Annual Financial Report
Invesco Perpetual UK Smaller Companies Investment Trust plc
Annual Financial Report Announcement
for the year ended 31 January 2009
FINANCIAL INFORMATION AND PERFORMANCE STATISTICS
The Benchmark Index of the Company is the Extended Hoare Govett Smaller
Companies Index (excluding Investment Trusts)
AT AT
31 JANUARY 31 JANUARY %
2009 2008 CHANGE
Total return (all income
reinvested):
Net asset value (1)(2)(3) -29.9
Benchmark(2)(3) -36.7
FTSE All-Share Index(2)(3) -27.8
Net asset value per ordinary share:
- balance sheet 144.7p 205.2p -29.5
- after charging proposed final 141.0p 203.0p -30.5
and special dividend (capital NAV)
- excluding current year revenue 140.2p 203.0p -30.9
Shareholders' funds (£'000)(1) 84,348 124,971 -32.5
Mid-market price per ordinary share 107.0p 164.3p -34.9
(3)
Discount per ordinary share 26.1% 20.0%
Capital only return - indices:
Benchmark(2)(3) -39.0
FTSE All-Share Index(2)(3) -30.7
Return and dividend per ordinary
share:
Revenue return 6.0p 3.9p
Capital return (63.9)p (23.7)p
Total return (57.9)p (19.8)p
Interim dividend 1.60p 1.50p
Final dividend 2.50p 2.25p
4.10p 3.75p +9.3
Special dividend 1.20p -
Total dividends 5.30p 3.75p
Total expense ratio(3)
- excluding performance fee 0.9% 0.9%
- including performance fee 2.1% 1.0%
Gearing
- actual gearing 100 102
- potential gearing 130 120
- asset gearing 93 101
Note: (1) Includes enhancements from share repurchases.
(2) Source: Datastream and Fundamental Data.
(3) Excludes the effect of any recoverable VAT on management fees and interest
thereon.
Chairman's Statement
I highlighted in my statement in the Half-Yearly Financial Report in September
2008 that economic conditions had deteriorated and were likely to remain
challenging for some time. The scale of the economic crisis has exceeded all
expectations and, as the Manager's Report notes, this has produced one of the
worst periods in stock market history.
In the year under review, the net asset value (`NAV') total return per share
has declined by 29.9%. This fall, although disappointing, compares favourably
with the benchmark, the Extended Hoare Govett Smaller Companies Index
(excluding Investment Trusts) which fell 36.7% for the year ended 31 January
2009. In addition, the Company has performed relatively well against the other
UK smaller companies investment trusts, ranking 6 of 24 over one year, 5 of 24
over three years and 2 of 23 over five years, in terms of net asset value;
source, Cazenove. During this difficult time, however, your Company's share
price discount to NAV widened, to 26.1% as at 31 January 2009. It has since
narrowed to 19.5% as at 31 March 2009 (the latest practicable date prior to
publication of this report).
The Manager's Report reviews the Company's performance during this period and
gives further details of his investment strategy and the current prospects for
your Company. The Board remains confident that the Manager's investment style
continues to be suited to those investors seeking long term returns for a
reasonable level of risk. The Manager has consistently produced above-average
returns for a relatively low level of volatility.
Dividend
Despite such difficult market conditions, I am pleased to report that, for the
year ended 31 January 2009, the Directors will be proposing to shareholders at
the Annual General Meeting a final dividend of 2.5 pence per share, to be paid
on 18 May 2009 to shareholders on the register on 17 April 2009. As an interim
dividend of 1.6 pence per share was paid in October 2008, this will mean a
total dividend of 4.1 pence per share, representing a 9.3% increase on the
previous year. Additionally, the Directors are pleased to declare a special
dividend of 1.2 pence per share, representing the VAT recoverable plus interest
receivable that has been credited to revenue in the Company's Income Statement.
This special dividend will also be paid on 18 May 2009, to shareholders on the
register on 17 April 2009. Future dividends, as well as investment performance,
will, of course, depend entirely on market conditions and the ability of the
Manager to achieve satisfactory results.
Share repurchases
During the year ended 31 January 2009, the Company purchased and cancelled a
total of 2.6 million ordinary shares at an average price of 158.2 pence per
share and at an average discount to NAV of over 21.5%. The effect has been to
buy in 4.3% of the issued share capital and to enhance NAV by approximately
0.9%. Since the period end, a further 585,000 ordinary shares have been bought
back and cancelled.
VAT on Management Fees
Following the European Court of Justice ruling in 2007 that investment trusts
should be regarded as `special' investment funds, management fees paid by the
Company are no longer subject to VAT.
