Half Yearly Report

RNS Number : 9528L

Standard Life Equity Income Tst PLC

17 May 2010

 



STANDARD LIFE EQUITY INCOME TRUST PLC

Investment Objective

The objective of Standard Life Equity Income Trust is to provide shareholders with an above average income from their equity investment while also providing real growth in capital and income.

Investment Policy

The Directors intend to achieve the investment objective by investing in a diversified portfolio consisting mainly of quoted UK equities. The portfolio will normally comprise between 50 and 70 individual equity holdings. In order to reduce risk in the Company without compromising flexibility:

-    no holding within the portfolio will exceed 10% of net assets; and

-    the top ten holdings within the portfolio will not in aggregate exceed 50% of net assets

Convertible preference shares, convertible loan stocks, gilts and corporate bonds may make up the balance of the portfolio.

The Directors have set parameters of between 95% and 115% for the level of gearing that can be employed. The maximum level of borrowings will therefore represent 15% of net assets and the maximum cash position will be equivalent to 5% of net assets. The Directors have delegated responsibility to the Manager for the operation of the gearing level within the above parameters.

The Manager's investment process combines asset allocation, stock selection, portfolio construction, risk management and dealing. The investment process is research-intensive and is driven by a distinctive focus on change which recognises that different factors drive individual stocks and markets at different times in the cycle. This flexible but disciplined investment process ensures that the Manager has the opportunity to perform in different market conditions.

HALF-YEARLY FINANCIAL REPORT FOR THE SIX MONTHS ENDED 31 MARCH 2010

For further information, please contact:

Hilda Stewart

Press Manager, Standard Life Investments         Tel. [phone]

________________________________________________________________________________________________

CHAIRMAN'S STATEMENT

Income and Dividends

Revenue return per ordinary share was 5.33p in respect of the six months ended 31 March 2010, representing a decrease of 15.1% compared with 6.28p in the previous year.  Income from investments increased by 3.2% during the period.  Earnings in the comparable period had benefited from a VAT refund of 0.91p.

Shareholders will have noted that in the Budget a year ago the higher tax rate on investment income was raised from 32.5% to 42.5% as from 6th April 2010.  In response, and after taking advice, your Board decided that it was in the overall interest of shareholders to arrange to pay the interim dividend early.  Accordingly it decided to recommend an unchanged interim dividend of 3.15p per share, which was paid on 24 March.

VAT on Investment Management Fees

No further repayments of VAT have been received during the reporting period.  Discussions continue with HMRC through our former manager, Deutsche Asset Management, for the period since the Company's inception in 1991 to 1996.  The Board has also supported the PwC legal action to try and recover any non-recoverable VAT incurred by the Company since inception but does not expect a conclusion from this for some years.

Performance

For the six months ended 31 March 2010, your Company's net asset value (excluding net current year income) increased by 10.4% compared with a  rise of 10.5% for the FTSE All-Share Index and a fall of 4.5% for the FTSE 350 High Yield Index.

The Company ranks seventh out of 22 peers in the UK Growth & Income sector based on net asset value total return over the six months ended 31 March 2010 (Source J.P. Morgan Cazenove).

The long term performance of your Company against its peers is shown in the table below:

UK Growth & Income Peer Group	Six Months Total Return	Three Year Total Return	Five Year Total Return
SLEIT	7/22	2/22	4/20

The Company's share price increased by 8.5% over the reporting period and the discount widened slightly to 8.0%.

The Manager's Report provides further information on the UK economy and equity market as well as a review of the portfolio of investments and activity during the financial year.

Gearing

Your Manager increased the Company's gearing in the middle of last year, since when it has remained at around 10%.  The Company has renewed its borrowing facilities on terms that your Board regarded as favourable.  A £15m one year credit facility was agreed on very competitive terms at 100bps over LIBOR.

Share Buybacks

The Company did not buy back any shares in the period. The Board and the Manager continue to monitor the level of the Company's discount on a regular basis.

