies
	A summary of the principal accounting policies, all of which, unless otherwise stated, have been consistently applied throughout the year and the preceding year is set out below.
	(a)	Basis of preparation and going concern
		The financial statements have been prepared under the historical cost convention, as modified to include the revaluation of investments and in accordance with the applicable UK Accounting Standards and with the Statement of Recommended Practice 'Financial Statements of Investment Trust Companies and Venture Capital Trusts'. They have also been prepared on the assumption that approval as an investment trust will continue to be granted.
		The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further detail is included in the Directors' Report (unaudited).
		The financial statements and the net asset value per share figures have been prepared in accordance with UK Generally Accepted Accounting Practice (UK GAAP).
	(b)	Income
		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. Special dividends are credited to capital or revenue, according to the circumstances.
		The fixed returns on debt securities are recognised on a time apportionment basis so as to reflect the effective yield on the debt securities and shares.
		Interest receivable from cash and short-term deposits and interest payable is accrued to the end of the year.
	(c)	Expenses
		All expenses are accounted for on an accruals basis and are charged to the Income Statement. Expenses are charged against revenue except as follows:
		·      transaction costs on the acquisition or disposal of investments are charged to the capital account in the Income Statement;
		·      expenses are charged to realised capital reserves where a connection with the maintenance or enhancement of the value of the investments can be demonstrated. In this respect, the investment management fee is allocated 30% to revenue and 70% to realised capital reserves to reflect the Company's investment policy and prospective income and capital growth.
	(d)	Deferred taxation
		Deferred taxation is provided on 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 timing 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 to meet the conditions required to obtain approval for the foreseeable future, the Company has not provided deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.
	(e)	Investments
		All purchases and sales of investments are recognised on the trade date, being the date the Company commits to purchase or sell the investment. Investments are initially recognised and subsequently re-measured at fair value in the Income Statement. Transaction costs on purchases and sales are expensed through the Income Statement.
	(f)	Borrowings
		Monies borrowed to finance the investment objectives of the Company are stated at the amount of the net proceeds immediately after issue plus cumulative finance costs less cumulative payments made in respect of the debt. The finance costs of such borrowings are accounted for on an accruals basis using the effective interest rate method and are charged 30% to revenue and 70% to realised capital reserves to reflect the Company's investment policy and prospective income and capital growth.
	(g)	Dividends payable
		Interim and final dividends are recognised in the period in which they are paid.
	(h)	Capital reserve
		Gains or losses on realisation of investments and changes in fair values of investments which are readily convertible to cash, without accepting adverse terms, are transferred to the capital reserve. The costs of share buybacks are also deducted from this reserve.
	(i)	Foreign currency
		Assets and liabilities in foreign currencies are translated at the rates of exchange ruling on the Balance Sheet date. Transactions involving foreign currencies are converted at the rate ruling on the date of the transaction. Gains and losses on the realisation of foreign currencies are recognised in the Income Statement and are then transferred to the capital reserve.
	(j)	Traded options
		The Company may enter into certain derivatives (e.g. options). Option contracts are accounted for as separate derivative contracts and are therefore shown in other assets or other liabilities at their fair value. The initial fair value is based on the initial premium, which is recognised upfront. The premium received and fair value changes in the open position which occur due to the movement in underlying securities are recognised in the revenue column, losses realised on the exercise of the contracts are recorded in the capital column of the Income Statement.
		In addition, the Company may enter into derivative contracts to manage market risk and gains or losses arising on such contracts are recorded in the capital column of the Income Statement.

		2014	2013
2.	Income	£'000	£'000
	Income from overseas listed investments
	Dividend income	8,210	6,463
	REIT income	544	286
	Interest income from investments	1,634	1,178
		______	______
		10,388	7,927
		______	______
	Other income from investment activity
	Traded option premiums	2,534	410
	Deposit interest	7	1
		______	______
		2,541	411
		______	______
	Total income	12,929	8,338
		______	______
	During the year, the Company was entitled to premiums totalling £2,534,000 (2013 - £410,000) in exchange for entering into derivative transactions. This figure includes a mark to market on derivative contracts open at each year end. At the year end there were 2 open positions, valued at a liability of £14,000 (2013 - liability of £226,000) as disclosed in note 11. Losses realised on the exercise of derivative transactions are disclosed in note 9.

