Annual Report and Accounts

RNS Number : 5329O

Scottish American Investment Co PLC

09 March 2009

 



Regulatory Announcement

THE SCOTTISH AMERICAN INVESTMENT COMPANY P.L.C.

ANNUAL REPORT AND ACCOUNTS AND PROPOSED NEW ARTICLES OF ASSOCIATION

Copies of the Annual Report and Accounts for the year ended 31 December 2008 and the proposed new articles of association of the Company 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 Annual Report and Accounts for the year ended 31 December 2008 is also available on the SAINTS page of the Managers website at:

www.saints-it.com

At the annual general meeting to be held on 9 April 2009, it is proposed that new articles of association be adopted in order to update the Company's 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 Notice of Annual General Meeting within the Annual Report and Accounts for the year ended 31 December 2008. The new articles of association are available for inspection at the offices of Dickson Minto WS, Royal London House, 22-25 Finsbury Square, London EC2A 1DX and at the offices of Baillie Gifford & Co, Calton Square, 1 Greenside Row, Edinburgh EH1 3AN.

The unedited full text of those parts of the Annual Report and Accounts for the year ended 

Baillie Gifford & Co

Company Secretaries

9 March 2009

CHAIRMAN'S STATEMENT

Overview

Financial markets and the global economy were struck by a grave crisis during 2008.  The crisis had its origins in the excessive levels of debt that had become prevalent in many parts of the global financial system and amongst private households in some of the developed economies, notably the United States.   Its impact, particularly from late September onwards, was severe - equity markets experienced steep declines, credit and interbank lending markets ceased to function properly, and economic activity slowed dramatically.

It is against this backdrop that we report a significant decline in net asset value per share from 272.7p at the start of the year to 145.3p at the year end. The share price reflected the decline in net asset value by falling from 240p to 130.5p.

In contrast to capital performance, investment income grew strongly and underpinned a 23% rise in earnings per share to 10.5p. The earnings per share number includes a re-imbursement from HM Treasury of previous VAT payments which is explained in more detail later. Nonetheless, it is a strong result and one which supports an increased dividend for 2008. We propose a final quarterly dividend of 2.25p which will mean a total dividend for 2008 of 8.8p, a rise of 6.7 % on the previous year. 2008 was the fifth successive year in which dividend growth substantially outpaced inflation.

After the inclusion of dividends, the total return for the year was -44.4%. This compares to a total return on the benchmark index of -26.1%. Most of this underperformance occurred in the second half of the year, when the financial crisis was at its worst. A full explanation of performance and how the portfolio was positioned is given in the Managers' Overview and Portfolio Review.

The severity of the financial crisis and its global nature are without precedent in the post-war period.  We also know from previous banking crises that the contractions in economic activity that follow such episodes can be deep and prolonged. However, governments and central banks around the world are tackling current problems with great urgency and vigour. We believe these efforts will have a positive effect over time. Already there are some signs that interbank lending markets are operating more normally and risk premia in credit markets have reduced a little in the opening weeks of 2009.  

Asset valuations are also at their lowest levels for many years and, although we cannot know with certainty how markets will behave in the short run, it is our view that long run returns from current levels will be strong.

Borrowings

SAINTS' borrowings take the form of a single debenture due for repayment in April 2022.  The book value of these borrowed funds is £88.3m although the final repayment amount will be £80m, a function of the debenture having been issued at a premium to its par value.  

We believe that over time, and in more normal market conditions than experienced during 2008, the use of gearing can, potentially, give rise to better returns to shareholders than would otherwise be possible.  However, during periods when markets fall, this gearing can work in the opposite direction, as it did during 2008.  

At the start of the year the book value of the debenture amounted to 23.9% of shareholders' funds but this had risen to 44.0% by the year end because of the decline in net asset value.  

Change of Benchmark and Cost Allocation Policy

The portfolio now has a more international spread of investments. At the interim stage, we announced a change in the composite index that we use for performance comparisons.  This change, from 70% FTSE All-Share and 30% FTSE World ex UK (in sterling terms) to 50% FTSE All-Share and 50% FTSE All World Ex UK (in sterling terms), took effect from 1 January 2009.  