Marketing and Shareholder Communications

The Manager continued to hold meetings with private client and wealth managers. In addition a number of individual holders attended your Company's AGM, held last year at the offices of J.P. Morgan Cazenove, the Company's stockbrokers.

Proposed European AIFM Directive

The Directive on Alternative Fund Managers continues to move slowly to completion, possibly in the summer or autumn.  Your Directors have taken part in the lobbying by the AIC and the UK authorities at this piece of regulation which remains quite unnecessary, given the existing framework of company law and financial regulation in the UK.

Outlook

Over the last twelve months stockmarkets have staged a significant recovery, driven initially by the actions of governments globally.  Extraordinarily low interest rates still persist despite the absence of normal liquidity in terms of bank lending and the credit markets.  There can however be no guarantee that the recovery will be self supporting when official policy becomes less expansive. 

What has been reassuring, however, are signs that company managements have begun to offer more positive guidance on the outlook for earnings.  There are also signs of a recovery in dividend payments. 

The continued relative weakness of sterling is also enhancing reported company earnings overseas, while a number of companies held in your Company's portfolio declare their payment in overseas currencies.

The General Election took place after the Company's half year end.  The response of the new Government in dealing with the challenges of the public finances remains to be articulated. 

Your Board continues to believe that this is a protracted economic cycle, but is encouraged by your Manager's investment performance, matching the return on our benchmark.  In recent years we have been able to increase our annual dividend payments while at the same time also building up your Company's revenue reserves.  That is a good base, and the Board remains confident of providing attractive long-term returns.

Charles Wood OBE

Chairman

14 May 2010

________________________________________________________________________________________________

DIRECTORS' RESPONSIBILITY STATEMENT

The Directors are responsible for preparing the Half-Yearly Financial Report in accordance with applicable law and regulations. The Directors confirm that to the best of their knowledge -

-     the condensed Financial Statements have been prepared in accordance with the Accounting Standards Board's statement "Half-Yearly Financial Reports"; and

-     the Interim Management Report includes a fair review of the general conditions required by 4.2.7R and 4.2.8R of the Financial Services Authority's Disclosure and Transparency Rules.

The Half-Yearly Financial Report, for the six months ended 31 March 2010, comprises an Interim Management Report in the form of the Chairman's Statement, the Directors' Responsibility Statement and a condensed set of Financial Statements, and has not been audited or reviewed by the auditors pursuant to the APB guidance on Review of Interim Financial Information.

For and on behalf of the Directors of Standard Life Equity Income Trust PLC

Charles Wood OBE

Chairman

14 May 2010

________________________________________________________________________________________________

MANAGER'S REPORT

Market Review

UK equities continued their recovery that began in March 2009, making further strong gains over the last six months. Towards the end of the period, the FTSE 100 Index broke through the 5,700 level for the first time since June 2008. Investors reacted positively to better corporate earnings news, as companies across a range of sectors announced results ahead of market expectations, driven mainly by cost cutting but also by sales upgrades. Improving global economic data also supported equities, as activity moved back onto a growth path following last year's deep recession.

A rise in merger and acquisition activity provided further support for the market. Towards the end of 2009, British Airways agreed a deal with Spanish rival Iberia. Moving into 2010, US food group Kraft successfully completed an £11.6 billion takeover of Cadbury, whilst insurer Prudential announced a deal to buy the Asian subsidiary of US insurance company AIG for $35.5 billion. Elsewhere, there were a number of potential deals in the mid-cap sector. Defence company VT Group agreed to a bid from rival Babcock International, Deutsche Bahn made an offer for bus and train operator Arriva, while inter-dealer broker Tullett Prebon announced it was in takeover discussions.

While global economic activity picked up during the period, the UK's recovery remained sluggish. The UK economy emerged more slowly from recession than other G7 economies, largely on account of its deeper and more prolonged downturn, with fourth-quarter GDP up a subdued 0.4%. However, monetary policy is set to remain accommodative, helping to stimulate activity in the housing market and retail sales. Indeed, house prices have risen for the past six months, while mortgage approvals have increased month on month for the last 12 months.