		2014			2013
		Revenue	Capital	Total	Revenue	Capital	Total
3.	Investment management fee	£'000	£'000	£'000	£'000	£'000	£'000
	Investment management fee	667	1,555	2,222	515	851	1,366
		______	______	______	______	______	______
	The management fee is payable to Aberdeen Asset Managers Limited ("Aberdeen") based on 0.8% per annum of gross assets after deducting current liabilities and excluding commonly managed funds, payable quarterly.
	The management agreement between the Company and Aberdeen is terminable by either party on three months' notice. In the event of a resolution being passed at the AGM to wind up the Company the Manager shall be entitled to three months' notice from the date the resolution was passed. In the event of termination on not less than the agreed notice period, compensation is payable in lieu of the unexpired notice period. The balance due to Aberdeeen at the year end was £548,000 (2013 - £488,000).

		2014			2013
		Revenue	Capital	Total	Revenue	Capital	Total
4.	Finance costs	£'000	£'000	£'000	£'000	£'000	£'000
	Bank loans	94	219	313	32	74	106
		______	______	______	______	______	______

		2014			2013
		Revenue	Capital	Total	Revenue	Capital	Total
5.	Administrative expenses	£'000	£'000	£'000	£'000	£'000	£'000
	Directors' fees	54	-	54	54	-	54
	Registrar's fees	50	-	50	44	-	44
	Custody and bank charges	31	-	31	64	-	64
	Secretarial fees	100	-	100	67	-	67
	Auditor's remuneration (excl. irrecoverable VAT):
	Fees payable to the Company's auditor for the audit of the annual accounts	15	-	15	15	-	15
	Fees payable to the Company's auditor for other services:
	Other servics	1	-	1	-	-	-
	Contribution to the Investment Trust Initiative	184	-	184	106	-	106
	Printing, postage and stationery	25	-	25	29	-	29
	Fees, subscriptions and publications	54	-	54	37	-	37
	Standard & Poors' licence fee	6	-	6	4	-	4
	Professional fees	58	-	58	156	254	410
	Other expenses	38	-	38	29	-	29
		______	______	______	______	______	______
		616	-	616	605	254	859
		______	______	______	______	______	______
	The Company has an agreement with Aberdeen Asset Managers Limited ("Aberdeen") for the provision of secretarial and administration services. The fee is payable monthly in advance and based on an index-linked annual amount of £100,000 (2013 - £100,000) and there was a accrual of £17,000 (2013 - £17,000) at the year end. The agreement is terminable on three months' notice.
	The contribution to the Investment Trust Initiative is paid to the Manager in respect of marketing of the Company. At the year end £71,000 was due (2013 - £57,000 due) to the Manager.
	Professional fees allocated to capital in the year to 31 January 2013 relate to the change in the investment mandate.

