Annual Financial Report

RNS Number : 4986D

Securities Trust of Scotland PLC

16 May 2012

 



Securities Trust of Scotland plc

Annual report

Year to 31 March 2012

The financial information set out below does not constitute the company's statutory accounts for the years ended 31 March 2012 or 2011 but is derived from those accounts.  Statutory accounts for the year ended 31 March 2011 have been delivered to the Registrar of Companies and those for the year ended 31 March 2012 will be delivered following the company's annual general meeting.  The auditor's have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under s498(2) or (3) Companies Act 2006.

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

The annual general meeting of the company will be held at the offices of Martin Currie, Saltire Court, 20 Castle Terrace, Edinburgh, EH1 2ES on Wednesday 18 July 2012 at 12.30pm.  Full notice of the meeting can be found within the Annual Report and Accounts.

The unedited full text of those parts of the annual report and accounts for the year ended 31 March 2012, which require to be published are set out on the following pages.

Financial Summary

Key data

	As at 31 March 2012	As at 31 March 2011	% change
Net asset value per share	119.75p	117.35p	+2.1
Share price	122.00p	108.00p	+13.0
MSCI World High Dividend Yield Index #	556.70	559.36	-0.5
FTSE All-Share index	3,002.78	3,067.73	-2.1
Discount	(1.88%)	7.97%
Average (premium)/discount+	(2.65%)	7.41%

Total returns*

	Year ended 31 March 2012	Year ended   31 March 2011
Share price	17.8%	14.3%
Net asset value per share	5.8%	12.6%
Benchmark #	5.0%	8.7%

Income

	Year ended 31 March 2012	Year ended 31 March 2011
Revenue return per share	5.22p**	4.41p
Dividend per share	4.70p	4.65p

# Prior to 1 August 2011, the company's benchmark was the FTSE All-Share index and the MSCI World High Dividend Yield index thereafter

+ Average discount/(premium) over twelve week period to 31 March (based on capital only net asset value)

* The combined effect of any dividends paid, together with the rise or fall in the net asset value, index or share price

**0.41p of the increase in revenue return per share is attributable to transitional impact of the change of mandate

Total expense ratio

	Year ended 31 March 2012	Year ended 31 March 2011
Excluding performance fee	0.7%	0.7%
Performance fee*	0.3%	0.4%
Total	1.0%	1.1%

Five year record

Annual total returns with dividends reinvested over 12 month periods to 31 March

	2012	2011	2010	2009	2008
Share price	17.8%	14.3%	58.9%	(39.1%)	(14.5%)
Net asset value per share	5.8%	12.6%	55.8%	(35.9%)	(15.0%)
Benchmark #	5.0%	8.7%	52.3%	(29.3%)	(7.7%)

Source: Martin Currie

*The performance fee for year ended 31 March 2012 relates to the period from 1 April 2011 to 31 July 2011

# Prior to 1 August 2011, the Trust's benchmark was the FTSE All-Share index and the MSCI World High Dividend Yield index thereafter

Chairman's Statement

I am pleased to report that in the 12 months to 31 March 2012, investment returns were ahead of benchmark. The net-asset-value total return was 5.8% compared with the composite benchmark's return of 5.0%. The share-price total return was 17.8%, reflecting a significant narrowing of the discount over the year.  Indeed the company has consistently traded at a premium over the last 5 months of the reporting period and continues to trade at a premium today.

The manager's review explains how these returns were achieved against a backdrop of global market volatility, and how the portfolio is positioned for the coming months.

Revenues and dividends

The revenue return over the year to 31 March 2012 was 5.22p per share, an increase of 18.4% compared with 4.41p per share in the year to 31 March 2011.

Much of the increase was attributable to the transitional impact of the transitional change of mandate.

Three interim dividends of 1.15p per share have been paid this year, and the board has declared a fourth interim dividend of 1.25p per share, making a total of 4.7p for the year. This represents a yield of 3.9% on the share price at 31 March 2012. This increases the total dividend for the year by 1.1% and delivers your board's objective of providing rising income for shareholders through steady growth in dividends. The dividend will be paid on 29 June 2012 to shareholders on the register on 1 June 2012.

Articles of Association

New conditions for a company being approved as an investment trust came into force with effect for accounting periods beginning on or after 1 January 2012. As a result of the change in legislation there is no longer a requirement for there to be prohibition on the distribution as a dividend of surpluses arising from the realisation of investments. The Department for Business, Innovation and Skills has proposed corresponding amendments to the definition of 'investment company' in the Companies Act 2006 to bring it into line with the conditions for 'investment trust' status.

The board therefore seeks shareholder approval at the AGM to amend the articles of association to permit the distribution of capital profits by way of a dividend.

Borrowing

The company has a short-term loan facility of £11 million. During the year, the company maintained the level of gearing between 9% and 11%. This allowed the manager to enhance returns for shareholders over the period.

Discount management

Encouragingly, demand for shares in the company has been strong since the move to a global equity income mandate. Over the last five months of the reporting period, the company has consistently traded at a premium, which, as at 31 March 2012, was 1.9% on a cum-income basis.

As a result, the board has not had to buy back shares over the period.

Simplification of fee structure

On 20 April 2012, the company announced a change in the management fee structure. The basic annual management fee of the company is now 0.6% of net assets per annum. This took effect at the start of the company's current financial year (1 April 2012).

Previously, the basic annual management fee was 0.3% of net assets per annum, supported by a performance fee arrangement subject to outperformance of the trust's benchmark.

Following the company's successful change in mandate to a global equity income strategy on 1 August 2011, the investment manager waived the right to receive any performance fee for the eight-month period from 1 August 2011 until 31 March 2012

Given the changing demands of the market place and the advent of the Retail Distribution Review, the board wished to ensure that the company's new mandate was complemented by a straightforward and competitive fee structure. With the expected total expense ratio at below 1%, this secures good value for shareholders and positions Securities Trust of Scotland strongly against its open-ended and closed-ended fund peer groups.

Outlook

The board welcomes the positive outcomes achieved by the change in mandate and is committed to ensuring that shareholders continue to benefit over the longer term. We firmly believe that the attractions of a global equity income portfolio remain compelling, both in terms of the diversified source of income such a strategy can provide and also the potential for high total returns.

Uncertainty remains in markets, particularly within the Eurozone, but we believe our exposure to wider global markets will help cushion any short or medium term Euro issues.

Thank you for your continued support; please contact me if you have any questions regarding your company.

Annual General Meeting

I would like to invite all shareholders to attend the annual general meeting of the company to be held at 12.30pm on 18 July 2012 at the offices of Martin Currie, Saltire Court, 20 Castle Terrace, Edinburgh.