Performance

For the six months ended 31 March 2010, the Company's net asset value (capital return only) rose by 10.4%, compared to the FTSE All-Share Index which rose by 10.5% (source: Thomson Datastream).

Our holdings in the mining sector had a significant impact on performance during the period. Overweight holdings in Vedanta Resources, Xstrata, Rio Tinto and Kazakhmys were beneficial as robust economic data from China spurred metal and mineral prices. A better-than-expected global settlement on iron ore prices was also positive for stocks within the sector. However, not holding BHP Billiton and Anglo American was detrimental.

Exposure to companies and sectors geared towards economic recovery was generally positive for performance. Our holdings in engineering firm IMI and industrial conveyor belt manufacturer Fenner performed well. Results were significantly ahead of expectations as a combination of cost cutting and top-line growth led to increased operating margins. Paper producer Mondi also boosted returns, as strong volumes and improving prices resulted in substantial earnings upgrades.

Elsewhere, concerns over UK consumer spending during the period meant that our holdings in retail stocks such as N Brown, HMV Group and Debenhams detracted from returns over the period as a whole. In the banking sector, not holding Barclays was positive overall as initial proposals for capital requirements put pressure on the sector in the first half of the period. However, the company later reported strong results and confirmed that loan impairments had peaked.     

Activity

Purchases in the first half of the period included utility company National Grid as we expected its US operations to start to receive positive regulatory news. We invested further in the sector through United Utilities and Severn Trent, as final proposals from the recent OFWAT review were better than expected, leaving no requirement for a rights issue. Both companies also offered an attractive dividend yield. Elsewhere, we bought Marston's, on evidence of an improvement in trading conditions. The stock was attractively valued and offered a superior dividend yield. Publisher Daily Mail was another purchase, as it should benefit from a recovery in UK advertising.

We took some profits in the mining sector, reducing our holding in Kazakhmys. We also sold sugar producer Tate & Lyle following a period of strong performance, with worries over its dividend outlook contributing to our decision. Concerns over defence spending led us to sell defence technology firm QinetiQ and reduce our holding in BAE Systems. Meanwhile, we reduced tour operator Thomas Cook, after a period of strong performance, and food group Dairy Crest, given the decline in the UK milk home delivery business.

Outlook

UK equities remain attractively priced both on a historical basis and compared to other asset classes. The market is well supported by strong cashflow, improving earnings and an attractive dividend yield.   The pick up in merger and acquisition activity should continue to provide further support. There is still significant value at the individual stock level, including some of the larger stocks by market capitalisation. Our Focus on Change investment approach leaves us well positioned to take advantage of these opportunities as they arise, particularly as sentiment on economic recovery prospects remains volatile.

Standard Life Investments Limited

Manager

14 May 2010

________________________________________________________________________________________________

INCOME STATEMENT

		Six months ended 31 March 2010 (unaudited)
		Revenue	Capital	Total
	Notes	£'000	£'000	£'000
Net gains/(losses) on investments at fair value		-	10,578	10,578
Income	2	2,320	-	2,320
Investment management fee		(119)	(277)	(396)
VAT recoverable on investment management fees	9	-	-	-
Administrative expenses		(155)	-	(155)
		_________	_________	_________
Net return before finance costs and taxation		2,046	10,301	12,347
Finance costs		(26)	(61)	(87)
		_________	_________	_________
Return on ordinary activities before taxation		2,020	10,240	12,260
Taxation on ordinary activities		-	-	-
		_________	_________	_________
Return on ordinary activities after taxation		2,020	10,240	12,260
		_________	_________	_________
Return per ordinary share	4	5.33p	27.00p	32.33p
		_________	_________	_________

The total column of this statement represents the profit and loss account of the Company.