The Managers have been liaising with HMRC to recover on the Company's behalf
VAT paid in the past on investment management fees. As a result, £1,168,000 has
been agreed by the Managers with HMRC as recoverable for the period 2001 to
2007. This will be paid in full to the Company and accordingly has been
credited £519,000 to revenue and £649,000 to capital, in the same proportion as
originally charged to the income statement. In addition, estimated interest
receivable of £159,000 has been credited to revenue. These amounts add a
further 2.3 pence per share to the net asset value, of which 1.2 pence is
revenue, to be distributed as a special dividend, as I have outlined above.
The Company remains in discussion with the Manager re further recovery of VAT
paid, including for the earlier period from 1990 to 1996, together with
interest. However, as the amounts involved and the timing of receipts is
uncertain, no accrual has been made in these accounts.
Annual General Meeting
The Directors have carefully considered all the resolutions proposed in the
Notice of the AGM and consider them all to be in the best interests of
shareholders. The Directors accordingly recommend that shareholders vote in
favour of each resolution.
There are five resolutions to be proposed as Special Business at the Annual
General Meeting and these will be proposed as three Special Resolutions and two
Ordinary Resolutions.
Authority to Allot Shares and Authority to Buy Back Shares (Resolutions 8, 9
and 10)
In order to assist the Board with its commitment to discount management, the
Directors are seeking to renew the authority to undertake purchases of the
Company's ordinary shares in the market and to issue new ordinary shares, and
are also seeking authority to issue new ordinary shares whilst disapplying
pre-emption rights, if required, within the set limits set out in Ordinary
Resolution 8 and Special Resolutions 9 and 10 in the Notice of Annual General
Meeting. New shares will not be issued at prices below, nor will shares be
repurchased at prices higher than the prevailing net asset value.
As stated in previous years, the Directors might consider holding repurchased
shares as treasury shares, with a view to possible resale. To take account of
the possibility of treasury shares, the disapplication of pre-emption rights
has been extended to apply to the resale of treasury shares (if any) in the
same way as to the allotment of new securities.
Notice Period for General Meetings (Resolution 11)
The EU Shareholder Rights Directive, once brought into force later in 2009, is
expected to increase the notice period for general meetings of companies to 21
days unless certain conditions are met in which case it may be 14 days' notice.
A shareholders' resolution is required to reduce the period of notice to not
less than 14 days' notice.
At the time of printing this report, it is not known whether any alleviating
transitional provisions will be included in legislation implementing the EU
Shareholder Rights Directive. The Directors are, therefore, proposing
Resolution 11, as a Special Resolution, to allow the period of notice required
for general meetings (other than AGMs) to be not less than 14 days' notice.
Rule 9 Waiver (Resolution 12)
Various funds under the discretionary management of Invesco Perpetual, the
Company's investment manager, own 15,804,970 shares (27.39% of the issued share
capital) in the Company. The Company is seeking a waiver from the Takeover
Panel of any obligation to make a mandatory bid to the extent that it would
otherwise be triggered if the Invesco Perpetual Funds' holdings increased to
greater than 30% as a result of purchases by the Company of its own shares. The
Takeover Panel has agreed to do so provided such waiver is approved by the
Independent Shareholders pursuant to Resolution 12.
Further details of the waiver (including the Directors' recommendation) are set
out in a circular dated 2 April 2009 and posted to shareholders with this
annual financial report.
Outlook
The UK is in the midst of a deep recession which may continue for some time.
Against this backdrop, smaller companies have under-performed their larger
counterparts for the second successive year.
The Manager has positioned the portfolio relatively defensively in anticipation
of a continued slowdown. Eventually, however, confidence will return and it is
encouraging to note that, during any past period of market recovery, smaller
companies have tended to outperform the wider market.
The Manager's bias towards well-established, quality companies with strong
balance sheets should ensure the Company is in as strong a position as possible
during the continued economic slowdown, as well as being well placed to benefit
once economic conditions and sentiment towards smaller companies improves.
Ian Barby
Chairman
2 April 2009
Manager'sReport
Investment Review
The year to January 2009 ranks amongst the worst in stock market history. The
UK market, as measured by the FTSE All-Share Index, declined by 27.8% having
rallied by almost 10% since the market low in November. Smaller companies, as
measured by our benchmark, the Extended Hoare Govett Smaller Companies Index
(excluding Investment Trusts), declined by 36.7%, having registered a peak to
trough decline of 46.0%. Other markets were equally weak with the US, Japan and
Europe all registering declines of around 40% for the period. Any hope of
Emerging markets decoupling from the developed nations was extinguished. Many
of these markets more than halved, with Russia being the poorest performer,
declining by almost 70%.