Company Secretary

It is with regret that I report that Tamsin Hooton, our company secretary since 2007, is leaving our manager, Martin Currie, in May to relocate overseas. Your board have valued her capable skills and consistently professional approach. We wish her every success in her travels and future endeavours.

We are fortunate to welcome Victoria Timlin as her successor. Victoria holds a law degree and is a qualified chartered accountant and we look forward to working with her.

Neil Donaldson

Chairman

16 May 2011

Manager's Review

The year under review was a volatile one for global equity markets. The relative stability of the first few months gave way in July to sharp declines, followed by a rally that started in October and lasted until the year-end. In capital terms, global markets ended the year pretty much where they had started, despite a 23% drop from May's peak to October's trough, and a 23% rally from October to year-end. High dividend yield stocks performed marginally better than the broader market until early August, then outperformed strongly in the weak markets until October, but gave up these gains as the broader market rallied toward the year-end.

So what were the drivers of this market volatility? In equity-market investing, confidence is all, and last year greed swung to fear and back again. Investors' confidence had risen, with a few wobbles along the way, from the trough in global markets in March 2009 until May 2011, over which time markets had doubled. At that point, a number of macroeconomic issues came back into focus. The most prevalent was the indebtedness of governments in the US and much of continental Europe, along with the effects of deleveraging on global growth. Economic statistics released from the US, the world's largest economy, remained weak and, to add insult to injury, the S&P credit-rating agency downgraded the US from its top 'AAA' rating. At the same time, concerns mounted in Europe regarding the solvency of the peripheral countries, particularly Greece. Even the existence of the euro in its current form was called into question. Dealing with that particular problem has been, and will remain, difficult given the number of countries involved and the lack of a single eurozone-wide fiscal policy. While these were the key issues in much of the developed market world, the biggest developing markets of Brazil, Russia, India and China (the BRICs) were having their own problems. Here the issue was inflationary pressures and signs of overheating leading to tightening policies.

The response of policymakers to these issues encouraged market participants to overcome their fear. In effect, the developing- market policymakers appear to be achieving the right balance between encouraging growth and keeping a lid on inflation, while their developed-market counterparts have simply thrown money at the debt crisis, which will delay rather than resolve it.

For the full year the portfolio outperformed the benchmark by 0.8%. This included a strong outperformance of the FTSE All Share index up to the point of the mandate change and a small underperformance since then.

The first part of the year saw strong contribution from basic materials and energy stocks. These included the specialty chemicals companies Elementis and Croda. In addition a couple of consumer names were strong including British American Tobacco and Next.

After August's mandate change the main stock contributors were the more defensive names including Abbott Laboratories and Pfizer, the US healthcare companies, as well as Lawson, the Japanese convenience store. Key detractors included Suez Environment, the French utility, which suffered from contract issues in Australia, and Vivendi, the French media and telecoms company which was affected by new competition in the French mobile market.

When the portfolio transitioned from UK to global in August, we initiated a defensive stance as we felt markets were at risk of falling in absolute terms. In practice, this meant keeping an underweight position in the cyclical areas of the market and being focused on quality companies with strong enduring franchises that offered some element of growth. We felt markets were at risk because economic data remained negative, companies were cautious and not investing, and valuations were not particularly attractive. Towards the end of the year, we noted that a broader number of US economic releases were improving, and there was evidence that investor cash levels were close to record highs. In addition, valuations were looking attractive and corporate results were robust. We therefore took the decision to move from a bearish to a neutral stance by increasing our exposure to cyclicals, funding this by reducing some of our most defensive stocks.

Purchases included PNC Financial, the US regional bank; WorleyParsons, the Australian oil services firm; and Safran, the French aircraft engine builder. At PNC Services (PNC), the key positive changes include increasing loan growth and an improving credit environment. In addition, we like PNC's quality characteristics of a low loan-to-deposit ratio and strong capital ratios. The company's dividend is also recovering strongly. Meanwhile, we see positive change in the increasing expenditure at energy and resources firms, the clients of WorleyParsons. The firm also stands to benefit from a high oil price and the increasing technical complexity of projects. Safran, in a joint venture with GE, makes the engines for the Airbus A320 and Boeing 737. Like the other companies we purchased, Safran has a strong balance sheet and strong cashflow, and should benefit from the resurgence of the aftermarket sales and service business, after the financial crisis lull.

Sales included US telecommunications giant AT&T, France Telecom and Italian energy company ENI. AT&T had performed well, despite its deal to buy Deutsche Telecom's US assets being blocked. This was our key reason for owning the stock, so we felt it prudent to sell. We also sold France Telecom as we became increasingly concerned about the threat of a new entrant in the French mobile phone market. We sold ENI for better ideas in the energy sector, like WorleyParsons.

We remain confident in our neutral stance on markets. Although the macroeconomic backdrop is improving, it remains negative. Companies are cautious, holding a lot of cash on their balance sheets, which is good in the short term for dividend expectations, but worrisome for growth prospects in the long term. The yield available on equities means they stand out versus other asset classes. Meanwhile, cash positions at the investor level are above average. Finally, valuations, following the rally, have moved from inexpensive to around fair value. Taking all these factors into account, we are neutral in cyclicals and underweight in companies that have limited growth prospects, with our main focus on medium-growth, quality franchises that trade at attractive valuations.

Alan Porter

16 May 2012

Portfolio Summary

Portfolio distribution as at 31 March

By asset class	2012 %	2011 %
Equities	109	109
Fixed interest	-	3
Less borrowings	(9)	(12)
	100	100

By Sector (excluding cash)	2012 %	2011 %
Healthcare	18	7
Financials	15	23
Consumer services	12	7
Consumer goods	11	12
Industrials	11	14
Oil and gas	10	14
Telecommunications	9	7
Utilities	6	5
Basic materials	5	9
Technology	3	2
	100	100

By region	2012 %	2011 %
Developed Europe	45.4	100.0
North America	42.8	-
Developed Asia Pacific ex Japan	7.5	-
Japan	3.1	-
Global emerging markets	1.2	-
	100	100

Largest Holdings	2012 Market Value £000	2012 % of total portfolio	2011 Market Value £000	2011 % of total portfolio
Pfizer	5,441	4.2	-	-
Royal Dutch Shell ('B' Shares)	5,186	4.0	9,829	7.49
Philip Morris International	4,675	3.6	-	-
Chevron	4,406	3.4	-	-
Vodafone Group	4,365	3.4	7,139	5.44
Abbott Laboratories	4,213	3.2	-	-
GlaxoSmithKline	3,984	3.0	5,461	4.16
Novartis	3,913	3.0	-	-
British American Tobacco	3,741	2.9	7,303	5.56
McDonald's	3,737	2.9	-	-