The Board believes that a more international portfolio has the potential to deliver better long term capital returns.  This potential derives from the greater number of investment opportunities that are available to the Manager and from the increased exposure to faster growing economies. Consequently, the Board has decided to change the basis of allocation whereby finance costs and management fees are charged to the revenue and capital accounts.  Previously the costs had been allocated on a 50:50 basis but from 2009 onwards will be allocated 35% to revenue and 65% to capital, reflecting the Board's expected long-term split of returns generated by the portfolio. 

Buy-backs and Treasury Shares

The power to buy back shares was renewed at last year's Annual General Meeting and shareholders will have an opportunity to authorise it renewal at this year's AGM.  The Board is mindful of the enhancement to net asset value that can accrue to shareholders through use of buy-backs and of the preference of shareholders to avoid undue volatility in the discount. However, with the discount narrowing in 2008 from 12% at the start of the year to 10.6% by year end, the Board did not exercise the buy back powers.

VAT

In 2007, the European Court of Justice ruled that investment trust management fees should be exempt from VAT.  This decision was accepted by HM Revenue and Customs and the Company sought to recover VAT incurred in previous years.  

The Company recovered £880,000 of VAT and associated interest for the period 2004 to 2007 which was allocated to income and capital accounts in the proportions by which it had previously been charged.  This benefited the revenue account by approximately 0.27p per share.

The claim for the period prior to Baillie Gifford's management has yet to be agreed between the previous manager and HM Revenue and Customs and as recovery remains uncertain there has been no accrual in this accounting year for VAT relating to periods prior to 2004.

The Board and the AGM

As indicated last year, Dr Morgan retired from the Board during the year after 16 years of service. I am very grateful for her valued support, full commitment and considerable contribution over that period. I am pleased to welcome Rachel Lomax as a Director. Ms Lomax served as Deputy Governor of the Bank of England between 2003 and 2008. Her previous appointments included being Permanent Secretary at several government departments, Chief of Staff to the President of the World Bank, Head of the Economic and Domestic Secretariat at the Cabinet Office and Principal Private Secretary to the Chancellor of the Exchequer and deputy Chief Economic Adviser. The Board believes that her considerable expertise will prove very beneficial to shareholders. Having been appointed during the year, Ms Lomax is required to seek election by shareholders at the forthcoming AGM.

Following the introduction of the Companies Act 2006, a number of changes to the Articles of Association are proposed. These are detailed in the Annual Report, which will be posted to shareholders and will be available on the SAINTS page of the Managers' website (www.saints-it.com) on or around 9 March 2009.

All shareholders are invited to the AGM which will be held at Baillie Gifford's offices at Calton Square, 1 Greenside Row, Edinburgh on Thursday 9 April at 11.00am. Mr Edwardson will make a short presentation on the investment position and the Directors look forward to meeting you.

MANAGER'S OVERVIEW AND PORTFOLIO REVIEW

Managers' Overview

At the start of 2008, investment markets were under considerable strain as a result of various liquidity issues that had emerged the previous year in credit and banking markets. We thought this would result in volatile market conditions and slowing economic growth during 2008. However, we felt that investment prospects were reasonable because many markets had already experienced falls and, we thought, discounted much of the bad news.

This assessment was too optimistic. It underestimated the severity of the financial crisis that subsequently engulfed markets during 2008 and the ensuing deterioration in the economic outlook. Consequently, the portfolio was not well positioned to withstand the significant market declines that occurred.

The magnitude of the financial crisis reflected the size of the imbalances which had built up within countries and across the global economy over the last two decades. Over that period, consumers in the US, the UK and other developed economies took on ever higher levels of debt.  At the same time, innovation in financial instruments, aspects of the regulatory framework and remuneration structures that emphasized short term profits over long term results encouraged higher gearing levels in the global financial system. This was sustainable as long as borrowers paid interest costs and met repayment obligations in a timely fashion and if lenders were confident and financially strong. However, the equilibrium did not hold. Instead, capital markets fell into a vicious circle in which fear of rising default rates caused credit to be withheld which in turn undermined growth and raised the likelihood of higher defaults. Moreover, heightened expectations of defaults and loan losses caused the market prices of many bonds and financial assets to fall, thus eroding the capital strength of banks and their ability to supply credit.  