				2014					2013
				Revenue		Capital		Total	Revenue		Capital		Total
6.	Taxation			£'000		£'000		£'000	£'000		£'000		£'000
	(a)	Analysis of charge for the year
		UK corporation tax		605		(605)		-	-		-		-
		Overseas tax suffered		1,258		-		1,258	978		-		978
				______		______		______	______		______		______
		Current tax charge for the year		1,863		(605)		1,258	978		-		978
		Deferred taxation		-		(64)		(64)
				______		______		______	______		______		______
		Total tax		1,863		(669)		1,194	978		-		978
				______		______		______	______		______		______
	(b)	Factors affecting the tax charge for the year The UK corporation tax rate was 24% until 31 March 2013 and 23% from 1 April 2013 giving an effective rate of 23.17% (2013 - effective rate of 24.33%). The tax assessed for the year is lower than the rate of corporation tax. The differences are explained below:
			2014						2013
			Revenue		Capital		Total		Revenue	Capital		Total
			£'000		£'000		£'000		£'000	£'000		£'000
		Net profit on ordinary activities before taxation	11,552		10,934		22,486		7,186	19,130		26,316
			______		______		______		______	______		______
		Corporation tax at 23.17% (2013 - 24.33%)	2,676		2,533		5,209		1,748	4,654		6,402
		Effects of:
		Non taxable overseas dividends	(1,902)		-		(1,902)		(1,572)	-		(1,572)
		Unutilised management expenses	(169)		(194)		(363)		(176)	287		111
		Irrecoverable overseas withholding tax	1,258		-		1,258		978	-		978
		Capital gains not taxable	-		(2,931)		(2,931)		-	(4,983)		(4,983)
		Currency gains not taxable	-		(13)		(13)		-	42		42
			______		______		______		______	______		______
		Current tax charge	1,863		(605)		1,258		978	-		978
			______		______		______		______	______		______
	(c)	Provision for deferred taxation
		A provision for deferred taxation has been made in the current year due to the Company expecting to fully utilise the losses brought forward in the following year (2013 - £nil). The Company has not provided for deferred tax on capital gains or losses arising on the revaluation or disposal of investments as it is exempt from tax on these items because of its status as an investment trust company.

		2014	2013
7.	Dividends	£'000	£'000
	Amounts recognised as distributions to equity holders in the year:
	Final dividend for 2013 - 13.0p per share (2012 - 5.2p)	4,092	1,637
	1st interim dividend for 2014 - 5.5p per share (2013 - 6.5p)	1,798	2,046
	2nd interim dividend for 2014 -5.5p per share (2013 - n/a)	1,815	-
	Unclaimed dividends from previous years	(7)	(5)
		______	______
		7,698	3,678
		______	______
	The proposed third interim dividend was unpaid at the year end and the final dividend for 2014 is subject to approval by shareholders at the Annual General Meeting. Accordingly, neither has been included as a liability in these financial statements.
	The table below sets out the total dividends paid and proposed in respect of the financial year, which is the basis on which the requirements of Sections 1158-1159 of the Corporation Tax Act 2010 are considered. The revenue available for distribution by way of dividend for the year is £9,689,000 (2013 - £6,208,000).
		2014	2013
		£'000	£'000
	1st interim dividend for 2014 - 5.5p per share (2013 - 6.5p)	1,798	2,046
	2nd interim dividend for 2014 -5.5p per share (2013 - n/a)	1,815	-
	3rd interim dividend for 2014 - 6.0p per share (2013 - n/a)	2,000	-
	Proposed final dividend for 2014 - 10.0p per share (2013 - 13.0p)	3,334	4,092
	Unclaimed dividends from previous years	(7)	(5)
		______	______
		8,940	6,133
		______	______
	The amount payable for the proposed final dividend above is based on the Ordinary shares in issue at the date of this Report (33,338,582) and this satisfies the investment trust status test.

		2014		2013
8.	Return per Ordinary share	£'000	p	£'000	p
	Based on the following figures:
	Revenue return	9,689	28.60	6,208	19.72
	Capital return	11,603	35.69	19,130	60.77
		______	______	______	______
	Total return	21,292	65.49	25,338	80.49
		______	______	______	______
	Weighted average number of Ordinary shares in issue		32,511,787		31,478,582
			________		________