Portfolio Holdings

	Country	Market value	% of total
		£	portfolio
Developed Europe		59,228,323	45.35
Royal Dutch Shell ('B' Shares)	United Kingdom	5,186,443	3.97
Vodafone Group	United Kingdom	4,364,791	3.34
GlaxoSmithKline	United Kingdom	3,984,254	3.05
Novartis	Switzerland	3,912,995	3.00
British American Tobacco	United Kingdom	3,740,904	2.86
Sanofi	France	3,640,719	2.79
BASF	Germany	2,985,705	2.29
AstraZeneca	United Kingdom	2,680,874	2.05
Prudential	United Kingdom	2,663,395	2.04
Allianz	Germany	2,427,313	1.86
Tesco	United Kingdom	2,373,558	1.82
BT Group	United Kingdom	2,352,399	1.80
BAE Systems	United Kingdom	2,341,015	1.79
Centrica	United Kingdom	2,300,614	1.76
Fortum OYJ	Finland	1,891,565	1.45
HSBC Holdings	United Kingdom	1,880,700	1.44
Schneider Electric	France	1,842,317	1.41
Pearson	United Kingdom	1,669,771	1.28
British Sky Broadcasting	United Kingdom	1,652,604	1.26
Safran	France	1,603,187	1.23
Inmarsat	United Kingdom	1,346,305	1.03
ProSiebenSat.1 Media Pref. (non-voting)	Germany	1,201,144	0.92
Seadrill	Norway	1,185,751	0.91
North America		55,901,424	42.80
Pfizer	United States	5,441,250	4.17
Philip Morris International	United States	4,674,685	3.58
Chevron	United States	4,406,453	3.37
Abbott Laboratories	United States	4,213,033	3.23
McDonald's	United States	3,737,040	2.86
Du Pont (E.I.) De Nemours	United States	2,947,786	2.26
Bank Of Montreal	Canada	2,718,790	2.08
Taiwan Semiconductor ADR	United States	2,582,352	1.98
Heinz	United States	2,479,248	1.90
Altria Group	United States	2,449,892	1.87
Sempra Energy	United States	2,317,282	1.77
Canadian Imperial Bank Of Commerce	Canada	2,315,249	1.77
Watsco	United States	2,299,713	1.76
PNC Financial Services	United States	2,283,483	1.75
Waste Management	United States	2,179,640	1.67
Paychex	United States	2,009,428	1.54
Intel	United States	1,838,969	1.41
Kellogg	United States	1,765,239	1.35
Lockheed Martin	United States	1,720,801	1.32
Fifth Third Bancorp	United States	1,521,091	1.16
Developed Asia Pacific ex Japan		9,798,300	7.49
Woolworths	Australia	2,418,542	1.85
China Mobile	Hong Kong	2,125,068	1.63
United Overseas Bank	Singapore	2,107,703	1.61
WorleyParsons	Australia	1,846,553	1.41
SJM Holdings	Hong Kong	1,300,434	0.99
Japan		4,094,122	3.13
Lawson	Japan	2,423,558	1.85
NTT Docomo	Japan	1,670,564	1.28
Global emerging markets		1,603,792	1.23
CEZ	Czech Republic	1,603,792	1.23
Total portfolio		130,625,961	100.00

Revenue and dividends

Gross revenue for the year amounted to £6,353,000 (2011: £5,111,000) and the revenue return per share was 5.22p (2011: 4.41p). Interim dividends totalling 4.65p have been paid during the year.

The directors recommend a fourth interim dividend of 1.25p per share payable on 29 June 2012 to holders on the register at the close of business on 1 June 2012, making a total for the year of 4.70 (2011: 4.65p).

Related Party Transactions

With the exception of the management and secretarial fees, there were no related party transactions during the year. 

Going concern status

The company's business activities, together with the factors likely to affect its future development, performance and position are set out in the chairman's statement, manager's review and the report of the directors.

The financial position of the company as at 31 March 2012 is shown on the balance sheet.  The cash flows of the company are set out on page 26.  Note 15 on pages 34 to 37 set out the company's risk management policies, including covering market net risk, liquidity risk and credit risk.

The company has a loan facility of £11,000,000 which expires on 30 September 2012, of which £11,000,000 was drawn down at the year-end date. The purpose of the facility is to enable the manager to enhance the return for shareholders by borrowing and investing where the return is expected to exceed the cost of borrowing. Therefore the company has adequate financial resources in the form of readily realisable listed securities and as a result the directors assess that the company is able to continue in operational existence without the facility.

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

Risks and Uncertainties

Management of principal risks

With the assistance of the manager, the board has drawn up a risk matrix, which identifies the key risks to the company. These key risks fall broadly under the following categories and the implementation of specific mitigating measures and procedures has taken place in order to reduce the probability and impact of each risk to the greatest extent possible.

Risk Mitigation

Loss of s1158-1159 status - In order to qualify as an investment trust, the company must comply with s1 158-1159 of the Corporation Taxes Act 2010.  s1158-1159 qualification criteria are continually monitored by Martin Currie and the results reported to the board.

The board is comfortable that the mitigating measures in place reduces the risk to the greatest extent possible. The Investment Trust tax rules have changed for companies with financial year ends beginning on or after 1 January 2012. The board believes that due to the more favourable nature of the new rules, the risk of losing investment trust status will be greatly reduced. The application for investment trust status under the new regime will be made during 2012.

Operational disruption at the manager's premises - Martin Currie has in place a full disaster recovery and business continuity plan which facilitates continued operation of the business should their premises be subject to operational disruption. The plan is tested annually and was last tested in December 2011 with successful results. Martin Currie maintains a fully operational off-site disaster recovery centre for use by key staff during any disruption.

Regulatory, accounting/internal control breach - The company must comply with the Companies Act 2006 and the UKLA Listing Rules. The board relies on the services of its company secretary and its professional advisers to ensure compliance.  Details of how the board monitors the services provided by Martin Currie and the key elements designed to provide effective internal control are included within the internal control section of the Corporate Governance Report. 

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

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

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

Gearing/Interest rate risk - From time to time the company finances its operations through bank borrowings. However, the board monitors such borrowings (gearing) closely and takes a prudent approach. At the year end bank borrowings were £11,000,000. In accordance with the investment policy the limit on gearing is 15% of total assets.

