Annual Financial Report

RNS Number : 2364D

F&C Capital & Income Inv Tst PLC

27 November 2009

 



Date:	27 November 2009
Contact:	Julian Cane
	F&C Management Limited
	020 7628 8000

F&C Capital and Income Investment Trust plc

Audited Statement of Results

for the year ended 30 September 2009

HIGHLIGHTS

• Three interim dividends totalling 5.7 pence per share and a special dividend of 0.4 pence per share paid to reflect the extra VAT recovered.

• Fourth interim dividend of 2.55 pence per share declared.

• 4,720,000 shares issued at a small premium during the year.

Summary of results

Attributable to shareholders	30 September 2009	30 September 2008	% Change
Net assets	£166.68m	£158.20m	+5.4
Net asset value per share	199.28p	200.45p	-0.6
Net revenue after tax	£7.21m	£7.61m	-5.3
Revenue return per share	8.85p	9.69p	-8.7
Total return per share	9.62p	(50.47p)	-
Dividends per share	* 8.65p	* 8.40p	+3.0
Share price	199.00p	196.50p	+1.3

* includes a special dividend of 0.4 pence per share paid in both years.

  F&C Capital & Income Investment Trust PLC

Audited Statement of Results for the year ended 30 September 2009

The Chairman, commenting on the results, said:

The year under review was turbulent, with both the economy and the stock market plunging sharply and then shares at least recovering dramatically to end the period higher than at the start. Many companies have cut or passed their dividends and the aggregate payout from the market has been lower than last year. Despite this, we have again been able to increase our dividend with an underlying annual dividend of 8.25 pence per share, an increase of 3.1%, and a total, including special dividend as explained later, of 8.65 pence per share.

Capital performance

For equities the extent and speed of the collapse and subsequent recovery were quite exceptional. Sentiment changed from increasing gloom during the winter to rapidly growing optimism thereafter as confidence cautiously returned to the banking system following government intervention.

Over the course of the year, your Company's net asset value ("NAV") per share decreased by 0.6% compared to an increase in the FTSE All-Share Index of 6.1%. Nearly all of this shortfall occurred in the first half when the NAV per share fell 24.3% compared to the fall in the Index of 20.1%, while in the second half the NAV per share rose 31.4% compared to 32.8% for the Index. Our focus on maintaining and growing the dividend to shareholders has been partly at the expense of NAV as there has been a marked negative correlation between dividend yield and capital performance; many of the strongest performing companies had little or no dividend yield, whilst the share price of many companies with attractive dividend yields fell.

The extent of the longer-term weakness of equity markets is better shown by looking at performance over the last ten years. At the end of this period, the FTSE All-Share Index was lower than at the start but, encouragingly, our NAV per share was ahead relative to the Index and in absolute terms.

Revenue and dividend

Against a background of falling dividend payments, we are pleased that we can increase the underlying dividend to shareholders. The increase, at 3.1%, contrasts with the 1.4% fall in the Retail Price Index. As last year, there has also been a separate special dividend payment to reflect a further reclaim of VAT as explained later.

Reflecting the difficult environment, your Company's income fell 3.5%. The fall was considerably less than that of the market generally and would have been larger but for a number of factors. First, the portfolio had been positioned conservatively with a focus on companies that would be able to maintain and grow their dividends. Secondly, the Company received many dividends denominated or paid in foreign currencies which have experienced an uplift following the weakness of sterling. Thirdly, the use of gearing was positive as we were able to invest in companies that yielded more than the cost of borrowing, especially as interest rates were reduced. Fourthly, the Company benefited from two additional sources of income: interest on the convertible bond holdings and sub-underwriting commission on rights issues, which has proven to be very profitable.

The largest single increase in costs over the year came about due to the success of the F&C Child Trust Fund and the extra administration cost these savings plans incur. Nevertheless, the total expense ratio (including the management fee and other running costs of the Company) is very low at 0.7% of average total assets and compares favourably not only with other investment trusts, but also with the vast majority of unit trusts.

