Interim Results
Keystone Investment Trust plc
Interim Results
Six Months to 31 March 2005
Chairman's Statement
Performance
The Company's shares gave a total return to shareholders of 14.5% over the six
months from 30 September 2004 to 31 March 2005. During the same period, the
total return of the net asset value per share was 15.5%, while the total return
of the Company's benchmark for performance measurement purposes, the FTSE
All-Share Index, was 9.9%. (All these figures are with income reinvested.) The
discount of the share price relative to net asset value widened from 9.4% at 30
September to 10.5% at 31 March.
The Manager's stock selection has continued to be good. Portfolio changes have
reflected the Manager's continuing caution about the market as a whole, as
discussed in the report below.
Gearing
Equity exposure decreased from 116.1% of net assets at 30 September 2004 to
114.2 % at 31 March 2005. Including fixed interest securities gearing fell
from 117.4% to 114.2%, as the Manager sold the Company's remaining bond
holdings during the period under review. The limits set by the Board remained
unchanged during the six months to 31 March 2005: the Manager must make no net
purchases if equity exposure is more than 115% of net assets, and must make
sales if (as a result of market movements) equity exposure exceeds 120% of net
assets. However, since 31 March, the Board increased the limits to 117.5% and
122.5% respectively, to allow the Manager a little more room for manoeuvre to
invest in interesting opportunities in the current market. In addition, up to
£4 million may be held in corporate bonds.
Dividends
The interim dividend will be 13.00p per share, compared with an interim
dividend of 12.75p last year. The dividend will be paid on 24 June 2005 to
shareholders on the Register on 27 May 2005.
Richard Oldfield
Chairman
23 May 2005
Manager's Report
Market and Economic Review
The UK's benchmark FTSE All-Share Index rose over the 6 months to the end of
March. The market's performance was generally good, but remained volatile.
Market sentiment was dominated in particular by macro economic issues in the US
and the direction and pace of interest rate movements.
The performance of the UK economy was relatively strong again, with real GDP
growth of 2.9% year-on-year in the fourth quarter of 2004. This growth was
driven by continued strength in government spending and household consumption
despite persistently high energy prices throughout the period under review.
However, the housing market and consumer expenditure showed clear signs of
slowing down at the start of 2005 in reaction to rising interest rates 12
months prior.
Portfolio Strategy and Review
Over the review period to 31 March 2005, the Net Asset Value of the Company
rose by 15.5%, outperforming the FTSE All-Share Index, which increased by 9.9%
(with net income reinvested). Over the same period, the Company's share price
rose by 14.5%. The performance of the Company benefited from large holdings in
utility companies, notably the water stocks and the US tobacco companies.
Overall, the market continued to reward good stock selection.
Over the review period, the Manager maintained the defensive stance of the
portfolio due to concerns over imbalances in the UK and US economies, in
particular in the consumer sector. Against this backdrop, the portfolio is
focused on dividend yields, earnings certainty and cash generation. The trust
has underweight positions in cyclicals and is significantly overweight in
defensive sectors, most notably tobacco and utilities.
The Manager reduced exposure to high street retailers over the period as
trading conditions became tougher, selling Boots, Dixons and N. Brown Group as
well as selling the remaining bank holding Lloyds TSB and our holding in pub
company Mitchells & Butler. The other major change in the consumer related
areas of the market was to increase the weighting in Tesco. The Manager's
conviction in the strength of this business has grown over the period, and he
continues to believe that the Company will be able to further exploit both its
dominant market position in the UK and its fast growing overseas business,
which now accounts for 50% of total selling space. Elsewhere, the holding in
mmo2 was sold after a period of strong performance.
In the electricity sector, the Manager purchased two new holdings in British
Energy and Scottish & Southern Energy. These companies are benefiting from a
combination of falling power-generation costs allied with rising electricity
prices for consumers. In addition, investors are currently being attracted to
the sector because of its ability to withstand a potential weakening economic
backdrop.
New holdings in British Airways and Reuters were purchased. BA has successfully
restructured and cut costs since 2001 and its results are beginning to show
marked improvement, despite continued high oil prices. Reuters has also
restructured after a challenging few years for the financial data industry.
This should lead to a one-off cash return to shareholders as well as a more
cash generative business going forward.
Outlook
The factors that contributed to UK economic growth may now begin to soften as
interest rates have risen significantly and government expenditure is likely to
be reined in after the General Election. Furthermore, the forthcoming
re-assessment of council tax bands and upward pressure on utility bills will
add further pressure to already stretched disposable incomes.
The MPC have left rates on hold since August 2004, and given the recent run of
weak economic data the current level of 4.75% may mark the peak of the recent
upward trend.
It is impossible to tell how imbalances currently facing global economies such
as unsustainably high levels of consumer debt and a huge US trade deficit will
unwind. However, in such an environment the Manager believes it is best to be
cautious. It could be that these issues dissipate over a prolonged period of
time in a benign way, but any exogenous shock to global economies could have
severe implications.
A key factor is how US consumption growth will slow. If it does slow in a
dramatic fashion it could lead to investors searching for safe havens in equity
and bond markets, and in particular high-yielding, cash-resilient utilities and
tobacco businesses will do well in such an environment.