The Company has no recognised gains or losses other than those recognised in the Income Statement above.

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

The accompanying notes are an integral part of the financial statements.

________________________________________________________________________________________________

INCOME STATEMENT (Cont'd)

	Six months ended 31 March 2009 (unaudited)			Year ended 30 September 2009 (audited)
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Net gains/(losses) on investments at fair value	-	(18,048)	(18,048)	-	6,246	6,246
Income	2,247	-	2,247	4,922	-	4,922
Investment management fee	(83)	(193)	(276)	(183)	(428)	(611)
VAT recoverable on investment management fees	348	261	609	348	261	609
	(126)	-	(126)	(240)	-	(240)
Administrative expenses	_________	________	________	________	________	________
Net return before finance costs and taxation	2,386	(17,980)	(15,594)	4,847	6,079	10,926
	-	-	-	(7)	(17)	(24)
Finance costs	_________	________	________	________	________	________
Return on ordinary activities before taxation	2,386	(17,980)	(15,594)	4,840	6,062	10,902
	(4)	-	(4)	(4)	-	(4)
Taxation on ordinary activities	_________	________	________	________	________	________
Return on ordinary activities after taxation	2,382	(17,980)	(15,598)	4,836	6,062	10,898
	_________	________	________	________	________	________
Return per ordinary share	6.28p	(47.40p)	(41.12p)	12.75p	15.98p	28.73p
	_________	________	________	________	________	________

___________________________________________________________________________________________________

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
Six months ended 31 March 2010 (unaudited)	Notes	£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 September 2009		9,935	20,373	12,615	57,240	6,139	106,302
Return on ordinary activities after taxation		-	-	-	10,240	2,020	12,260
Dividends paid	3	-	-	-	-	(4,379)	(4,379)
		_________	________	________	________	________	________
Balance at 31 March 2010		9,935	20,373	12,615	67,480	3,780	114,183
		_________	________	________	________	________	________
			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
Six months ended 31 March 2009 (unaudited)		£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 September 2008		9,935	20,373	12,615	51,178	5,472	99,573
Return on ordinary activities after taxation		-	-	-	(17,980)	2,382	(15,598)
Dividends paid	3	-	-	-	-	(2,974)	(2,974)
		_________	________	________	________	________	________
Balance at 31 March 2009		9,935	20,373	12,615	33,198	4,880	81,001
		_________	________	________	________	________	________
			Share	Capital
		Share	premium	redemption	Capital	Revenue
		capital	account	reserve	reserve	reserve	Total
Year ended 30 September 2009 (audited)		£'000	£'000	£'000	£'000	£'000	£'000
Balance at 30 September 2008		9,935	20,373	12,615	51,178	5,472	99,573
Return on ordinary activities after taxation		-	-	-	6,062	4,836	10,898
Dividends paid	3	-	-	-	-	(4,169)	(4,169)
		_________	________	________	________	________	________
Balance at 30 September 2009		9,935	20,373	12,615	57,240	6,139	106,302
		_________	________	________	________	________	________

_______________________________________________________________________________________________________

BALANCE SHEET

		As at	As at	As at
		31 March 2010	31 March 2009	30 September 2009
		(unaudited)	(unaudited)	(audited)
	Notes	£'000	£'000	£'000
Fixed assets
Investments at fair value through profit or loss		122,734	79,482	114,186
		_________	_________	_________
Current assets
Debtors		848	553	812
AAA money market funds		1,640	1,207	737
Cash at bank and in hand		74	15	8
		_________	_________	_________
		2,562	1,775	1,557
		_________	_________	_________
Creditors: amounts falling due within one year
Bank loan		(10,750)	-	(9,000)
Other creditors		(363)	(256)	(441)
		_________	_________	_________
		(11,113)	(256)	(9,441)
		_________	_________	_________
Net current (liabilities)/assets		(8,551)	1,519	(7,884)
		_________	_________	_________
Net assets		114,183	81,001	106,302
		_________	_________	_________
Capital and reserves
Called-up share capital		9,935	9,935	9,935
Share premium account		20,373	20,373	20,373
Capital redemption reserve		12,615	12,615	12,615
Capital reserve	5	67,480	33,198	57,240
Revenue reserve		3,780	4,880	6,139
		_________	_________	_________
Equity shareholders' funds		114,183	81,001	106,302
		_________	_________	_________
Net asset value per ordinary share	6	301.03p	213.55p	280.25p
		_________	_________	_________