At various points during the first half of the year, it looked as if this cycle might have been broken by action on the part of central banks and governments. However, the collapse of a number of US financial institutions during August and September, particularly the bankruptcy of investment bank Lehman Brothers, broke market confidence. Willingness to take risk disappeared and markets fell dramatically. 

The gravity of the situation was recognised by governments which moved to shore up the banking system and stimulate activity by introducing various fiscal packages. At the same time, central banks cut interest rates and flooded inter-bank lending markets with liquidity. Collapse was avoided, but not before significant damage had been done to economic confidence.

Managers' Portfolio Review

This report details how each part of the portfolio performed during the year but, by way of a general comment, it would be fair to say we did not foresee the scale of the financial crisis nor its impact on the global economy. In particular, we did not expect the market turmoil that occurred during September and October. Consequently, we went in to that period with the portfolio fully invested and with too many holdings that proved sensitive to the deterioration in confidence and economic prospects.

Equities

On average during the year, 70% of the portfolio was invested in equities. As a percentage of shareholders' funds, the average figure was 91%.

The equity investments bore the full brunt of the economic and financial crisis. Market indices in every major market fell significantly but our portfolio incurred greater losses, returning -36% against the benchmark return of -26%.  

Our stock picking during 2008 was poor. The most costly holdings were in UK banks, particularly Royal Bank of Scotland, HBOS and Barclays which suffered precipitous share price declines. We were braced for large falls in these banks' profits and persuaded ourselves this was discounted in their share prices. We did not anticipate that market confidence and liquidity would fall so far as to undermine the basic viability of these businesses nor, therefore, did we foresee the need for the Government's involvement in highly dilutive recapitalisations.

We also lost ground through our choice of oil stocks. We have not been enthused in recent years by the large oil majors listed in developed markets (the exception being BG). Instead we have preferred emerging market oil producers such as Brazilian company Petrobras which we believe can grow production volumes more quickly. However, in 2008, the market favoured the former because of their strong balance sheets and high dividend payouts.

Together, these two sectors account for the bulk of our underperformance in equities. Elsewhere in the portfolio, the large positions in tobacco manufacturing stocks were very helpful and we did well out of various positions in insurance companies and a preference for mobile telecoms over fixed line operators. However, these gains were offset by the absence of large pharmaceutical companies (whose share prices rose as defensive stocks came increasingly into favour), poor timing of transactions in the mining sector and investments in a number of other sectors and stocks which proved sensitive to the deterioration in economic prospects.

Looking at the geographic spread of the portfolio, a shift out of UK stocks and into overseas markets meant we benefited from the weakness in sterling. For the year as a whole, a little over half of the equity investments were listed outside of the UK but by year end two-thirds of the portfolio comprised overseas stocks. We believe this shift will bring long run benefits. A greater portion of the portfolio invested globally will give us a broader range of stocks to choose from and greater exposure to faster growing markets.

Quoted Equity Forestry Investments

The quoted equity forestry investments are represented by a single, large holding in Cambium Global Timberland. This is an AIM listed investment fund with a diversified portfolio of forestry plantations in various locations around the world including Brazil, Australia and the US. The holding was on average 4% of the portfolio during 2008 which equates to 5% of shareholders' funds.

During 2008, the net asset value of the Cambium fund rose slightly. However, the fund's share price fell with equity markets. This was disappointing and it leaves the fund trading at a substantial discount to its asset value. We remain of the view that this investment will make a very worthwhile contribution to the portfolio over the medium to long term and the possibility that the discount might narrow adds an extra element to returns in the shorter term.

Quoted Equity Property Investments

The investments in quoted property funds proved very costly to performance. On average through 2008, the value of these holdings represented 4.5% of the portfolio, or a little under 6% of shareholders' funds. All of our holdings experienced steep declines in their market value.

All bar one of these funds are listed on the UK stock market but their investment portfolios are located in Europe, China and Japan where property valuations have generally held up better than in the UK, particularly when expressed in sterling terms. However, the share prices have slumped as the market has focused on the prospect of further valuation declines and gearing levels.

We also expect valuations to decline further but we believe the share price falls have already exceeded the likely falls in net asset value for these funds. Each individual holding will be subject to careful review but, in aggregate, we believe these investments to be valued by the market some way below their true worth.