The Directors have declared a fourth interim dividend for the year of 2.55 pence per share which, together with the three previous quarterly dividends each of 1.9 pence per share, takes the total underlying dividend for the year to 8.25 pence per share. This fourth dividend will in future be paid as an interim rather than a final in order that the dividends fall more regularly at each of the calendar quarter ends and so give our shareholders more certainty about the timing of dividend payments. An interim dividend does not require approval from shareholders unlike a final dividend, so it can be paid before the annual general meeting ("AGM").  

VAT

Your Board has been active again this year in pursuing VAT recoveries from the government after the victory of the Association of Investment Companies in a case in the European Court of Justice which freed investment trusts from VAT on management fees. The Directors' policy has been to distribute these recoveries to shareholders and the recovery achieved this year of 0.4 pence per share was paid to shareholders in March 2009. 

Share price performance and discount

The share price, which rose 1.3% over the year, performed a little better than the NAV per share. It has traded at a small premium to NAV per share on average over the course of the year as demand for your Company's shares has remained strong and even grown, despite market conditions. There has been some volatility along the way, with the discount reaching more than 10%, but for one day only when markets were at their most volatile. Your Company maintains its commitment to its share buyback programme with the intention of ensuring that the Company's share price does not trade at a material discount to NAV per share. The last share buyback took place in December 2007.

Shareholders

The majority of the Company's shares are held by shareholders through F&C's range of savings plans ("F&C plans"). Your Company has remained popular within the F&C plans both in terms of the number of investors and in cash amounts invested. New investors have continued to come in and each of the F&C plans (Individual Savings Account, Private Investor Plan, Child Trust Fund and Pension Savings Plan) has seen cash inflows. The total number of shareholders in the Company is now more than 25,000.

In order to satisfy demand for the Company's shares, particularly from dividend reinvestment and regular investment through the F&C plans, the Company issued 4,720,000 shares at a small premium to NAV per share in the year under review. Such issues are positive for existing shareholders as they help to spread fixed costs across a larger number of shareholders at no dilution to NAV per share, and positive for new shareholders as they limit the price paid for shares to a small premium to NAV per share. Your Board was pleased that shareholders granted authority at an extraordinary general meeting held on 6 October 2009 for the Company to issue a further 4.5 million shares in the run up to the AGM in 2010. Your Board is asking at the 2010 AGM for authority to issue further shares, equal to just under 10% of the Company's shares in issue at the date of this report. This will give your Directors the maximum flexibility to continue to issue shares when appropriate to the benefit of shareholders over the coming year.  

Gearing

Your Company has the ability to borrow to finance investment and it does this when we expect future returns to exceed the cost of borrowing. This year we have been reasonably active in our balance sheet management. We started with no borrowings and increased them steadily as markets moved lower (which made future returns look potentially more attractive). This coincided with a reduction in interest rates making the hurdle rate to beat for income on the investments even lower. At the year end, your Company had borrowed £14 million at an annualised cost of just over 1%. The use of gearing has an impact on both NAV per share, as share prices rise and fall, and on earnings, as the extra investments that we have purchased pay a dividend or coupon that has typically exceeded the cost of the debt.

Although gearing before early March was not immediately profitable, keeping it in place and increasing it through the second half of the year was beneficial to both capital and income performance over the year as a whole. 

Investment strategy

This year the Board used its regular strategy meeting, with the help of the Manager and its broker, to review the Company's investment policy and explore whether there were attractive ways of enhancing shareholder returns at acceptable levels of risk. These could include using more aggressive gearing; reducing the cost of existing gearing by using futures instead of bank loans; diversifying our asset range to include more unquoted stocks or private equities; or holding a larger proportion of overseas equities in the portfolio.