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

Counterparty and operational risk - Martin Currie has outsourced its entire operational infrastructure to third party organisations. Contracts and service level agreements have been defined to ensure that the service provided by each third party organisation is of a sufficiently professional and technically high standard. The board carry out an annual evaluation of the manager and feeds back the results to the manager through the management engagement committee. Periodically the board requests that representatives from other third party service providers (such as the auditor and custodian) also attend board meetings to give the board the opportunity to ensure service standards continue to meet the company's requirements.

Major regulatory change - The board has identified a number of developments that will potentially increase operational and regulatory risk for the company of which it draws investors' attention to the following: Retail Distribution Review (UK regulation) - The Retail Distribution Review (RDR) is central to the FSA's agenda of customer protection and will affect firms from the investment product manufacturers, such as insurers and asset managers to the investment product distributors, such as banks, wealth managers and IFA's. The RDR aims to drive structural change throughout the retail investments industry, in order to give consumers confidence that the advice they are given, and products they are sold, are best suited to their needs. Whilst the regulation will not be in force until the end of 2012, the market is already changing and the board is assessing the future market environment in which the company will operate, including the future use of fund platforms, to ensure the company is positioned correctly for the post-RDR market and remains attractive to investors and distributors.

AIFM Directive (EU regulation) - The Alternative Investment Fund Managers (AIFM) Directive is European legislation which creates a European-wide framework for regulating managers of 'alternative investment funds' (AIFs). It is designed to regulate any fund which is not an Undertakings for Collective Investment in Tranferable Securities (UCITS) fund and which is managed and/or marketed in the EU. This will include hedge funds, private equity funds and property funds. Closed- ended investment companies also fall within the remit of the new regulations. The Directive originated as a political response to the recent financial and economic crisis. Although policymakers recognised that AIFs did not contribute directly to the problems, the new rules are intended to reduce systemic risk created by the financial sector. The Directive aims to improve regulation, enhance transparency and investor protection, develop a single EU market for AIFs (similar to that for UCITS funds) and implement effective mechanisms for micro- and macro-prudential oversight.

The board continues to monitor developments in AIFM legislation to ensure the company complies with the new requirements.

FATCA (US regulation) - FATCA is an acronym for The Foreign Account Tax Compliance Act. FATCA creates a new tax information reporting and withholding regime for payments made to certain foreign financial institutions and other foreign persons. FATCA is intended to increase transparency for the Internal Revenue Service (IRS) with respect to US persons that may be investing and earning income through non-US institutions. While the primary goal of FATCA is to gain information about US persons, FATCA imposes a withholding tax where the applicable documentation and reporting requirements are not met.

Once the final requirements of FATCA are known the company will work with its advisers and the investment trust industry as appropriate to ensure compliance.

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

Directors' Responsibility

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 the directors have elected to prepare the financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law). 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 year. In preparing these financial statements, the directors are required to:

·      select suitable accounting policies and then apply them consistently;

·      make judgements and estimates that are reasonable and prudent;

·      state whether applicable United Kingdom 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 assume that the company will continue in business.

The directors are responsible for keeping proper accounting records that are sufficient to disclose the company's transactions and 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 2006. They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The financial statements are published on the www.securitiestrust.com website, which is maintained by the manager. The maintenance and integrity of the website maintained by Martin Currie is, so far as it relates to the company, the responsibility of Martin Currie.

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

In accordance with Chapter 4 of the Disclosure and Transparency Rules, and to the best of their knowledge, each director of Securities Trust of Scotland plc ('the company') confirms that the financial statements have been prepared in accordance with the applicable set of accounting standards and give a true and fair view of the assets, liabilities, financial position and profit or loss of the company. Furthermore each director certifies that the report of the directors includes a fair review of the development and performance of the business and the position of the company, together with a description of the principal risks and uncertainties that the company faces.

Edward Murray

Chairman of audit committee

16 May 2012

Income Statement

		Year to 31 March 2012
	Notes	Revenue £000	Capital £000	Total £000
Gains on investments	8	-	2,738	2,738
Currency gains/ (losses)		(17)	(135)	(152)
Income	3	6,353	-	6,353
Investment management fee		(102)	(189)	(291)
Performance fee		-	(372)	(372)
Other expenses	4	(541)	-	(541)
Net return before finance costs and taxation		5,693	2,042	7,735
Finance Costs	5	(109)	(202)	(311)
Net return on ordinary activities before taxation		5,584	1,840	7,424
Taxation on ordinary activities	7	(354)	-	(354)
Return attributable to ordinary redeemable shareholders		5,230	1,840	7,070
Return per ordinary redeemable share	2	5.22p	1.83p	7.05p

		Year to 31 March 2011
	Notes	Revenue £000	Capital £000	Total £000
Gains on investments	8	-	9,143	9,143
Currency gains/ (losses)		55	7	62
Income	3	5,111	-	5,111
Investment management fee		(99)	(184)	(283)
Performance fee		-	(474)	(474)
Other expenses	4	(482)	-	(482)
Net return before finance costs and taxation		4,585	8,492	13,077
Finance Costs	5	(139)	(258)	(397)
Net return on ordinary activities before taxation		4,446	8,234	12,680
Taxation on ordinary activities	7	-	-	-
Return attributable to ordinary redeemable shareholders		4,446	8,234	12,680
Return per ordinary redeemable share	2	4.41p	8.17p	12.58p

The total columns of this statement are the income statement of the company.

The revenue and capital items are presented in accordance with The Association of Investment Companies (AIC) SORP 2009.

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

No operations were acquired or discontinued in the year.

A statement of total recognised gains and losses is not required as all gains and losses of the company have been reflected in the above statement.

Balance sheet

		As at 31 March 2012		As at 31 March 2011
	Note	£000	£000	£000	£000
Non-current assets
Investments at fair value through profit or loss
Listed on Exchanges in the UK			38,538		131,289
Listed on Exchanges abroad			92,088		-
	8		130,626		131,289
Current Assets
Loans and receivables	9	718		1,279
Cash at bank		-		134
		718		1,413
Creditors
Amounts falling due within one year	10	(11,282)		(15,048)
Net current liabilities			(10,564)		(13,635)
Net assets			120,062		117,654
Capital and reserves
Called up ordinary share capital	11		1,003		1,003
Capital redemption reserve			78		78
Special distributable capital reserve			109,411		109,411
Capital reserve	11		6,713		4,873
Revenue reserve			2,857		2,289
			120,062		117,654
Net asset value per ordinary redeemable share	2		119.75p		117.35p

The revenue reserve represents the amount of the company's reserves distributable by way of dividend.