Direct Property

The direct investments in UK commercial property are managed by OLIM Ltd, a specialist in property investment. On average in 2008 they represented 7.5% of the portfolio, or 10% of shareholders' funds.

Commercial property values in the UK fell significantly in 2008. SAINTS' investments were affected by this difficult environment but the falls in their valuations were less severe than the declines experienced by the broader market.

As in previous years, the properties are fully occupied and generating an attractive and growing level of income.

Fixed Interest

The investments in bond markets represented just over 12% of the portfolio on average during 2008, equivalent to 16% of shareholders' funds. They delivered a small positive return but this was mainly as a result of exchange gains. In local currency terms, the investments were less rewarding.  

The performance of bond markets in 2008 can be split between those securities issued by highly rated governments and most other types of bonds. Government bonds generally rose in price as the financial crisis gathered strength, partly in response to falling short term interest rates, partly a function of their appeal as a safe haven. In other bond markets, prices either fell or failed to keep up with the gains being recorded by government bonds. Consequently, credit spreads, which had been widening since the middle of 2007, rose to historically high levels.

This increase in the returns on offer from credit markets has encouraged us to invest a large portion of the portfolio in a range of higher yielding instruments. This move was made in stages through the year and some of the earlier investments saw price falls in the second half of the year. However, from current levels, we think these investments are capable of delivering substantial capital gains as well as providing very large income flows.

The single largest investment has been in the Athena Debt Opportunities Fund. This fund is managed by London based investment firm Prytannia and is invested in various forms of structured and securitised debt. We have also invested in two other open-ended funds. One is a loan fund managed by Dublin based Harbourmaster Capital Management. The other is the Baillie Gifford High Yield Bond Fund. Both give exposure to the debt of companies with relatively low credit ratings and relatively high levels of gearing. This sort of investment is not without its risks, but we believe the returns on offer outweigh the possibility of losses arising from defaults.

Alongside these pooled fund investments, we also have a number of directly held securities. Some of these are new investments made this year. Others, such as the Brazil index linked bond and the insurance linked notes issued by Bay Haven and Fremantle have been in the portfolio throughout the year.  

Outlook

It is clear that the financial crisis has caused a very serious slowdown in the global economy. The developed world is likely to experience an outright contraction in economic activity. Growth rates in the emerging markets may remain positive but will be very significantly lower than in recent years, particularly in those countries where international trade plays an important role in their economies.  

We still face a period, perhaps prolonged, of falling profits and rising default rates. It is also the case that the measures being taken to revive the global economy do not address the principal cause of the crisis, namely excessive debt. Households will still need to consume less and save more and the banking and financial system will continue working towards lower levels of leverage. Neither is supportive of a quick return to strong growth. Nonetheless, the nature and scale of the policy response are extraordinary. We expect financial markets to recover confidence at some point and for economic activity to recover.

Financial markets have also moved a very long way in the last eighteen months. To a considerable degree, they already discount harsh economic conditions. We believe that equity markets are attractive at current levels with cyclically adjusted earnings yields back down to or below long run historic averages. Credit markets offer rich pickings with yields at levels that imply economic conditions as bad as those experienced in the early 1930s, an outcome we view as very unlikely given the magnitude of the fiscal and monetary response. Property yields are also now attractive, particularly when compared to government bond yields. Just as financial markets fell before the full effects of the credit crisis hit the real economy, so we expect them to recover in advance of any substantial improvement in the global economy.  

ASSET ALLOCATION

	At 31 December 2008 %		At 31 December 2007 %
UK Quoted Equities*	22.1		45.6
Overseas Quoted Equities*	41.4		30.2
Total Quoted Equities*	63.5		75.8
Direct property	8.3		6.5
Quoted Equity Property Investments	2.2		6.3
Quoted Equity Forestry Investments	3.5		3.8
Quoted Fixed Interest	21.2		6.9
Unquoted	0.7		0.3
Net Liquid Assets	0.6		0.4
	100.0		100.0

* Excludes quoted equity property and forestry investments.