		2014	2013
9.	Investments	£'000	£'000
	Fair value through profit or loss:
	Opening fair value	248,001	217,966
	Opening investment holdings gains	(36,295)	(68,246)
		______	______
	Opening book cost	211,706	149,720
	Purchases at cost	100,760	269,518
	Sales - proceeds	(82,336)	(259,926)
	Sales - realised gains{A}	18,201	52,431
	Amortisation of fixed income book cost	(67)	(37)
		______	______
	Closing book cost	248,264	211,706
	Closing investment holdings gains	30,746	36,295
		______	______
	Closing fair value	279,010	248,001
		______	______
	Listed on overseas stock exchanges	279,010	248,001
		______	______
		2014	2013
	Gains on investments	£'000	£'000
	Realised gains on sales{A}	18,201	52,431
	Movement in investment holdings gains	(5,549)	(31,951)
		______	______
		12,652	20,480
		______	______
	{A} Includes losses realised on the exercise of traded options of £1,524,000 (2013 - £26,000) offset by premium received of £2,534,000 (2013 - £410,000) per note 2.
	Transaction costs
	During the year expenses were incurred in acquiring or disposing of investments classified as fair value through profit or loss. These have been expensed through capital and are included within gains on investments in the Income Statement. The total costs were as follows:
		2014	2013
		£'000	£'000
	Purchases	113	69
	Sales	129	71
		______	______
		242	140
		______	______

		2014	2013
10.	Debtors: amounts falling due within one year	£'000	£'000
	Dividends receivable	412	314
	Interest receivable	417	475
	Deferred tax	64	-
	Other debtors and prepayments	47	45
	Overpayment of dividend	9	9
		______	______
		949	843
		______	______

			2014	2013
11.	Creditors: amounts falling due within one year		£'000	£'000
	(a)	Bank loan	14,603	15,138
			______	______
		At the year end, the Company's secured bank loan of US$24,000,000 (2013 - US$24,000,000) equivalent to £14,603,000 (2013 - £15,138,000) was drawn down from the £30 million multi-currency revolving loan facility provided by State Street Bank and Trust Company at an all-in interest rate of 1.6595% (2013 - 1.7017%) with a maturity date of 28 February 2014.
		At the date of signing this report US$24,000,000 was drawn down to 28 March 2014 at an interest rate of 1.6545%.
		The terms of the loan facility contain covenants that gross borrowings should not exceed 25% of net assets and should not exceed 30% of adjusted assets.
			2014	2013
	(b)	Other payables	£'000	£'000
		Investment management fee payable	548	488
		Interest payable	4	4
		Traded option contracts	14	226
		Other creditors	167	157
			______	______
			733	875
			______	______

		2014	2013
12.	Called-up share capital	£'000	£'000
	Allotted, called-up and fully paid:
	Opening balance	7,870	7,870
	Shares issued during the year	465	-
		______	______
	33,338,582 (2013 - 31,478,582) Ordinary shares of 25p each	8,335	7,870
		______	______
	During the year the Company issued 1,860,000 (2013 - nil) Ordinary shares of 25p each for a total consideration of £16,289,000 (2013 - £ nil).
	There have been no buy-backs or share issues of Ordinary shares since the year end, leaving 33,338,582 Ordinary shares in issue at the date of this report.

		2014	2013
13.	Capital reserve	£'000	£'000
	At 1 February	181,444	162,314
	Movement in fair value gains	12,652	20,480
	Foreign exchange movements	56	(171)
	Tax relief to capital	605	-
	Deferred tax	64
	Administrative expenses	-	(254)
	Finance costs of bank loan	(219)	(74)
	Investment management fees	(1,555)	(851)
		______	______
	At 31 January	193,047	181,444
		______	______
	The administration expenses of £254,000 in the year to 31 January 2013 relate to the change in investment policy.
	Included in the total above are investment holdings gains at the year end of £30,746,000 (2013 - £36,295,000).
	The Directors regard the total capital reserve as being available to fund share buy-backs.