Against this backdrop the net asset value per share of your Company fell by
29.9%. The main relative, positive sector contributors were overweight
positions in Aerospace & Defence, Industrial Engineering and Pharmaceuticals &
Biotech, and underweight positions in General Financials, Real Estate, Media
and Retail. In terms of individual companies, the leading performers were Expro
International, an oil field services business which was acquired by private
equity, Chemring, a defence company manufacturing consumable countermeasures
which once again produced sparkling results, new contracts and
earnings-enhancing acquisitions, and Hiscox and Amlin, both of which are
Lloyds' underwriting businesses currently benefiting from improved pricing in
the wake of AIG's nationalisation. Your Company was ungeared for most of the
year although a very modest level was used earlier in the period in support of
the share repurchase programme.
The scale and pervasiveness of the global credit crunch surprised all but the
most bearish of market commentators. The failure of Lehman Brothers in
September 2008 was perhaps the defining moment of the crisis. The resulting
destruction of confidence throughout the whole banking system and losses
incurred by counterparties to Lehman ensured a downward spiral of forced
selling of assets. The resulting collapse of asset values led to a further loss
of solvency and confidence in the financial system and a significant part of
the global banking sector effectively came under government control. Equity
markets were further disrupted by an unwinding of positions by hedge funds and
proprietary trading desks as they de-leveraged. This resulted in extreme
volatility and unpredictable trading patterns across the market. In September
and October alone, the UK stock market lost almost a quarter of its value, with
smaller companies declining by nearly one third.
The lack of availability of credit to individuals and companies combined with a
relentless stream of negative news in the media had an inevitable impact on
behaviour. This was particularly apparent in October and November 2008 which
produced a raft of profit warnings. Companies deferred discretionary capital
expenditure and reduced inventories, both to take account of lower future
demand and to squeeze some cash out of their businesses. Consumer confidence
also plunged to some of the lowest levels on record, resulting in significant
declines in like-for-like sales for retailers, particularly for 'big ticket'
items such as furniture and cars. The impact of this shift in behaviour
cascaded back through the supply chain and has ultimately led to the collapse
in exports from the Far East. This, in turn, has had a knock-on effect on
companies supplying capital goods to Far East manufacturers and on shipping
rates, as evidenced by the Baltic Dry Freight Index, which fell by over 90%
during the period. Other effects include the lack of availability of project
finance, which has brought large capital projects, such as construction and
ship building, as well as PFI projects, to a relative standstill. Consequently,
there have been significant reductions in the demand for steel, oil and most
other commodities, and for labour. The unfortunate and worrying consequence of
all of this is an increase in nationalism and protectionism, driven by rising
unemployment, poverty and civil unrest.
As mentioned in the Chairman's statement, your Company continues to achieve its
objective relative to the sector of being an above average performer combined
with lower than average volatility, as the chart in the Annual Financial Report
shows.
Investment Strategy
The economic backdrop has deteriorated materially from that of a year ago and
it appears that we are in the midst of a deep and prolonged recession, not just
in the UK but globally. Worryingly, the issues facing the UK economy appear to
be worse than those of other major economies. The degree of over indebtedness
amongst consumers, companies, particularly the banking sector, and at a
governmental level is problematical. The collective assets of the `big four' UK
banks are well in excess of UK GDP, with Barclays alone accounting for 87% of
GDP. The annual public sector borrowing requirement is likely to be around 8-9%
of GDP (c£110bn) for the next 3 years. It is not obvious how this level of debt
issuance will be achieved at low interest rates and it is likely to cause
crowding-out of the private sector. The process of deleveraging in the UK will
be a protracted and painful process which may take many years and will exert
continued downward pressure on economic growth. Although the Bank of England
cut base rate during the year under review from 5% to 1%, and later to 0.5%,
its lowest rate ever, it is not clear that this will have a material impact on
the economy in the short term. Borrowing rates available to individuals and
companies remain well in excess of this figure and it is the lack of
availability of credit, rather than the cost, that remains the key issue. With
the scope for further interest rate reductions being limited, the government
has now taken the more drastic step of 'quantitative easing', which, in more
basic terms, means printing money. The immediate impact of these policy
responses has been the sharp fall of Sterling relative to most major
currencies. Historically, this would have been of benefit to the economy but,
with the demise of the UK manufacturing base, the major impact will be
increased import costs. The economy has become too heavily skewed towards the
financial services sector which will not be helped by the quasi-nationalisation
of the UK banking sector. Rather than fretting about above trend inflation, we
are now in a period of significant asset price deflation. The consumer
continues to be under pressure from over-indebtedness and falling house prices,
but now is also witnessing unemployment rising at the fastest rate for a
generation. There are some offsets, including lower interest rates and
commodity prices, in particular petrol, but inevitably consumer spending on
discretionary items is falling and has claimed a number of household names,
including Woolworths and MFI.
Against this backdrop, we will, as ever, continue to run a portfolio of quality
companies. The importance of owning stocks with strong balance sheets,
sustainable competitive advantage and recurring revenues has never been
clearer. We aim to hold companies that have a realistic prospect of being able
to continue to grow profits regardless of the wider economy. We believe that
these companies should command a significant valuation premium to the market as
investors search for rare pockets of growth. Many cyclical areas, particularly
consumer related, will, in our judgement, continue to lack sales momentum.