The aggregate amount of called up share capital as at 31 March 2012 is £1,002,598 (2010: £1,002,598)

 

 

Statement of cash flow

		Year to 31 March 2012		Year to 31 March 2011
	Note	£000	£000	£000	£000
Net cash inflow from operating activities	12		4,278		4,410
Servicing of finance
Finance costs			(370)		(362)
Taxation
Taxation received			(28)		30
Capital expenditure and financial investment
Payments to acquire investments		(122,790)		(16,210)
Receipts from disposal of investments		126,674		16,932
Net cash inflow/(outflow) from investing activities			3,884		722
Dividends paid			(4,662)		(4,686)
Net cash inflow/(outflow) before use of liquid resources and financing			3,102		114
Financing
Repurchase of ordinary share capital	11	(76)		(481)
Net movement in short-term borrowings		(3,240)		200
Net cash (outflow)/inflow from financing			(3,316)		(281)
Decrease in cash for the year			(214)		(167)
Reconciliation of net cash flow to movements in net debt
Decrease in cash as above		(214)		(167)
Net movement in short-term borrowings		3,240		(200)
Change in net debt resulting from cash flows			3,026		(367)
Opening net debt			(14,066)		(13,699)
Closing net debt	13		(11,040)		(14,066)

 Reconciliation of movements in shareholders' funds

For the year ended 31 March 2012	Notes	Called up ordinary share capital £000	Capital redemption reserve £000	Special distributable capital reserve £000	Capital reserve £000	Revenue reserve £000	Total £000
As at 31 March 2011		1,003	78	109,411	4,873	2,289	117,654
Return attributable to shareholders		-	-	-	1,840	5,230	7,070
Dividends paid	6	-	-	-	-	(4,662)	(4,662)
Balance at 31 March 2012		1,003	78	109,411	6,713	2,857	120,062

For the year ended 31 March 2011	Notes	Called up ordinary share capital £000	Capital redemption reserve £000	Special distributable capital reserve £000	Capital reserve £000	Revenue reserve £000	Total £000
As at 31 March 2010		1,008	73	109,968	(3,361)	2,529	110,217
Return attributable to shareholders		-	-	-	8,234	4,446	12,680
Ordinary shares bought back during the year		(5)	5	(557)	-	-	(557)
Dividends paid	6	-	-	-	-	(4,686)	(4,686)
Balance at 31 March 2011		1,003	78	109,411	4,873	2,289	117,654

The revenue reserve represents the amount of the company's reserves distributable by way of dividend.

Notes

1      Accounting policies

(a)   The financial statements have been prepared on a going concern basis and in accordance with UK Generally Accepted Accounting Practice (UK GAAP) and the Statement of Recommended Practice for Financial Statements of Investment Trust Companies and Venture Capital Trusts' (SORP), issued in January 2009.

                The disclosures on going concern on pages 10 and 11 of the report of the directors form part of the financial statements.

                Dividends - In accordance with FRS 21: 'Events after the balance sheet date', dividends are included in the financial statements in the period in which they are paid.

                Functional currency - In accordance with FRS 23: 'The effects of changes in foreign currency', the company is required to nominate a functional currency, being the currency in which the company predominately operates. The board has determined that sterling is the company's functional currency, which is also the currency in which these financial statements are prepared.

(b)   Income from equity investments is determined on the date on which the investments are quoted ex-dividend, or where no ex-dividend date is quoted, when the company's right to receive payment is established. Income from fixed interest securities is recognised on an effective yield basis. UK dividends received are accounted for at the amount receivable and are not grossed up for any tax credit. Other income includes any taxes deducted at source. Gains and losses arising from the translation of income denominated in foreign currencies are recognised in the revenue reserve. Scrip dividends are treated as unfranked investment income; any excess in value of shares received over the amount of the cash dividend is recognised in capital reserve. Income from underwriting commission and traded options is recognised as earned.

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

(d)   The management fee and interest costs are allocated 65% to capital and 35% to revenue in accordance with the board's expected long-term split of returns in the form of capital gains and income, respectively. The performance fee paid during the year was wholly allocated to capital. All other expenses are wholly allocated to revenue.

(e)   Gains and losses on the realisation of investments and changes in the fair value of investments which are readily convertible to cash, without accepting adverse terms, together with exchange adjustments to overseas currencies are taken to capital reserve.

(f)    Transactions in foreign currencies are recorded in the operational currency of the company at the prevailing exchange rate on the date of the transaction and re-translated at the rates of exchange ruling on the balance sheet date. Investments are recognised initially as at the trade date of a transaction. Subsequent to this, the disposal of an investment is accounted for once again as at the trade date of a transaction.

(g)   Revenue received and interest paid in foreign currencies are translated at the rates of exchange on the transaction date. Any exchange differences between the recognition and settlement both for revenue transactions are taken to the revenue account.

(h)   The company's investments are classified as 'financial assets at fair value through profit or loss' and are valued at fair value. For listed investments this is deemed to be bid market prices. Gains and losses arising from changes in fair value are included in the capital return for the period.

(i)    All financial assets and liabilities are recognised in the financial statements.

(j)    Deferred tax is recorded in accordance with Financial Reporting Standard 19 (Deferred Tax). Deferred tax is provided on all timing differences that have originated but not reversed by the balance sheet date. A deferred tax asset is only recognised to the extent that it is regarded as recoverable. Due to the company's status as an investment trust company, and the intention to continue meeting the conditions required to obtain approval in the foreseeable future, the company has not provided for deferred tax on any capital gains and losses arising on the revaluation or disposal of investments.

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

(l)    Share buybacks are funded through the capital reserve.

(m)  The company uses derivative financial instruments to manage the risk associated with foreign currency fluctuations arising on dividends received in currencies other than sterling. This is achieved by the use of forward foreign currency contracts. The company does not hold or issue derivative financial instruments for speculative purposes. Derivative financial instruments are recognised initially at fair value on the contract date and subsequently remeasured to the fair value at each reporting date. The resulting gain or loss is recognised as revenue or capital in the income statement depending on the nature and motive of each derivative transaction. Derivative financial instruments with a positive fair value are recognised as financial assets and derivative financial instruments with a negative fair value are recognised as financial liabilities. A derivative is presented as a non-current asset or a non-current liability if the remaining maturity of the instrument is more than 12 months and it is not expected to be realised or settled within 12 months.

2. 

	Year to 31 March 2012	Year to 31 March 2011
Returns and net asset value Revenue return
Revenue return attributable to ordinary redeemable shareholders	£5,230,000	£4,446,000
Average number of shares in issue during the year	100,259,771	100,768,215
Revenue return per ordinary redeemable share	5.22p	4.41p
Capital return
Capital return attributable to ordinary redeemable shareholders	£1,840,000	£8,234,000
Average number of shares in issue during the year	100,259,771	100,768,215
Capital return per ordinary redeemable share	1.83p	8.17p
Total return
Total return per ordinary redeemable share	7.05p	12.58p
Net asset value per share	As at 31 March 2012	As at 31 March 2011
Net assets attributable to shareholders	£120,062,000	£117,654,000
Number of shares in issue at year end	100,259,771	100,259,771
Net asset value per share	119.75p	117.35p

3. 