PERFORMANCE ATTRIBUTION

for the year ended 31 December 2008

Portfolio Breakdown	Average allocation		Total return*			Contribution to relative return %	Stock Selection %	Asset Allocation %
	SAINTS %	Benchmark %	SAINTS %		Benchmark %
UK Quoted Equities*	44.6	70.0	(47.2)	(29.9)		(9.2)	(10.6)	1.5
Overseas Quoted Equities*	46.0	30.0	(26.1)	(17.1)		(3.4)	(5.7)	2.5
Total Quoted Equities*	90.6	100.0	(36.4)	(26.1)		(12.6)	(16.3)	4.0
Direct Property	9.8		(13.6)			0.9		0.9
Quoted Equity Property Investments	5.9		(70.3)			(4.2)		(4.2)
Quoted Equity Forestry Investments	5.1		(31.9)			(0.5)		(0.5)
Quoted Fixed Interest	16.0		2.8			3.6		3.6
Unquoted	0.6		42.5			0.4		0.4
Debenture at Book Value	(30.4)		6.8			(10.7)		(10.7)
Deposits and Other Items	2.4		-			(1.6)		(1.6)
Portfolio Total Return (debenture at book value)			(42.4)	(26.1)		(22.0)	(16.3)	(7.9)
Adjustment for change in fair value of debenture			(0.8)
Portfolio Total Return (debenture at fair value)			(43.2)	(26.1)		(23.1)
Expenses and other items			(1.2)
Fund Total Return (debenture at fair value)			(44.4)

The above returns are calculated on a total return basis with net income reinvested. Contributions cannot be added together as they are calculated on a geometric basis.

* Excludes quoted equity property and forestry investments.

Past performance is not a guide to future performance.

Source: Baillie Gifford & Co

THIRTY LARGEST HOLDINGS at 31 December 2008
Name	Classification	Business	2008		2007
			Value £'000	% of total assets	Value £'000
Athena 2007 F/R 31/12/37	Fixed Interest	Debt opportunities fund	13,908	4.8	-
Brazil CPI Linked 15/05/2045	Fixed Interest	Brazilian government bond	10,190	3.5	16,699
Cambium Global   Timberland	Quoted Equity Forestry Inv.	Forestry investment fund	10,050	3.5	15,750
Petrobras	Overseas	Integrated oil	9,641	3.3	24,581
Bay Haven FRNs 2009/10	Fixed Interest	Insurance-linked bond	9,101	3.2	6,625
UBS and UBS 8% 2009 †	Overseas	Banking	6,935	2.4	-
China Mobile	Overseas	Mobile telecommunication services	6,392	2.2	-
Baillie Gifford High Yield   Bond Fund	Fixed Interest	High yield bond fund	6,310	2.2	-
Baillie Gifford Greater    China Fund	Overseas	Investment fund	6,010	2.1	-
Amazon.com	Overseas	Online retailer	5,771	2.0	7,539
Quorum Oil and Gas	United Kingdom	Oil Industry technology fund	5,565	1.9	5,024
British American Tobacco	United Kingdom	Cigarette manufacturer	5,435	1.9	11,299
Vodafone	United Kingdom	Mobile telecommunication services	5,294	1.8	9,511
Holiday Village in New    Romney	Direct property	Holiday village	5,250	1.8	5,800
British Gas 7.25% 2008†	United Kingdom	Oil and gas producer	5,090	1.8	11,536
Imperial Tobacco	United Kingdom	Tobacco	5,027	1.7	-
Atlas Copco	Overseas	Engineering	4,750	1.6	6,052
Philip Morris International	Overseas	Cigarette manufacturer	4,511	1.6	-
Barclays Bank 14% 2019	Fixed Interest	Bank bond	4,261	1.5	-
Man Group 11% Perpetual	Fixed Interest	Financial bond	4,173	1.4	-
Deere	Overseas	Farm machinery	4,019	1.4	-
Nursing home in    Kenilworth	Direct property	Nursing home	4,000	1.4	4,950
SAP	Overseas	Business software developer	3,930	1.4	4,238
Harbourmaster Senior    Loan Fund	Fixed Interest	Leveraged loan fund	3,816	1.3	-
CVRD	Overseas	Iron ore mining	3,774	1.3	7,233
Samsung Electronics	Overseas	Electrical component manufacturer	3,758	1.3	4,495
Teva Pharmaceuticals	Overseas	Pharmaceuticals	3,402	1.2	2,693
Fremantle FRNs 2008/10	Fixed Interest	Insurance-linked bond	3,372	1.2	2,512
Rexam 6.75% 2017-67	Fixed Interest	Commercial bond	3,339	1.1	-
Public house/restaurant in    Nottingham	Direct property	Public house/restaurant	3,300	1.1	4,750
Penn West Energy Trust	Overseas	Oil and natural gas income trust	3,275	1.1	5,649
			173,649	60.0	156,936

†These investments are structured notes, the capital performance of which are dependent upon the prices of the respective companies.