However, the valuations amongst the more cyclical stocks appear to be very low,
although this could reflect that earnings estimates are too high. There is also
the prospect of highly dilutive 'rescue' rights issues for the more distressed
companies. While we have seen significant rallies in some stocks in the wake of
rights issues, this has generally been for good quality businesses where the
balance sheet issues are deemed to have been solved. Obviously this creates a
challenge in terms of stock selection and there will be niche opportunities
within the more heavily sold-off sectors. However, we remain concerned about
the outlook for the UK economy and have made few changes to the portfolio
structure, which has remained broadly similar for some time. Whilst we are
essentially stock-pickers and do not target sectors, the net effect of our
purchases and sales is to leave the portfolio overweight in aerospace and
defence, healthcare, industrial engineering and support services. Underweight
sectors would include general retailers, real estate, general financial, food
producers and telecommunications. There are currently 120 holdings and the
portfolio has an average weighted capitalisation of £438 million, with an
estimated yield of 4.48%.
Current Prospects
Smaller companies under-performed their larger counterparts for the second
successive year in 2008. This is a typical scenario when going into a recession
but it should be noted that smaller companies tend to out-perform the general
market significantly during market recoveries and over the long term have
materially out-performed the wider market. At some point corporate activity
will return to the market with acquirers seeking to take advantage of very low
valuations. Within the portfolio we prefer to hold companies with strong
balance sheets, preferably with net cash. These companies will be in a strong
position to make earnings accretive acquisitions over the next year or two as
weaker players are forced to sell. Additionally the portfolio enters the new
year with a reasonable level of cash with which to take advantage of
opportunities as they arise.
It is clear that we are in the midst of a relatively deep and prolonged
economic slow down which will inevitably lead to a decline in corporate
profitability from the recent elevated levels. Although markets have declined
and valuations appear very low relative to their long run average, earnings
estimates may have much further to fall to reflect genuine company prospects.
Eventually the credit crunch will abate and more 'normal' lending conditions
will see a return of confidence to the market. Balance sheets will be rebuilt
through equity issuance and profits, and although recapitalisations will have a
short term depressive impact on market levels it will allow a resumption of
profitable growth once complete. Additionally, lower commodity and raw material
prices combined with lower interest rates will be beneficial to company
profitability. At some point the market will begin to price these factors in to
valuations and a new bull market will emerge. Just as equities sold off in
advance of the recession, they will rally in advance of an improvement in
economic conditions. However, this may take some time and the portfolio remains
relatively defensively positioned.
Richard Smith
Invesco Asset Management Limited
2 April 2009
INVESTMENTS IN ORDER OF VALUATION
AT 31 JANUARY 2009
Ordinary shares unless stated otherwise
VALUE % OF
COMPANY ACTIVITY BY SECTOR £'000 PORTFOLIO
Chemring Aerospace & Defence 3,527 4.5
VT Aerospace & Defence 3,360 4.3
Mouchel Parkman Support Services 3,076 3.9
Synergy Healthcare Health Care Equipment & Services 2,563 3.3
Dignity General Retailers 2,024 2.6
Dechra Pharmaceutical Pharmaceuticals & Biotechnology 1,926 2.5
Croda Chemicals 1,727 2.2
Omega Insurance Non-life Insurance 1,612 2.1
Hiscox Non-life Insurance 1,491 1.9
Mears Support Services 1,490 1.9
Top Ten Holdings 22,796 29.2
Serco Support Services 1,357 1.7
Charles Taylor General Financial 1,295 1.7
Consulting
Homeserve Support Services 1,220 1.6
Care UK Health Care Equipment & Services 1,189 1.5
Consort Medical Health Care Equipment & Services 1,170 1.5
Fenner Industrial Engineering 1,117 1.4
Carillion Construction & Materials 1,104 1.4
Domino Printing Electronic & Electrical 1,083 1.4
Equipment
Babcock Support Services 1,077 1.4
Venture Production Oil & Gas Producers 1,040 1.3
Top Twenty Holdings 34,448 44.1