14.	Net asset value per equity share
	The net asset value per share and the net assets attributable to the Ordinary shareholders at the year end were as follows:
		2014	2013
	Net assets attributable	£271,952,000	£242,069,000
	Number of Ordinary shares in issue	33,338,582	31,478,582
	Net asset value per share	815.73p	769.00p

15.	Reconciliation of net return before finance costs and	2014	2013
	taxation to net cash inflow from operating activities	£'000	£'000
	Return on ordinary activities before finance costs and taxation	22,799	26,422
	Adjustments for:
	Net gains on investments	(12,652)	(20,480)
	Foreign exchange movements	(56)	171
	Amortisation of fixed income book cost	67	37
	Increase in accrued income	(58)	(619)
	Increase in other debtors	(2)	(5)
	(Decrease)/increase in other creditors	(142)	672
		______	______
	Net cash inflow from operating activities	9,956	6,198
		______	______

		At			At
		1 February	Cash	Exchange	31 January
		2013	flow	movements	2014
16.	Analysis of changes in net debt	£'000	£'000	£'000	£'000
	Cash and short term deposits	9,238	(1,430)	(479)	7,329
	Debt due within one year	(15,138)	-	535	(14,603)
		______	______	______	______
	Net debt	(5,900)	(1,430)	56	(7,274)
		______	______	______	______
	A statement reconciling the movement in net debt to the net cash flow has not been presented as there are no differences from the above analysis.