Income	Year to 31 March 2012 £000	Year to 31 March 2011 £000
From listed investments
Franked income - equities	3,551	4,530
Franked income - fixed interest and convertibles	62	185
Unfranked income - equities	2,721	290
Unfranked income - fixed interest and convertibles	10	76
	6,344	5,081
Other income
Interest on deposits	9	3
Underwriting commission	-	27
Interest	19	79
	6,353	5,111
Total income comprises:
Dividends from investments
Listed in the UK	3,623	4,966
Listed overseas	2,711	39
	6,334	5,005

No capital dividends were received during the year to 31 March 2012 (31 March 2011: no capital dividends received), however as at 31 March 2012, there was an amount receivable (on 12 April 2012) of £14,000 relating to a capital dividend from GlaxoSmithKline.

4.

Other expenses	Year to 31 March 2012 £000	Year to 31 March 2011 £000
Bank Charges	4	6
Director's fees	116	109
Employers' national insurance contributions	11	10
Irrecoverable VAT	57	48
Legal fees	14	13
Printing and postage	28	24
Registrar's fees	45	36
Savings plan administration and advertising	20	18
Secretarial fee	92	87
Other	140	117
	527	468
Auditors' remuneration:
Audit services	14	14
	541	482

In addition to the audit fee, the company's auditor received a fee of £9,000 from Martin Currie Investment Management Limited for other assurance services relating to the change in administrator

Details of the contract between the company and Martin Currie for provision of investment management, administration and secretarial services are given in the report of the directors on page 9 and 10 of the full annual report.

5.

	Year to 31 March 2012			Year to 31 March 2011
	Revenue £000	Capital £000	Total £000	Revenue £000	Capital £000	Total £000
Finance costs
Interest payable on bank loans and overdrafts	109	202	311	139	258	397

6.

	Year to 31 March 2012 £000	Year to 31 March 2011 £000
Dividends
Year ended 31 March 2010 - fourth interim dividend of 1.20p	-	1,209
Year ended 31 March 2011 - first interim dividend of 1.15p	-	1,159
Year ended 31 March 2011 - second interim dividend of 1.15p	-	1,159
Year ended 31 March 2011 - third interim dividend of 1.15p	-	1,159
Year ended 31 March 2011 - fourth interim dividend of 1.20p	1,203	-
Year ended 31 March 2012 - first interim dividend of 1.15p	1,153	-
Year ended 31 March 2012 - second interim dividend of 1.15p	1,153	-
Year ended 31 March 2012 - third interim dividend of 1.15p	1,153	-
	4,662	4,686

Set out below are the total dividends payable in respect of the period, which forms the basis on which the requirements of S1158-1159 of the Corporation Tax Act 2010 are considered.

	Year to 31 March 2012 £000	Year to 31 March 2011 £000
First interim dividend of 1.15p for the year ended 31 March 2012 (2011 - 1.15p)	1,153	1,159
Second interim dividend of 1.15p for the year ended 31 March 2012 (2011 -1.15p)	1,153	1,159
Third interim dividend of 1.15p for the year ended 31 March 2012 (2011 -1.15p)	1,153	1,159
Proposed fourth interim dividend of 1.25p for the year ended 31 March 2012 (2011 - 1.20p)	1.253	1,203
	4,712	4,680

During the year the directors received dividends of 4.65p (2011: 4.65p) per share.  Directors' shareholdings are disclosed in note 14.

7.

Taxation on ordinary activities	As at 31 March 2012 £000	As at 31 March 2011 £000
Foreign tax	354	-

In accordance with the SORP issued in 2009, the company has adopted the marginal method for allocating tax relief between income and capital.  The revenue account tax charge for the period is lower than the standard rate of corporation tax in the UK for an investment trust company (26%) (2011: 28%).  The differences are explained below.

Taxation on ordinary activities	As at 31 March 2012 £000	As at 31 March 2011 £000
Net return on ordinary activities before taxation	7,424	12,680
Corporation tax at standard rate of 28% (2010: 28%)	1,930	3,550
Effects of:
Gains on investments not taxable	(712)	(2,560)
UK dividends not taxable	(942)	(1,320)
Overseas dividends not taxable	(705)	-
Overseas tax suffered	354	-
Currency (gains)/losses not taxable	35	(2)
Excess management expenses not utilised	394	397
Non-taxable income	-	(65)
Current year tax charge	354	-

At the year end, the company has, for taxation purposes only, accumulated unrelieved management expenses and loan relationship deficits of £7,507,000 (2011: £5,983,000).  A deferred tax asset in respect of this has not been recognised and these expenses will only be utilised if the company has profits chargeable to corporation tax in the future.

8.

Investments	As at 31 March 2012 £000	As at 31 March 2011 £000
Opening valuation	131,289	123,509
Opening investment holding (gains)/losses	(20,145)	(12,268)
Opening cost	111,144	111,241
Add:  acquistions at cost	122,790	14,178
Disposal proceeds	(126,177)	(15,541)
Less: net gain/(loss) on disposal of investments	10,955	1,266
Disposals at cost	(115,222)	(14,275)
Closing cost	118,712	111,144
Add: investment holding gains	11,914	20,145
Closing valuation	130,626	131,289

There were no fixed interest securities as at 31 March 2012 (2011: £3,915,000).  Details of the interest rate risk profile of the fixed interest securities are contained within note 15. 

	As at 31 March 2012 £000	As at 31 March 2011 £000
Gains/(losses) on investment
Net gain/(loss) on disposal of investments	10,955	1,266
Movement in investment holdings unrealised gains /(losses)	(8,231)	7,877
Capital distributions	14	-
	2,738	9,143

Transaction costs

During the period 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:

	As at 31 March 2012 £000	As at 31 March 2011 £000
Acquisitions	158	65
Disposals	103	16
	261	81

9. 

Loans and receivables	As at 31 March 2012 £000	As at 31 March 2011 £000
Dividends receivable	632	701
Special dividends to capital receivable	14	-
Interest accrued	-	30
Due from brokers	-	497
Tax recoverable	35	7
Financial assets held for trading derivatives that are not designated in hedge accounting relationships:
Forward foreign currency contracts	3	28
Prepayments and other debtors	34	16
	718	1,279

10.