Greggs Food & Drug Retailers 979 1.3
PZ Cussons Household Goods 963 1.2
Ultra Electronic Aerospace & Defence 957 1.2
Xchanging Support Services 936 1.2
Filtrona Support Services 889 1.1
Spirax-Sarco Industrial Engineering 860 1.1
BPP Support Services 851 1.1
Paypoint Support Services 831 1.1
Amlin Non-life Insurance 815 1.0
Brown (N.) General Retailers 812 1.0
Top Thirty Holdings 43,341 55.4
Diploma Support Services 810 1.0
Premier Oil Oil & Gas Producers 809 1.0
Rensburg Sheppards General Financial 804 1.0
RWS Support Services 797 1.0
Fidessa Software & Computer Services 790 1.0
Rotork Industrial Engineering 781 1.0
Davis Service Support Services 774 1.0
BTG Pharmaceuticals & Biotechnology 770 1.0
Eaga Support Services 768 1.0
James Halstead Construction & Materials 762 1.0
Top Forty Holdings 51,206 65.4
Beazley Non-life Insurance 720 0.9
Victrex Chemicals 714 0.9
Cranswick Food Producers 714 0.9
Hunting Oil Equipment Services & 704 0.9
Distribution
Devro Food Producers 664 0.8
Just Retirement Life Insurance 657 0.8
Genus Pharmaceuticals & Biotechnology 643 0.8
CVS General Retailers 634 0.8
Interserve Support Services 606 0.8
Hansard Global Life Insurance 601 0.8
Top Fifty Holdings 57,863 73.8
SDL Software & Computer Services 593 0.8
Mitie Support Services 590 0.8
Phoenix Software & Computer Services 578 0.7
Micro Focus Software & Computer Services 560 0.7
Luminar Travel & Leisure 548 0.7
Hill & Smith Industrial Engineering 547 0.7
Melrose Industrial Engineering 526 0.7
Datacash Support Services 521 0.7
NCC Software & Computer Services 516 0.7
Aveva Software & Computer Services 507 0.6
Top Sixty Holdings 63,349 80.9
Headlam Household Goods 505 0.6
Spectris Electronic & Electrical 497 0.6
Equipment
Greene King Travel & Leisure 482 0.6
Yougov Support Services 475 0.6
May Gurney Support Services 470 0.6
RPS Support Services 459 0.6
Wincanton Industrial Transportation 435 0.6
Intec Telecom Systems Software & Computer Services 432 0.6
Avocet Mining Chemicals 418 0.5
Abbey Protection General Financial 413 0.5
Top Seventy Holdings 67,935 86.7
Vectura Pharmaceuticals & Biotechnology 381 0.5
JKX Oil & Gas Oil & Gas Producers 377 0.5
E2V Technologies Electronic & Electrical 368 0.5
Equipment
Anglo Pacific Mining 364 0.5
Salamander Energy Oil & Gas Producers 364 0.5
Meggitt Aerospace & Defence 363 0.5
Personal Non-life Insurance 360 0.5
Microgen Software & Computer Services 357 0.5
Cohort Aerospace & Defence 351 0.4
Scott Wilson Support Services 334 0.4
Top Eighty Holdings 71,554 91.5
Immunodiagnostics Health Care Equipment & Services 319 0.4
Kofax Software & Computer Services 285 0.4
Ark Therapeutics Pharmaceuticals & Biotechnology 275 0.4
New Britain Palm Oil Food Producers 273 0.4
Shaftesbury Real Estate 270 0.3
Elec Data Process Software & Computer Services 248 0.3
WSP Support Services 244 0.3
Assura Health Care Equipment & Services 240 0.3
Augean Support Services 237 0.3
Centaur Media Media 232 0.3
Top Ninety Holdings 74,177 94.9
GNE General Retailers 221 0.3
Low & Bonar Construction & Materials 212 0.3
Playtech Software & Computer Services 208 0.3
Valiant Petroleum Oil & Gas Producers 205 0.3
Mucklow A&J Real Estate 190 0.2
Vantis General Financial 190 0.2
Concateno Pharmaceuticals & Biotechnology 184 0.2
Carluccio's Travel & Leisure 183 0.2
Northgate Industrial Transportation 173 0.2
Sterling Energy Oil & Gas Producers 171 0.2
Top Hundred Holdings 76,114 97.3
Strategic Thought Software & Computer Services 164 0.2
PV Crystalox Solar Electronic & Electrical 164 0.2
Equipment
Mountview Estates Real Estate 155 0.2
Morson Support Services 152 0.2
SIG Support Services 151 0.2
Assetco Support Services 148 0.2
Umeco Aerospace & Defence 144 0.2
Henderson General Financial 120 0.2
Brammer Support Services 103 0.1
Sinclair Pharmaceuticals & Biotechnology 101 0.1
Pharmaceuticals
Top Hundred and Ten Holdings 77,516 99.1
Cape Construction & Materials 100 0.1
Clyde Process Industrial Engineering 99 0.1
Lupus Capital Construction & Materials 97 0.1
XP Power Electronic & Electrical 95 0.1
Equipment
Laird Electronic & Electrical 89 0.1
Equipment
Mavinwood Support Services 81 0.1
Cyril Sweett Construction & Materials 80 0.1
Clean Energy Brazil Chemicals
- ords and Warrants 69 0.1
Dec 2011
Minorplanet Systems Electronic & Electrical 63 0.1
Equipment
Fisher J Industrial Transportation 28 -
TOTAL INVESTMENTS 78,317 100.0
(120)
As at 31 January 2009, 4 (2008: 4) investments were held with a fair value of
nil.