CASHFLOW STATEMENT

	Six months	Six months	Year
	ended	ended	ended
	31 March	31 March	30 September
	2010	2009	2009
	(unaudited)	(unaudited)	(audited)
	£'000	£'000	£'000
Net return on ordinary activities before finance costs and taxation	12,347	(15,594)	10,926
Adjustments for:
(Gains)/losses on investments at fair value	(10,578)	18,048	(6,246)
	_________	_________	_________
Revenue before finance costs and taxation	1,769	2,454	4,680
(Increase)/decrease in accrued income	(336)	(3)	40
Increase in other debtors	(9)	(6)	1
Increase/(decrease) in other creditors	17	(38)	37
	_________	_________	_________
Net cash inflow from operating activities	1,441	2,407	4,758
Net cash outflow from servicing of finance	(80)	(2)	(21)
Net tax paid	-	(4)	(4)
Net cash inflow/(outflow) from financial investment	2,237	(1,890)	(12,504)
Equity dividends paid	(4,379)	(2,974)	(4,169)
Net cash (outflow)/inflow from management of liquid resources	(904)	2,428	2,898
	_________	_________	_________
Net cash outflow before financing	(1,685)	(35)	(9,042)
Net cash inflow from financing	1,750	-	9,000
	_________	_________	_________
Increase/(decrease) in cash	65	(35)	(42)
	_________	_________	_________
Reconciliation of net cash flow to movement in net debt
Increase/(decrease) in cash as above	65	(35)	(42)
Net change in liquid resources	904	(2,428)	(2,898)
Repayment of loan	(1,750)	-	(9,000)
	_________	_________	_________
Movement in net debt in the period	(781)	(2,463)	(11,940)
Opening net (debt)/funds	(8,255)	3,685	3,685
	_________	_________	_________
Closing net (debt)/funds	(9,036)	1,222	(8,255)
	_________	_________	_________
Represented by:
Cash at bank and in hand	74	15	8
AAA money market funds	1,640	1,207	737
Bank loan	(10,750)	-	(9,000)
	_________	_________	_________
	(9,036)	1,222	(8,255)
	_________	_________	_________

______________________________________________________________________________________________________

NOTES TO THE FINANCIAL STATEMENTS

1.    Accounting policies

(a)   Basis of accounting

       The accounts have been prepared in accordance with applicable UK Accounting Standards, with pronouncements on half-yearly reporting issued by the Accounting Standards Board and with the Statement of Recommended Practice for "Financial Statements of Investment Trust Companies and Venture Capital Trusts", issued in January 2009. They have also been prepared on the assumption that approval as an investment trust will continue to be granted.

       The financial statements and the net asset value per share figures have been prepared in accordance with UK Generally Accepted Accounting Practice (UK GAAP) and using the same accounting policies as the preceding annual accounts.

(b)   Dividends payable

       Dividends are recognised in the period in which they are paid.