17.	Derivatives and other financial instruments
	Risk management
	The Company's financial instruments, other than derivatives, 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.
	Subject to Board approval, the Company also has the ability to enter into derivative transactions, in the form of traded options, for the purpose of enhancing income returns and portfolio management. During the year, the Company entered into certain derivative contracts. As disclosed in note 2, the premium received and fair value changes in respect of options written in the year was £2,534,000. Positions closed during the year realised a loss of £1,524,000. The largest position in derivative contracts held during the year at any given time was £886,000 (2013 - £331,000).  The Company had open positions in derivative contracts at 31 January 2014 valued at a liability of £14,000 as disclosed in note 11.
	The Manager has a dedicated investment management process, which aims to ensure that the investment policy is achieved. Stock selection procedures are in place based on the active portfolio management and identification of stocks. The portfolio is reviewed on a periodic basis by a Senior Investment Manager and also by the Manager's Investment Committee.
	The Company's Manager has an independent Investment Risk department for reviewing the investment risk parameters of all core equity, fixed income and alternative asset classes on a regular basis. The department reports to the Manager's Performance Review Committee which is chaired by the Manager's Chief Investment Officer. The department's responsibility is to review and monitor ex-ante (predicted) portfolio risk and style characteristics using best practice, industry standard multi-factor models.
	Additionally, the Manager's Compliance department continually monitors the Company's investment and borrowing powers and reports to the Manager's Risk Management Committee.
	The main risks the Company faces from its financial instruments are (i) market risk (comprising interest rate risk, currency risk and other price risk), (ii) liquidity risk and (iii) credit risk.
	The Board regularly reviews and agrees policies for managing each of these risks. The Manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term debtors and creditors, other than for currency disclosures.
	(i)	Market risk
		The fair value or future cash flows of a financial instrument held by the Company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk and other price risk.
		Interest rate risk
		Interest rate movements may affect:
		the fair value of the investments in fixed interest rate securities;
		the level of income receivable on cash deposits;
		interest payable on the Company's variable rate borrowings.
		The possible effects on fair value and cash flows that could arise as a result of changes in interest rates are taken into account when making investment and borrowing decisions.
		The Board reviews on a regular basis the values of the fixed interest rate securities.
		The Board imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. Borrowings comprise fixed rate, revolving, and uncommitted facilities. Details of borrowings at 31 January 2014 are shown in note 11.
		Interest risk profile
		The interest rate risk profile of the portfolio of financial assets and liabilities at the Balance Sheet date was as follows:
			Weighted
			average period for		Weighted
			which		average					Non-
			rate is fixed		interest rate		Fixed rate		Floating rate	interest bearing
		At 31 January 2014	Years		%		£'000		£'000	£'000
		Assets
		Sterling	-		0.25		-		3,568	-
		US Dollar	7.28		6.22		24,125		3,587	230,857
		Canadian Dollar	-		-		-		174	24,028
			______		______		______		______	______
		Total assets					24,125		7,329	254,885
			______		______		______		______	______
		Liabilities
		Bank loans	0.08		1.66		(14,603)		-	-
			______		______		______		______	______
		Total liabilities					(14,603)		-	-
			______		______		______		______	______
			Weighted
			average
			period for		Weighted
			which		average					Non-
			rate is fixed		interest rate		Fixed rate		Floating rate	interest bearing
		At 31 January 2013	Years		%		£'000		£'000	£'000
		Assets
		Sterling	-		0.25		-		2,882	-
		US Dollar	8.39		5.91		26,897		6,306	201,423
		Canadian Dollar	-		-		-		50	19,681
			______		______		______		______	______
		Total assets					26,897		9,238	221,104
			______		______		______		______	______
		Liabilities
		Bank loans	0.08		1.70		(15,138)		-	-
			______		______		______		______	______
		Total liabilities					(15,138)		-	-
			______		______		______		______	______
		The weighted average interest rate is based on the current yield of each asset, weighted by its market value. The weighted average interest rate on bank loans is based on the interest rate payable, weighted by the total value of the loans. The maturity date of the Company's loan is disclosed in note 11.
		The floating rate assets consist of cash deposits at prevailing market rates.
		The non-interest bearing assets represent the equity element of the portfolio.
		Short-term debtors and creditors have been excluded from the above tables.
		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.
		The rate of interest on the loan is the percentage rate per annum which is the aggregate of the applicable margin, adjusted LIBOR Offered Rate and mandatory cost if any.
		If interest rates had been 100 basis points higher or lower (based on current parameter used by Manager's Investment Risk Department on risk assessment) and all other variables were held constant, the Company's revenue return for the year ended 31 January 2014 would increase/decrease by £73,000 (2013 - increase/decrease by £92,000). This is mainly attributable to the Company's exposure to interest rates on its floating rate cash balances. These figures have been calculated based on cash positions at each year end.
		In the opinion of the Directors, the above sensitivity analyses are not representative of the year as a whole, since the level of exposure changes frequently as part of the interest rate risk management process used to meet the Company's objectives. The risk parameters used will also fluctuate depending on the current market perception.
		Foreign currency risk
		The Company's portfolio is invested mainly in US quoted 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.
		The revenue account is subject to currency fluctuation arising on overseas income.
		Foreign currency risk exposure by currency of denomination is detailed underInterest Risk Profile.
		Foreign currency sensitivity
		There is no sensitivity analysis included as the Company's significant foreign currency financial instruments are in the form of equity investments, and they have been included within the other price risk sensitivity analysis so as to show the overall level of exposure.
		Other price risk
		Other price risks (ie 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 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.
		Other price risk sensitivity
		If market prices at the Balance Sheet date had been 10% higher or lower while all other variables remained constant, the return attributable to Ordinary shareholders for the year ended 31 January 2014 would have increased/decreased by £27,901,000 (2013 - increase/decrease of £24,800,000) 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. Short-term flexibility is achieved through the use of loan (note 11).
	(iii)	Credit risk
		This is failure of the counterparty to a transaction to discharge its obligations under that transaction that could result in the Company suffering a loss.
		The risk is not significant, and is managed as follows:
		·      where the Manager makes an investment in a bond, corporate or otherwise, the credit ratings of the issuer are taken into account so as to manage the risk to the Company of default;
		·      investments in quoted bonds are made across a variety of industry sectors so as to avoid concentrations of credit risk;
		·      transactions involving derivatives are entered into only with investment banks, the credit rating of which is taken into account so as to minimise the risk to the Company of default;
		·      investment transactions are carried out with a number of brokers, whose credit-standing is reviewed periodically by the Manager, and limits are set on the amount that may be due from any one broker;
		·      the risk of counterparty exposure due to failed trades causing a loss to the Company is mitigated by the review of failed trade reports on a daily basis. In addition, both stock and cash reconciliations to the custodian's records are performed on a daily basis to ensure discrepancies are investigated on a timely basis. The Manager's Compliance department carries out periodic reviews of the custodian's operations and reports its finding to the Manager's Risk Management Committee.
		·      cash is held only with reputable banks with acceptable credit quality. It is the Manager's policy to trade only with A- and above (Long Term rated) and A-1/P-1 (Short Term rated) counterparties.
		Credit risk exposure
		In summary, compared to the amounts in the Balance Sheet, the exposure to credit risk at 31 January 2014 was as follows:
				2014				2013
				Balance		Maximum		Balance		Maximum
				Sheet		exposure		Sheet		exposure
				£'000		£'000		£'000		£'000
		Debtors and prepayments		949		949		843		843
		Cash and short term deposits		7,329		7,329		9,238		9,238
				______		______		______		______
				8,278		8,278		10,081		10,081
				______		______		______		______