  Given the level of demand for the Company's shares in the market, which has kept the share price at a small premium to NAV for much of the last year, and the relatively good dividend track record, the Board concluded that our shareholders, who have plenty of alternative choices, have broadly chosen our existing investment policy and it would therefore not be right to change it. The Board will continue to explore ways of reducing the cost of our limited gearing, but otherwise it has resolved to leave your Company's investment policy basically unchanged.

Annual general meeting

The AGM will be held on 14 January 2010 at the Company's registered office, Exchange House, Primrose Street, London EC2 and shareholders are encouraged to attend. As in previous years, Julian Cane, the fund manager, will make a presentation on the results for the year, the investment policy and the outlook for the coming year.  

Electronic communications

Arrangements have been made to allow shareholders and investors through the F&C plans, other than the Pension Savings Plan, to access the annual report via the website and to lodge their proxy vote online. Details of how to do so are given on the AGM voting forms.

F&C plans proportional voting

In 2008, F&C modified its arrangements for investors in the F&C plans to vote at shareholder meetings. Under these arrangements, the nominee company, which holds around 80% of the Company's share capital on behalf of these investors, now votes the shares held on behalf of planholders who have not given their voting directions in the same proportion to those who have. This arrangement will apply at the Company's AGM, provided that a minimum threshold of 10% of the shares held in the F&C plans are voted. There will be a maximum ceiling of 330,000 on the number of shares of any one individual investor included for the purposes of calculating voting proportions, being approximately 5% of the minimum threshold. Any shares voted by an investor in excess of that limit will remain valid, but will not form part of the proportional voting calculation. Any investor wishing to exclude their shares from the proportional voting calculation may do so.

Prospects

At the time of writing, stock markets had staged a strong recovery from the low point in March and appear to be anticipating a strong cyclical recovery in the economy. So whilst the economy is showing some signs of pulling out of the recession, it is doing so as a result of the unprecedented fiscal and monetary stimulus. There remains relatively little discussion as to how and when the stimulus will be scaled back, and in the case of quantitative easing and fiscal stimulus, how the money will be repaid. The prospect of a rising tax burden, a rise in interest rates to more normal levels and cuts in public sector expenditure may slow down the recovery in growth. In particular the Bank of England has recently warned that bank lending will probably recover only slowly over the next two or three years. Consumers are also likely to spend less and save more for the foreseeable future.

Nevertheless valuations of many companies do not appear too demanding. This is particularly true when looking at your Company's own investments and we expect future returns to be driven more by valuation than by sentiment or speculation on recovery. With our focus on steady growth in income, the prospect for our own dividend is reasonably positive although we do not expect much revenue growth from the portfolio over the course of the next 12 months.

Pen Kent
Chairman
27 November 2009

  Income Statement

for the year ended 30 September	2009			2008
	Revenue	Capital	Total	Revenue	Capital	Total
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Gains/(losses) on investments	-	884	884	-	(47,234)	(47,234)
Foreign exchange gains	-	-	-	-	4	4
Income	8,181	212	8,393	8,480	260	8,740
Management fee	(304)	(304)	(608)	(348)	(348)	(696)
Recoverable VAT	167	-	167	289	289	578
Other expenses	(656)	(11)	(667)	(558)	(9)	(567)
Net return before finance costs and taxation	7,388	781	8,169	7,863	(47,038)	(39,175)
Finance costs	(154)	(154)	(308)	(178)	(178)	(356)
Net return on ordinary activities before taxation	7,234	627	7,861	7,685	(47,216)	(39,531)
Taxation on ordinary activities	(24)	-	(24)	(77)	-	(77)
Net return attributable to shareholders	7,210	627	7,837	7,608	(47,216)	(39,608)
Return per share - pence	8.85	0.77	9.62	9.69	(60.16)	(50.47)

The total 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.

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.