Related Party Transactions
Invesco Asset Management Limited (`IAML'), a wholly owned subsidiary of Invesco
Limited, acts as Manager, Company Secretary and Administrator to the Company.
Details of IAML's services and fees are disclosed in the Report of the
Directors. Full details of Directors' interests are set out in the Report of
the Directors in the Annual Financial Report. There are no other related party
transactions.
Principal Risks and Uncertainties
Market Movements and Portfolio Performance
The majority of the Company's investments is traded on the London Stock
Exchange. A smaller proportion of investments is traded on the AIM Market. The
principal risk for investors in the Company is of a significant fall in the
markets and/or a prolonged period of decline in the markets relative to other
forms of investment as well as bad performance of individual portfolio
companies.
The Manager's approach to investment is one of individual stock selection.
Market risk is mitigated via the stock selection process, together with the
slow build-up of holdings rather than the purchase of large positions outright.
This allows the Manager to observe more data points from a company before
adding to a position. The overall portfolio is well diversified by company and
sector. The weighting of an investment in the portfolio tends to be loosely
aligned with the market capitalisation of that company. This means that the
largest holdings will often be amongst the larger smaller companies available.
The Manager remains cognisant at all times of the potential liquidity of the
portfolio.
The Manager is relatively risk averse, seeks lower volatility in the portfolio
and has a tendency to outperform in more challenging markets. In comparison to
peer group investment trusts, the Company believes that its portfolio often has
a higher than average market capitalisation and a lower than average exposure
to the AIM market.
The Board cannot influence market movements and the performance of portfolio
companies. However, the performance of the Manager is carefully monitored by
the Board, and the continuation of the Manager's mandate is revisited annually.
The Board has established guidelines to ensure that the investment policy that
it has approved is pursued by the Manager. The Board and the Manager maintain
an active dialogue with the aim of ensuring that the market rating of the
Company's shares reflects the underlying net asset value; and there are in
place both share buy back and issuance facilities to help the management of
this process.
The Risks and Risk Management Policies are detailed in note 19 to the financial
statements in the Annual Financial Report.
Regulatory and Tax Related
The Company is subject to various laws and regulations by virtue of its status
as an investment trust, and its listing on the London Stock Exchange. A breach
of s842 ICTA could lead to the Company being subject to capital gains tax on
the sale of its investments. A serious breach of other regulatory rules may
lead to suspension from the Stock Exchange or a qualified Audit Report. Other
control failures, either by the Manager or any other of the Company's service
providers, may result in operational or reputational problems, erroneous
disclosures or loss of assets through fraud, as well as breaches of
regulations.
The Manager reviews the level of compliance with s842 ICTA and other financial
regulatory requirements on a daily basis. All transactions, income and
expenditure are reported to the Board. The Board regularly considers all risks,
the measures in place to control them and the possibility of any other risks
that could arise. The Board ensures that satisfactory assurances are received
from service providers. The Manager's Compliance and Internal Audit Officers
produce regular reports for review at the Company's Audit Committee.
DIRECTORS' RESPONSIBILITY STATEMENT
in respect of the preparation of the Annual Financial Report
The Directors are responsible for preparing the Annual Financial Report 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 financial
statements in accordance with International Financial Reporting Standards as
adopted by the European Union. The financial statements are required by law to
give a true and fair view of the state of affairs of the Company and of the
profit or loss of the Company for that period.
In preparing these financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgments and estimates that are reasonable and prudent;
• state whether applicable International Financial Reporting Standards as
adopted by the European Union have been followed, subject to any material
departures disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis unless it is
inappropriate to presume that the company will continue in business.
The Directors, to the best of their knowledge, state that:
• the financial statements, prepared in accordance with International Financial
Reporting Standards as adopted by the European Union, give a true and fair view
of the assets, liabilities, financial position and loss of the company; and
• 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 it faces.
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 1985. 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.
Signed on behalf of the Board of Directors
Ian Barby
Chairman
2 April 2009
INCOME STATEMENT
FOR THE YEAR ENDED 31 JANUARY
2009 2008
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Losses on investments
at fair value through - (36,782) (36,782) - (14,455) (14,455)
profit or loss
Income - Note 2 3,666 - 3,666 3,264 88 3,352
Investment management fee - (347) (1,589) (1,936) (540) (578) (1,118)
Note 3
VAT recoverable on 519 649 1,168 - - -
management fees - Note 3
Other expenses (270) (2) (272) (221) (3) (224)
Profit/(loss) before
finance
costs and taxation 3,568 (37,724) (34,156) 2,503 (14,948) (12,445)
Finance costs (4) (18) (22) (35) (142) (177)
Profit/(loss) before tax 3,564 (37,742) (34,178) 2,468 (15,090) (12,622)
Taxation (4) - (4) (5) - (5)
Profit/(loss) after tax 3,560 (37,742) (34,182) 2,463 (15,090) (12,627)
Earnings per ordinary share
Basic - Note 4 6.0p (63.9)p (57.9)p 3.9p (23.7)p (19.8)p
The total column of this statement represents the Company's Income Statement,
prepared in accordance with International Financial Reporting Standards. The
supplementary revenue and capital columns are both prepared under guidance
published by the Association of Investment Companies. All items in the above
statement derive from continuing operations and the Company has no other gains
or losses. No operations were acquired or discontinued in the year.