18.	Capital management policies and procedures
	The capital of the Company consists of equity, comprising issued capital, reserves and retained earnings. The Board monitors and reviews the broad structure of the Company's capital on an ongoing basis. This review includes the impact of share buybacks and the extent to which revenue should be retained. The Company is not subject to any externally imposed capital requirements.

19.	Fair value hierarchy
	FRS 29 'Financial Instruments: Disclosures' requires an entity 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 has the following levels:
	Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
	Level 2: inputs other than quoted prices included within Level 1 that are observable for the assets or liability, either directly (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 of financial position are grouped into the fair value hierarchy as follows:
	As at 31 January 2014
			Level 1	Level 2	Level 3	Total
		Note	£'000	£'000	£'000	£'000
	Financial assets at fair value through profit or loss
	Quoted equities	a)	252,471	-	-	252,471
	Quoted bonds	b)	26,539	-	-	26,539
			______	______	______	______
	Net fair value		279,010	-	-	279,010
			______	______	______	______
	Financial liabilities at fair value through profit or loss
	Derivatives	c)	(14)	-	-	(14)
			______	______	______	______
	Net fair value		(14)	-	-	(14)
			______	______	______	______
	As at 31 January 2013
			Level 1	Level 2	Level 3	Total
		Note	£'000	£'000	£'000	£'000
	Financial assets at fair value through profit or loss
	Quoted equities	a)	218,543	-	-	218,543
	Quoted bonds	b)	29,458	-	-	29,458
			______	______	______	______
	Net fair value		248,001	-	-	248,001
			______	______	______	______
	Financial liabilities at fair value through profit or loss
	Derivatives	c)	(226)	-	-	(226)
			______	______	______	______
	Net fair value		(226)	-	-	(226)
			______	______	______	______
	a) Quoted equities
	The fair value of the Company's investments in quoted equities has been determined by reference to their quoted bid prices at the reporting date. Quoted equities included in Fair Value Level 1 are actively traded on recognised stock exchanges.
	b) Quoted bonds
	The fair value of the Company's investments in quoted bonds has been determined by reference to their quoted bid prices at the reporting date. Bonds included in Fair Value Level 1 include Corporate Bonds.
	c) Derivatives
	The fair value of the Company's investments in exchange traded options has been determined using quoted prices on an exchange traded basis and therefore have been classed as Level 1.

ADDITIONAL NOTES TO THE ANNUAL FINANCIAL REPORT

This Annual Financial Report announcement is not the Company's statutory accounts for the year ended 31 January 2014. The statutory accounts for the year ended 31 January 2014 received an audit report which was unqualified.

The statutory accounts for the financial year ended 31 January 2014 were approved by the Directors on 19 March 2014 but will not be filed with the Registrar of Companies until after the Company's Annual General Meeting which is to be held at 2.30 pm on 29 May 2014 at 40 Princes Street, Edinburgh EH2 2BY.

The Annual Report will be posted to shareholders in April 2014 and additional copies will be available from the Manager (Investor Helpline - Tel. [phone]) or by download from the Company's webpage

(www.northamericanincome.co.uk)

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

For The North American Income Trust plc

Aberdeen Asset Management PLC, Secretaries

 

END

 

 

FR JLMBTMBABTJI