  Reconciliation of Movements in Shareholders' Funds

for the year ended  30 September 2009
		Share	Capital				Total
	Share	premium	redemption	Special	Capital	Revenue	shareholders'
	capital	account	reserve	reserve	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 September 2008	19,731	77,630	4,146	4,434	46,365	5,895	158,201
Movements during the year ended 30 September 2009
Dividends paid	-	-	-	-	-	(7,303)	(7,303)
Ordinary shares issued	1,180	6,769	-	-	-	-	7,949
Net return attributable to shareholders	-	-	-	-	627	7,210	7,837
Balance at 30 September 2009	20,911	84,399	4,146	4,434	46,992	5,802	166,684

for the year ended  30 September 2008
		Share	Capital				Total
	Share	premium	redemption	Special	Capital	Revenue	shareholders'
	capital	account	reserve	reserve	reserves	reserve	funds
	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s	£'000s
Balance at 30 September 2007	20,548	76,334	3,154	6,034	93,581	4,480	204,131
Movements during the year ended 30 September 2008
Dividends paid	-	-	-	-	-	(6,193)	(6,193)
Shares purchased and held in  treasury	-	-	-	(1,600)	-	-	(1,600)
Cancellation of ordinary shares  previously held in treasury	(992)	-	992	-	-	-	-
Ordinary shares issued	175	1,296	-	-	-	-	1,471
Net return attributable to shareholders	-	-	-	-	(47,216)	7,608	(39,608)
Balance at 30 September 2008	19,731	77,630	4,146	4,434	46,365	5,895	158,201

  Balance Sheet

at 30 September		2009		2008
	£'000s	£'000s	£'000s	£'000s
Fixed assets
Investments		178,710		157,136
Current assets
Debtors	946		1,908
Cash at bank and short-term deposits	2,466		437
	3,412		2,345
Creditors: amounts falling due within one year
Loans	(14,000)		-
Other	(1,438)		(1,280)
	(15,438)		(1,280)
Net current (liabilities)/assets		(12,026)		1,065
Net assets		166,684		158,201
Capital and reserves
Share capital		20,911		19,731
Share premium account		84,399		77,630
Capital redemption reserve		4,146		4,146
Special reserve		4,434		4,434
Capital reserves		46,992		46,365
Revenue reserve		5,802		5,895
Total shareholders' funds		166,684		158,201
Net asset value per ordinary share - pence		199.28		200.45

  Cash Flow Statement

for the year ended 30 September		2009		2008
	£'000s	£'000s	£'000s	£'000s
Operating activities
Investment income received	8,018		8,085
Interest received	32		144
Other revenue	225		43
Distribution from subsidiary (in liquidation)	472		-
VAT recovered (including interest thereon)	924		-
Fee paid to management company	(592)		(786)
Fees paid to Directors	(91)		(83)
Other payments	(565)		(487)
Net cash inflow from operating activities		8,423		6,916
Servicing of finance
Interest paid	(304)		(375)
Net cash outflow from the servicing of finance		(304)		(375)
Taxation
UK tax recovered	-		1
Total taxation		-		1
Financial investment
Purchases of investments	(43,181)		(35,310)
Sales of investments	23,691		44,359
Other capital charges	(11)		(11)
Net cash (outflow)/inflow from financial investment		(19,501)		9,038
Equity dividends paid		(7,303)		(6,193)
Net cash (outflow)/inflow before use of liquid resources and financing		(18,685)		9,387
Management of liquid resources
Increase in short-term deposits		(1,543)		(433)
Financing
Sterling loans raised /(repaid)	14,000		(10,000)
Shares purchased	-		(1,600)
Shares issued	7,543		1,471
Net cash inflow/(outflow) from financing		21,543		(10,129)
Increase/(decrease) in cash		1,315		(1,175)

  Notes

1    Return per ordinary share

Revenue return

The revenue return per share is based on the revenue return attributable to shareholders of £7,210,000 profit (2008: £7,608,000 profit).