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 were appointed as Investment Managers and Secretaries with effect from 1 January 2004. The management contract can be terminated at six months' notice. Baillie Gifford's fee is 0.45% of total assets less current liabilities, excluding the property portfolio. The property portfolio is managed by OLIM Limited. This agreement can be terminated on three months' notice. OLIM's annual fee is 0.5% of the value of the property portfolio, subject to a minimum quarterly fee of £6,250.

The details of the management fees are shown in note 3.

PRINCIPAL RISKS AND UNCERTAINTIES

The Company's assets consist mainly of listed securities and its principal risks are therefore market related and include 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 or its profits available for dividend rather than to minimise the short term volatility.

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

Other risks faced by the Company include the following:

Regulatory risk - failure to comply with the applicable legal and regulatory requirements could lead to suspension of the Company's Stock Exchange Listing, financial penalties or a qualified audit report. Breach of section 842 of the Income and Corporation Taxes Act 1988 could lead to the Company being subject to tax on capital gains. Baillie Gifford's Heads of Business Risk & Internal Audit and Regulatory Risk provide regular reports to the Audit Committee on Baillie Gifford's monitoring programmes. The Managers monitor investment movements and the level of forecast income and expenditure to ensure the provisions of section 842 are not breached.

Operational/financial Risk - failure of the Managers' accounting systems or those of other third party service providers could lead to an inability to provide accurate reporting and monitoring or a misappropriation of assets. The Board reviews the Managers' Report on Internal Controls and the reports by other key third party providers are reviewed by the Manager on behalf of the Board.

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 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 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 they comply with applicable UK accounting standards, 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 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 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 a 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 
SIR BRIAN IVORY
23 February 2009

INCOME STATEMENT

	For the year ended 31 December 2008				For the year ended 31 December 2007
	Revenue £'000	Capital £'000		Total £'000	Revenue £'000	Capital £'000	Total £'000
Net (losses)/gains on investments - securities	-	(160,818)		(160,818)	-	460	460
Currency (losses)/gains	-	(5,265)		(5,265)	-	53	53
Income (note 2)	20,901	-		20,901	17,751	-	17,751
Management fees	(832)	(832)		(1,664)	(1,053)	(1,053)	(2,106)
Recovered VAT (note 3)	419	388		807	-	-	-
Other administrative expenses	(824)	-		(824)	(885)	-	(885)
Net return before finance costs and taxation	19,664	(166,527)		(146,863)	15,813	(540)	15,273
Finance costs of borrowings	(3,002)	(3,002)		(6,004)	(3,089)	(3,089)	(6,178)
Net return on ordinary activities before taxation	16,662	(169,529)		(152,867)	12,724	(3,629)	9,095
Tax on ordinary activities	(2,757)	2,414		(343)	(1,379)	1,116	(263)
Net return on ordinary activities after taxation	13,905	(167,115)		(153,210)	11,345	(2,513)	8,832
Net return per ordinary share (note 4)	10.50p		(126.14p)	(115.64p)	8.56p	(1.89p)	6.67p

STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES

	For the year ended 31 December 2008			For the year ended 31 December 2007
	Revenue £'000	Capital £'000	Total £'000	Revenue £'000	Capital £'000	Total £'000
Net return on ordinary activities after taxation	13,905	(167,115)	(153,210)	11,345	(2,513)	8,832
Net losses on investments - property	-	(5,875)	(5,875)	-	(309)	(309)
Total recognised gains and losses for the year	13,905	(172,990)	(159,085)	11,345	(2,822)	8,523
Total recognised gains and losses  per ordinary share (note 4)	10.50p	(130.58p)	(120.08p)	8.56p	(2.13p)	6.43p

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

All revenue and capital items in these statements derive from continuing operations.