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 JANUARY
Capital
Share Share Redemption Capital Revenue
Capital Premium Reserve Reserve Reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
At 1 February 2007 13,359 21,244 669 113,108 2,785 151,165
Shares bought back and
cancelled (1,181) - 1,181 (11,466) - (11,466)
(Loss)/profit for the - - - (15,090) 2,463 (12,627)
year
Dividends paid - Note 5 - - - - (2,101) ( 2,101)
At 31 January 2008 12,178 21,244 1,850 86,552 3,147 124,971
Shares bought back and
cancelled (522) - 522 (4,159) - (4,159)
(Loss)/profit for the - - - (37,742) 3,560 (34,182)
year
Dividends paid - Note 5 - - - - (2,282) (2,282)
At 31 January 2009 11,656 21,244 2,372 44,651 4,425 84,348
The accompanying notes are an integral part of this statement
BALANCE SHEET
AS AT 31 JANUARY
2009 2008
£'000 £'000
Non-current assets
Investments at fair value through profit 78,317 126,754
or loss
Current assets
Other receivables 2,076 1,297
Cash and cash equivalents 5,592 -
7,668 1,297
Total assets 85,985 128,051
Current liabilities
Other payables (1,637) (316)
Bank overdraft - (2,764)
(1,637) (3,080)
Net assets 84,348 124,971
Issued capital and reserves
attributable to equity holders
Share capital - Note 6 11,656 12,178
Share premium account 21,244 21,244
Other reserves:
Capital redemption reserve 2,372 1,850
Capital reserves 44,651 86,552
Revenue reserve 4,425 3,147
Total Shareholders' funds 84,348 124,971
Net asset value per ordinary share
Basic - Note 7 144.7p 205.2p
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 JANUARY
2009 2008
£'000 £'000
Cash flow from operating activities
Loss before tax (34,178) (12,622)
Taxation (4) (5)
Adjustments for:
Purchases of investments (19,933) (46,577)
Sales of investments 32,270 53,995
12,337 7,418
Losses on investments 36,782 14,455
Finance costs 22 177
Operating cash flows before movements in 14,959 9,423
working capital
(Increase)/decrease in receivables (1,343) 161
Increase/(decrease) in payables 1,226 (1,207)
Net cash flows from operating activities 14,842 8,377
after tax
Cash flows from financing activities
Interest paid (45) (154)
Decrease in bank overdraft (2,764) -
Buy back of shares (4,159) (11,466)
Equity dividends (2,282) (2,101)
Net cash used in financing activities (9,250) (13,721)
Net increase/(decrease) in cash and cash 5,592 (5,344)
equivalents
Cash inflow from movements in bank 2,764 -
overdraft
Cash, cash equivalents and bank overdraft (2,764) 2,580
at the beginning of the year
Cash, cash equivalents and bank overdraft 5,592 (2,764)
at the end of the year
Notes to the condensed Financial Statements
1. Principal accounting policies
The principal accounting policies adopted in the preparation of these financial
statements are set out below. These policies have been consistently applied
during the year and the preceding year, unless otherwise stated.
(a) Basis of preparation
(i) Accounting standards applied
The financial statements have been prepared on the historical cost basis,
except for the measurement at fair value of investments and in accordance with
International Financial Reporting Standards (`IFRS') which comprise standards
and interpretations approved by the International Accounting Standard Board
(`IASB') and Standing Interpretation Committee interpretations approved by the
IASC that remain in effect, and to the extent that they have been adopted by
the European Union.
Where presentational guidance set out in the Statement of Recommended Practice
(`SORP') for investment trusts issued by the Association of Investment
Companies (`AIC') in December 2005 is consistent with the requirements of IFRS,
the Directors have sought to prepare the financial statements on a basis
compliant with the recommendations of the SORP. The supplementary information
which analyses the income statement between items of a revenue and a capital
nature has been presented alongside the income statement, in accordance with
guidance issued by the AIC.
(ii) Changes to presentation
Following the publication of technical guidance by the Institute of Chartered
Accountants in England and Wales on Tech 01/08, capital reserves are now shown
in aggregate in the balance sheet and statement of changes in equity. This has
no effect on either net assets or earnings of the Company.