		Six months	Six months	Year
		ended	ended	ended
		31 March	31 March	30 September
2.	Income	2010	2009	2009
	Income from investments	£'000	£'000	£'000
	Franked investment income	2,230	2,120	4,731
	Unfranked investment income	69	42	92
		_________	_________	_________
		2,299	2,162	4,823
		_________	_________	_________
	Other income
	AAA money market interest	4	64	72
	Interest from HMRC	-	21	21
	Underwriting commission	17	-	6
		_________	_________	_________
		21	85	99
		_________	_________	_________
		2,320	2,247	4,922
		_________	_________	_________

		Six months	Six months	Year
		ended	ended	ended
		31 March	31 March	30 September
		2010	2009	2009
3.	Dividends	£'000	£'000	£'000
	Ordinary dividends on equity shares
	deducted from reserves:
	Final dividend for 2009 of 8.40p per share (2008 - 7.85p)	3,186	2,978	2,978
	Interim dividend for 2010 of 3.15p per share (2009 - 3.15p)	1,195	-	1,195
	Refund of unclaimed dividends from previous periods	(2)	(4)	(4)
		_________	_________	_________
		4,379	2,974	4,169
		_________	_________	_________

		Six months	Six months	Year
		ended	ended	ended
		31 March	31 March	30 September
		2010	2009	2009
4.	Return per ordinary share	p	p	p
	Revenue return	5.33	6.28	12.75
	Capital return	27.00	(47.40)	15.98
		_________	_________	_________
	Total return	32.33	(41.12)	28.73
		_________	_________	_________
	The figures above are based on the following figures:
		£'000	£'000	£'000
	Revenue return	2,020	2,382	4,836
	Capital return	10,240	(17,980)	6,062
		_________	_________	_________
	Total return	12,260	(15,598)	10,898
		_________	_________	_________
	Weighted average number of ordinary shares*	37,930,579	37,930,579	37,930,579

      * Calculated excluding shares held in treasury.

5.	Capital Reserve The capital reserve figure reflected in the Balance Sheet includes investment holdings gains at the period end of £15,439,000 (31 March 2009 - losses of £21,126,000; 30 September 2009 - gains of £4,534,000).

		Six months	Six months	Year
		ended	ended	ended
		31 March	31 March	30 September
6.	Net asset value per ordinary share	2010	2009	2009
	Attributable net assets (£'000)	114,183	81,001	106,302
	Number of ordinary shares in issue*	37,930,579	37,930,579	37,930,579
	NAV per ordinary share (p)	301.03	213.55	280.25

      * Excludes shares in issue held in treasury.

7.	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/(losses) on investments in the Income Statement. The total costs were as follows:
		Six months	Six months	Year
		ended	ended	ended
		31 March	31 March	30 September
		2010	2009	2009
		£'000	£'000	£'000
	Purchases	72	155	307
	Sales	19	32	54
		_________	_________	_________
		91	187	361
		_________	_________	_________

8.

Interim Report

The financial information contained in this Half-Yearly Financial Report does not constitute statutory accounts as defined in Sections 434-436 of the Companies Act 2006. The financial information for the six months ended 31 March 2010 and 31 March 2009 has not been audited. The information for the year ended 30 September 2009 has been extracted from the latest published audited financial statements which have been filed with the Registrar of Companies. The report of the auditors on those accounts contained no qualification or statement under Section 498 (2), (3) or (4) of the Companies Act 2006.

9.

Contingent assets

On 5 November 2007, the European Court of Justice ruled that management fees on investment trusts should be exempt from VAT. Deutsche Asset Management (UK) Limited, the former Investment Manager, has refunded £609,000 (excluding simple interest) to the Company for VAT charged on investment management fees for the period 2001 to 2005 (date of termination) and this was included in the financial statements for the year ended 30 September 2009.  This repayment was allocated between revenue and capital in line with the accounting policy of the Company for the periods in which the VAT was charged.  The reclaim for previous periods is at present uncertain and the Company has taken no account in these financial statements of any such repayment. Interest of £21,000 on the repaid VAT was recognised in the financial statements for the year ended 30 September 2009.

10.  This Half-Yearly Financial Report was approved by the Board on 14 May 2010 and the Half Yearly Report will be posted to shareholders in June 2010 and will be available from the Secretary and the Manager, Standard Life Investments (www.standardlifeinvestments.co.uk/its).

For Aberdeen Asset Management PLC

SECRETARY

17 May 2010

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

 

END

 

 

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