Creditors - Amounts falling due within one year	As at 31 March 2012 £000	As at 31 March 2011 £000
Interest accrued	-	59
Due to brokers	-	73
Sterling bank revolving loan	11,000	14,200
Bank overdraft	40	-
Financial liabilities held for trading derivatives that are not designated in hedge accounting relationships:
Forward foreign currency contracts	5	8
Other creditors	237	708
	11,282	15,048

The company has an £11,000,000 revolving loan facility with National Australia Bank which expires on 30 September 2012.  Under this agreement £11,000,000 was drawn at 31 March 2012 at a rate of 2.13088% with a maturity date of 29 June 2012.

The fair value of the sterling loan is not materially different from its carrying value.  The interest rate is set at each roll-over date at LIBOR plus a margin.

11. 

	Number of shares	Year to 31 March 2012 £000	Number of shares	Year to 31 March 2011 £000
Called up share capital
Ordinary shares of 1p
Authorised			-	3,050
Ordinary shares in issue at the beginning of the year	100,259,771	1,003	100,776,771	1,008
Ordinary shares bought back during the year	-	-	(517,000)	(5)
Ordinary shares in issue at the end of the year	100,259,771	1,003	100,259,771	1,003

The total cost of shares bought back during the year was £nil (2011: £557,000).  As at 31 march 2012, the outstanding amount payable for shares bought back and stamp duty were £nil and £nil (31 March 2011: £73,000 and £3,000 respectively), has been reflected in the current year's cash flow statement.

The analysis of the capital reserve is as follows:

	Realised capital reserve £000	Investment holding gains/(losses) £000	Total capital reserve £000
As at 31 March 2011	(15,272)	20,145	4,873
Gains on realisation of investments at fair value	10,955	-	10,955
Realised currency gains during the year	(135)	-	(135)
Movement in fair value gains	-	(8,231)	(8,231)
Capitalised expenses	(763)	-	(763)
Capital distributions	14	-	14
As at 31 March 2011	(5,201)	11,914	6,713

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

The capital distribution relates to a capital dividend receivable as at 31 March 2012 from GlaxoSmithKline.

12. 

	Year to 31 March 2012 £000	Year to 31 March 2011 £000
Reconciliation of net return before finance costs and taxation to net cash inflow from operating activities
Net return before finance costs	7,735	13,077
Decrease in accrued income and other debtors	106	145
Increase in other creditors	(471)	331
Net gains on investments	(2,738)	(9,143)
Taxation withheld from income on investments	(354)	-
Net cash inflow from operating activities		4,410

13.

	As at 31 March 2011 £000	Cashflow £000	As at 31 March 2012 £000
Analysis of net debt
Cash at bank	134	(134)	-
Bank overdraft	-	(40)	(40)
Bank borrowings - sterling loan	(14,200)	3,200	(11,000)
Net debt	(14,066)	3,026	(11,040)

14.

Directors' shareholdings	As at 31 March 2012 No. of shares held	As at 31 March 2011 No. of shares held
Neil Donaldson	89,200	85,120
Charles Berry	15,184	14,658
Andrew Irvine	80,000	80,000
Edward Murray	7,188	6,915
Rachel Beagles	30,000	30,000

Directors who held office during the year and their ordinary shareholdings at the year end are shown above. Charles Berry's holding of 15,184 shares includes a beneficial and family interest of 7,592 shares.  Andrew Irvine's holding of 80,000 shares includes a beneficial and family interest of 50,000 shares.

Since 31 March 2012 to the date of this report, Neil Donaldson's shares have increased by 769 shares.

15. Derivatives and other financial instruments

The company's financial instruments comprise securities and other investments, cash balances, loans and debtors and creditors that arise directly from its operations; for example, in respect of sales and purchases awaiting settlement, and debtors for accrued income. The company also has the ability to enter into derivative transactions in the form of forward foreign currency contracts, futures and options, for the purpose of managing currency and market risks arising from the company's activities.

The main risks the company faces from its financial instruments are (i) market price risk (comprising interest rate risk, currency risk and other price risk), (ii) liquidity risk and (iii) credit risk.

The board regularly reviews and agrees policies for managing each of these risks. The manager's policies for managing these risks are summarised below and have been applied throughout the year. The numerical disclosures exclude short-term debtors and creditors.

(i) Market price risk

The fair value or future cash flows of a financial instrument held by the company may fluctuate because of changes in market prices. This market risk comprises three elements - interest rate risk, currency risk and other price risk.

Interest rate risk

Interest rate movements may affect:

- the fair value of the investments in fixed interest rate securities;

- the level of income receivable on cash deposits; and

- the level of interest payable on 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 imposes borrowing limits to ensure gearing levels are appropriate to market conditions and reviews these on a regular basis. The company has a revolving loan facility with National Australia Bank which provides flexibility to finance opportunities in the short term. Current guidelines state that the total borrowings will not exceed 15 per cent of the total assets of the company. Details of borrowings at 31 March 2012 are shown in note 10.

Interest risk profile

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

	Weighted average period for which rate is fixed Years	Weighted average interest rate %	Fixed rate £000	Floating rate £000	Non-interest bearing £000
At 31 March 2012
Assets
Sterling - undated	-	0.30	-	(40)	130,626
Sterling - dated	-	-	-	-	-
Liabilities
Bank loan - sterling	0.3	2.13	11,000	-	-
At 31 March 2011
Assets
Sterling - undated	-	5.59	3,185	134	127,374
Sterling - dated	0.1	10.42	730	-	-
Liabilities
Bank loan - sterling	0.1	2.46	14,200	-	-

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 the bank loan is based on the interest rate payable on each tranche drawn down, which is set at each tranche draw down, weighted by its value. The maturity date of the company's loan is shown in note 10.

The floating rate assets consist of cash deposits on call earning interest at prevailing market rates.

The non-interest bearing assets represent the equity element of the portfolio.

Interest rate sensitivity

The sensitivity analysis below has been determined based on the exposure to interest rates at the balance sheet date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period in the case of instruments that have floating rates.

The following table illustrates the sensitivity of the return after taxation to an increase or decrease of 100 basis points in interest rates. This is mainly attributable to the company's exposure to the interest rate on its bank loan.

	2012 Increase in rate £000	2012 Decrease in rate £000	2011 Increase in rate £000	2011 Decrease in rate £000
Effect on revenue return	(39)	39	(49)	49
Effect on capital return	(72)	72	(92)	92
Effect on total return and on net assets	(111)	111	(141)	141

In the opinion of the directors, the above sensitivity analysis is not representative of the year as a whole, since exposure changes as investments are made, borrowings are drawn down and repaid throughout the year.