Capital return

The capital return per share is based on the capital return attributable to shareholders of £627,000 profit 

(2008: £47,216,000 loss).

Total return

The total return per share is based on the total return attributable to shareholders of £7,837,000 profit (2008: £39,608,000 loss).

Weighted average ordinary shares in issue

Both the revenue and capital returns per share are based on a weighted average of 81,433,763 (2008: 78,479,263) ordinary shares in issue during the year. Shares held in treasury have been excluded from the weighted average number of shares in issue with effect from the date of purchase.

2    Dividends

The Directors have declared a fourth interim dividend in respect of the year ended 30 September 2009 of 2.55 pence per share, payable on 31 December 2009 to all shareholders on the register at close of business on 11 December 2009. 

3    Financial risk management

The Company is an investment company, listed on the London Stock Exchange, and conducts its affairs so as to qualify in the United Kingdom ("UK") as an investment trust under the provisions of section 842 of the Income and Corporation Taxes Act 1988. In so qualifying, the Company is exempted in the UK from corporation tax on capital gains on its portfolio of investments.

The Company's investment objective is to secure long-term capital and income growth from a portfolio consisting mainly of FTSE All-Share companies. The Company can also have exposure to leading overseas companies, with the value of the non-UK portfolio not exceeding 10% of the Company's gross assets. In pursuing this objective, the Company is exposed to financial risks which could result in a reduction of either or both of the value of the net assets and the profits available for distribution by way of dividend. These financial risks are principally related to the market (currency movements, interest rate changes and security price movements), liquidity and credit. The Board, together with the Manager, is responsible for the Company's risk management. The Directors' policies and processes for managing the financial risks are set out in (a), (b) and (c) below.

The accounting policies which govern the reported Balance Sheet carrying values of the underlying financial assets and liabilities, as well as the related income and expenditure, are in compliance with UK accounting standards and best practice. The Company does not make use of hedge accounting rules.

(a) Market risks 

The fair value of equity and other financial securities held in the Company's portfolio fluctuates with changes in market prices. Prices are themselves affected by movements in currencies and interest rates and by other financial issues, including the market perception of future risks. The Board sets policies for managing these risks within the Company's objective and meets regularly to review full, timely and relevant information on investment performance and financial results. The Manager assesses exposure to market risks when making each investment decision and monitors ongoing market risk within the portfolio.

As up to 10% of the Company's gross assets can be invested in non-UK assets, other assets and liabilities may be denominated in currencies other than sterling and may also be exposed to interest rate risks. The Manager and the Board regularly monitor these risks. The Company does not normally hold significant cash balances. It is not the Board's general policy to borrow in currencies other than sterling and any such borrowings would be limited to amounts and currencies commensurate with the portfolio's exposure to those currencies, thereby limiting the Company's exposure to future changes in foreign exchange rates.

Gearing may be short or long-term in foreign currencies, and enables the Company to take a long-term view of the countries and markets in which it is invested without having to be concerned about short-term volatility. 

Income earned in foreign currencies is converted to sterling on receipt. The Board regularly monitors the effects on net revenue of interest earned on deposits and paid on gearing.

(b) Liquidity risk

The Company is required to raise funds to meet commitments associated with financial instruments and share buybacks. These funds may be raised either through the realisation of assets or through increased borrowing. The risk of the Company not having sufficient liquidity at any time is not considered by the Board to be significant, given: the number of quoted investments held in the Company's portfolio (68 at 30 September 2009); the liquid nature of the portfolio of investments; the industrial and geographical diversity of the portfolio; and the existence of an ongoing loan facility agreement. Cash balances are held with approved banks, usually on overnight deposit. The Company does not normally invest in derivative products. The Manager reviews liquidity at the time of making each investment decision. The Board reviews liquidity exposure at each meeting.

The Company has a loan facility with Lloyds TSB Scotland plc of £20 million, which is renewable in March 2011. 