BALANCE SHEET

	At 31 December 2008		At 31 December 2007
	£'000		£'000
Fixed Assets
Investments - securities	263,441		428,429
Investments - property	23,950		29,825
		287,391		458,254
Current Assets
Debtors	2,857		1,645
Cash and deposits	2,928		7,628
	5,785		9,273
Creditors
Amounts falling due within one year	(4,089)		(7,433)
Net Current Assets		1,696		1,840
Total Assets Less Current Liabilities		289,087		460,094
Creditors
Amounts falling due after more than one year (note 6)		(88,312)		(88,708)
Net Assets		200,775		371,386
Share Capital and Reserves
Called-up share capital		33,121		33,121
Capital redemption reserve		22,781		22,781
Capital reserve - realised		118,609		286,437
Capital reserve - unrealised		9,162		14,324
Revenue reserve		17,102		14,723
Shareholders' funds		200,775		371,386
Net Asset Value Per Ordinary Share:
(Debenture at fair value)		145.3p		272.7p
Net Asset Value Per Ordinary Share:
(Debenture at book value)		151.5p		280.3p
Ordinary Shares In Issue (note 7)		132,485,943		132,485,943

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS 

For the year ended 31 December 2008 

	Share capital £'000	Capital redemption reserve £'000	Capital reserve - realised £'000	Capital reserve - unrealised £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 January 2008	33,121	22,781	286,437	14,324	14,723	371,386
Total recognised gains and losses for the year	-	-	(167,828)	(5,162)	13,905	(159,085)
Dividends paid in the year	-	-	-	-	(11,526)	(11,526)
Shareholders' funds at 31 December 2008	33,121	22,781	118,609	9,162	17,102	200,775

For the year ended 31 December 2007 

	Share capital £'000	Capital redemption reserve £'000	Capital reserve - realised £'000	Capital reserve - unrealised £'000	Revenue reserve £'000	Total shareholders' funds £'000
Shareholders' funds at 1 January 2007	33,121	22,781	200,533	103,050	14,109	373,594
Transfer between reserves	-	-	83,164	(83,164)	-	-
Total recognised gains and losses for the year	-	-	2,740	(5,562)	11,345	8,523
Dividends paid in the year	-	-	-	-	(10,731)	(10,731)
Shareholders' funds at 31 December 2007	33,121	22,781	286,437	14,324	14,723	371,386

CASH FLOW STATEMENT
	For the year ended 31 December 2008			For the year ended 31 December 2007
	£'000	£'000		£'000	£'000
NET CASH INFLOW FROM OPERATING ACTIVITIES		17,707			14,195
SERVICING OF FINANCE
Interest Paid	(6,400)			(6,549)
NET CASH OUTFLOW FROM SERVICING OF FINANCE		(6,400)			(6,549)
TAXATION
Overseas tax	(327)			(253)
TOTAL TAX PAID		(327)			(253)
FINANCIAL INVESTMENT
Acquisitions of investments	(179,148)			(150,312)
Disposals of investments	179,057			158,966
Forward currency contracts	(4,479)			805
NET CASH (OUTFLOW)/INFLOW FROM FINANCIAL INVESTMENT		(4,570)			9,459
EQUITY DIVIDENDS PAID		(11,526)			(10,731)
(DECREASE)/INCREASE IN CASH		(5,116)			6,121
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
(Decrease)/increase in cash		(5,116)			6,121
Other non-cash changes		396			371
Translation difference		416			93
MOVEMENT IN NET DEBT IN THE YEAR		(4,304)			6,585
NET DEBT AT 1 JANUARY		(81,080)			(87,665)
NET DEBT AT 31 DECEMBER		(85,384)			(81,080)