Foreign currency risk

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

Foreign currency risk profile

	As at 31 March 2012			As at 31 March 2011
	Investments £000	Net monetary assets £000	Total currency exposure £000	Investments £000	Net monetary assets £000	Total currency exposure £000
US dollar	50,867	136	51,003	-	-	-
Euro	15,592	-	15,592	-	-	-
Canadian dollar	5,034	23	5,057	-	-	-
Australian dollar	4,265	135	4,400	-	-	-
Japanese yen	4,094	72	4,166	-	-	-
Swiss franc	3,912	36	3,948	-	-	-
Hong Kong dollar	3,426	-	3,426	-	-	-
Singapore dollar	2,108	-	2,108	-	-	-
Czech Republic koruna	1,604	-	1,604	-	-	-
Norwegian krone	1,186	-	1,186	-	-	-
Total overseas investments	92,088	402	92,490	-	-	-
Pound Sterling	38,538	(10,966)	27,572	131,289	(13,635)	117,654
Total	130,626	(10,564)	120,062	131,289	(13,635)	117,654

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

A number of companies within the investment portfolio declare dividends payable in currencies other than sterling.  The revenue account is therefore subject to currency fluctuations arising on such dividends.  To reduce the risk of currency fluctuations, the company entered into a number of forward foreign exchange contracts.  At the year end, the following contracts were held:

	As at 31 March 2012		As at 31 March 2011
	Amount Currency '000	Unrealised (gain)/loss £000	Amount Currency '000	Unrealised (gain)/loss £000
US dollar purchases	433	4	948	3
US dollar sales	(433)	(6)	(2,704)	19
Euro purchases	17	(1)	15	1
Euro sales	(17)	1	(80)	(3)
	-	(2)	-	20

A currency risk sensitivity analysis is not required as the investment portfolio is denominated exclusively in sterling.

Foreign currency sensitivity

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

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 sector. The allocation of assets 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.

Other price risk sensitivity

The following table illustrates the sensitivity of the return after taxation and the net asset value to an increase or decrease of 15% in the fair value of the company's investment portfolio. The calculations are based on the portfolio valuations, as at the respective balance sheet dates, and are not representative of the year as a whole.

	Year to 31 March 2012		Year to 31 March 2011
	Increase in fair value £000	Decrease in fair value £000	Increase in fair value £000	Decrease in fair value £000
Effect on revenue return	(21)	21	(21)	21
Effect on capital return	19,556	(19,556)	19,655	(19,655)
Effect on total return and on net assets	19,535	(19,535)	19,634	(19,634)

The effect of the performance fee is not included in this sensitivity analysis.

(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 are readily realisable within three months therefore no maturity table has been provided. Short-term flexibility is achieved through the use of loan and overdraft facilities (note 10).

The contractual maturities of the financial liabilities at the year-end, based on the earliest date on which payment can be required are as follows:

	As at 31 March 2012			As at 31 March 2011
	Three months or less £000	More than three months £000	Total £000	Three months or less £000	More than three months £000	Total £000
Creditors:  amounts falling due within one year
Interest accrued	-	-	-	59	-	59
Due to brokers	-	-	-	73	-	73
Sterling bank revolving loan	11,000	-	11,000	14,200	-	14,200
Financial liabilities carried at fair value through the income statement: Forward foreign currency contracts	5	-	5	1	7	8
Bank overdraft	40	-	40	-	-	-
Other creditors	237	-	237	708	-	708
	11,282	-	11,282	15,041	7	15,048

(iii) Credit risk

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

The risk is not considered to be significant by the board, and is managed as follows:

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

- cash is held only with reputable banks who have high quality external credit ratings.

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

The company is not currently undertaking any securities lending

The maximum credit risk exposure as at 31 March 2012 was £678,000 (2011: £1,413,000). This was due to debtors and cash as per notes 9 and 13.

Fair values of financial assets and financial liabilities

All financial assets and liabilities of the company are included in the balance sheet at fair value or the balance sheet amount is a reasonable approximation of fair value.

16. Capital management policies and procedures

The company's capital management objectives are:

- to ensure that the company will be able to continue as a going concern; and

- to maximise the income and capital return to its equity shareholders through an appropriate balance of equity capital and debt.

The capital of the company consists of equity, comprising issued capital, reserves and retained earnings.

The board monitors and reviews the broad structure of the company's capital on an ongoing basis. This review includes the nature and planned level of gearing, which takes account of the manager's views on the market and the extent to which revenue in excess of that which is required to be distributed should be retained.

17. Fair value hierarchy

The company adopted the amendments to FRS 29 'Financial Instruments: Disclosures' effective from 1 January 2009.  These amendments require an entity to classify financial assets using a fair value hierarchy that reflects the significance of the inputs used in making the measurements.   The fair value hierarchy shall have the following levels:

-       Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities:

-       Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices); and

-       Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The financial assets and liabilities measured at fair value in the balance sheet are grouped into the fair value hierarchy as follows:

As at 31 March 2012	Note	Level 1 £000	Level 2 £000	Level 3 £000	Total £000
Fair assets at fair value through profit or loss
Quoted equities	(a)	130,626	-	-	130,626
Quoted bonds	(b)	-	-	-	-
Forward foreign exchange contracts	(c)	-	3	-	3
Total		130,626	3	-	130,629
Financial liabilities at fair value through profit or loss
Forward foreign exchange contracts	(c)	-	(5)	-	(5)
Total		130,626	(2)	-	130,624

As at 31 March 2011	Note	Level 1 £000	Level 2 £000	Level 3 £000	Total £000
Fair assets at fair value through profit or loss
Quoted equities	(a)	130,559	-	-	130,559
Quoted bonds	(b)	-	730	-	730
Forward foreign exchange contracts		-	28	-	28
Total		130,559	758	-	131,317
Financial liabilities at fair value through profit or loss
Forward foreign exchange contracts	(c)	-	(8)	-	(8)
Total		130,559	750	-	131,309

There have been no movements between levels in the fair value hierarchy during the year.

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 investment in corporate quoted bonds has been determined by reference to its quoted bid price at the reporting date.

c)   Forward foreign exchange contracts

      The fair value of the company's forward foreign exchange contracts has been determined using observable market inputs.

18 Post balance sheet events

On16 May 2012 the board declared a fourth interim dividend of 1.25p per share.  On 13 March 2012 the board agreed a revised management and performance fee structure.  As a result from 1 April 2012 the fund no longer pays performance fees and the management fee rate has been fixed at 0.6% of net assets.  There are no other post balance sheet events.

 

END

 

 

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