Although corporate profitability is currently very good and balance sheets are
in a healthy condition in the US and UK, the Manager believes that profit
growth for companies will become more difficult to achieve against a worsening
economic backdrop. Indeed, markets could well be surprised by a period of
slower growth for both economies and corporate profits. Nevertheless, despite
this bleaker backdrop, there remain a large number of stocks with cheap
valuations and businesses with the characteristics to sustain and grow
dividends over the medium term. These are the kind of companies which the
Manager is seeking to identify for investment in the stockmarket. It remains
his belief that by picking companies with sustainable dividend growth, he will
be able to maximise returns for the portfolio.
Mark Barnett
Investment Manager
23 May 2005
Statement of Total Return
(Incorporating the Revenue Account)
Six months ended 31 March 2005
(Unaudited)
Revenue Capital Total
£'000 £'000 £'000
Gains on investments - unrealised - 9,792 9,792
Gains on investments - realised - 7,909 7,909
Exchange rate gains - 36 36
Gains on currency hedges - note 1 - 585 585
Special dividends - - -
Income:
UK dividends 1,706 - 1,706
Dividend from subsidiary - - -
Overseas dividends 292 - 292
STIC interest 348 - 348
UK unfranked investment income - interest 34 - 34
Deposit interest 214 - 214
Underwriting commission - - -
Investment management fee (133) (391) (524)
Performance fee - note 2 - (1,995) (1,995)
Other expenses (151) - (151)
Net return before finance costs
and taxation 2,310 15,936 18,246
Finance costs (382) (1,145) (1,527)
Return on ordinary activities
1,928 14,791 16,719
before taxation
Tax on ordinary activities (44) - (44)
Return on ordinary activities
1,884 14,791 16,675
after taxation
Dividends in respect of non-equity shares (6) - (6)
Return attributable to equity shareholders 1,878 14,791 16,669
Dividends in respect of equity shares (1,738) - (1,738)
Transfer to reserves 140 14,791 14,931
Return per ordinary share - note 3
Basic 14.1p 110.6p 124.7p
The revenue column of this statement is the profit and loss account of the
Company. All revenue and capital items in the above statement derive from
continuing operations. No operations were acquired or discontinued in the
period.
Statement of Total Return
(Incorporating the Revenue Account)
Year to
Six Months Ended 30 September
31 March 2004 2004
(Unaudited) (Audited)
Revenue Capital Total Total
£'000 £'000 £'000 £'000
Gains on investments - unrealised - 7,409 7,409 12,376
Gains on investments - realised - 7,035 7,035 5,525
Exchange rate losses - (69) (69) (59)
Gains on currency hedges - note 1 - 990 990 957
Special dividends - 209 209 216
Income:
UK dividends 1,485 - 1,485 3,701
Dividend from subsidiary 129 - 129 129
Overseas dividends 273 - 273 575
STIC interest 270 - 270 592
UK unfranked investment income - 153 - 153 225
interest
Deposit interest 234 - 234 427
Underwriting commission - - - 10
Investment management fee (131) (392) (523) (993)
Performance fee - note 2 - (1,067) (1,067) (614)
Other expenses (135) - (135) (255)
Net return before finance costs
and taxation 2,278 14,115 16,393 22,812
Finance costs (382) (1,145) (1,527) (3,044)
Return on ordinary activities
before taxation 1,896 12,970 14,866 19,768
Tax on ordinary activities (40) - (40) (85)
Return on ordinary activities
after taxation 1,856 12,970 14,826 19,683
Dividends in respect of non-equity shares (6) - (6) (12)
Return attributable to equity shareholders 1,850 12,970 14,820 19,671
Dividends in respect of equity shares (1,705) - (1,705) (4,011)
Transfer to/(from) reserves 145 12,970 13,115 15,660
Return per ordinary share - note 3
Basic 13.8p 97.0p 110.8p 147.2p
Balance Sheet
At At At
31 March 30 September 31 March
2005 2004 2004
(Unaudited) (Audited) (Unaudited)
£'000 £'000 £'000
Fixed assets
Listed investments at market value 144,078 130,559 126,708
Unlisted investments at directors' - - 13
valuation
144,078 130,559 126,721
Current assets
Amounts due from brokers 784 248 302
Tax recoverable 17 17 17
Unrealised profit on forward contracts - 75 - 66
note 1
Prepayments and accrued income 919 898 897
Cash at bank 25,586 24,085 24,492
27,381 25,248 25,774
Creditors: amounts falling due within one
year
Amounts due to brokers - (716) (123)
Amounts due to group company - (1) (1)
Unrealised loss on forward contracts - - (3) -
note 1
Accruals and deferred income (1,035) (1,031) (1,427)
Proposed dividends (1,738) (2,307) (1,705)
Performance fee due and deferred - note 2 (2,340) - -
(5,113) (4,058) (3,256)
Net current assets 22,268 21,190 22,518
Total assets less current liabilities 166,346 151,749 149,239
Creditors: due after more than one year
Debenture stock (39,596) (39,584) (39,574)
Performance-related fee deferred - note 2 - (408) -