2. Income
2009 2008
£'000 £'000
Income from listed investments
UK dividends 3,256 3,123
Overseas dividends 221 54
3,477 3,177
Other income
Deposit interest 15 62
Interest on VAT recoverable (Note 3) 159 -
Underwriting commission 15 25
Total income 3,666 3,264
A special dividend of £88,000 was received in 2008 and was in relation to a
dividend received in lieu of a capital distribution. This was allocated to
capital.
3. Investment management fee
2009 2008
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investment management 347 347 694 484 484 968
fee
Performance-related fee - 1,242 1,242 - 38 38
VAT thereon (prior to 1 - - - 56 56 112
October 2007)
347 1,589 1,936 540 578 1,118
Invesco Asset Management Limited (`IAML') provides investment and
administration services to the Company. Details of the Investment Management
Agreement can be found in the Report of the Directors. The performance-related
fee is charged wholly to capital. At 31 January 2009, £86,000 (2008: £68,000)
was due for payment in respect of management fees and £1,242,000 (2008: £
38,000) was due for payment in respect of the performance-related fee.
With effect from 1 October 2007, no VAT has been payable on management or
performance fees. An amount of £1,168,000 has been recognised in these accounts
in respect of VAT recoverable on management fees paid to the current manager,
IAML, together with £159,000 of interest thereon.
4. Earnings per ordinary share
2009 2008
Revenue Capital Total Revenue Capital Total
Basic 6.0p (63.9)p (57.9)p 3.9p (23.7)p (19.8)p
Basic total return per ordinary share is based on the net total loss for the
financial year of £34,182,000
(2008: £12,627,000).
Basic revenue return per ordinary share is based on the net revenue return on
ordinary activities after taxation of £3,560,000 (2008: £2,463,000).
Basic capital return per ordinary share is based on the net capital loss for
the financial year after taxation of £37,742,000 (2008: £15,090,000).
All three returns are based on the weighted average number of shares in issue
during the year of 59,034,482 (2008: 63,744,492).
5. Dividends on ordinary shares
Dividends on equity shares paid in 2009 2008
the year:
pence £'000 pence £'000
Final paid in respect of previous 2.25 1,344 1.75 1,156
year
Prior year adjustment - (2) - -
Interim paid 1.60 940 1.50 945
3.85 2,282 3.25 2,101
Dividends on equity shares payable in respect of the year:
2009 2008
pence £'000 pence £'000
Interim 1.60 940 1.50 945
Final 2.50 1,442 2.25 1,344
4.10 2,382 3.75 2,289
Special 1.20 692 - -
5.30 3,074 3.75 2,289
6. Share capital
2009 2008
Number £'000 Number £'000
Authorised:
Ordinary shares of 20p each 160,000,000 32,000 160,000,000 32,000
Allotted, called-up and fully
paid:
Ordinary shares of 20p each 58,279,629 11,656 60,889,229 12,178
During the year the Company bought back the following ordinary shares:
Number £'000
At 1 February 2008 60,889,229 12,178
Buy backs (2,609,600) (522)
At 31 January 2009 58,279,629 11,656
Details of the share purchases are given in the Report of Directors in the
Annual Financial Report.
Since the year end a further 585,000 ordinary shares have been bought back and
cancelled.
7. Net asset value
The net asset value per ordinary share and the net assets attributable at the
year end were as follows:
Net asset Net assets
value per attributable
share
2009 2008 2009 2008
pence pence £'000 £'000
Ordinary shares 144.7 205.2 84,348 124,971
Net asset value per ordinary share is based on net assets at the year end and
on 58,279,629 (2008: 60,889,229) ordinary shares of 20p each, being the number
of ordinary shares in issue at the year end.
8. This Annual Financial Report announcement is not the company's statutory
accounts. The statutory accounts for the year ended 31 January 2008 have been
delivered to the Registrar of Companies. The statutory accounts for the year
ended 31 January 2008 and 31 January 2009 received an audit report which was
unqualified, did not include a reference to any matters to which the auditors
drew attention by way of emphasis without qualifying the report, and did not
include a statement under either section 237(2) or 237(3) of the Companies Act
1985. The statutory accounts for the financial year ended 31 January 2009 have
been approved and audited but have not been filed.
The Audited Annual Financial Report will be posted to shareholders shortly.
Copies may be obtained during normal business hours from the Company's
registered office, 30 Finsbury Square, London, EC2A 1AG. A copy of the Annual
Financial Report will be available from Invesco Perpetual on the following
website
www.invescoperpetual.co.uk/investmenttrusts shortly.
The Annual General Meeting of the Company will be held at 12.00 noon on 12 May
2009 at 30 Finsbury Square, London, EC2A 1AG.
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