NOTES 

1.	The financial statements for the year to 31 December 2008 have been prepared on the basis of the accounting policies set out in the Company's Annual Financial Statements to 31 December 2007.
2.	Income
					2008								2007
					£'000								£'000
	Franked investment income				6,986								8,129
	UK unfranked investment income				1,214								770
	Overseas dividends				6,215								3,847
	Overseas interest				4,106								2,447
					18,521								15,193
	Deposit income				295								447
	Rental income				1,835								2,072
	Other income				250								39
					20,901								17,751
3.	Recovered VAT
	In 2007 the European Court of Justice ruled that investment trust management fees should be exempt from VAT. Since then HMRC have accepted the Managers' repayment claims for the periods from 2004 to 2007 and the Company has received a reimbursement of £807,000 of VAT, together with interest thereon of £73,000 during the year. In accordance with guidance from the AIC, the VAT recovered has been allocated between revenue and capital on the same basis as the VAT expense was originally charged and the interest received has been allocated wholly to revenue. The Board is in discussion with the previous Managers about sums recoverable for previous periods but no amount has been provided for in the financial statements as the outcome remains uncertain.
4.	Returns per ordinary share
		2008								2007
			Revenue	Capital			Total				Revenue			Capital			Total
	Net return per ordinary share (Income Statement)		10.50p	(126.14p)			(115.64p)				8.56p			(1.89p)			6.67p
	Total recognised gains and losses per ordinary share		10.50p	(130.58p)			(120.08p)				8.56p			(2.13p)			6.43p
	Net return per ordinary share is based on the return on ordinary activities after taxation figures in the Income Statement and on 132,485,943 ordinary shares of 25p, being the number of ordinary shares in issue during each year. Total recognised gains and losses per ordinary share is based on the total recognised gains and losses for the year in the Statement of Total Recognised Gains and Losses and on 132,485,943 ordinary shares of 25p, being the number of ordinary shares in issue during each year. There are no dilutive or potentially dilutive shares in issue.

NOTES (cont'd)

5.	Ordinary dividends
							2008				2007
		2008		2007			£'000				£'000
	Amounts recognised as distributions in the year:
	Previous year's final (paid 14 April 2008)	2.15p		2.00p			2,848				2,650
	First interim (paid 30 June 2008)	2.15p		2.00p			2,848				2,649
	Second interim (paid 30 September 2008)	2.20p		2.05p			2,915				2,716
	Third interim (paid 31 December 2008)	2.20p		2.05p			2,915				2,716
		8.70p		8.10p			11,526				10,731
	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 out of current year profits by way of dividend for the year is £13,905,000 (2007 - £11,345,000).
		2008		2007			2008 £'000				2007 £'000
	Dividends paid and proposed in the year:
	First interim (paid 30 June 2008)	2.15p		2.00p			2,848				2,649
	Second interim (paid 30 September 2008)	2.20p		2.05p			2,915				2,716
	Third interim (paid 31 December 2008)	2.20p		2.05p			2,915				2,716
	Current year's proposed final dividend (payable 15 April 2009)	2.25p		2.15p			2,981				2,848
		8.80p		8.25p			11,659				10,929
	If approved the final dividend of 2.25p will be paid on 15 April 2009 to all shareholders on the register at the close of business on 13 March 2009.
6.	The market value of the 8% Debenture Stock 2022 at 31 December 2008 was £96.6m (2007 - £98.8m)
7.	At 31 December 2008, the Company had the authority to buy back 19,859,642 of its own shares. No shares were bought back during the year under review.
8.	Reconciliation of net return before finance costs  and taxation to net cash inflow from operating activities
					2008 £'000					2007 £'000
	Net return before finance costs and taxation				(146,863)					15,273
	Losses/(gains) on investments - securities				160,818					(460)
	Currency losses/(gains)				5,265					(53)
	Increase in accrued income				(1,207)					(282)
	Increase/(decrease) in other debtors				(21)					6
	Increase/(decrease) in creditors and prepaid income				477					(282)
	Other non-cash changes				(762)					(7)
					17,707					14,195
9.	The Report and Accounts will be available on the SAINTS page of the Managers' website www.saints-it.com on or around 9 March 2009.

NOTES (cont'd)

10.

The financial information set out above does not constitute the Company's statutory accounts for the year ended 31 December 2008. The financial information for 2007 has been extracted from the statutory accounts for 2007. The statutory accounts for 2007 have been delivered to the Registrar of Companies. The Auditors have reported on the 2007 accounts, their report was unqualified and did not contain a statement under section 237(2) or (3) of the Companies Act 1985. The statutory accounts for 2008 are unaudited and will be finalised on the basis of the financial information presented in this preliminary announcement. They will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

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