Provisions for liabilities and charges - (345) (283) (736)
note 2
Net assets 126,405 111,474 108,929
Capital and reserves
Called up share capital 6,685 6,685 6,685
Share premium account 1,258 1,258 1,258
Other reserves:
Capital reserve - realised 90,648 85,664 81,745
Capital reserve - unrealised 23,504 13,697 15,213
Capital redemption reserve 466 466 466
Revenue reserve 3,594 3,454 3,312
Equity Shareholders' funds 126,155 111,224 108,679
Non-equity interests:
Cumulative preference shares 250 250 250
Total Shareholders' funds 126,405 111,474 108,929
Net asset value per share - note 3
Basic 943.7p 832.0p 812.9p
Cash Flow Statement
Six months Year Six months
to to 30 to
31 March September 31 March
2005 2004 2004
(Unaudited) (Audited) (Unaudited)
£'000 £'000 £'000
Cash flow from operating activities 1,850 3,523 1,022
Servicing of finance (1,516) (3,033) (1,516)
Capital expenditure and financial
investment
Purchase of fixed asset investments (33,394) (67,991) (36,091)
Proceeds from sale of fixed asset 36,323 66,033 33,864
investments
Equity dividends paid (2,306) (3,977) (2,273)
Net cash inflow/(outflow) before
management of
liquid resources and financing 957 (5,445) (4,994)
Management of liquid resources (1,626) (4,399) -
Decrease in cash in the period (669) (9,844) (4,994)
Increase in debt (11) (22) (11)
Exchange movements 543 1,135 1,090
Cash outflow from decrease in liquid 1,626 4,399 -
resources
Movement in net debt in the period 1,489 (4,332) (3,915)
Net debt at beginning of period (15,499) (11,167) (11,167)
Net debt at end of period (14,010) (15,499) (15,082)
Reconciliation of Movement in Shareholders' Funds
Six months to Year to Six months to
31 March 30 September 31 March
2005 2004 2004
(Unaudited) (Audited) (Unaudited)
£'000 £'000 £'000
Revenue return for the period 140 287 145
Capital return for the period 14,791 15,373 12,970
Net movement in Shareholders' funds 14,931 15,660 13,115
Opening Shareholders' funds 111,474 95,814 95,814
Closing Shareholders' funds 126,405 111,474 108,929
Notes to the Interim Accounts
1. The equity portfolio includes £12,031,000 (30 September 2004: £10,343,000;
31 March 2004: £9,467,000) of equities denominated in currencies other than
pounds sterling. In order to crystallise the value of these holdings in
sterling terms, the Manager has hedged their currency exposure into sterling
through the use of forward foreign exchange contracts. The gains to date on
these contracts are more or less exactly offset by the decrease in value of the
equity investments due to currency movements.
2. The performance fee is based on a calendar year.
31 March 30 31 March
September
2005 2004 2004
£ £ £
Performance fee relating
to
31 December 2004 1,650,000 - -
31 December 2003 - 331,000 331,000
Provision for performance
fee relating to
31 December 2005 345,000 - -
31 December 2004 - 283,000 -
31 December 2003 - - 736,000
Total 1,995,000 614,000 1,067,000
Performance fee due and deferred includes performance fee of £1,052,000
(30 September 2004: £408,000; 31 March 2004: £nil) deferred to 31 December
2005, and £1,288,000 (30 September 2004: £nil; 31 March 2004: £nil) payable as
at 31 December 2004.
3. The returns per ordinary share are based on the net revenue return
attributable to equity shareholders and on 13,368,799 (30 September 2004 and
March 2004: 13,368,799) ordinary shares, being the number of ordinary shares in
issue in the period.
4. The basic net asset value per ordinary share of 943.7p is calculated on
net assets attributable to equity shareholders of £126,155,000 (30 September
2004: £111,224,000, 31 March 2004: £108,679,000) and on 13,368,799 (30
September 2004 and 31 March 2004: 13,368,799) ordinary shares in issue.
5. The Directors have declared an interim dividend of 13.00p (2004: 12.75p)
per ordinary share in respect of the six months ended 31 March 2005. This will
be paid on 24 June 2005 to ordinary shareholders registered on 27 May 2005.
6. Shareholders wishing to have their dividends reinvested and who have not
already informed the Registrars, should write to 'Key Client Dividends', Capita
Registrars, The Registry , 34 Beckenham Road, Beckenham, Kent BR3 4TH or call
0870 162 3100. The deadline for joining the Company's Dividend Reinvestment
Plan in respect of the interim dividend is 6 June 2005.
7. It is the intention of the Directors to conduct the affairs of the Company
so that it satisfies the conditions for approval as an investment trust company
set out in section 842 of the Income and Corporation Taxes Act 1988.
8. The foregoing information at 30 September 2004 is an abridged version of
the Company's full Accounts which carry an unqualified Auditor's report and
have been filed with the Registrar of Companies.
By order of the Board
INVESCO Asset Management Limited
Secretaries
23 May 2005
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