(c) Credit risk and counterparty exposure 

The Company is exposed to potential failure by counterparties to deliver securities for which the Company has paid, or to pay for securities which the Company has delivered. Such transactions must be settled on the basis of delivery against payment (except where local market conditions do not permit).

Responsibility for the approval, limit setting and monitoring of counterparties is delegated to the Manager and a list of approved counterparties is periodically reviewed by the Board. Broker counterparties are selected based on a combination of criteria, including credit rating, balance sheet strength and membership of a relevant regulatory body. The rate of default in the past has been negligible. Cash and deposits are held with approved banks.

The Company has an ongoing contract with its custodian for the provision of custody services. The contract is reviewed regularly. Details of securities held in custody on behalf of the Company are received and reconciled monthly.

To the extent that the Manager carries out management and administrative duties (or causes similar duties to be carried out by third parties) on the Company's behalf, the Company is exposed to counterparty risk. The Board assesses this risk through regular meetings with the management of F&C (including the fund manager) and with the Manager's internal audit function. In reaching its conclusions, the Board also reviews the Manager's parent group's annual audit and assurance faculty report. 

None of the Company's financial liabilities are past their due date or impaired.

4    Annual general meeting

The annual general meeting will be held at the registered office of the Company, Exchange House, Primrose Street, London EC2A 2NY on Thursday 14 January 2010 at 11.30 a.m. 

5    Report and accounts

The report and accounts for the year ended 30 September 2009 will be posted to shareholders and made available on the website www.fandccit.com shortly. Copies may also be obtained from the Company's registered office, Exchange House, Primrose Street, London EC2A 2NY.

By order of the Board

F&C Management Limited, Secretary

27 November 2009

  Principal risks

The specific key risks faced by the Company, together with our mitigation approach, include the following: 

• Investment strategy - inappropriate long-term strategy, asset allocation and stock selection might lead to underperformance against the Company's benchmark index and peer group. The Board periodically reviews the investment strategy and regularly monitors the Company's investment portfolio, investment selection, performance and operations of the Manager. 

• Investment management resources - the quality of the management team employed by F&C is a crucial factor in delivering good performance and loss of the Manager's key staff could affect investment returns. The Manager develops its recruitment and remuneration packages in order to retain key staff, has training and development programmes in place and undertakes succession planning.

• Regulatory - failure to comply with applicable legal and regulatory requirements could result in the Company losing its listing and/or being subject to corporation tax on the sale of its investments. The Board reviews regular reports from the Manager on the controls in place to ensure the Company's compliance with these requirements, together with regular investment listings and income forecasts as part of its monitoring of compliance with section 842 of the Income and Corporation Taxes Act 1988. 

• Operational - failure of the Manager's core accounting systems, or a disastrous disruption to its business, could lead to an inability to provide accurate reporting and monitoring. The Manager is contractually obliged to ensure that its conduct of business conforms to applicable laws and regulations. The Manager has confirmed that reliable back-up systems are in place. 

• Financial - inadequate financial controls could result in misappropriation of assets, loss of income and debtor receipts and inaccurate reporting of NAV per share. The Board regularly reviews the Manager's statements on its internal controls and procedures and subjects the books and records of the Company to an annual audit.

• Counterparties - the Company is exposed to potential failures by counterparties to deliver securities for which it has paid or to pay for securities which it has delivered. Further details are included in note 3.

Statement of Directors' Responsibilities in Respect of the Financial Statements

In accordance with Chapter 4 of the Disclosure and Transparency Rules the Directors confirm, in respect of the annual report for the year ended 30 September 2009 of which this statement of results is an extract, that to the best of their knowledge: 

• the financial statements have been prepared in accordance with applicable UK Accounting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company; 

• the annual report includes a fair review of the important events that have occurred during the financial year; the principal risks and uncertainties and their impact on the financial statements; and details on related party transactions.

On behalf of the Board

Pen Kent

Chairman

27 November 2009

 

END

 

 

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